Pakistan Bulletin
An up-to-date and informed analyses of key issues of Pakistan.
More of The Same but Tougher: The 2024 Budget and the Economic Future of Pakistan
August 2024
Excerpts from the Knowledge Forum’s interview with Dr. Kaiser Bengali, a leading economist and architect of Pakistan’s Benazir Income Support Programme, on Pakistan’s economic future.
The Budget: A Political Document
“It is important to recognize that the budget is not merely an economic or accounting document; it is fundamentally a political one. In creating the budget, decisions are made about how much money is extracted from individuals and how it is redistributed. Unfortunately, the wealthiest members of society often contribute the least in taxes, while the burden falls disproportionately on those with less power and fewer resources. This results in a continuous cycle where wealth is transferred from lower-income groups to higher-income groups, a pattern that occurs globally but seems particularly pronounced in Pakistan.
In Pakistan, there exists a stark divide between the privileged and the common people. For the privileged, economic hardships are rarely felt. For instance, five-star restaurants remain fully booked, and in affluent areas of Islamabad, residents continue to shop regularly, drive luxury cars, and dine out frequently, giving the illusion that the country is not amidst an economic crisis. However, the reality for the average citizen is vastly different, as they face significant financial strain.”
Pakistan’s Debt Crisis
“The economic challenges facing Pakistan are not new. Approximately 25 years ago, between 2001 and 2002, for every Rs. 100 of revenue, the country would spend Rs. 110, and for every $100 of imports, $120 worth of goods were imported. The loss was typically around 10 to 30 percent. However, changes implemented after 2003 severely disrupted this delicate balance. The country began spending Rs. 210 for every Rs. 100 of revenue and $210 for every $100 of imports, resulting in losses that now range between 110 and 120 percent. This has led to a situation where Pakistan survives primarily through taking on more loans, often just to service existing debt.
Currently, Pakistan is at a critical juncture, where loans are taken simply to pay off previous loans. There have been few, if any, significant developments in education or public welfare, and the government is under immense pressure to increase tax collection, particularly as international agencies like the World Bank and IMF demand it. For those earning less than PKR 50,000 per month, making ends meet has become nearly impossible, with much of their income consumed by rent and taxes. This situation has reached a point where it feels more like extortion under the guise of taxation.
Pakistan's budget exacerbates wealth inequality, with the wealthy paying less in taxes while the burden falls disproportionately on the average citizen.
There is a common belief that influential landowners in Pakistan do not pay their fair share of taxes, but it is important to base such claims on credible data. Research has shown that while the wealthy do pay fewer taxes than they should, the number of rich individuals in both rural and urban areas is relatively small. Even if they paid their full share, it would not be enough to cover the country’s total tax revenue needs, leaving Pakistan still in debt. The only sustainable solution is to reduce expenditures, particularly by cutting down on imports. The current focus on increasing exports by imposing more taxes on industries only serves to stifle them, leading to closures and economic contraction.”
Government Expenditures: Development vs. Non-Development
“Government expenditures are divided into development and non-development categories. Unfortunately, development expenditures have all but ceased. While development schemes are still listed in the budget, they often fail to materialize due to a lack of allocated funds, rendering the development budget nearly non-existent. Meanwhile, non-development expenditures continue to rise. In 1992, approximately 100 industries were privatized, with the expectation that this would help reduce the national debt. However, the losses only continued to grow, and 82% of the revenue from these sales was funnelled into non-development expenditures.
The 18th Amendment in 2010, which abolished the concurrent list and distributed 40 of its 47 items among the provinces, was expected to result in significant savings by shutting down ministries in Islamabad. However, these expectations were not met, and many of the ministries were simply renamed rather than closed. Additionally, the planned closure of 18-20 government divisions in Islamabad did not lead to the anticipated savings, as the government was unable to eliminate the positions of the employees in these divisions.”
Energy Related Debt
Apart from government expenditure, the second-largest component of national spending is the subsidy allocated to electricity, which has created a significant circular debt of approximately 2-3 billion Pakistani Rupees. This debt is largely due to the government’s agreement to make capacity payments to power producers, regardless of whether electricity is produced or not. These payments are made in dollars, further exacerbating the economic burden.
Petroleum products constitute a significant portion of Pakistan’s import bill as well, with furnace oil and diesel being the most substantial components. The country’s reliance on imported resources for electricity production is a major issue. Although efforts are underway to transition to using domestic coal from Thar, this process will take time. Additionally, Pakistan’s heavy reliance on road transport for intercity travel contributes to high diesel consumption. A return to rail transport, which is significantly more cost-effective, could reduce diesel imports by 17%.”
Defence Spending: Necessity or Obsolete?
The third major issue is defence spending. While security is crucial for the country’s survival, there must be a balance between defending the budget and defending the country itself. A country with a collapsed economy is unlikely to survive, regardless of its military strength. The Soviet Union serves as a prime example of this; it collapsed without engaging in war because its economy had crumbled. Pakistan’s economy is similarly on the brink, with the country surviving on borrowed funds, akin to being on life support.
The defence budget is divided into combat and non-combat expenditures. Many of the non-combat expenditures, such as maintaining cantonments established during the British era, are outdated and unnecessary. India recently took steps to dismantle such cantonments, and Pakistan should consider doing the same to reduce defence spending.”
Privatization and Land Sales: A Desperate Measure
“PIA, the national airline, has been on the verge of privatization, with limited response from potential buyers. Meanwhile, Pakistan has begun selling land to raise funds. A recent agreement to lease 5,000 hectares of land to a Saudi company for fodder production is a prime example of the country’s desperate economic situation. This shift in land use has significant implications for food security, as it prioritizes export crops over essential food production for local consumption.”
Pakistan's reliance on borrowing to manage debt, combined with harmful tax policies, perpetuates a cycle of economic instability and stifles sustainable growth.
Conclusion: The Path Forward
“There is an urgent need to reduce the demand for imported goods, including non-essential consumer products. Imported items like luxury vehicles place an unnecessary burden on the economy, particularly when the country is already struggling with malnutrition and other pressing issues. Non-commercial vehicles should be discouraged, and policies should be implemented to promote the use of locally produced goods.
In conclusion, the only way for Pakistan’s economy to survive is through comprehensive structural changes. This includes reducing government expenditures, particularly non-development expenditures, shifting defence spending towards modern electronic warfare capabilities, and prioritizing education and local production over reliance on imports and foreign loans. Without these changes, the country’s economic future remains bleak.”
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