No early end to fiscal imbalance

The inadequacy of our tax-to-GDP ratio reveals an unsustainable financial structure

No early end to  fiscal imbalance


akistan’s economy remains in a state of turbulence, grappling with multifaceted crises that have yet to subside. Although the immediate future appears less precarious than it did a few months ago, attainment of a sustainable economy still seems a distant dream.

The world’s fifth most populous country, with a history spanning over 76 years, is struggling to leverage the abundant natural resources and strategic geographical location to its advantage. It imports a wide range of essentials, including lentils, medicine, energy inputs and heavy machinery.

Consequently, the expenditure on imports is consistently on the rise, reaching a point where our dollar inflows are insufficient to cover the import bill. The persistent trend has led to a continuous trade deficit, with only occasional relief. Marked by a negative current account balance, the current economic scenario is unfavourable.

The imbalance between the cost of our imports and available financial resources has created challenges for maintaining a positive economic trajectory. This situation calls for strategic measures to address trade deficit to promote a more balanced economic environment.

According to recent statistics, worker remittances in November 2023 amounted to $2.3 billion. There is cause for concern as remittances experienced an 8.6 percent decrease on a month-to-month basis. Over the initial five months of the fiscal year 2024 (July to November 2023), total remittances stood at $11.02 billion, marking a 10.3 percent decline compared to the same period in FY 2023 and a 16.9 percent decrease compared to FY 2022. This translates into a reduction of $1.2 billion and $2.2 billion, respectively, signaling an alarming downturn in remittance values during this period.

Pakistan endeavours to secure dollars through various means by receiving support without any accompanying conditions, such as debt service costs or repayment obligations that could significantly contribute to enhancing Pakistan’s external position. Assistance without strings attached can bring much-needed relief to Pakistan’s external financial challenges, potentially alleviating the burden associated with debt service and repayment obligations.

This support comes at a critical time when Pakistan is actively seeking ways to bolster its external reserves and stabilise its economic standing. Absence of stringent conditions makes this support particularly valuable, allowing Pakistan the flexibility to address its immediate external challenges without incurring additional financial burdens.

However, relying solely on this support cannot comprehensively address the long-term challenges confronting the economy. Instead, it should be a component in a broad overhaul, encompassing a systematic redesign of the revenue system, governance structures and expenditure mechanisms.

A comprehensive and strategic approach is imperative to create a sustainable economic framework that addresses the root causes and ensures lasting improvements. The reformative efforts must extend beyond short-term solutions, focusing on restructuring fundamental elements of the economic framework for efficiency and resilience.

The imbalance between the cost of our imports and available financial resources has created challenges for maintaining a positive economic trajectory. This situation underscores the need for strategic measures to address the trade deficit to promote a more balanced economic environment.

A holistic transformation can be achieved by revisiting and reshaping revenue generation methods, improving governance practices and optimising expenditure mechanisms. The objective should be aimed to establish a robust and adaptable economic system capable of withstanding future challenges and fostering long-term stability.

Persistent fiscal deficits have landed Pakistan in a debt trap, significantly restricting resources available for public investment. A substantial allocation towards debt-servicing and interest payments leaves a meager amount for crucial public investments.

In response to the fiscal constraints, the government has increasingly pursued revenue-generating policies, intensifying its focus on accumulating funds. However, these steps have cast a shadow on the local business climate, adversely affecting businesses and impeding their growth.

The relentless pursuit of revenue, amidst fiscal challenges, underscores the pressing need for a more balanced and sustainable fiscal strategy. A strategic reevaluation of fiscal policies is crucial to alleviate the strain on businesses while ensuring financial sustainability.

The persistent depreciation of the Pakistani rupee, coupled with frequent adjustments in energy and fuel prices and increased tax rates, has triggered an inflationary spiral gaining momentum by the day. In November 2023, the national consumer price index inflation, year-on-year, surged to 29.2 percent, up from 26.8 percent the previous month. Over the past 18 months, starting from June 2022, the average inflation rate has stood at 28.5 percent.

Notably, in May 2022, inflation peaked at an unprecedented high of 38 percent, contributing to the overall inflationary pressures. This sustained inflationary trend poses a serious threat to economic stability and necessitates comprehensive measures to mitigate its adverse effects.

The solutions to Pakistan’s economic challenges are evident and have been reiterated consistently. Prioritising government spending on fundamental public facilities, education, and healthcare is crucial. Targeting subsidies and tax benefits more effectively, focusing on those in genuine need rather than those with political influence, is essential for equitable resource allocation.

Growth in the agriculture sector is paramount for addressing issues like unemployment and poverty. Collaborative efforts between the government, ministries and public-private partnerships should concentrate on enhancing productivity; offering subsidies; converting barren lands into cultivable ones; and safeguarding farmers from exploitation.

In the face of climate change and water scarcity, innovative and diverse strategies are imperative to avert crises in these areas. These measures can foster economic stability and improve the overall well-being of the population.

The inadequacy of our tax-to-GDP ratio reveals an unsustainable and imbalanced fiscal structure. Preferential treatment and sectoral disparities can undermine the overall tax framework as certain segments benefit from lower rates or evasion so that the compliant taxpayers bear a disproportionate burden.

For fairness and fiscal sustainability to prevail, a comprehensive review and restructuring of the tax system is the need of the hour. This involves closing loopholes, addressing disparities and ensuring that all sectors contribute equitably to the national revenue.

Dr Ikramul Haq, an advocate of Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the US 

No early end to fiscal imbalance