How Pakistan’s Federal Government is Sabotaging Its Own Economy

Fiscal indiscipline is a persistent challenge for Pakistan’s federal government, and it is essential to analyze the ways in which it manifests. This article provides an analysis of 10 common ways in which Pakistan’s federal government expresses fiscal indiscipline. 

Detailed suggestions on the resolution of Budgetary policy issues can be found within the Pakistan Charter of Economy.

Low Tax Collection

Pakistan’s tax collection is considerably lower than other countries with similar income levels. The Federal Board of Revenue (FBR) reported that Pakistan’s tax-to-GDP ratio was 11.2% in 2020, which is well below the average for middle-income countries. This low tax collection is a significant contributor to fiscal indiscipline, as it limits the government’s ability to fund its expenditures adequately.

Unproductive Spending

Pakistan’s federal government also engages in unproductive spending, which is another contributor to fiscal indiscipline. For example, the government has a history of investing in large, expensive infrastructure projects without proper cost-benefit analysis. These projects often lead to increased debt, which can lead to further financial instability.

Poor Management of Public Sector Enterprises

Pakistan’s public sector enterprises have a history of mismanagement and financial inefficiencies, which can lead to a significant drain on government resources. According to the Pakistan Economic Survey 2020-21, state-owned enterprises’ accumulated losses reached Rs. 2.6 trillion in 2020. This mismanagement leads to increased government spending to keep these enterprises afloat, contributing to fiscal indiscipline.

Lack of Transparency

The government has been criticized for its lack of transparency in awarding contracts and allocating resources, which can lead to increased corruption and inefficiencies.

One example of the lack of transparency is the inadequate public disclosure of information on government spending. The lack of comprehensive and timely information on public spending hinders accountability and makes it difficult to monitor and assess government spending. The Public Financial Management Act of 2019 aims to improve transparency and accountability in public financial management. However, implementation has been slow, and transparency remains a significant challenge.

Another example is the lack of transparency in tax administration. Pakistan’s tax administration has been criticized for its lack of transparency and accountability, leading to low tax compliance and revenue collection. The absence of clear and consistent procedures, as well as limited access to information on tax administration, contribute to this problem.

The lack of transparency in public procurement processes is another area of concern. Public procurement processes are often opaque, leading to mismanagement and corruption. The absence of clear rules and guidelines, coupled with a lack of transparency, often leads to the awarding of contracts to politically connected individuals or firms, which may not be the most qualified for the job. This results in the misallocation of resources and reduced effectiveness of public spending.

Excessive Defense Spending

Pakistan’s defense spending has increased significantly in recent years, which can contribute to fiscal indiscipline. According to the Stockholm International Peace Research Institute (SIPRI), Pakistan’s military expenditure was $10.3 billion in 2020, which represents 4% of the country’s GDP. This excessive defense spending limits the government’s ability to fund other critical areas, such as health and education, contributing to fiscal indiscipline.

Dependence on Loans

Pakistan’s federal government also has a high dependence on loans to finance its expenditures, which can contribute to fiscal indiscipline. According to the Pakistan Economic Survey 2020-21, external debt and liabilities increased to $117.8 billion at the end of March 2021, which is 38.8% of the country’s GDP. This reliance on external financing can lead to increased debt and financial instability.

Lack of Long-Term Planning

Pakistan’s federal government also lacks long-term planning, which can contribute to fiscal indiscipline.

The lack of long-term planning results in poor decision-making and the misallocation of resources. Short-term policies often lead to incomplete projects and the inefficient use of resources, which results in cost overruns and further drains on the budget. This issue is evident in the government’s energy policies, where frequent changes in policies and a lack of long-term planning have resulted in an inadequate and unreliable energy supply system.

Another example of the lack of long-term planning is insufficient investment in infrastructure development. The government’s failure to prioritize infrastructure development has led to inadequate road networks, limited access to clean water and sanitation, and poor quality of public transportation. This hampers economic growth and development, as businesses struggle to transport goods and services efficiently, and individuals face challenges in accessing basic services.

The government’s lack of planning also affects social welfare programs. The government often introduces social welfare programs without adequate planning, which results in poor implementation and inadequate funding. This is evident in the government’s poverty alleviation programs, where a lack of long-term planning has led to inadequate funding, inefficient implementation, and limited impact on poverty reduction.

Weak Revenue Administration

One of the key challenges facing Pakistan’s federal government is the weak revenue administration, which contributes to fiscal indiscipline. The government has struggled to increase its revenue collection and improve tax compliance, resulting in a low tax-to-GDP ratio and an over-reliance on borrowing.

According to the World Bank, Pakistan’s tax-to-GDP ratio stands at around 11%, which is significantly lower than other developing countries in the region. The low tax-to-GDP ratio is due to the government’s failure to effectively implement tax policies, a narrow tax base, and a lack of enforcement.

The government has also struggled to broaden the tax base by including more taxpayers and sectors into the tax net. A significant portion of the economy remains undocumented and operates in the informal sector, which limits the government’s ability to collect taxes effectively. Furthermore, tax exemptions and concessions granted to influential individuals and industries also contribute to a narrow tax base and revenue losses.

The weak revenue administration also results in a high degree of tax evasion and non-compliance. Tax evasion is prevalent in Pakistan, and it contributes to a significant loss of revenue for the government. According to a report by the Federal Board of Revenue (FBR), around 72% of registered taxpayers in Pakistan do not file tax returns. Tax non-compliance not only results in revenue losses but also contributes to a lack of trust in the government and a culture of impunity.

Dependence on External Financing

Pakistan’s dependence on external financing is a significant contributor to fiscal indiscipline. According to the Pakistan Economic Survey 2020-21, the country’s external debt and liabilities increased to $117.8 billion at the end of March 2021, which is 38.8% of the country’s GDP. This indicates that the government is relying heavily on external financing to finance its expenditures.