Daily Times

Few topics in Pakistani politics are more discussed and less understood than the fiscal deficit. We constantly hear that reducing the deficit is crucial to our economy, but we rarely hear why. The deficit is blamed for a variety of economic ills, including high-interest rates, unemployment, the trade deficit, the low rate of national saving, and low productivity growth – whichever appears most significant at the time – but little attention is paid to the reasons why it may have these effects.

The near-unanimity in public discourse regarding the horror of deficits may lead one to believe that economists are also united. In reality, they have fundamental disagreements over whether deficits matter and, if so, why. They have been arguing these questions for over two centuries, sporadic but not enduring unanimity. In the past 25 years, the argument among economists over the deficit has become increasingly dissonant, reflecting the issue’s rising prominence, the growing scale of reported deficits, and the demise of Keynesianism in the 1960s.

Today, as classic economist theorists believed, we witness many challenges within Pakistani, including economic crowding out of the private sector, higher interest rates, future tax rises and even the potential for inflation. With a lengthy history of debt and deficit, like in Pakistan’s case, we now have begun to see its determinantal effects on the economy. The State Bank of Pakistan confirmed that the debts and liabilities of the nation grew by Rs. 11.85t in FY22. According to data on domestic and foreign obligations and liabilities, Pakistan’s total debt and liabilities increased from Rs. 47,844t in FY21 to Rs59,696t as of 30 June. According to the SBP, Pakistan’s IMF debt increased by 21 per cent in one year, reaching Rs. 1.4 trillion at the end of the previous fiscal year. During their last five-year terms in office, the PML-N and PPP respectively added around Rs10 trillion and Rs8 trillion to the national debt. When former prime minister Imran Khan left office in April 2022, his administration added Rs. 19.5 trillion to the federal government’s overall debt. The only sigh of relief for Pakistan’s horrendous debt relief came in the shape of gut-wrenching flood disasters after the size of the total deferred debt reached $730 million.

In the past 25 years, the argument among economists over the deficit has become increasingly dissonant.

However, Pakistan is not alone in this situation; according to the latest UNDP report, “A serious debt crisis is unfolding across developing economies, and the likelihood of a worsening outlook is high.” The United Nations Development Programme (UNDP) projected that 54 nations, home to more than half of the world’s poorest people, require immediate debt relief to prevent further extreme poverty and give them a fighting chance against climate change.

The only plausible solution to this challenge is effectively “financing the deficit”-the three most commonly known antidotes to the financial deficit – taxes, borrowing and monetization. The most popular model of deficit finance is borrowing. However, in Pakistan’s instance, over-borrowing without a solidifying and effective strategy to channel the financial borrowings have unfortunately led to weak trust by Foreign Investor in the country’s economic situation. While all previous political setups seem to quickly fall back on Foreign lending bodies like the World Bank and the IMF – Pakistan’s immediate solution is debt deferment which the upcoming meeting in the US is expected to result in. However, adding further to the shock is the 60% loss incurred by the country’s sovereign bonds, which are one of its primary sources for raising capital or earning revenue. The global markets are uncertain about Pakistan due to the country’s $45 billion in flood-related economic losses.

On the other hand, the Federal Bureau of Revenue showed that revenue collection posted nearly 17pc growth in the first quarter of FY2022. The FBR collection in September exceeded the target by Rs. 1bn to Rs. 685bn, a 27 per cent rise over the estimated monthly target of Rs. 684 billion. This paints an optimistic picture of the FBR performance, but there is a looming pressure on the economy and the government in the shape of higher tax collections as committed to the IMF. The revenue performance reflects the FBR’s comprehensive revenue mobilization plan and the field formations’ effective enforcement. However, Pakistan still faces the mountainous challenge of widening its tax net. The previous government had to roll back its retail taxation reforms, leaving a tough challenge for the coalition government. On top of this, there is absolutely no effort or mechanism of “documenting” the undocumented. The very nature of the regressive income taxation system in the country amidst the corruption, weak judicial system and a dominating anti-nationalistic attitude are all part of the challenge that hinders any major progress towards a reformative perspective.

The final part of the puzzle is stimulating monetization in the economy to finance the debt and deficit. Pakistan briefly experienced a positive monetization with the introduction of Naya Pakistan Bonds when it received a positive response in the international market. The country’s debt fell from 87.6% to 83.5% in 2021 and the rupee value appreciated against the dollar. Pakistan also experienced a positive credit rating from international monitoring bodies. This phenomenon was seen globally during the peak of COVID-19 when central banks around the globe fell on stimulus programs in direct payments, tax breaks, business subsidies, and other relief. However, this is an unlikely solution for Pakistan’s problem and may not work, provided that the global economists favoured the option in times of extreme crisis.

I firmly believe that the main problem is our attitude towards the challenge while countries like the US continue to grow and expand with huge amounts of debt. The real opportunity or solution here is to manage the debt and deficit by creating a positive environment for the investors. We are sitting on a gold mine in the form of CPEC, with countless SMEs that can benefit hugely if we can redirect the debts into building the economic cycle and channelising a charity cycle that, like in Iran’s case, can lead to the sprouting of numerous economic opportunities.

The writer is the Foreign Secretary-General for BRI College, China. He tweets @DrHasnain_javed