Fiscal gap: real elephant in room

Policymakers must strike balance between debt servicing, essential expenses

ISLAMABAD:

As per the announcement for the federal budget 2024-25, Pakistan will have to finance a budget deficit of Rs8,500 billion. This is such an important and staggering figure, yet no one recognises its real impact. We have been told that it is 8% of the GDP, but no one tells us that it is actually 45% of the total budget for 2024-25. To add some spice to it, a total of Rs7,800 billion will be financed through domestic financing, for which the lending rate is around 20%. Thus, the real figure would be even higher. For reference, the net federal receipts for 2024-25 would be Rs10,377 billion. Despite all the additional revenue mobilisation measures, the fiscal deficit would be 82% of the net federal revenue.

It is quite interesting to note that despite the very strict and squeezing new tax measures, we are talking about additional revenue of a couple of Rs100 billion. Imagine the situation if we have to make up for even one fourth of this fiscal deficit. Pakistan has been grappling with serious debt challenges for a long time, and one of the central issues is its budget or fiscal deficit. Addressing this budget deficit requires prudent fiscal management, revenue diversification, and targeted spending. Policymakers must strike a balance between debt servicing and essential expenditures to ensure long-term economic stability.

To address these issues, here are ten suggestions that will most likely be ignored by the relevant authorities but are at least a contribution towards the wake-up calls:

Reduce government debt

The federal budget 2024-25 aims to cut government debt to 68% of GDP, aided by inflation and lower interest costs. However, this looks quite unlikely due to prevailing economic productivity issues, macroeconomic uncertainty, lack of clear direction and adaptive planning, and political vulnerabilities. High inflation and deflator effects can help offset soaring domestic interest costs if fiscal and monetary policies are well-aligned.

Monetary policy adjustments

The State Bank of Pakistan (SBP) should consider cutting policy rates, which is anticipated to support a further decline in inflation. This is required for encouraging productive investments in the economy by reducing the cost of capital and also reducing the domestic debt burden.

Rationalise taxation

This does not mean increasing tax rates but increasing the tax base and rationalising tax rates and incidences.

Subsidy reforms

Implement rational, fair, and extensive subsidy reforms. These reforms are almost absent in the recent fiscal and economic policy narratives, probably due to pressure groups of subsidy beneficiaries. We hear every day about the so-called subsidies on utilities for the general public, but these wouldn’t even constitute one quarter of the direct and indirect subsidies to the upper classes through tax exemptions, rebates, and other incentives in the name of industrialisation.

Rationalise fiscal expenditure

Focus on fiscal savings and the efficiency of development expenditure, as well as zero-based budgeting for non-development expenditures.

Manage non-budgetary debt drivers

Addressing these drivers is quite challenging but would have a positive impact on debt management and reducing the fiscal deficit burden.

Reform state-owned enterprises

Minimise the burden of SOEs on public finances by improving governance and efficiency in management and operations, without blanket privatisation.

Control expenditures, promote growth

Focus on controlling expenditures, promoting economic growth, reducing government participation in economic activities, and managing debt servicing and inflation.

Secure additional financing

Enhance exports, remittances, and private sector investments, especially from expatriate Pakistanis, rather than relying solely on the International Monetary Fund (IMF) and traditional donors.

Enhance fiscal revenue collection

Increase the tax base through rational measures instead of penalising everyone simply for being citizens.

Before concluding, it may be of interest to remind that we have the Fiscal Responsibility and Debt Limitation Act 2005 in Pakistan. It could be helpful if the stakeholders could open it, read it, and reflect upon it. I leave it to the responsible ones to ponder the mechanisms and consequences of non-compliance or breach of laws, including this Act.

It is hard to consider the latest budget and related actions as anything like economic or fiscal policy or management. I would rather feel it is an attempt at a “broth” by many cooks; in the Pakistani context, the broth is actually karhai. Enjoy the fiscal karhai, my dear fellow Pakistanis. The meat in this karhai is none of the usual ones, and to keep it forcefully fresh, the spices are added in the form of additional taxes every year. Someone needs to tell the chef (finance minister) that it is time to change the recipe, ingredients, and even serving (budget allocations) before it is too late.

THE WRITER IS AN INTERNATIONAL ECONOMIST