New year challenges

For Pakistan, the main challenges on the fiscal front for 2023 will not only be the revival of a fast deteriorating economy amidst perpetual political instability, but also meeting losses arising out of the devastating floods situation and the rehabilitation of affectees.

Other challenges include completing the International Monetary Fund (IMF) programme under tough conditions, difficulty in managing current account deficit and huge foreign liability payments, 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 2022-2023.

According to figures released by the State Bank of Pakistan (SBP), the total debt and liabilities as on September 30, 2022 stood at Rs62.5 trillion. Out of these, foreign debts and liabilities were Rs26.5 trillion, that is an addition of Rs6.8 trillion or 35 per cent higher as compared to last year.

As per budget 2023 details, debt servicing alone for FY23 will be Rs3.95 trillion (domestic Rs3.43 trillion and foreign Rs0.511 trillion), whereas defence will be Rs1.56 trillion. This means that after transferring Rs 4.37 trillion in taxes to the provinces under the 7th National Finance Commission (NFC) Award, the government will be left with only Rs5.03 trillion. In other words, debt servicing and defence alone will result in a negative balance of Rs0.481 trillion. Thus, partly defence and all other expenses (Rs7.14 trillion current and Rs1.02 trillion development) will have to be met by taking further loans. This proves that Pakistan’s real dilemma is debt trap.

On assuming power in August 2018, the Pakistan Tehreek-e-Insaf (PTI) government inherited a public debt of about Rs24.2 trillion. During its five-year rule [2013-18], the Pakistan Muslim League-Nawaz (PML-N) government added Rs5.65 billion a day to public debt, but the PTI government’s record was even worse, adding Rs13.2 billion on average per day, according to a report.

As per the Ministry of Finance, the federal budget deficit for first quarter of FY23 was Rs1.026 trillion or 1.3 per cent of GDP. As stated in a report, “During the current fiscal year, the federal government’s total expenditure shot up to Rs.1.991 trillion, 28% or Rs436 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 per cent”. However, the World Bank in its ‘Post Disaster Need Assessment Report’ claimed that “due to the floods, the country may run an overall primary deficit of 3 per cent of the GDP again in the current fiscal year”.

On the revenue front, though the Federal Board of Revenue (FBR) exceeded its target of first five months by collecting Rs2.688 trillion against a target of Rs2.680 trillion, the growth is 15.3 per cent, whereas it needs to be 21 per cent to collect the annual target of Rs7.470 trillion. The FBR is confident of achieving this target without imposing new taxes. However, the prime minister has directed it to collect Rs7.6 trillion by June 30, 2023. The actual tax potential is Rs12 trillion as elaborated in Tax reforms: Agenda for Self-Sustainability.

According to a report, the 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 the delayed 9th Review, the IMF is asking for more taxes to be imposed, electricity price raised, financing for flood losses, reasons for shortfall in collection of petroleum levy against the target of Rs855 billion in the FY 23 budget etc. If the IMF prevails, there will be more taxes and levies, destroying the chances of revival of an already stagnant economy. While other countries are providing tax incentives to businesses to recover from the economic effects of the Russia-Ukraine war, Covid-19 etc., Pakistan is resorting to oppressive tax measures.

The irony is that even after imposing multiple and higher taxes, the 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 people, who were paying adjustable withholding income tax of 12.5 per cent as broadband users till June 30, 2022. From July 1, 2022, the rate was enhanced to 15 per cent. The Pakistan Telecommunication Authority’s (PTA) November 30, 2022 data reveals total mobile users to be around 194 million, out of which 124 million are broadband users.

The problems on the fiscal front are thus concerning bad tax policy and administrative weaknesses in broadening the base with lower tax rates, necessary for accelerated and sustainable higher growth. The actual fiscal dilemma, as evident from above, is not solely related to revenue mobilisation. A huge expenditure remains the real culprit. In the face of these realities, there is still optimism in official quarters that despite political instability and being the election year 2023 will witness economic recovery and growth. Independent analysts believe that the twin menace of rising debt and fiscal deficit will persist. They have forecasted a growth of less than three per cent in FY 23.

As for inflation and cost of living, 2023 will bring more miseries for the poor due to rise in items of daily use, costly utilities, and unemployment. The PTI’s real dilemma was that it had no plan – short, medium or long term – to overcome fiscal maladies. The same is true for the present government. The time available to them is also too short for any meaningful corrective measures to be taken, and it also lacks political will for even short-term structural reforms. Governments in Pakistan have been borrowing just to repay maturing external debts taken by their predecessors and the PDM is no exception.

The PTI government and all finance experts knew of the challenges of 2022 and beyond. However, little debate or discussions happened on viable solutions. The opposition parties under their alliance only created chaos, and had no agenda for economic recovery. Their failure in tackling economic challenges has been evident since April, 2022 when they succeeded in ousting, for the first time in the country’s history, an elected prime minister through the vote of no confidence.

It is an incontrovertible fact that no political party in Pakistan runs an in-house think-tank that has produced 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 about it.

The key to debt retirement is export-driven growth, drastic reduction of unproductive and wasteful expenditure, utilisation of state land for commercial purposes by leasing them through public auction, and collecting taxes fairly and justly, but firmly. We also 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 the long-overdue second Green Revolution in Pakistan. They should increase productivity and quality, reduce costs and establish 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 in telecom sector is proving to be anti-growth.

Managing a high fiscal deficit with a massive debt burden is the toughest challenge our economic managers will have to face in 2023 and beyond. For the past many decades, Pakistan’s fiscal policy has remained under immense pressure owing to the FBR’s perpetual underperformance, continued security related outlays, sharp rise in wasteful expenditure and greater than targeted subsidies, losses to Public Sector Enterprises (PES), and circular debt, especially in the energy sector.

During international recession, the first and foremost priority should have been to take measures to ensure survival, revival and growth in all sectors. The federal and provincial governments have taken no concrete steps till today to address the situation emerging on the economic front. 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 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 will set the stage for a structural change that can help achieve economic growth for the people, by the people.

The writer, Advocate Supreme Court, is Adjunct Faculty at LUMS and member Advisory Board of PIDE