Syed Shabbar Zaidi
The discussion and debates on budget are generally made in technical terms due to which the common man is not able to understand what is there in Pakistan’s budget. In this article very complicated issues are handled in the most possible lucid manner.
The conclusion is that things are not in control; however, there are solutions for achieving sustainable development.
The International Monetary Fund (IMF) in its report of May 2025 has included Table 4a. Pakistan: General Government Budget, 2019/20–2029/30. This table provides the cash inflows and outflows of Pakistan, including provinces for ten years.
Table A
These figures are also in line with the budget that would be presented by the government today.
For an accountant the story is very simple. The deficit is almost equal to or slightly higher than domestic interest expense. That domestic interest is not actually paid. It is actually further borrowing from the same sources. So actually nothing is done. Taxes are collected by squeezing economic activities and the funds so collected are spent essentially for current expenses. The budget for development expenditure on an overall basis is around 10 percent only. So, in order for simplicity financial adjustment is excluded, then the position emerges as under:
Table B
This means that in Pakistan there are two budgets.
On an overall basis there is an inflow of Rs 18,402 billion (out of which Rs 13,316 billion is from a limited number of people from taxes). There is an expenditure, most of which is current, of Rs 24,888 billion out of which Rs 7,938 billion is domestic interest. This results in a deficit Rs 6486 billion which is again borrowed from the people to whom the interest is paid. The borrowing from the bank is Rs 4,090 billion and other saving schemes, etc. 1,753 billion. The calculation and working is very simple and straightforward.
The other is the budget for the banks who have lent to the government. They do book entries on a yearly basis. Under those book entries the Asset being ‘Loan to Government’ increases on a year to year basis. This increase finances around 80 percent of the budget deficit of the government for that year. The status of domestic debt is as under:
Rs Billion
2020: 23,875
2021: 26,959
2022: 31,858
2023: 39,655
2024: 47,160
2025: 54,789
2026: 60,861
2027: 65,629
2028: 71,019
2029: 75,995
2030: 80,841
Then there is another book entry of interest income on that loan. That interest income is never received. It forms part of the new debt given. Out of the interest income around 90 percent of the sum is paid to depositors and expenses and the remaining 10 percent is given to the owners of the banks and taxes on income in almost equal proportion. So the banks are doing a risk free business with the banks. This happens in every developing country, except those who have got out of this trap like India. Bangladesh is still in. However, the position of Pakistan is worsening gradually.
This means that nothing is being done. Each year the domestic debt is increasing by the budget deficit, which correspondingly increases the debt servicing. So in other words, Pakistani banks are running the Pakistani government. They get the deposit from the people at ‘x’ rate of interest and lend the same to x+1 to the government. The difference is their margin. For them interest/discount rate is not relevant as their margin effectively remains the same. There is a fixed, risk-free, profit for the banks. Whatever spread the banks have is subject to heavy taxes say up to 50 percent. This also does not affect as the business model for them which is simple as under:
This is a risk-free model as the depositors are secured and the borrower is the government. 50 percent of the spread is the guaranteed after tax profit. Each year this model is being strengthened. Borrowing from banks suits as the cost to the government after tax is lesser than private borrowing as there is no tax recovery from such sources.
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Interest income from government 100
Interest to depositor and expenses 90
Margin 10
Tax 5
Net Profit 5
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The author may consider about the possibility of restructuring the domestic debt; however, for that purpose the following remark of IMF in the case of Ghana is to be taken into consideration:
IMF (2021) and subsequently Gregorian (2023) provide a framework for thinking about the decision on whether to undertake a domestic debt restructuring and how to approach its design. According to this approach, the decision to restructure any type of claims (e.g., external, domestic, nonfinancial state-owned company debt, etc.) should depend on the relative economic costs of doing so, the amount of debt relief that could be secured from each type of claims, and of the total debt relief required to reach sustainability. If a decision is made to restructure domestic debt, the approach essentially argues that domestic debt should be restructured up to a point where the gross debt relief accrued to the budget by restructuring still exceeds the costs of recapitalization of affected institutions and of ring fencing financial stability.41 Both decisions (i.e., whether to restructure and how much) are complex choices requiring a significant amount of data and technical analysis (see IMF, 2021, for details).
