Pakistan’s fiscal situation is in dire straits. Years of low tax collection and rising spending have resulted in ballooning budget deficits and a massive national debt. This instability spills over to the external sector, causing recurring balance-of-payments crises.
World Bank Reiterates Reform Call
The World Bank, in its latest policy note, urges the Pakistani government to implement broad fiscal reforms in the upcoming federal and provincial budgets. These reforms aim to achieve a consolidated fiscal deficit reduction by:
Boosting Tax Revenue: Increasing tax collection is crucial.
Controlling Expenditure: Unsustainable spending must be curtailed.
Reforming Borrowing: Smarter borrowing practices are needed to curb debt accumulation.
Efficiency and Investment
Fiscal reforms are critical for boosting national savings and attracting investment. India serves as a prime example. After its 1991 economic crisis, India prioritized fiscal reforms, leading to significant domestic and foreign investment and propelling it to become the world’s third-largest economy.
A Provincial Partnership
This time, the World Bank emphasizes the crucial role of Pakistan’s provinces. The bank calls for their equal participation to strengthen inter-governmental coordination on fiscal issues. The goal is a national fiscal policy that aligns both federal and provincial tax efforts and spending frameworks, adhering to the constitutional mandate.
Tough Times Ahead
The World Bank recommends implementing new Fiscal Responsibility and Debt Limitation Acts at both federal and provincial levels. These reforms are expected to pave the way for a more substantial medium-term IMF program. As the Prime Minister has warned, this program will likely be the most challenging one yet, demanding stringent fiscal and external sector reforms for economic recovery and growth.
Pakistan’s precarious external position, forcing import restrictions and stunted economic growth, necessitates a demanding IMF program. Achieving the program’s goals will require both the central government and provincial authorities to embrace and co-own the reforms.