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2023: challenges on fiscal front

Dr. Ikramul Haq

For Pakistan, the main challenges on the fiscal front for 2023, just a few days away, will not only be revival of a fast deteriorating economy amidst perpetual political instability, meeting losses arising out of devastating floods and rehabilitation of the affected, completion of programme of International Monetary Fund (IMF) with tough conditions, difficulties in managing current account deficit and huge payments of foreign liabilities, fast depleting forex reserves, burgeoning fiscal deficit, stagflation, rising unemployment, huge circular debt in electricity and gas sectors, continuous funding from taxpayers’ money of inefficient and loss-bearing state-owned enterprises (SOEs), but most importantly, how to manage the mounting debt burden and meeting revenue (tax and non-tax) targets fixed for the fiscal year 2022-23. 

According to figures released by the State Bank of Pakistan (SBP), total debt and liabilities as on September 30, 2022 were Rs. 62.5 trillion. Out of these, foreign debts and liabilities were Rs. 26.5 trillion that is an addition of Rs. 6.8 trillion or 35% higher as compared to last year.

The details of budget 2023. available on the website of Ministry of Finance [MoF], show that for fiscal year 2022-23 (FY23), debt servicing alone will be Rs. 3950 billion (domestic Rs. 3439 billion and foreign Rs.511 billion) and defence Rs. 1563 billion. It means that after transfer of taxes (Rs. 4373 billion) to the provinces under 7th National Finance Commission (NFC) Award, the government will be left only with Rs. 5032 billion [tax and non-tax revenues]. In other words, debt servicing and defence alone will result in a negative balance of Rs. 481 billion. Thus, partly defence and all other expenses (current: Rs. 7141 billion and development: Rs. 1024 billion) will be met by taking further loans. Thus, debt trap, is the real dilemma of Pakistan. How to come out of this, after the Constitution (Eighteenth Amendment) Act, 2010 [commonly called “the 18th Amendment”], is discussed in detail in a paper [Taxation Post 18th Amendment] published by Islamabad Policy Research Institute (IPRI).   

On assuming power in August 2018, the Government of Pakistan Tehreek-i-Insaf (PTI) inherited public debt of about Rs. 24.2 trillion. During its five-year rule [2023-18], the Government of Pakistan Muslim League (Nawaz) added Rs. 5.65 billion a day to public debt, but the record of PTI government was even worse as it had been adding “on average per day Rs. 13.2 billion”, according to a report.

As per MoF, the federal budget deficit for first quarter of FY 23 was Rs. 1.026 trillion or 1.3% of GDP. As stated by a report, “During the current fiscal year, the federal government’s total expenditure shot up to Rs.1.991 trillion, 28% or Rs. 436 billion higher than the comparative period last year”. The report adds: “Under IMF programme, Pakistan has committed to converting the primary deficit, calculated after excluding interest payments into a surplus of 0.2% of GDP, down from last fiscal year’s 3.6%”. However, the World Bank in ‘Post Disaster Need Assessment Report’ claims that “due to the floods, the country may run an overall primary deficit of 3% of the GDP again in the current fiscal year”.

On the revenue front, though Federal Board of Revenue (FBR) exceeded its target of first five months of the current fiscal year by collecting Rs. 2.688 trillion against the target of Rs. 2.680 trillion, the growth is 15.3%, whereas it needs 21% to collect annual target of Rs. 7.470 trillion. FBR is confident to achieve this target without imposition of new taxes. However, the Prime Minister directed it to collect Rs. 7.6 trillion by June 30, 2023. The actual tax potential is Rs. 12 trillion as elaborated in Tax reforms: Agenda for Self-Sustainability, Management Accountant [Volume 31.2,pp 36-38, March-April 2022].

According to a report, the International Monetary Fund (IMF) has “remained unsatisfied with the revenue and spending plans shared by Pakistan and has sought additional information, including details of shelved development projects that have now been taken up again as a top priority of the government”.

