There is no worse way to manage public finance than what the government of Pakistan has done for over a decade.
My last column (‘Pakistan’s IMF experience’, September 9) made clear how the government’s economic policy, in and out of IMF agreements, has weakened the economy. Nowhere does it show more glaringly than in the way we spend and raise public money. The government’s approach to spending has reduced the economy’s capacity to grow. It has also laden it with debt. Rather than empower firms to produce more, the government practices austerity in the productive areas and binges on surplus rent for the privileged.
Behind this languid approach is the lack of a well-thought strategy. Government spending must have the goal of stimulating growth or improving citizen welfare. What we see though is spending that hinder progress. The government does not seem to be aware of the key role it occupies in economic development. No big idea guides its spending.
Let us see where the federal and provincial governments spend money. Interest payment is a good indicator. In FY24, 55 per cent of federal spending went to interest. Each year that ratio has worsened. It was 28 per cent in FY2008. There is a perverse circle that impoverishes the economy.
The government borrows to pay for expenses, much of which is interest on debt. And the next year it borrows more to pay interest on the new debt. Banks and foreign creditors may have recycled the same money more than once. In FY24, the government of Pakistan paid 7.7 per cent of GDP in interest alone, over Rs8 trillion. That amount is 66 per cent of gross revenues and 114 per cent of net federal receipts. Overall, Pakistan paid $17 billion or 5.0 per cent of GDP to foreign creditors in interest and principal. There is nothing to show for this drain on our finances. For the next few years, this number would likely grow.
As interest pre-empts ever more share, there is no visible step to reduce debt dependence. Debt begets more debt. The government has not shared a growth agenda to enable the return of debt. Beneficiaries of the enormous amount spent on interest are creditors, foreign and at home. The taxpayer who funds it gets nothing.
Subsidies and grants have the second highest share in the government of Pakistan’s total spending. Between FY2000 and FY2017, their share in federal spending was under 10 per cent. That started to change in 2018 and then rose rapidly. It went up to 30 per cent in FY22, correcting later. In FY24, the government spent Rs2.4 trillion in subsidies and grants.
A lot of this amount props up bad policy and poor management. Some of the subsidy goes to the power sector. This practice began in 2007 when oil prices suddenly shot up. To cushion the public from its full impact, the government kept the power tariff on hold. Producers received the difference as subsidy. What was meant as a stop-gap for one year has become an enduring spoil for big corporations.
Subsidies have stayed even as the power tariff has risen sharply. Revenue losses of DISCOs, an item the government could reduce, are still high. Also, circular debt stock keeps piling up. This is an absurd arrangement practised by the government at the expense of consumers, exporters, and taxpayers. In addition, government pays grants to PSEs to meet their losses. Interest, grants, and subsidies together consume over 70 per cent of federal outlay. Despite such high expense, the government has also built-up large payables in the latter two heads.
This spending spree for the well-to-do comes at a cost. In a disturbing trend, spending on defence is half of what it was twenty years ago as percent of GDP. This is hardly comforting, as defence is a vital area. One source of growth for the economy is development spending – PSDP. It needs major reforms, but the PSDP’s possible role in GDP growth and its potential for raising private productivity is beyond doubt. Expense on the PSDP is one-third of what it was in FY2007. The long-term trend of decline in the PSDP, which correlates with falling GDP growth rates, suggests political consensus on short-changing development.
One definition of poverty is to deprive people of the capability to improve their lives. Pakistan is in the bottom category in most human capability indicators. This is not just a moral issue. Skilled workers are key for private sector growth. We are woefully short in this area.
A truism in public space spreads the belief that Pakistan’s government spending is too high and wasteful. Pakistan has one of the lowest ratios of public expenditure to GDP. The economically conservative The Heritage Foundation of Washington DC normally advocates less government. Yet, it agrees that “public spending could contribute to productive investment and economic growth.”
In FY22, total government spending in Pakistan, federal and provincial, was 19.8 per cent of GDP. As per the IMF, in 2022, India’s public spending was 29 per cent of GDP. China spent 33 per cent of GDP and the US 36 per cent. Even from this small kitty, the government of Pakistan chooses to favour special interests over economic growth. Public spending should build capacity and offer incentives to private sector to move up the value chain. Pakistan ignores such goods and spends on interest, subsidies for private power and to keep afloat loss-making state units. There is consensus among all parties on this account. Experts too may have missed the point, though it is central to our economic woes.
The same tired decision-making guides government incentives for investment. In FY24, total investment was 13 per cent of GDP. For four decades, from the 1970s to 2010, the average investment-to-GDP ratio stayed above 17 per cent. Of this, manufacturing investment was about 5.0 per cent of GDP. Since then, these ratios have dropped. For the last five fiscals, total investment averaged 14 per cent with manufacturing investment 1.2 per cent of GDP.
There is a cost to the fall in investment, especially in manufacturing. Though its share has fallen in recent years, in the last one hundred years, manufactured goods have led exports by a long margin. New growth economies competed because of low labour cost. Their people prospered. With goods becoming ever more complex, low-end economies such as Pakistan must become especially competitive to succeed among other low-cost producers. But the government’s support is dwindling. Manufacturing needs infrastructure, quality people, R&D and solid legal and governance support. Most governments of growth economies set aside large sums for the purpose. Their leaders devote a great deal of time to the matter. We have cut down.
Manufacturers also lack access to credit. That has been a problem for long, even before the present period of bizarre interest rates began. Nor does manufacturing enjoy special incentives such as those offered to private power, construction, and auto assembly. In fact, the latter incentives divert investment from manufacturing. It is no surprise that exports did not respond to the steep fall in the value of the rupee. We have reduced the ability to compete globally.
There is a lengthy list of past policy mistakes that the government of Pakistan must correct. Yet, its key focus is debt and taxes. The government considers the problem as the cure. There is no urgency to repair flawed policy. We are fighting fire with the wrong weapon.
By lending us funds, foreigners will increasingly own more of Pakistan. That is hardly an uplifting thought. Do we have a plan to reassert sovereignty?
The writer is chair and CEO, Institute for Policy Reforms. He has a long record of public service.
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