Pakistan’s fiscal system has long been under immense strain due to the mounting pressure of borrowing and the substantial portion of revenue being diverted towards debt servicing, and 2024 was no different.
The country’s fiscal health is in a precarious position, with its borrowing strategy playing a significant role in shaping the economy.
In the first five months of the current fiscal year (FY) 2024-25 (July to November), the government borrowed a total of US$2.667 billion from various financing sources, as revealed by the Economic Affairs Division (EAD).
This figure represents a sharp decline compared to the US$4.285 billion borrowed during the same period in FY 2023-24, signaling a decline in the country’s ability to secure foreign loans on the same scale.
The total borrowing figure of US$2.667 billion does not include the first tranche of US$1.03 billion received from the International Monetary Fund (IMF), a critical lifeline for the country’s foreign exchange reserves.
Adding IMF inflows, the total borrowing for the first five months of FY 2024-25 increases to US$3.697 billion. Despite these inflows, the overall borrowing situation remains dire, especially given the country’s substantial debt obligations.
The government had initially budgeted time deposits totaling US$9 billion, which included US$5 billion from Saudi Arabia and US$4 billion from China’s SAFE deposit, for FY 2024-25. However, as of November 2024, no funds had been received under this head.
Additionally, the government has not received any assistance from the United Arab Emirates (UAE) during this period. Although Saudi Arabia extended its US$3 billion deposit for another year in December 2024, this extension was not reflected in the EAD data covering the first five months of the fiscal year.
For the FY 2024-25, the government had budgeted US$19.393 billion from various financing sources, including US$19.216 billion in loans and US$176.29 million in grants. This target does not account for any funding from IMF, highlighting growing reliance on other sources to fill the financing gap.
The government had hoped to secure US$3.779 billion from foreign commercial banks in 2024-25, but so far, only US$200 million has been received from this source. There was no borrowing from foreign commercial banks in November 2024.
Another significant element in the government’s borrowing strategy is the US$1 billion in bonds that were budgeted for issuance during the fiscal year. However, no bonds were issued in the first five months of the fiscal year, underscoring difficulties the government faces in raising funds through international markets.
On the other hand, revenue collection has become an increasing challenge, with tax collection falling short of expectations. In the FY 2023-24, the Federal Board of Revenue (FBR) collected Rs. 9,306 billion, exceeding the revised target of Rs. 9,252 billion by Rs 54 billion.
However, this figure fell short of the original target of Rs 9,415 billion by Rs 109 billion. Despite this, collection in FY 2023-24 was 30 percent higher than in FY 2022-23.
For the current fiscal year, the government has set an ambitious revenue target of Rs 12,970 billion, a 40% increase compared to the previous year. To meet these targets, the government has continued with a regressive tax policy that imposes additional burdens on the already taxed sectors, particularly the salaried class and the export sector.
This has sparked concerns about the potential adverse effects on business growth and the overall economic environment.
The government’s efforts to increase revenue have led to growing discontent among the business community, which feels burdened by excessive taxes without receiving adequate support or a conducive work environment in return.
However, FBR has struggled to meet its revenue targets, with a shortfall of Rs 344 billion in the first five months of FY 2024-25. FBR collected Rs 4,295 billion during this period, falling short of the Rs 4,639 billion target. This persistent shortfall has raised doubts about FBR’s ability to meet its full-year target of Rs 12.97 trillion.
There are growing concerns that the government may need to introduce a “mini budget” to bridge the gap by imposing additional taxes.
On December 18, 2024, the federal finance minister for revenue and finance introduced in the National Assembly Tax Laws (Amendment) Bill, 2024, which ostensibly seeks to address issues of tax evasion and improve tax compliance.
Among its proposals are measures that would restrict certain economic transactions for individuals who are non-compliant for tax filing purposes though paying advance income tax through various withholding provisions, especially as mobile/internet users.
The Bill includes provisions that would allow the government to bar individuals from opening or operating bank accounts, acquiring property, or engaging in trade and business if they are not filing income tax returns. These provisions have raised significant concerns about the constitutional validity of the Bill and its potential impact on the fundamental rights of citizens.
The Bill has faced strong opposition, particularly with respect to its implications for individuals’ rights to acquire and dispose of property, freely engage in business and trade, as well as right to life. Critics argue that these provisions of Bill violate several constitutional provisions, including Articles 4, 8, 9,14, 18, 23, and 25, which guarantee fundamental rights such as the right to life and property, and the freedom to engage in business. Similar provisions were included in the Finance Act of 2018 but were later withdrawn after being deemed unconstitutional.
Introduction of these restrictive measures has further stoked fears that Pakistan’s tax policy is becoming increasingly irrational, harsh and punitive. The government’s focus on increasing tax revenue through draconian measures has raised apprehensions about its long-term impact on the economy.
Critics rightly argue that such policies may stifle business growth, deter foreign investment, and exacerbate the existing economic challenges facing the country.
Furthermore, performance of Pakistan Revenue Automation (Pvt) Ltd (PRAL), FBR’s technology arm, has been a source of frustration and disappointment. PRAL has been criticized for deliberately delaying reforms that could modernize the country’s tax administration system.
The PRAL’s leadership has been accused of hindering progress to protect their own interests, fearing that the private sector may develop more efficient and innovative solutions. This has led to a situation where the country’s tax administration remains decades behind regional peers in terms of technological advancement.
PRAL’s tactics have included agreeing to unrealistic timelines for software development, producing subpar products that fail to meet expectations, and shifting blame onto FBR. There are also concerns that PRAL’s leadership is more focused on maintaining control over data and operations rather than enabling reforms necessary for improving efficiency and tax collection.
The combination of borrowing to meet fiscal obligations and an inefficient, regressive tax system has left Pakistan’s economy in a vulnerable position.
Despite the government’s substantial borrowing from international and domestic sources, debt servicing continues to take up a substantial portion of the revenues, leaving little room for investment in essential infrastructure and public services. This vicious cycle of borrowing, debt servicing, and revenue shortfalls is unsustainable and threatens the long-term stability of the country’s fiscal system.
To address these challenges in 2025 and beyond, Pakistan needs to implement comprehensive reforms to both its borrowing strategy and tax system.
A more efficient and progressive tax policy, alongside improved revenue collection mechanisms, is essential for reducing the country’s dependence on borrowing. Furthermore, efforts to modernize the tax administration system, such as empowering PRAL to embrace technological reforms, could help improve compliance and increase revenue generation.
The road ahead for Pakistan’s fiscal system is fraught with challenges, but with the right reforms and a shift towards a more sustainable economic model, there is potential for growth and stability.
However, this will require bold leadership and a commitment to tackling root causes of the country’s economic difficulties, including over-reliance on borrowing, irrational tax policies, and outdated administrative practices.
Without such reforms, Pakistan’s fiscal system will remain in a state of crisis, with serious consequences for its economic future. Let us hope that 2025 brings a political consensus and concrete agreed plan beyond parties divide to put Pakistan on the road to economic stability, growth and prosperity for all.
Copyright Business Recorder, 2024
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
The writer is a US-based corporate lawyer, and specialises in white collar crimes and sanctions compliance. He has written several books on corporate and taxation laws of Pakistan. He can be reached at [email protected]
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