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Bourgeoning debt & fiscal woes

Dr. Ikramul Haq & Abdul Rauf Shakoori

Pakistan budget for financial year (FY) 2022-23 was presented with total outlay of Rs. 9.579 trillion with gross federal revenues at Rs.9.405 trillion. The government pitched Federal Board of Revenue (FBR) tax collections at Rs. 7.470 trillion [now increased to Rs. 7.640 trillion] and non­tax revenue at Rs.1.935 trillion. Share of the provinces under 7th National Finance Commission (NFC) Award was estimated at Rs. 4.373 trillion. The residual revenue for federal government was estimated to be Rs. 5.023 trillion.

The federal government plans expenditures of Rs. 9.579 trillion leading to budget deficit of Rs. 4.547 trillion. With an estimated provincial surplus of Rs. 750 billion, the overall federal deficit was expected at Rs.3.797 billion or 4.9% of GDP, to be bridged by banking/non-banking borrowings and external receipts.

It is pertinent to mention that for the current year, the federal government has targeted a primary surplus of Rs. 153 billion as opposed to revised estimates of primary deficit of Rs.1.596 trillion in FY 2021-22. However, the challenging economic situation and the impact of strong macro-economic adjustment measures have reduced the overall economic growth that has resulted in decreased government tax collection. Moreover, owing to destruction caused by unprecedented floods, assigned target for fiscal deficit is bound to fail, even making primary surplus quite difficult to achieve. In a Press report [Despite squeezing people, government projects record high deficit], it is revealed:

Pakistan’s federal budget deficit projection has been revised to history’s highest at Rs6.22 trillion, highlighting the unending fiscal woes that have pushed the country into a debt trap despite putting an additional burden of Rs735 billion on people in the current fiscal year.

The revision has been made in light of recent talks with the International Monetary Fund (IMF), which exposed the massive underreporting of expenditures at the time of budget presentation by the finance ministry.

The Rs6.22 trillion deficit will be bridged by taking more loans from domestic and external sources, a task that the government is unable to perform due to the economic meltdown.

The figures also showed that the size of budget, which had been estimated at Rs9.6 trillion in June, will rise to Rs11.2 trillion, a new record for expenditure, which is also higher by 17%.

A key reason for the record budget deficit is the unprecedented debt servicing cost of Rs5.2 trillion, which is Rs1.25 trillion, or 32%, more than that approved in June.

Lack of discipline in Pakistan’s financial affairs has been a constant feature since long, due to which our domestic and external debts have skyrocketed. Gap arising due to deficits is consistently filled through borrowings that is now taking up a considerable portion of our budget. In FY 2022-2023 budget, Rs. 3.950 billion is earmarked for interest payments, which is 41% of total budgeted expenditures and more than 50% of budgeted revenue collection. Now, this number is to exceed Rs. 5 trillion as mentioned in Despite squeezing people, government projects record high deficit, published on February 26, 2023.

This dangerous trend needs to be corrected on emergent basis as it has already started casting doubts on our ability to continue as a sustainable economic entity. Similarly, on the external front we have been posting huge current account deficits while external position is being managed with borrowing. During the rule of Pakistan Peoples Party (PPP) from 2008 to 2013, Pakistan’s external debt increased from US$ 46.16 billion to US$ 60.89 billion, depicting an increase of US$ 14.7 billion i.e. annual average increase of US$ 2.9 billion. During Pakistan Muslim League Nawaz (PMLN) rule from 2013 to 2018, our external loan increased from US$ 60.89 billion to US$ 95.23 billion, marking an increase of US$ 34.3 billion i.e. annual average increase of US$ 6.8 billion. The worst came during the regime (August 18, 2018 to April 10, 2022) of coalition government of Pakistan Tehreek-e-Insaaf (PTI), when external debt jumped from US$ 95.23 billion to US$ 130.19 billion, addition of US$ 34.9 billion—annual average increase of US$ 8.7 billion.

Although during 2013-18 a number of energy and infrastructure related projects were executed under the landmark initiative of China Pakistan Economic corridor (CPEC), but subsequently post 2018, the momentum decelerated therefore, expected dividends associated with these projects could not be realised. This is one of the prime reasons behind the present foreign reserve-related crisis. Current account deficit is presently dealt with makeshift arrangements like import restrictions, as there are limited options available when it comes to debt servicing, especially connected to commercial and market-based borrowings.

It is worthwhile to note that since the alliance government of Pakistan Democratic Alliance (PDM) assumed power in April this year, external debt has started to decline. Based on State Bank of Pakistan’s data for December 2022, our external debt decreased from US$ 130.19 billion to US$ 126.3 billion showing a reduction of US$ 3.8 billion. Still, a lot more requires to be done in view of Pakistan’s gigantic external financing needs for the ongoing year.

We need to pay US$ 20.49 billion per year, whereas for next four years it is estimated to be an average of US$ 25.23 billion. These numbers are exclusive of the additional impact which can arise due to Current Account Deficit (CAD). Based on International Monetary Funds’ reports, if we add estimated CAD, Pakistan’s average annual gross financing requirement in next four years is US$ 37.5 billion.

As per International Monetary Funds’ publication based on Seventh and Eighth Review under Extended Fund Facility (EFF) program of US$ 6.5 billion, Pakistan has resolved to restrict its CAD to US$ 9.28 billion which is 46% lower than US$ 17,461 billion posted last year during PTI government. According to the recent economic outlook publication by Ministry of Finance, this target seems to be achievable as during July to December 2023, the CAD is US$ 3.7 billion, which is 60% lower than US$ 9.1 billion posted during corresponding months of last year.

Approach adopted by the PDM government has been an orthodox one which has adversely impacted business cycle in the country. Rather than lowering deficit through increased exports and remittances, the government is managing this by imposing restrictions on imports. Additionally, the government is either not processing or delaying transactions of importers permitted to import, which is shaking investors’ confidence and badly affecting businesses as well as creating shortages of medicine and other imported products, including vegetables.

Pakistan’s passive and compromised foreign policy is also adding to our economic difficulties, Its relations with the neighboring countries are not ideal at all. China, which is considered a trusted friend, has distanced itself and is silent despite being cognizant about Pakistan’s bleak economic condition. Moreover, government trade agreement with China is proving more beneficial to China rather than to us as we have failed in getting proper access to Chinese markets to boost our exports.

Similarly, with India and Pakistan sharing borders and culture, most of our food requirements can be met through import of vegetables and other products.  We can export textile products to India which has a population close to 145 billion people. Unfortunately, due to continuous tension with this neighbouring country, we have remained unsuccessful in extracting maximum advantage from its huge market.

Rather than bilateral trade, we also have various security related issues with Iran and Afghanistan to our west. Resultantly, Pakistan, a country of around 225 million people with markets of over 3 billion people near home is facing export related challenges. Rulers of Pakistan should realize that unabated borrowing to meet burgeoning fiscal needs and bridging current account deficit through import restriction and reliance on traditional ways of exporting, ignoring information and technology as well as human capital, will land us into further economic mess. It will, on the one hand, create anarchy in the country, and on the other, pose serious national security threat.


Dr. Ikramul Haq, Advocate Supreme Court, specializes 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 has been studying phenomena of arms-for-drugs, narco-terrorism and global heroin economy since 1979 and authored Pakistan: From Hash to Heroin and its sequel Pakistan: From Drug-trap to Debt-trap. 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). 

Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, investment companies, money service businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

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