The current state appears to have reduced the budget to a mere accounting representation, lacking the inclusion of both present and future fiscal strategies.

The government holds the primary prerogative to augment tax revenue. As historical government approaches indicate, this involves elevating indirect taxes constituting 60 per cent of the total tax revenue. Within direct taxes, around 70pc is sourced from withholding taxes, which can indirectly affect consumers.

However, such action has the potential to stimulate inflation, which has averaged at 25pc over the last two years. Nonetheless, the government’s adoption of a contractionary monetary policy, characterised by increased interest rates and a decline in money supply, has yielded unsatisfactory results. This can be attributed to the dominance of cost-push inflation over demand-pull inflation.

Rising business costs such as energy costs, cost of raw materials and regulatory costs have led to price hikes independent of demand dynamics. Unfortunately, elevated interest rates have compounded this situation by escalating operational costs. Conversely, the escalating inflation has eroded purchasing power, contributing to a projected 37.2pc poverty rate and a 38pc decline in purchasing power due to exorbitant food costs in 2023.

The path to prosperity lies in the adoption of inclusive, just, and sustainable fiscal and administrative strategies

The second option involves a government increasingly relying on debt financing, which exposes it to financial vulnerabilities. By June 2023, Pakistan’s external debt reached $124.3 billion, with more than half the budget allocated to servicing this debt. This equals 105pc of total tax revenue.

The government also faces a looming external debt repayment of $77.5bn from April 2023 to June 2026. To address this challenge, Pakistan might consider debt rescheduling, particularly with key bilateral lenders like China and Saudi, which account for more than 30pc of the external debt.

Similar challenges are not unique to Pakistan and other nations encounter these issues. However, Pakistan’s capacity to tackle this is constrained by its limited ability to develop effective counterstrategies. This is mainly because its debt servicing obligations exceed its overall tax revenue. If the government opts for rescheduling, it is a short-term solution — its frequency and duration are limited.

On the other side, the current budget indicates a total expenditure of Rs14.46 trillion. Less than half originates from revenue, and the remainder comes from debt sources. This debt includes Rs3.1tr rupees from banks, Rs2.5tr from external sources, and Rs1.9tr from non-banking sources.

The current risk exposure of Pakistan’s banking sector is another concern, with over 83pc of loans extended to the government. If the government acquires additional loans, such as the indicated Rs3.1tr rupees in the current budget, this proportion could exceed 85pc.

Failing to address the challenges of this crucial stage could exacerbate poverty, deepen societal fissures, and hinder the advancement of the formal sector

A persistent trend in this direction might result in the banking sector’s complete reliance on state lending, reaching 100pc. Given its reliance on only loans to service prior debts, this raises questions about the state’s ability to repay. Secondly, a notable concern exists regarding the quality of the bank’s asset portfolio, which is accompanied by an elevated level of credit risk.

In the event that financial institutions manifest a reluctance to extend credit to the government, it is imperative to explore viable alternative strategies for the management of public affairs and the servicing of prevailing debt obligations.

Concurrently, with regard to banks, in the scenario where the government faces challenges in meeting its debt obligations and given that a substantial portion of banks’ credit portfolios is interconnected with government debt, a conundrum emerges for these financial institutions. This situation effectively leads to a cul-de-sac for both entities.

There is a misconception that post-election, all challenges will be resolved, and the economy will experience a swift recovery. The central issue now pertains to how the new government will address the inherited crises.

A supplementary concern arises regarding the capability and competence of mainstream political parties to effectively manage these challenges. Unfortunately, no mainstream political party seems adequately equipped or prepared to handle Pakistan’s socio-economic issues. Rather than focusing on concrete ideologies, parties are inclined towards changing narratives, often centred on populist agendas. These shifting narratives lack a stable foundation for sustainable economic growth.

Parties must select between socialist, capitalist, or hybrid frameworks to address these challenges. The government should prioritise expanding the tax base instead of increasing tax rates. Integrating individuals across income levels and the informal sector into the tax system is crucial.

Additionally, the government should minimise discretionary spending. Following the 2009 National Finance Commission Award, redundant federal agencies and organisations could be dissolved, and public sector entities facing deficits might be privatised or managed through public-private partnerships to enhance efficiency and reduce financial shortfalls.

Failing to address this crucial stage could exacerbate poverty, deepen societal fissures, and hinder the advancement of the formal sector. The present juncture demands resolute measures to effect assertive change, encompassing a revitalisation of the civil bureaucracy, a reduction in defence expenditures, the implementation of stringent oversight mechanisms for quasi-governmental entities, and a shift towards land reform as opposed to corporate farming to augment agricultural sector productivity.

The path to prosperity, growth, and sustainability in Pakistan lies in the adoption of inclusive, just, and sustainable fiscal and administrative strategies. These can be effectively realised through a consensus-based Charter of Economy, akin to the collaborative approach undertaken in the 1970s during the constitution-building process of Pakistan.

The writer is an Assistant Professor (PhD Financial Economics) at the National University of Modern Languages, Islamabad.

Email: abwahid.fms@gmail.com

Published in Dawn, The Business and Finance Weekly, November 13th, 2023