Despite the earlier position the author would not recommend any such step at this stage. Notwithstanding the status of domestic debt, on an overall basis the cost of external debt has almost remained the same and it is not expected to increase substantially. The possibility of arranging dollars for principal sum remains an issue, which is not the subject of this article.
The problem lies with the local debt. At present total debt is around 75 percent of GDP. There’s no universally “ideal” debt-to-GDP ratio for a state. However, it’s generally considered best to keep the ratio low, ideally under 60 percent. Some models suggest an “optimal” level around 50-80 percent for certain economic conditions. A higher ratio can indicate a greater risk of economic problems. The problem lies with the ratio of debt servicing to total revenue or expenditure or GDP. In Pakistan, it is estimated at 49.03 percent, 34.03 percent, 8.32 percent of revenue, expenditure or GDP respectively.
In simple words, the amount of loan is not high; however, there is no income to pay the interest and the principal. Or, in other words, fixed expenditures swallow all the revenues. This means that the entity is not a ‘going concern’. In the case of a state the shop is not closed. However, when the shop is continued to be run in this manner then people suffer and the talent migrates, which leads to further deprivation. The economic issues, which are arising from this system, are as under:
a. All of the savings of the people are effectively being used for consumption purposes instead of investment. This reduces the employment level substantially. This gets aggravated when there is a population growth of 2.5 percent;
b. Taxpayers are not provided any facility or welfare as their taxes are used effectively for non-developmental expenses. There is no money left for the government for infrastructure development;
c. Especially in the Pakistani environment, bank deposits out of untaxed wealth are lured to provide necessary credit to the government. The banks’ debt to the government is Rs 40 trillion, which is even higher than total deposits. The result is that the Central Bank funds the commercial banks to lend to the government.
This debt trap started after 2014. In 2014 the 1 dollar was equal to around 65 Pakistani rupees. Earlier the debt was less than 60 percent of GDP. Now in 2024 it reached over 78 percent and crossed 80 percent in 2020. These are the bad years of Pakistan’s governance. During the Musharraf time of 2005/2006, it was at an international level of around 40 percent. This means that democratic governments after 2008 have not been able to run the economy.
The manner in which tax revenues are collected has prospered the cash economy. At the moment there is around Rs 9.4 trillion worth of currency in circulation. This is one of the highest proportions with reference to GDP in the world. The future does appear to be promising. However, it cannot be left like this. The solutions are:
a. Retirement of the domestic public debt by selling the unutilised real estate of the government (both Federal and Provincial) including that held by the military in the urban areas. Huge pieces of land and property are available. Provincial Governments and military to surrender their rights if the proceeds are used for settling the national debt. The target should be a reduction of domestic debts by 50 percent in the next five years. At the moment it is an unutilised asset not generating any economic activity;
b. Property survey of all urban properties for Urban Immovable Property Tax in Pakistan. At the moment UIPT is the lowest in Pakistan. For the financial year 2024-25 the Bombay Municipal Corporation collected property tax amounting to Rs 619 billion Indian rupees which equals to around Rs 1,800 billion in Pakistan. It is around 13 percent of total taxes collected in Pakistan. Total tax of this nature in Punjab is only Rs 28 billion;
c. Provincial governments to be given the right to tax agricultural business activity like ‘Arthis’ with a condition that Provincial Governments will be given the whole share in NFC if their own revenue is not less than 40 percent of the share of NFC.
d. Reduction in the tax rate for companies to a maximum of 30 percent to incentivise reinvestment and maintain the same for another twenty years;
e. Substantial reduction in tax rate for salaried class. Limiting the effective rate to 25 percent with total exemption for salary up to Rs 1.5 million;
f. Substantial reduction in expenses referred to as 1A in Table 1. This includes subsidy, grants, pensions and other administrative expenses of the federal government;
g. Stop frequent adjustment in discount rates. Review to be limited to quarter only.
h. Providing a ten-year government plan 2025-2035 for Pakistan including Constitutional Amendment for new provinces, devolution under Article 140A.
Pakistan’s economic condition is to be understood in a simple sense. The model is not working and from the papers issued by the IMF and the government it appears that no out of box solution is on the cards. The author is of the view that there is no space for more taxation in the traditional way to resolve the economic issues of Pakistan.
