ISLAMABAD: The government, wielding the primary authority to bolster tax revenue, has historically favoured elevating indirect taxes, which constitute a staggering 60% of the total tax revenue.
A closer look reveals that approximately 70% of direct taxes are sourced from withholding taxes, with potential indirect repercussions for the consumers, Dr. Faiz-ur-Rehman, fiscal policy specialist, told WealthPK.
This move, however, risks exacerbating inflation, which has maintained an alarming 25% on average over the past two years, he said.
“Contrary to the expectations, the government’s adoption of a contractionary monetary policy, marked by heightened interest rates and reduction in money supply, has yielded unsatisfactory results. The dominance of cost-push inflation over demand-pull inflation is identified as a key factor in this suboptimal outcome,” he added.
Rising business costs, including energy, raw materials, and regulatory expenses, have independently led to price hikes, irrespective of demand dynamics. The elevated interest rates have further compounded the situation by increasing the operational costs.
Consequently, the escalating inflation has eroded the purchasing power, contributing to a projected 37.2% poverty rate and a staggering 38% decline in the purchasing power due to the soaring food costs in 2023.
“Two potential paths lie ahead for Pakistan’s economic trajectory. The first involves an increased reliance on debt financing, exposing the government to financial vulnerabilities. As of June 2023, Pakistan’s external debt has soared to $124.3 billion, with over half of the budget allocated to servicing this debt, equivalent to 105% of the total tax revenue,” he highlighted.
“To address this challenge, Pakistan may consider debt rescheduling, particularly with major bilateral lenders like China and Saudi Arabia, which collectively account for over 30% of the external debt. However, the efficacy of this approach is limited, given the government’s constrained ability to develop effective counterstrategies, with debt servicing obligations surpassing overall tax revenue,” he continued.
“On the other hand, the current budget shows a total spending of Rs14.46 trillion, with less than half coming from taxes and the rest from various loans. This raises concerns about the banking sector’s heavy reliance on government loans, which currently make up over 83% of all loans and could reach 100%,” he added.
A persistent trend in this direction could lead to a banking sector wholly dependent on state lending, raising questions about the state’s ability to repay and the quality of the bank’s asset portfolio.
He emphasized, “Though challenges are not unique to Pakistan, the nation’s limited ability to develop effective counterstrategies intensifies the gravity of the situation. Failure to address these challenges could worsen poverty, deepen societal divides, and impede the advancement of the formal sector.”
Building a stronger and more sustainable Pakistan requires implementing fair and inclusive fiscal policies, along with efficient and transparent administrative practices. –INP
