The Ministry of Finance recently published fiscal operations figures for FY2024. And -- gee whiz! -- it has reported a primary surplus (in accounting terms: profit before interest) of Rs953 billion (0.9 per cent of GDP) after two decades.
The Ministry of Finance recently published fiscal operations figures for FY2024. And -- gee whiz! -- it has reported a primary surplus (in accounting terms: profit before interest) of Rs953 billion (0.9 per cent of GDP) after two decades.
Alongside this apparent achievement, which we will pit shortly, the highlight of the doc is the notable discrepancy of Rs281 billion in spending. One may wonder how this is possible, or perhaps we are defenestrating the very reality -- the mammoth of dullard ensnaring government’s machinations.
Moreover, the SBP has also released the Monetary Policy Statement (MPS), announcing a 100-bps cut in the policy rate -- a cut which is seen as meagre given the stagnant economy and neck-breaking poverty. In addition to the positive aspects, the MPS aptly noted: “the government’s reliance on the domestic banking system increased significantly” and “expressed concern on increasing reliance on banks for deficit financing, which has been squeezing borrowing space for the private sector.”
To truly appreciate this achievement, as professed by the Ministry of Finance, and the insights of the SBP, one needs to understand both the begotten and the begetting, in pith and substance -- the catch-22: the debt sustainability quagmire, and the lopsided anatomy of the economic growth.
As per the fiscal operations for FY2024, the federal government added Rs7.7 trillion to the public debt to finance the deficit. There was a significant increase in domestic borrowings, with the federal government having to take Rs7.4 trillion in new loans from commercial banks and other local sources. Domestic borrowings exceeded budget estimates by Rs2.6 trillion, and overall public debt is expected to reach the gargantuan figure of Rs71 trillion.
Additionally, as per Budget 2024-25, the plan is to rely on overzealous revenue mobilization. However, after transferring the lion's share to the provinces, this already-inflated revenue falls short of financing the budget, leading to 45 per cent of the total budget being financed through borrowings. Budget 2024-25 further outlines a significant increase in domestic banking borrowings, rising from around 19 per cent to 27 per cent, while external borrowings remain at approximately 14 per cent, nearly the same as the previous fiscal year.
Further, according to the IMF, as highlighted by Murtaza Syed in his op-ed in Financial Times, Pakistan needs to pay $25 billion annually for each of the next five years ($19 billion for repayment of principal and $6 billion to finance the current account deficit), which casts a gloomy outlook unto foreign exchange reserves (currently stands at $9 billion). Ergo, the incumbent government is trying its best to reprofile debt, which is also seen as an IMF conditionality.
Given all this, one is fully eligible to flak the insignificant decrease in the policy rate.
On the fiscal side, fiscal operations state that interest payments amounted to Rs8.2 trillion, which is Rs2.5 trillion or 43 per cent higher than the previous year. For the current year, as noted in Budget 2024-25, this amount is projected to increase to over 56 per cent of the budget, reaching Rs9.8 trillion for debt servicing, which exceeds the federal government's projected net income.
Since the government dominates the credit market, there is very little left for the private sector. Consequently, aggregate demand for money will remain steady rather than decrease, failing to address inflation effectively. This creates a double whammy: it exacerbates the fiscal deficit and sequesters output by smothering development expenditure, thereby leading to a primary surplus and counteracting growth.
To address the deficit, we turn to revenue mobilization, which often feels like rubbing salt in the wounds of those already taxed by excessive withholding taxes. Instead of taxing a taxpayer's ‘income’, a presumptive approach that taxes the ‘transaction’ at the moment it occurs has been adopted. Since the implementation of Budget 2024-25, urban high- and middle-income individuals might end up working for 6-7 months just to pay taxes. And, needless to say, the exorbitant corporate tax rate of 29 per cent vis-a-vis the worldwide average of 23 per cent. This imprudent and extractive taxation stifles economic growth, discourages documented transactions, and burdens businesses.
Regarding the anatomization of economic growth, the ‘State of the Pakistan Economy Report for FY 2023-24’ by the Lahore School of Economics (LSE) notes that Pakistan's GDP growth is primarily import-driven. This is due to the inelastic nature of exports (averaging around $34 billion over five years, while imports during the same period remained around $70 billion), which stems from low productivity, limited product diversification and value addition, high dependence on a few export markets, and high energy costs.
Consequently, while imports are elastic, GDP becomes dependent on imports. As imports increase, so does GDP; however, beyond a tipping point (5.0 per cent as indicated by the report), the current account deficit becomes unsustainable, requiring intervention to stabilize it by increasing foreign exchange reserves with assistance from workers' remittances and MLDAs.
Interestingly, over the years, our trysts with the IMF often led to short-term growth and increased capacity to import more. However, due to stagnant export potential and pro-cyclical austerity measures imposed by the Fund, the long-term effects have remained grim.
What is the way forward? At the outset, it cannot be overstated how crucial it is to indigenize or contextualize any proposed solution or supposed reparation. One must emerge from the Socratic cave shaped by liquidators to fully appreciate the current dynamics: non-austerity pro-growth policies are the need of the day. Unnecessary economic psychosis should be avoided, just as there is no conditionality requiring us to stick with producing primary surpluses as we did.
Fiscal discipline is the key. This involves reducing the fiscal deficit by cutting costs such as those related to bleeding SOEs, elitist tax expenditures and pension liabilities while increasing spending on development projects. These projects should be free from political maneuvering, be ‘development-based’ rather than purely ‘infrastructural’, and contribute to the welfare, economic growth, or development of the people.
To address the current account deficit, the government, given the aforementioned reforms, should facilitate private sector investments to attract FDI and increase workers' remittances. Additionally, the government should focus on expanding the export base while reducing non-essential imports (estimated by LSE at 28 per cent) in the short term and substituting the remaining 72 per cent in the long term.
And all the more, instead of relying on extractive regimes like excessive withholding taxes, a more effective approach would be to tax high-income sectors, including real estate, the feudal sector, retail, and rentiers. Overall governance needs to evolve to be more inclusive, rational, and merit-oriented to achieve sustainable growth.
Furqan Ali hails from Peshawar. He is a researcher and works in the financial sector.
Abdullah Ahmed hails from Islamabad. He is a policy enthusiast and researcher.
