Huzaima Bukhari & Dr. Ikramul Haq
For Pakistan the main challenges on the fiscal front for 2021, just a few days away, are not only revival of economy amidst rising human and financial toll of Covid-19 endemic, but also how to manage mounting debt burden and meeting revenue targets fixed for the fiscal year 2020-21.
According to a recent report, the coalition Government of Pakistan Tehreek-i-Insaf (PTI) has “added Rs. 397 billion more in public debt during first four months of current fiscal year, which is contrary to a claim” allegedly made by Prime Minister Imran Khan and Finance & Revenue Minister, Dr Abdul Hafeez Shaikh. It is claimed in the report that public debt of Rs. 35.1 trillion in June 2020 “increased to Rs. 35.5 trillion by end-October, reported the State Bank of Pakistan (SBP)”. “There was an increase of Rs. 397 billion or 1.2% in the debt stock, which was lower than the pace of increase recorded in the previous months”.
The Government of PTI borrowed over $13 billion in foreign loans in the fiscal year 2019-20. The burden of ever-increasing national debt during the tenure of PTI Government is also highlighted by the Institute of Policy Reforms (IPR) in its report, “Pakistan’s debt and debt servicing is cause for concern”.
At the time of assuming power in August 2018, the PTI Government inherited public debt of about Rs. 24.2 trillion—the Government of Pakistan Muslim League (Nawaz) during its five-year rule added Rs. 5.65 billion a day to public debt, but the record of PTI government is even more worrisome as it has been adding “on average per day Rs13.2 billion”, according to the report.
The federal budget deficit was Rs. 894 billion or 2% of GDP in the first four months of the current fiscal year due to double-digit growth in expenditures despite a squeeze on both defence and development spending.
On the revenue front, though FBR exceeded its target of first five months of the current fiscal year by collecting Rs. 1.69 trillion against the target of Rs. 1.67 trillion, the growth is around 4.2%, whereas it needs 22% to collect annual target of Rs. 4.963 trillion. According to a report, the International Monetary Fund (IMF) has projected collection shortfall of over Rs. 300 billion and “is asking Pakistan to introduce a mini-budget”. If IMF prevails, there will be more taxes destroying the revival of an already sluggish economy. While other countries are providing tax incentives to businesses to recover from the economic effects of Covid-19, we in Pakistan are continuing with oppressive taxes. The irony is that after imposing multiple and higher taxes, FBR has failed to enforce return filing by 7.4 million who, according to own admission, paid withholding taxes. The problem of fiscal front is not related to revenues, but the real culprit is huge expenses e.g. debt servicing, wasteful expenses and high administrative cost to run the gigantic and inefficient government machinery. This was explained in great detail in Fiscal deficit and tax expenditure, TNS, [Political Economy] The News, September 20, 2020.
On the trade side, according to the Pakistan Bureau of Statistics (PBS), deficit widened to $9.6 billion in first five months of current fiscal year. During July-November 2020, exports increased slightly by 2.1% and stood at $9.7 billion as compared to $9.5 in the same period last year. Imports during July-November period increased 1.3% or $247 million to $19.4 billion.
In fiscal year 2019-20, debt servicing by federal government was Rs. 2620 billion (domestic Rs. 2313 billion and foreign Rs. 307 billion) against net revenues of Rs. 3278 billion after transfer to the provinces. Debt servicing was 79% of total net revenues of the federal government and 65% of tax collection of FBR. This is the real dilemma and challenge on the fiscal front faced by Federal Government.
Even in the face of above realities, there is optimism in official quarters that in 2021, the economy will be on the path of recovery and growth. However, independent observers are of the view that the twin menace of rising debt and fiscal deficit will persist. Their forecast is that growth will be less than 2% and irrational revenue target fixed for FBR would certainly be revised downward.
As regards inflation and cost of living, 2021 will bring more miseries for the poor Pakistanis due to rise in items of daily use, costly utilities and unemployment for many. The real dilemma of PTI Government is that it has no plan—short, medium and long term—to overcome fiscal maladies.
The PTI Government is borrowing just to repay maturing external debts taken by its predecessors. During the fiscal year 2019-20, it received gross loans of $13.2 billion from bilateral and multilateral lenders including, the IMF and commercial creditors. The IRP’s Report says: “In FY 20 alone, Pakistan added Rs. 4.3 trillion to its total debt and liabilities. This amount is 10.4% of GDP. In two years, total debt and liabilities have grown by a massive Rs. 14.7 trillion. This shows weak fiscal management as well as inability to stimulate growth in the productive sectors. It also reflects a failure to introduce necessary reforms in key sectors of energy and power”.
The IRP’s Report has emphasised that “the increase in domestic debt is because of weak FBR revenue collection, where attempt to reform may have had the opposite effect of what was intended”. It is, however, not highlighted in the IRP’s Report that the PTI Government started its term with exceptional debt burden, record fiscal and current account deficits, forcing it to more borrowing, increasing taxes and devaluating rupee.
The PTI Government and all the experts in fiscal field know the tough challenges for 2021 and beyond. However, little debate in TV talk-shows takes place on solutions. The Opposition parties under the banner of Pakistan Democratic Alliance (PDA) are creating chaos without giving any agenda for economic well-being of masses and overcoming the fiscal woes faced by the nation. None of the political parties has any think-tank that has produced a research-based study offering pragmatic solutions to put Pakistan back on the road to prosperity. This is not the failure of democracy but of all parties, including the ruling one. Good economics is good politics, but they have never bothered to act upon it.
The key to debt retirement is export-driven growth, drastic reduction of unproductive and wasteful expenditure, utilisation of State lands for commercial purpose by giving them on lease through public auction, and collection of taxes fairly and justly, but firmly, without any favour or fear. Simultaneously, we need to lower tax rates, make tax codes simple and easy to comply.
It is high time that the federal and provincial governments chalk out a national plan for long-overdue second Green Revolution in Pakistan by increasing productivity and quality, reducing costs and establishing agro-based industries capable of meeting local demands and producing value-added exportable surplus. Our emphasis should be on growth, productivity and enhancing exports through diversification and value addition. The IT sector is highly ignored and heavy taxation of telecom sector is proving to be anti-growth.
Managing high fiscal deficit coupled with massive debt burden is the toughest challenge faced by our economic managers in 2021. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is easier said than done. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of FBR, continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies, losses of Public Sector Enterprises (PES), circular debt, especially in the energy sector etc.
In the days of international recession due to Covid-19 endemic, the first and foremost priority should have been to take measures to ensure survival, revival and growth in all sectors. Till today, no concrete steps have been taken by the federal and provincial governments for meeting this emergent situation. Resource mobilisation should be given preference to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. There is a need to run PSEs with equity stakes for the poor through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites, for the elites and by the elites only.
The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).