EDITORIAL: A debt sustainability analysis conducted by the Ministry of Finance concluded that its attainment will hinge on fiscal consolidation and a favourable growth-interest rate differential. Debt dynamics, the study argued, are influenced by external and domestic factors and “despite improvements in debt dynamics over the medium term public debt risks remain high.”
The International Monetary Fund’s (IMF’s) Sovereign Risk and Debt Sustainability Analysis contained in the October 2024 uploaded documents on Staff-Level Agreement rate the risk in the medium term high premised on “uneven programme implementation, political risks and bilateral financing in view of the high gross financing needs” and in the long term; moderate, although “insufficient progress with policies and structural reforms could hamper potential growth, yet with its relatively young population Pakistan also bears great potential through leveraging digital technologies.
Pakistan is also very exposed to the adverse consequences of climate change, such as more frequent floods and droughts, and the necessary adaptation costs would slow the reduction of debt and financing requirements”. Overall risk, the Fund staff argues is high (risk) and advises “centred on fiscal consolidation underpinned by enhanced revenue mobilisation and careful spending management, including to create space for much-needed spending on development, infrastructure and social protection, while keeping public debt on a downward trajectory.”
To date, the significant pledges made by the three friendly countries — China, Saudi Arabia and the United Arab Emirates — have not yet been fully disbursed though there is no indication of any refusal to meet these pledges.
At the same time, federal and provincial data for the first quarter of the fiscal year indicates that current expenditure has increased by more than 10 percent, and this in spite of a steady decline in the discount rate over the period (which reduced the domestic debt servicing costs substantially); the budgeted 1217 billion rupee provincial surplus is at risk even though the 140 billion rupee Punjab deficit for the first quarter was updated overnight to 40 billion surplus during the recent visit of the IMF team to Pakistan - from 11 to 15 November this year – which has legitimately raised concerns.
The other three provinces have shown a deficit. In other words, with a significant increase in current expenditure with the provincial surplus as a revenue source for the federal budget unlikely to be realised the onus of debt sustainability rests with the government’s ability to generate not only the funds budgeted from external sources but also to secure more loans if possible.
Fiscal reforms remain the bane of this government, just like its predecessors. The narrative of the first-time finance minister Muhammad Aurangzeb is that reforms envisaging widening the tax net based on the ability to pay principle rather than on the ease of collection that has been the modus operandi of administrations, are in the works; unfortunately though in the interim period he has, like his predecessors, opted to raise taxes on existing taxpayers, which implies 75 to 80 percent of all collections are to be from indirect taxes whose incidence on the poor is greater than the rich.
However, while in the past poverty levels were not as high as 41 percent, a rate reflective of decades of a steady rise in reliance on indirect taxes, the situation today is dire and it is a constraint that has been acknowledged by the Finance Minister though his focus to date remains on raising revenue as opposed to reforming the inequitable tax structure.
One way out of the dilemma would be to slash current expenditure, which makes no contribution to growth but backed as it is by a massive cash injection into the economy it has an inherently inflationary impact.
Business Recorder has been persistently proposing a massive slash in current expenditure through voluntary sacrifice by the major recipients of this outlay for a period of two years to stabilise the economy, reduce reliance on external financing sources and, at the same time, mitigate the need to implement contingency measures agreed with the Fund in case of a shortfall in the budgeted revenue (read a mini-budget). Sadly, so far there appears to be no drive, overt or covert, to reduce this outlay.
Copyright Business Recorder, 2024
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