Dr Hasnain Javed<\/p>\n
In the past 25 years, the argument among economists over the deficit has become increasingly dissonant<\/p>\n
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 \u2013 whichever appears most significant at the time \u2013 but little attention is paid to the reasons why it may have these effects.
\nThe 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\u2019s rising prominence, the growing scale of reported deficits, and the demise of Keynesianism in the 1960s.
\nToday, 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\u2019s 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\u2019s total debt and liabilities increased from Rs. 47,844t in FY21 to Rs59,696t as of 30 June. According to the SBP, Pakistan\u2019s 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\u2019s overall debt. The only sigh of relief for Pakistan\u2019s horrendous debt relief came in the shape of gut-wrenching flood disasters after the size of the total deferred debt reached $730 million.
\nHowever, Pakistan is not alone in this situation; according to the latest UNDP report, \u201cA serious debt crisis is unfolding across developing economies, and the likelihood of a worsening outlook is high.\u201d The United Nations Development Programme (UNDP) projected that 54 nations, home to more than half of the world\u2019s poorest people, require immediate debt relief to prevent further extreme poverty and give them a fighting chance against climate change.
\nThe only plausible solution to this challenge is effectively \u201cfinancing the deficit\u201d-the three most commonly known antidotes to the financial deficit \u2013 taxes, borrowing and monetization. The most popular model of deficit finance is borrowing. However, in Pakistan\u2019s 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\u2019s economic situation. While all previous political setups seem to quickly fall back on Foreign lending bodies like the World Bank and the IMF \u2013 Pakistan\u2019s 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\u2019s 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\u2019s $45 billion in flood-related economic losses.
\nOn 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\u2019s comprehensive revenue mobilization plan and the field formations\u2019 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 \u201cdocumenting\u201d 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.
\nThe 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\u2019s 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\u2019s problem and may not work, provided that the global economists favoured the option in times of extreme crisis.
\nI 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\u2019s case, can lead to the sprouting of numerous economic opportunities.<\/p>\n","protected":false},"excerpt":{"rendered":"
Dr Hasnain Javed In the past 25 years, the argument among economists over the deficit has become increasingly dissonant 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 […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10],"tags":[11108,888,1555],"class_list":{"0":"post-289914","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-article","7":"tag-debt","8":"tag-deficit","9":"tag-dr-hasnain-javed"},"yoast_head":"\n