ISLAMABAD (ABC) – Pakistan needs comprehensive structural reforms to effectively address its unprecedented fiscal challenge. The revenue has to be increased to at least 15% of GDP, necessitating broadening the tax base, eliminating tax exemptions, and streamlining tax compliance procedures for simplicity.
Dr. Faiz ur Rehman, a fiscal economic researcher at the Institute of Business Administration, said this while talking to WealthPK.
Dr Rehman highlighted the significance of tackling fiscal mismanagement to attain a more sustainable and balanced budget. He emphasized the importance of streamlining expenditures, particularly in areas now falling in the provincial jurisdiction.
Additionally, he stressed that improving coordination between the federal and provincial authorities could enhance the efficiency of resource allocation, thereby easing the burden on the federal budget.
Conversely, the government faces challenges in aligning expenditures with available resources, including debt-servicing obligations, civil government costs, untargeted subsidies, and significant losses by state-owned enterprises (SOEs).
During the Fiscal Year 2023, the government generated a total revenue of Rs9.64 trillion, equivalent to 11.4% of GDP. However, the consolidated expenditure skyrocketed to Rs16.2 trillion, accounting for 19.1% of GDP. This resulted in a substantial fiscal deficit of Rs6.5 trillion, representing 7.7% of GDP.
A significant portion of the expenditure, Rs5.7 trillion, was allocated to debt servicing, thus further exacerbating the already mounting debt levels. Pakistan faced a primary deficit of 1% of GDP, indicating its inability to cover expenditures solely from revenues, even excluding debt servicing.
The situation takes a more ominous turn when considering the current account deficit of $2.24 billion during the same period, coupled with the depleting foreign reserves, painting a grim picture of Pakistan’s fiscal health.
As of June 30, 2023, Pakistan’s gross debt surged to Rs62.9 trillion, equivalent to 74.3% of GDP, with total debt and liabilities reaching Rs76.1 trillion, constituting approximately 90% of GDP. The pressing concern revolves around the necessity of repaying approximately $73 billion in external loans within a tight three-year window from July 2023 to June 2026.
To navigate this precarious fiscal situation, Pakistan entered into an IMF standby arrangement in July 2023, securing $3 billion. This move reflects the urgent need for external support to bolster the country’s financial stability and manage its escalating debt-related challenges.
Talking to WealthPK, State Bank of Pakistan memorial chairperson Dr. Eatzaz said a critical factor contributing to Pakistan’s fiscal imbalance was the low tax-to-GDP ratio compared to other developing nations, standing at approximately 10% of GDP.
As of June 2023, only 4.2 million individuals out of the 67 million employed labor force filed tax returns, highlighting the widespread problem of poor tax compliance. The root causes of this deficiency include a narrow tax base, exemptions for influential sectors, a substantial informal economy, weak tax machinery, and an inadequate tax structure.
To tackle these issues, he said, it was crucial to implement structural reforms aimed at expanding the tax base, reducing exemptions for influential sectors, enhancing the capabilities of tax administration, and improving the overall tax structure. These measures are essential steps to boost revenue generation and strengthen the fiscal foundation of Pakistan.