Is there light at the end of the tunnel? Reading the perennial multilateral lender’s latest country report on Pakistan, one gathers the impression that the measures identified in the programme will have effects that will last a whole generation. But will it be worthwhile? Down the road, will the hoped-for creation of fiscal space allow Pakistan to spend more on human development and filling infrastructure gaps?
Looking at the IMF projections from FY20 until FY24, one doesn’t see much of a qualitative difference in how the government will re-orient its spending priorities.
Five years from now, the full might of tax reforms that have riled the business community would achieve a fiscal top-line of 19.6 percent of GDP in FY24. That will be an addition of just over four percentage points from actual FY18 numbers.
That is the highest that fiscal enlargement can go under the IMF projections. The growth in tax base will mainly come from indirect taxes that the FBR collects. That is hardly a surprise as customs duties, excise duties and sales taxes are the taxman’s staple.
What will also not change much that is provincial revenue mobilization in terms of GDP? Provincial tax to GDP ratio is projected to rise to 1.5 percent in FY24 (FY18: 1.2%).
A provincial tax on agriculture income that is commensurate with the sector’s economic heft might have made those numbers look better and lifted the national fiscal top-line well above the bloated expenditures. It’s quite striking that the discourse on taxing agricultural income is missing from the economic chatter.
On the expenditure side, the story will remain the same. Whatever fiscal space is created will continue to feed mostly the current expenditures, with the remnants tossed for development.
Current expenditures are estimated at 22 percent of GDP in FY24, slightly higher than 21.7 percent projected in FY19. Development spending will pick up to 3.8 percent of GDP by FY24; and in the process improve its share in total spending as well. But it will not be enough to meet Pakistan’s development needs.
The optimistic projections of high revenues and contained spending will still leave the government with a fiscal deficit of 2.3 percent of GDP by FY24, which will be a third of what is projected for the ongoing fiscal. The IMF may find comfort in that deficit number, but it is based on achieving a lofty provincial surplus of 2.7 percent of GDP!
By the end of the programme, the idea is to bring public debt to a manageable level. That level is projected at 67 percent of GDP in FY24 – down from 79 percent in FY19. This will help cap the debt-servicing costs at 5 percent of GDP, which would have otherwise run amok given the direction twin deficits had been heading lately. As for development, it will have to wait out the era of fiscal squeeze.
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