A fiscal disaster

The National Economic Council has set an economic growth target of 3.5 per cent for the upcoming fiscal year, while also acknowledging a population growth rate of 3.6 per cent – making Pakistan the fastest growing country in the world in terms of population.In-effect, even with much rosy assumptions, GDP per capita may actually decline further, as population growth outpaces GDP growth.

The National Economic Council has also proposed a development budget of Rs2.7 trillion, which is fiscally profligate, while the sovereign continues to operate with constrained budgets, and keeps on running massive fiscal deficits.If the plan is to continue borrowing to bridge fiscal deficits, and allocate trillions towards development expenditure while refusing to expand the tax net, then things may get even worse during the upcoming months.

The sovereign has a serious debt problem. It is estimated that more than 70 per cent of all tax collected will be used for debt servicing, leaving very little to run operations of the state and undertake development expenditure. In an environment where the country is reeling with inflation levels exceeding 38 per cent on a year-on-year basis, and highest ever interest rates at 22 per cent, designing a growth strategy heavily relying on more debt is a recipe for disaster.

The expected fiscal deficit for the upcoming fiscal year is Rs6 trillion, and if history provides any guidance, we are going to shoot beyond that. Taking on additional debt at peak interest rates would effectively mean taking on more debt to settle earlier debt, and its associated mark-up.

As the sovereign takes on more debt, it further pushes out the private sector, further encroaching on its space. A growth strategy designed around debt will eventually lead to trouble, as capital available for the government to borrow from gets scarcer thereby pushing up interest rates.As the government keeps printing more money, it is only going to drive inflation further up, resulting in a bad feedback loop, and eventually ending up in hyperinflation if the fiscal position is not brought in order. As the quantum of local debt reaches an unsustainable level, and capital gets scarcer, that may lead to potential restructuring of local debt or excessive tax rates, which could hurt the overall fiscal stability of the system.

The tools that the sovereign can use to manage its finances are getting scarcer by the day. The inability to take corrective action is only going to make problems worse, making them more difficult and painful to solve in the near term.The upcoming budget is as unimaginative as the last many budgets. Hiking up tax rates on the same sectors that are already documented, grand schemes of grandeur under the development programme without any consideration of how they may be funded, and absolutely nothing on how the bloated expenditure side of the government can be rationalized.

The state-owned entities continue to bleed, and will continue to cost dearly to the taxpayer, while we take on more debt to plug their losses.Not much was expected from the budget either, but there was an iota of hope that there may be some fiscal prudence, and some efforts would be taken to expand the tax net and put the fiscal side in order. There seems to be little realization of how the incessant fiscal deficits are spiraling out of control that may either hurt fiscal stability of the system, or lead to hyperinflation.

This is a budget designed around accumulating more debt at historically high interest rates, without talking much about it. Failure or inability of the state to expand its tax net will eventually lead to higher inflation due to fiscal deficits, making it even harder for households to survive, let alone thrive.A fiscally irresponsible sovereign will be hurting any chances of prosperity or sustainable growth of the fastest growing country in the world, in terms of population. The government is working with a framework of 5Es, straight out of a consultant's playbook, without realizing that all of this is being funded by debt and an expanding fiscal deficit that no one has any plan to fix.

The writer is an independent macroeconomist.