Zafar Iqbal
Pakistan’s budgetary framework, although well-defined in its constitutional structure and supported by laws like the Public Financial Management Act (PFMA) of 2019, continues to struggle with significant inefficiencies that hinder fiscal sustainability. Despite the existence of a detailed system, the country’s approach to budgeting remains largely reactive and fails to implement a top-down, strategic approach. This fundamental flaw in the budget preparation process leads to misaligned priorities, poor resource allocation, and unsustainable fiscal practices.
The country’s budgeting process, as outlined in the 1973 Constitution, is guided by several laws and manuals, such as the Budget Manual of 2020.
However, despite the comprehensive nature of these documents, the actual implementation and execution of the budget continue to face numerous challenges. The current methodology used by the government to prepare the budget is based on outdated fiscal projections, relying heavily on historical data and previous year’s figures. This bottom-up approach is increasingly inadequate in the face of emerging economic pressures, shifting fiscal priorities, and global economic uncertainties. As a result, the budget is often prepared using past figures without adequately accounting for future fiscal pressures or economic conditions. This approach further exacerbates Pakistan’s economic vulnerabilities and delays the necessary adjustments needed to address urgent financial challenges.
A recent technical assistance report by the International Monetary Fund (IMF), titled “Technical Assistance Report Pakistan—Improving Budget Practices” (August 2024), identifies one of the major issues within Pakistan’s budget process as the disconnect between budget preparation and the timely release of macro-fiscal data. The Mid-term Budget Strategy Paper, which contains crucial fiscal projections and strategies, is released three months after budget preparation begins. This delay results in a misalignment between economic conditions and budgetary allocations, further weakening the ability of the government to make informed decisions. The late release of this strategic paper severely undermines the potential for effective long-term fiscal planning and puts Pakistan at a disadvantage in terms of maintaining economic stability and sustainability.
Coordination issues within the government further contribute to inefficiencies in the budget process. The lack of effective collaboration between the Budget Wing and the Macro-Fiscal Policy Unit (MFPU) impedes the integration of up-to-date data into budget forecasts. The absence of timely data-sharing mechanisms between these two departments limits the accuracy and relevance of budgetary projections, leading to inefficient fiscal policies. Additionally, ministries often operate in silos, without effective inter-ministerial cooperation, which weakens the implementation of fiscal policies and hampers overall economic governance. These coordination failures undermine the government’s ability to achieve its fiscal objectives and contribute to a fragmented approach to financial management.
At the federal and provincial levels, the budgeting process is further strained by unrealistic revenue projections. Governments set ambitious revenue targets, particularly in terms of tax and non-tax sources, without adequately assessing the capacity to meet these targets. This leads to unrealistic fiscal targets that rely heavily on external financial assistance, such as loans from bilateral and multilateral institutions, to cover budget deficits. Historically, Pakistan’s reliance on financial assistance to manage its fiscal shortfall has been a persistent issue. The need for external funding, rather than being a temporary solution, has become a long-term crutch that exacerbates Pakistan’s fiscal vulnerability and limits its financial independence.
The introduction of the Eighteenth Amendment in 2010, which granted greater autonomy to provinces, has further complicated the fiscal landscape. The allocation of a significant share of national revenue to provincial governments has placed increased financial pressure on the federal government, making it increasingly difficult to meet essential expenditures such as defense spending. This has created a fiscal imbalance where the federal government lacks sufficient resources to meet its obligations, leading to high levels of borrowing and constrained fiscal flexibility. As a result, Pakistan is left grappling with chronic fiscal deficits, which have only worsened in recent years.
Provincial governments, despite their increased share of national revenue, have failed to effectively manage their finances. They have struggled to implement progressive tax reforms, such as the imposition of agricultural income tax, as mandated by the Constitution. Additionally, provinces have underperformed in terms of tax collection, with only a small fraction of potential revenue being realized. In fiscal year 2023-24, the total tax collection by the provinces amounted to a meager Rs 997 billion, with agricultural income tax contributing a paltry 0.3 percent of the total tax revenue. This poor performance highlights the inefficiencies within the provincial tax systems and raises concerns about the sustainability of their fiscal practices.
The inability of provincial governments to streamline their tax collection and expenditure management has led to a misallocation of resources and undermined the capacity to address pressing developmental challenges. Provinces like Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan have been plagued by mismanagement and a lack of strategic planning. Despite the growth in tax revenue in some provinces, such as Punjab and Sindh, this increase is largely driven by regressive taxes like sales tax on services, rather than progressive taxes that could target wealthier segments of society. In contrast, essential taxes like property taxes have either stagnated or declined, reflecting an inadequate fiscal policy that fails to tap into the full economic potential of these regions.
Provincial governments also face challenges in managing their finances due to political instability, administrative inefficiency, and poor governance. In Punjab, for instance, despite ambitious revenue targets, the government posted a deficit of Rs 160 billion in the first quarter, only to revise this into a surplus of Rs 40 billion later. The high statistical discrepancy of Rs 177 billion in the revised figures points to continued inefficiencies and lack of reliable financial data, raising doubts about the government’s ability to meet its long-term fiscal goals. Similarly, the Khyber Pakhtunkhwa government’s management of Rs 1200 billion allocated under the National Finance Commission (NFC) Award has been criticized for a lack of transparency and accountability.
Sindh’s performance has been under scrutiny from the IMF, particularly due to its failure to implement the National Fiscal Pact and ensure fiscal accountability. Balochistan, despite its vast natural resources and strategic location, continues to face significant challenges in governance, including widespread illiteracy and a deteriorating law and order situation. The inability of provincial governments to effectively manage their resources and capitalize on their economic potential has left many citizens underserved and contributed to a widening gap between the regions.
To address these challenges, Pakistan’s provincial governments must prioritize long-term structural reforms aimed at improving tax collection, enhancing fiscal transparency, and building sustainable revenue streams. Provincial governments should also focus on strengthening governance and administrative capacity to ensure efficient use of public resources. Additionally, the federal government must adopt a more strategic, top-down approach to budgeting that emphasizes data-driven decision-making, policy coherence, and long-term fiscal sustainability.
The IMF’s technical assistance report on improving budget practices in Pakistan provides valuable recommendations to enhance the budget process. These include releasing the Budget Strategy Paper concurrently with the Budget Call Circular, improving coordination between the Budget Wing and the MFPU, and integrating up-to-date fiscal data into the budgeting process. These reforms, if implemented effectively, would promote a more disciplined, transparent, and strategic budgeting framework that aligns fiscal policy with the country’s economic realities and long-term development goals.
In conclusion, Pakistan’s current budgetary process is hampered by inefficiencies, coordination failures, and a lack of strategic foresight. To achieve fiscal sustainability and effective governance, it is imperative that both federal and provincial governments adopt a more cohesive, data-driven, and forward-looking approach to budgeting. By embracing strategic reforms, improving tax collection, and ensuring transparency in fiscal management, Pakistan can better align its financial practices with its economic potential and pave the way for long-term prosperity.
