ISSN 2330-717X

Pakistan: Prolonged Fiscal Deficit And Economy – Analysis


By: Tausheen Raza

The budget 2011-12 was presented by Pakistan’s Finance Minister on June 03, 2011 with the total estimated cost of Rs.2.767 trillion. The revenue side of budget at a glance shows net revenue receipts Rs.1.529 trillion, capital receipts Rs.396 billion and estimated provincial surplus Rs.125 billion. The expenditure side shows current expenditure has been estimated at Rs.2.315 trillion comprising payment of interest rate Rs.791 billion, overall security expenditures have been estimated Rs.790 billion, subsidies have been projected at Rs.166 billion and development expenditure Rs.452 billion. Keeping in view the total revenue and expenditure of the budget, the fiscal deficit has been worked out at Rs.724 billion. The lethal combination of low revenue collection and high expenditure is accompanied by a high fiscal deficit, increasing unemployment, rising inflation and debt burden. The huge and prolong fiscal deficit not only crowding out private investment, but also the cause of macroeconomic instability.


When the economies are facing unremitting fiscal deficit, it meets some of its expenses by issuing bonds. Thus Govt. competes with private sector borrower by raising interest rates. This leads to “Crowding Out” of private investment. The negative outcomes of huge budget deficit are likely to be harsher than just the crowding out of private investment. The raising inflation, increasing interest rate payments, and slowing down of the growth rate are also negative consequences of the fiscal deficit. “The inability of the Government to restore fiscal deficit can cause a fundamental shift in market expectations and result shall be the loss of confidence both at home and abroad, which in turn can generate a self-reinforcing negative cycle between the budgetary situation, financial markets and the real economy (Rubin, Orszag and Sinai 2004)”. To overcome the fiscal deficit, the far-reaching and bold reforms must be done which affect revenue generation and curtail non development expenditures.

In budget 2011-12, the tax revenue has been estimated at Rs.1.952 trillion by FBR. Mr. Sakib Sherani, a former Principal Economic Advisor to the Government, said the tax revenue target of Rs. 1.952 trillion is unrealistic. To achieve the unrealistic target, FBR should focus not only to ensure the estimated revenue collection, but also increase in the tax collection with the administrative and structural reforms and changes for an equitable and fair revenue collection system as without raising tax revenue; none of Pakistan’s economic problems can be resolved. According to FBR’s chairman, more than 700,000 wealthy people who are contributing nothing to the national exchequer and due to narrow tax network, economy has been suffering the loss of Rs.100bn of tax evasion. The existing policy must be revamped and tax base has to be broadened to minimize the tax evasion that will make it possible to achieve the ambitious target. Moreover, Value Added Tax (VAT) system has been adopted by the international economies to ensure long term increase in tax to GDP ratio. For the country like Pakistan the adaptation of RGST/VAT is a key structural reform to documenting the economy, broadening of the tax base and improving the overall efficiency in the tax system. A consensus with all stakeholders must be developed to ensure smooth implementation of RGST/VAT.

However, the expenditure side of the budget shows a major chunk of financial resources is the interest payment on both domestic and foreign debt, estimated at Rs.791bn which is more than projected fiscal deficit. The policy makers should emphasis to generate internal resources and reduce non development expenditures that would reduce interest payments, debt burden and fiscal deficit. The huge and prolong fiscal deficit led to accumulation of huge debt that requires the formulation of efficient debt management policies to ensure the present debt levels be kept under control and also to manage future repayment obligations as poor debt management poses risk of economic instability, insolvency, debt distress and fiscal crises.

Another major portion of expenditure in the budget is the defense expenditure. The overall military and security related expenditures are projected at Rs.790bn which are also more than fiscal deficit. Pakistan is the biggest loser in the world during the US-led war against terrorism as the acts of terrorism are not only threatening Pakistan’s law and order situation, destruction of property and infrastructure, loss of human lives also creates uncertainty, reduces confidence and increase risk perception. According to the Economic Survey, 2010-11, of Pakistan, the economy has suffered a loss of 68 billion US dollars in the war against terrorism. The expenditure on defense and maintaining law and order situation has been raised at the cost of development expenditures.

The massive loss is being incurred in the public sector enterprises of nearly around Rs.400bn a year. These enterprises need to be urgently addressed with a blend of restructuring and privatization to cope such a loss. The public sector enterprises are also deteriorating their capacity due to bad governance, huge corruption and incompetent senior management. In Pakistan railways, 150 locomotives are not operational and there is a need to renovate. These locomotives can be refurbished with the help of public-private partnership that would generate enough resources to triumph over the losses and other PSEs can also be restructured accordingly.

Tausheen Raza is a Pakistan civil servant, and may be reached at [email protected] These views do not represent those of the government and are personal.

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