EDITORIAL:
The World Bank’s recent review of Pakistan’s federal public expenditure has once again highlighted the nation’s persistent fiscal deficits over the past decade, leading to rapidly growing public debt and a trade gap that continues to widen. This report marks the first review since the implementation of the 18th Constitutional Amendment and the seventh NFC Award, which represented a significant shift in the country’s fiscal architecture in 2010.
According to the review, Pakistan’s fiscal deficit has averaged 6.2% of GDP over the last decade, a dangerously high level that continues to grow and poses risks to both fiscal and debt sustainability. The report also underscores the rapid accumulation of public debt, which reached 78% of GDP in the last fiscal year, slightly lower than the record high of 81.1% in 2020. Both the deficit and debt levels have breached the Fiscal Responsibility and Debt Limitation Act, 2005, which set upper limits of 3.5% and 60% of GDP for the budget deficit and public debt, respectively.The World Bank’s review paints a bleak picture of Pakistan’s fiscal situation, but it is not entirely unexpected.
The country has long been grappling with fiscal deficits, which have been exacerbated by factors such as low tax collection, corruption, and inefficient public spending. The review highlights the need for urgent action to address these issues and ensure fiscal sustainability, but the challenge lies in finding viable solutions that can be implemented in the current economic climate.One potential avenue for addressing the fiscal deficit is through increasing revenue generation, which can be achieved through various measures such as broadening the tax base, reducing tax exemptions, and improving tax administration. However, these steps are easier said than done, given the political and social challenges associated with tax reform in Pakistan.
In addition, there is a need to improve public spending efficiency and reduce wasteful expenditure, which is another major contributor to the fiscal deficit.The World Bank’s review also highlights the need for greater transparency and accountability in public finances, which can help to improve governance and reduce corruption. This is particularly important given the recent scandals and controversies surrounding public sector projects, such as the Diamer-Bhasha dam and the Peshawar Bus Rapid Transit project.
The World Bank’s latest review on Pakistan’s federal public expenditure has once again brought to the forefront the persistent issue of widening fiscal deficits that have plagued the country for over a decade. The report underscores how this has led to a rapidly growing public debt and trade gap, which pose a significant risk to the country’s fiscal and debt sustainability.
The repeated boom-and-bust cycles of recent years have shown how large deficits can adversely impact the economy, slow down growth, and increase public debt, among other issues. Therefore, it is critical to reduce the fiscal deficit and regain fiscal and debt sustainability. The report recommends various measures for fiscal consolidation, including the rollback of energy subsidies and other subsidies that benefit the wealthy, reducing spending on devolved subjects and provincial development projects, disinvestment of state-owned loss-making businesses, and expanding the tax base to mobilize domestic revenue.
Implementing the report’s proposed measures could result in fiscal savings of up to 4% of GDP, thereby freeing up fiscal space for the private sector to contribute to economic growth. The reduction of fiscal vulnerabilities and public debt within the limits set by the Fiscal Responsibility and Debt Limitation Act (FRDLA) will also improve the overall economic climate and create a more conducive environment for investment and sustained growth.
Despite the known solutions to address the economy’s underlying issues, politicians and policymakers have avoided implementing the necessary reforms for decades. One can only wonder whether this latest report will be enough to push them to take action and implement the necessary changes.
To address the issue of persistent fiscal deficits and growing public debt, Pakistan needs to implement long-overdue reforms to promote fiscal sustainability. The World Bank’s report highlights the urgency of this issue, which has been exacerbated by the country’s slow economic growth, recurrent balance of payment crises, and weakening of foreign reserves.
Pakistan’s economy has faced significant challenges due to the ongoing Covid-19 pandemic, which has affected economic activity and slowed down growth. In this context, reducing the fiscal deficit is crucial to improve the country’s overall economic performance and create a more conducive environment for investment and job creation.
One way to address the fiscal deficit is by reducing energy and other subsidies, which disproportionately benefit the wealthy and increase the burden on the government’s finances. Another measure is to reduce spending on devolved subjects and provincial development projects, which often result in over-expenditure and inefficient use of resources.
Disinvestment of state-owned loss-making businesses can also help to reduce the fiscal deficit, as these businesses often require significant government subsidies to stay afloat. By divesting these businesses, the government can free up financial resources for more productive investments that generate higher economic returns.
Expanding the tax base and improving tax collection efficiency is another way to increase domestic revenue and reduce the fiscal deficit. However, this must be done in a way that does not disproportionately burden the poor or small businesses.
While these measures are critical to reducing the fiscal deficit and promoting fiscal sustainability, their implementation requires political will and commitment from policymakers. The World Bank’s report is a timely reminder of the urgency of these issues and the need for swift action to address them.
In conclusion, Pakistan’s persistently widening fiscal deficits have created significant challenges for the country’s economic growth, public debt, and trade gap. The World Bank’s report underscores the urgent need to implement measures to promote fiscal sustainability, including reducing subsidies, curtailing spending on devolved subjects, disinvesting in loss-making businesses, and expanding the tax base. The implementation of these measures requires political will and commitment from policymakers, but they are crucial to creating a more conducive environment for investment and sustained economic growth.
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