Pending the finalization of delayed Ninth Review, IMF is asking for more taxes, raising prices of electricity, financing for flood losses, reasons for shortfall in collection of petroleum levy against the target of Rs. 855 billion in the FY 23 budget etc. If IMF prevails, there will be more taxes, levies etc destroying chances of revival of an already stagnant economy. While other countries are providing tax incentives to businesses to recover from the economic effects of Russia-Ukraine war, Covid-19 etc, we in Pakistan are resorting to oppressive taxes etc.

The irony is that even after imposing multiple/higher taxes, FBR has failed to tap the real potential by enforcing compliance from potential income tax return filers for tax year 2022, out of about 120 million persons, who were paying adjustable withholding income tax of 12.5% as broadband users till June 30, 2022. From July 1, 2022, the rate is enhanced to 15% and latest data by Pakistan Telecommunication Authority (PTA) of November 30, 2022 reveals total mobile users at 194 million out of which broadband users are 124 million.

The problems on fiscal front are, thus, of bad tax policy and administrative weakness to broaden the base with lower tax rates that are necessary for accelerated and sustainable higher growth. The actual fiscal dilemma, as evident from above, is not solely related to revenue mobilisation, but in reality, the real culprit remains huge expenditure e.g. debt servicing, wasteful expenses and high administrative cost to run a gigantic and inefficient government machinery as explained in ‘Fiscal deficit and tax expenditure[September 20, 2020].

In the face of above realities, there is still optimism in official quarters that 2023, despite political instability and being election year, will witness economic recovery and growth.  Independent analysts/experts say that the twin menace of rising debt and fiscal deficit will persist. Their forecast is that growth will be less than 3% in FY 23.

As for inflation and cost of living, 2023 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 was that it had no plan—short, medium and long term—to overcome fiscal maladies and the same is true for the present alliance government of Pakistan Democratic Movement (PDM). Also, the time available for them is too short for meaningful corrective measures and it also lacks political will for even short-term structural reforms.

The successive governments in Pakistan have been borrowing just to repay maturing external debts taken by their predecessors and the PDM is no exception. A news report of December 10, 2022, claims: “… there is no immediate chance of imposing an economic emergency in the country as the government still hopes that it would get $32 billion in loans this year…..Pakistan’s official foreign exchange reserves had dropped to four years’ lowest level of $6.7 billion and the critical phase had begun….Pakistan has recently requested Saudi Arabia to urgently provide $3 billion in cash after its foreign exchange reserves fell to a critically low level…..Pakistan needed a minimum of $32 to $34 billion in the current fiscal year to finance its debt and bridge the current account deficit gap….foreign inflows in the first four months remained at $4.2 billion...”

The PTI Government and all experts in fiscal field knew the tough challenges for 2022 and beyond. However, little debate in TV talk shows took place on discussing/giving viable solutions. The opposition parties under the banner of Pakistan Democratic Alliance (PDA) were merely creating chaos without giving any agenda for economic well-being of masses and overcoming the fiscal woes faced by the nation. Their failure in tackling the challenges faced by economy is evident since April 2022 when they succeeded to ouster for the first time in the history of Pakistan, an elected prime minister by using the vote of no confidence.  

All said and done, it is an incontrovertible fact that none of the political parties in Pakistan even till today have any in-house 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 with as highlighted in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, published in December 2020), Tax Reforms in Pakistan: Historic & Critical Review (PIDE, 2020) and PIDE Reform Agenda for Accelerated and Sustained Growth [2021].

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 to be faced by our economic managers in 2023 and beyond. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is all, 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, sharp 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, the first and foremost priority should have been to take measures to ensure survival, revival and growth in all sectors. For meeting the emergent situation on economic front, the federal and provincial governments till today have taken no concrete steps. Resource mobilisation should be given top 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.


Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, intellectual property, arbitration, international taxation, IT and ML/CFT related laws. He is author of many books on law, economic and political history of Pakistan, drugs, arms, terrorism and related matters. He studied journalism, English literature and law. He is Chief Editor of Taxation He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

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