The debt burden

Is Pakistan on the brink of a financial crisis like Greece? This question has been raised in a report by the research group, Research and Advocacy for the Advancement of Allied Reforms (Raftaar), on Pakistan’s taxation and public expenditure. The report has called the public debt situation an ‘existential crisis’ for the Pakistani state, which seem like strong words until one begins to look into the numbers and realise the severity of the situation. According to the report, the situation can be resolved by creating the correct tax collection mechanisms, instead of taking out commercial loans, using donor loans and aid to fill the budget hole. Talking about the tax situation, the report brings forth alarming numbers; only 0.3 percent of Pakistan’s population actually file taxes in comparison to the 3 percent taxpayers in neighbouring India. This has meant that Pakistan’s tax collection has remained flat since 2003 as the state’s expenditures have continued to grow amidst multiple new challenges, including natural disasters, annual flooding, terrorism and global commodity prices. With a tax-to-GDP ratio of 9.4 percent, Pakistan is on the lowest rung of countries in terms of revenue generation. The result is that our budget deficit continues to be covered by taking sovereign debt, which is becoming a parasite threatening the entire economy.
Pakistan’s public debt stood at Rs6.3 trillion in 2008. In 2015, it stands at Rs17 trillion. This means that public debt has increased three times in the last eight years. One-third of this debt is foreign while the other two-thirds is raised domestically. Five years ago, this ratio was almost equal. The report shows that foreign debt is at least five times cheaper than domestic debt but is hard for Pakistan to access. Each year, Pakistan pays Rs1.3 trillion to creditors, with 92 percent of it going to domestic creditors and eight percent going to international lenders. This means that in case of a debt repayment crisis, the Pakistani state is likely to take down the local banking industry with it. The situation is so dire that interest payments take up around 44 percent of the tax revenue. This means that interest payments per person are Rs6,684 per annum far greater than the expenditure on the public welfare of the population. One critical comparative is that per capita health expenditure is Rs1,009 per annum. The dependence on domestic debt to finance developmental spending is crippling our fragile economy. The irony is that, despite a low ratio of tax filers, the population continues to believe they are over taxed, which is a product of the government’s decision to use indirect taxation. The failure of the taxation regime is clear from the fact that 68 percent of tax revenue comes from indirect taxation. Pakistanis pay a higher price for fuel and electricity than other regional powers due to indirect consumption surcharges. The onus is on the Pakistani state to win back the trust of the people and move to a direct taxation system. A simplified tax system is one imperative that needs to be developed urgently. The authorities have been delivered a stark warning. It is now in their hands to act to prevent the coming fiscal calamity.