Challenges on the fiscal front

The real dilemma of the PTI government is that it has no plan — short-, medium- and long-term — to overcome fiscal maladies

For Pakistan the main challenges on the fiscal front for 2021, just a few days away, are not only the revival of the economy amid rising human and financial toll of Covid-19 pandemic, but also how to manage the mounting debt burden and meeting revenue targets fixed for the fiscal year 2020-21.

According to a recent report, the PTI government has “added Rs 397 billion in public debt during the first four months of the current fiscal year, which is contrary to a claim” allegedly made by Prime Minister Imran Khan and Finance and Revenue Minister Dr Abdul Hafeez Shaikh. It is claimed in the State Bank report that public debt of Rs 35.1 trillion in June 2020 “increased to Rs 35.5 trillion by end-October.”

“There was an increase of Rs 397 billion or 1.2 percent in the debt stock, which was lower than the pace of increase recorded in the previous months”.

The government borrowed over $13 billion in foreign loans in the fiscal year 2019-20. The burden of ever-increasing national debt 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 a public debt of about Rs 24.2 trillion. The government of Pakistan Muslim League-Nawaz had added Rs 5.65 billion a day to public debt during its five year rule. The record of the 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 percent of the 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, while the FBR exceeded its target for the first five months of the current fiscal year by collecting Rs 1.69 trillion against a target of Rs 1.67 trillion, the growth is around 4.2 percent, whereas it needs a 22 percent growth to collect the annual target of Rs 4.963 trillion. According to a report, the International Monetary Fund (IMF) has projected a collection shortfall of over Rs 300 billion and “is asking Pakistan to introduce a mini-budget”.

If the IMF prevails, there will be more taxes. This could destroy 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, the FBR has failed to enforce return filing by 7.4 million who, according to its own admission, have paid withholding taxes.

The problem on the fiscal front is not related to revenues. 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), the deficit widened to $9.6 billion in the first five months of the current fiscal year. During July-November 2020, exports increased slightly by 2.1 percent and stood at $9.7 billion as compared to $9.5 in the same period last year. Imports during July-November period increased by 1.3 percent or $247 million to $19.4 billion.

In fiscal year 2019-20, debt-servicing by federal government was Rs 2,620 billion (domestic Rs 2,313 billion and foreign Rs 307 billion) against net revenues of Rs 3,278 billion after transfer to the provinces. Debt-servicing was 79 percent of the total net revenues of the federal government and 65 percent of tax collection of the FBR. This is the real dilemma and challenge on the fiscal front faced by the 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 percent and the irrational revenue target fixed for the FBR would be definitely revised downward.

As regards inflation and cost of living, 2021 will bring more miseries for the poor due to rising prices of items of daily use, costly utilities and unemployment for many. The real dilemma of the PTI government is that it has no plan — short-, medium- and long-term — to overcome fiscal maladies.

The government is borrowing just to repay maturing external debts incurred by its predecessors. During the fiscal year 2019-20, it received $13.2 billion in gross loans 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 percent of the 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 an 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 government started its term with an exceptional debt burden, record fiscal and current account deficits, forcing it to borrow more, raise taxes and devalue rupee.

The key to debt retirement is export-driven growth, drastic reduction of unproductive and wasteful expenditure, utilisation of state lands for commercial purposes 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.

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. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual under-performance by the FBR, high 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 the 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 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. There is a need to run PSEs with equity stakes for the poor through public-private partnerships.

The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

Challenges on the fiscal front