FeaturedNationalVOLUME 19 ISSUE # 18

The struggle to balance earnings and expenses

Pakistan faces a persistent challenge in maintaining a delicate balance between its earnings and expenses. Despite efforts to boost revenue through taxation and external financing, the country often grapples with budget deficits and mounting debt obligations. Economic uncertainties, coupled with structural inefficiencies and external shocks, further complicate Pakistan’s fiscal management. Achieving a sustainable equilibrium between income generation and expenditure allocation remains a pressing priority for policymakers, necessitating strategic reforms and prudent financial management practices to ensure long-term economic stability and prosperity.

Pakistan’s legislative landscape regarding taxation presents a complex scenario, with Parliament authorized to legislate only on specific matters listed in the Federal Legislative List. While Parliament holds broad powers over most common tax types, certain exceptions, such as taxes on agricultural income and immovable property, fall within the purview of provincial assemblies. This division of responsibilities, compounded by the arrangement of federal tax revenues into a divisible pool, creates challenges and distortions in revenue collection and distribution. Concurrently, Pakistan grapples with managing its external debt amidst dwindling foreign exchange reserves, as evidenced by significant debt servicing obligations in the first quarter of the current fiscal year.

The Federal Board of Revenue (FBR) has collected Rs5.82 trillion in the first eight months of the current fiscal year. To meet the desired target of Rs9.415 trillion by June 30, 2024, the FBR needs to collect Rs3.58 trillion in the remaining four months (March-June) period. In March 2024, the FBR must achieve a monthly target of Rs890 billion to fulfill the third-quarter (Jan-March) agreement with the IMF. The IMF has outlined eight contingent measures to be taken by the FBR if there is a shortfall in achieving the monthly target.

Collecting Rs3,586 billion tax revenue during the remaining four months of the fiscal year is a significant challenge for the tax collection machinery. Any further shortfall may lead to the IMF prescribing additional revenue measures within the fiscal year. The government has identified eight contingency revenue measures to generate additional revenue of Rs18 billion per month in case the monthly FBR revenue falls short of the projected targets.

The IMF has recommended improved fiscal federalism and proposed revising the NFC Award with the consent of the Center and provinces on a medium-term basis. In the interim, the IMF suggests full implementation through improved coordination with the provinces, including updating Memorandums of Understanding (MoUs) with the federal government to ensure FY24 budget targets are met. Additionally, the IMF advised the FBR to launch a door-to-door campaign in four provincial capitals and Islamabad to register non-filing retailers and streamline their tax filing. By cross-referencing tax filings with electricity meter data, the FBR aims to detect evasion and conduct audits when necessary. The FBR plans to implement safeguards, including strict supervision through random audits of assessments filed under the scheme, to verify the correctness of valuations and payments.

Furthermore, the IMF recommends the establishment of a modern and semi-autonomous tax authority to collect federal and provincial taxes over the long term. The split in taxing rights between the federal government and provinces presents challenges for tax policy making and revenue administration, according to the IMF. It urges Pakistani authorities to complete discussions and take action to create a modern tax authority for collecting all taxes at the federal and provincial levels.

On the other hand, amidst dwindling foreign exchange reserves, Pakistan repaid $2.4 billion in external public debt servicing during the first quarter (July-September) of the current fiscal year, with a significant portion repaid to the IMF. The repayment includes principal and interest payments to various bilateral and multilateral creditors, including the World Bank, Asian Development Bank (ADB), Islamic Development Bank (IsDB), and commercial banks. Additionally, the government signed new agreements worth $642 million in the first quarter, primarily funded by multilateral development partners, with a focus on financing projects to mitigate the effects of floods in 2022. Disbursements during this period mainly came from project and program loans/grants from multilateral and bilateral partners. China and Saudi Arabia were among the largest contributors to disbursements during this period.

External financing plays a crucial role in the development of countries like Pakistan, facilitating sustainable economic growth. As of September 30, 2023, Pakistan’s total external public debt stood at $86.358 million. The government’s debt servicing efforts in the first quarter of FY 2023-2024 amounted to $2.404 billion, with principal repayments accounting for $1.627 billion and interest payments totaling $777 million. Despite these debt servicing obligations, the government’s net transfers to external public debt resulted in a positive balance of $1.869 billion.

The intricacies of tax legislation and external debt management in Pakistan underscore the need for strategic reforms and prudent fiscal policies. Addressing the complexities surrounding taxation is essential to promote transparency, efficiency, and equity in revenue collection. Simultaneously, managing external debt obligations requires a balanced approach to ensure sustainable economic growth while safeguarding against fiscal vulnerabilities. By implementing reforms that enhance tax administration and debt management practices, Pakistan can navigate these challenges and foster a conducive environment for economic development and prosperity.