ISLAMABAD: The World Bank has suggested a number of measures to address Pakistan’s chronic fiscal deficits, including a cut to the funding of projects that now fell within the provinces’ domain.

Briefing journalists, the World Bank’s senior macroeconomist Derek Chen said the federal government was still spending around Rs328bn every year on federal ministries devolved to the provinces around 15 years ago.

“This is a duplication of task,” he said, adding that the devolution process should have been completed at the earliest.

Let the provinces invest and develop health, sports, education and similar other areas so that the federal government could take care of its core responsibilities, Mr Chen added.

Official says Rs710bn spent on ministries handed over to provinces

He said Rs315bn or so from the federal Public Sector Development Programme (PSDP) funding also go to the provincial development projects.

On top of it, the federal government spends Rs70bn to fund Higher Education Commission (HEC) despite education being a provincial subject under the 2008-10 devolution process.

The World Bank official said the federal spending on devolved subjects stood at 0.39pc of GDP in 2009 and increased to 0.59pc in 2022.

As a result, the non-devolved federal expenditures could not benefit as much as their share improved slightly to a mere 10.37pc in 2022 from 10.13pc in 2009.

Mr Chen appreciated the government for rationalising subsidies and focusing towards targeted subsidies but said Pakistan urgently needed to restore fiscal and debt sustainability by fixing federal expenditure, increasing domestic revenue collections and minimising macroeconomic volatility.

But he noted that new tariff structures were still not as efficient as they should be.

Mr Chen emphasised that Pakistan’s fiscal deficit was not only persistent but growing and adding to its debt over the years.

The deficit stood at 7.9pc of the GDP in FY2021, the highest in 23 years but around half of this deficit accrued after 2010 due to the accumulation of public debt.

The debt stood at 81pc of the GDP in 2020 and slightly dropped to 78pc in 2022 owing to the change in base GDP.

Mr Chen added that the growing interest payments, pensions, salaries, subsidies and other operating expenses — accounting for almost 74pc of GDP — have made the government’s expenditures rigidity, leaving little space for development.

He added that fiscal and current account deficits in Pakistan go hand in hand. Once the current account deficit -– the difference between exports and imports — gets too huge, the government takes measures to curb it which results in a drop in growth — hence, the repeated boom and bust cycles.

The World Bank economist warned that even now, about 70pc of the total borrowing was going to the government, leaving very little credit for the private sector to invest and expand businesses.

“The government should worry about this situation because it impacts investments and economic growth”, he warned. The private investment in Pakistan has already declined from 15pc of the GDP in 2000 to about 11pc in 2020.

Published in Dawn, April 6th, 2023