PAKISTAN economy continues to be in trouble and not getting better due to reckless government spending and not controlling unnecessary expenditure, particularly perks and allowances for the administrative machinery and parliamentarians.
Pakistan’s large and persistent fiscal deficits have contributed to macroeconomic volatility.
The country’s economic growth has been largely consumption-driven with low contributions from productivity-enhancing investments and exports.
Declining total factor productivity has limited Pakistan’s potential growth.
Expansionary fiscal policies have caused aggregate demand to exceed potential growth, leading to large current account deficits and high inflation.
Remedial cooling measures often trigger boom–bust cycles, deterring investment and weighing on productivity and long-term development.
Persistent fiscal deficits have created a strong sovereign–financial sector nexus, with public debt increasingly held by the domestic financial sector.
Consequently, the financial sector’s health is now closely tied to the Government’s financial stability, heightening risks to the sector in the event of a severe fiscal shock.
In its first Public Expenditure Review (PER) since 2010, the World Bank Report analyzes the key drivers of Pakistan’s fiscal deficits and explores how the Federal Government can regain fiscal and debt sustainability, in accordance with the fiscal rules set forth in the FRDLA 2005.
The report builds upon previous studies and provides new and updated analysis, and suggests policy measures for fiscal consolidation that could bring the fiscal deficit under 3.5 percent of GDP and public debt below 60 percent of GDP, as stipulated by the FRDLA 2005.
Pakistan’s fiscal deficit has been persistently large and growing, posing risks to fiscal and debt sustainability.
In FY22, Pakistan’s deficit stood at 7.9 percent of GDP, matching that in FY19, to be the largest in more than 22 years.
In addition to being persistently high, averaging at 6.2 percent of GDP over the past decade, the deficit has also been growing, with the post 2010 annual average being 50 percent larger than its pre-2010 average.
The large recurrent budget shortfalls have led to a rapid accumulation of public debt, which reached 78.0 percent of GDP in FY22, slightly lower than the record high of 81.1 percent of GDP in FY-2020.
Accordingly, both the deficit and debt levels are in breach of the fiscal rules stipulated by the Fiscal Responsibility and Debt Limitation Act (FRDLA).
Rationalizing and reducing Pakistan’s fiscal deficit is, therefore, critical to regaining fiscal and debt sustainability.
The extensive government borrowing from the financial sector has crowded out private investment.
Credit extended by the banking sector to the Government rose by more than 400 percent over FY11–21.
The increased exposure to the public sector has contributed to the crowding out of credit to the private sector, which has fallen to 17.2 percent in 2020, one of the lowest among emerging economies.
The reduced access to credit contributes to low private investment and hence low productivity growth.
Debt servicing costs constitute a large share of fiscal expenditures and have been increasing over time, in tandem with the rapidly rising debt.
The high interest expenditures, together with government salaries, pensions, and government operating expenses, imply that more than 70 percent of total federal spending is pre-committed and largely rigid, leaving little fiscal space for growth-enhancing development expenditure and public investments, such as infrastructure development.
The rigidity of fiscal expenditures is also a key driver of the country’s persistent deficits.
Pakistan’s fiscal revenue collection is low and has been falling.
Persistent low fiscal revenue is another driver of Pakistan’s recurrent budget shortfall.
Pakistan’s total revenue collection averaged 12.8 percent of GDP over the past decade, substantially lower than the South Asian average of 19.6 percent.
In addition, total revenue collection has been falling over time, with the FY18–22 average at 12.5 percent of GDP, down from the FY13–17 average of 13.2 percent.
Tax revenue collection, which averaged at 10.3 percent of GDP over the past decade, is also low.
Federal spending is also elevated by incomplete fiscal decentralization and continued outlays in provincial areas of responsibility.
While there have been three provincial PERs since 2010, there has not been a federal-level PER released since then, presenting a substantial knowledge gap.
The federal government fiscal deficit is the key driver of the national fiscal deficit.
While the provinces together have been typically running small fiscal surplus over FY10-22, the Federal Government has been consistently running large budget deficits.
The latest Word Bank Report provides an overview of Pakistan’s macroeconomic and fiscal context and highlights the importance of fiscal and debt sustainability by examining the detrimental effects of persistently large deficits.
The unique drivers that contribute to the persistence of Pakistan’s fiscal deficits are also identified.
In addition to detailed analysis on the overall federal fiscal expenditures and the mobilization of federal domestic revenues, the report also deep dives into two areas that drive the two largest federal expenditure categories- debt management and their impact on federal interest payments, and fiscal support to State-Owned Enterprises (SOEs),which constitutes a significant portion of subsidy.
Improving SOE management also reduces contingent liabilities and fiscal risks from SOEs, which has been growing in recent years.
In addition, the Report discusses the realignment of federal government spending with its constitutional mandate, which would reduce expenditures pertaining to the operating expenses of the civil government and development spending or PSDP.
Another area where there is an urgent and pressing need to drastically cut the expenditure is the perks and salaries of the Parliamentarians.
Their salaries and perks have been doubled and the total yearly expenditure on them runs into billions of Rupees.
IMF and World Bank have both voiced their concern in this respect and have asked the government to curtail expenditure under this head.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration and author of seven books. (mughal_rashid@hotmail.com)
