Pakistan Development Update: Restoring Fiscal Sustainability

Pakistan Development Update: Restoring Fiscal Sustainability

A bare minimum reconciliation dialogue amongst the ruling elites could

ensure the continuity of financial policies for attaining fiscal sustainability

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By,

Mehboob Ahmad

Sr. Regional Manager Martin Dow Marker.

Ph.D. MGT (Marketing), MS-Marketing, MBA-Marketing, B. Sc. (Zoology)., AKU-MERCK-ABMTC, OSHA Certified

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Participation in The World Bank’s seminar regarding the restoration of fiscal sustainability in Pakistan ignited the spark to go through contemporary research about the titled subject. What is fiscal sustainability? OECD library has comprehensively defined Fiscal sustainability as”?the ability of a government to maintain public finances at a credible and?serviceable position over the long term”.

?? Fiscal policy sustainability involves determining whether the government can continue to pursue indefinitely its set of budgetary policies. An assessment of debt dynamics and its sustainability is very important in formalizing prudent and effective macroeconomic policies, especially for economies with weak macroeconomic fundamentals and alarming debt levels. Keeping in view the recent debt escalation in Pakistan, there is a need to explore the important factors that influence the public debt dynamics in the case of Pakistan and to evaluate its sustainability.

Why is fiscal sustainability important? Fiscal sustainability, or public finance sustainability, is the persistence of government in its tax/ revenue policies and expenditures in the long run it enables the government to refrain from the threat of government’s solvency/defaulting on some of its liabilities or promised expenditure Pakistan’s fiscal deficits are large, persistent & growing. Large deficits and debt have adverse economic effects on Government Borrowing from Banks, which ultimately affects the government’s bargaining position for availing funds from local or international institutions and pushes the government to crowd out of private investment.

Key drivers of fiscal Imbalances in Pakistan. Some major factors identified by the current literature are Low Revenue collection is low, overwhelmingly rigid Government spending, and Pakistan’s public debt exposed to macroeconomic shocks. A low tax collection base eventually compels the government to impose an indirect tax that ultimately hurts the poor economic strata. The trade deficit is due to negligence about the domestic production of raw materials & and Afghan transit trade. About 2/3 of the trade deficit or current account deficit is due to Afghan transit trade. Here the corruption is damaging the country like nothing else. As per reports, the importers have contributed to a deficit of PKR 1 trillion in lieu of import duty due to under-invoicing. The government’s reluctance to impose agriculture income tax is exposing the rest of the taxpayers to double taxation.

Some practical solutions to maintain fiscal sustainability. While reviewing the fiscal sustainability literature, it’s documented that many countries face bleak situations than ours through a bare minimum agreement amongst the ruling elites. The experts have suggested reviewing the general Sales Tax & Merge it into personal income tax rates. ?Increasing cigarette excise duty will bring in additional revenues without hurting the daily use commodities. Reduce Import Duty Exemptions. The importers in fiscal year 22-23 have allegedly imparted a deficit of more than PKR1000 billion by invoicing so we can improve fiscal sustainability by reducing the exempted articles in the import list. Other measures include reforming the Agriculture Tax, Strengthen Property Tax Collection, reforming income Tax, Broaden the income tax base, Remove concessional rates, Limiting zero ratings, setting Priorities for Rationalizing Expenditures, reducing Regressive Subsidies, Consolidate federal PSDP allocations and strengthening public investment management, ?Priorities for Improving Debt Management, Divest or restructure SOEs through increased private participation, Constrain the growth of pension spending through, ?Improve debt management institutions and capacity, Adopt treasury single account, Develop domestic debt market, Debt management office recruitment,Enhance information and frequency of publications, Installation of debt recording system, Analyze and disclose fiscal risks and contingent liabilities,

While talking about Priorities for More Effective Fiscal Federalism, Resurrect institutions for fiscal coordination, Implement legal reforms to support national fiscal policy, Limit federal spending on devolved areas, Develop a national tax policy to facilitate higher provincial own-source revenue to finance expanded priorities, Enhance federal-provincial coordination on tax policy, Limit exemptions and Increase income tax.

Policy options to restore fiscal sustainability. While talking about practical options for restoring fiscal sustainability, today’s session’s learning emphasizes increasing domestic revenue collection, rationalizing federal fiscal expenditures, improving debt management & and resolving fiscal federalism challenges. The 18th amendment has put the fiscal system under continuous stress as the revenue collection is mainly shouldered by the federal government and provincial governments enjoy the perks of the 18th amendment without sharing the responsibility that leads to a gateway to leakage of funds.

Moving towards the conclusion, the current situation needs a reconciliation dialogue. the rolling elites especially the non-representative ones are not ready to step back from grabbing the lion’s share of resources so we should come together to agree upon a bare minimum agreement for selecting the direction of fiscal policy & and then allowing it to work for its decided tenure to be fruitful.

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