ISLAMABAD: The new government in Pakistan must have a plan to tackle the debt challenge, with a reform agenda enhancing financial management, increasing revenue, enforcing fiscal discipline, diversifying funding sources and effectively managing debt, suggests the United Nations Development Programme (UNDP).

The UN agency’s latest publication — Development Advocate Pakistan — further suggests that parliament should provide regular oversight of treasury operations, and by putting these measures into action, Pakistan can work towards achieving fiscal sustainability, diminishing its dependency on external borrowing, and ultimately fostering economic stability and growth.

Overall, it says, Pakistan’s options to resolve the ongoing debt crisis are very limited, adding that the country is likely to continue relying on short-term measures of rollovers, along with additional external borrowing to ease debt pressure.

“After the ongoing Standby Arrangement with the IMF, a fresh three- to five-year programme will have to be negotiated, which could then unlock longer-term funds from multilateral lending agencies. But without correcting the underlying systemic faults producing debt crises, the country will just be delaying the problem rather than solving it,” cautions the main analysis of the UNDP publication, titled “From Debt Crisis to Solvency: Mid-Term Outlook for Pakistan”.

Suggests parliament should provide regular oversight of treasury operations

The report says Pakistan should embrace open budgets and participate in the ‘Open Government Partnership’ (OGP), as these initiatives promote transparency, accountability, and citizen engagement in public financial management.

“By adopting open budgets, Pakistan can enhance fiscal transparency, providing citizens with access to detailed information on government revenues, expenditures, and allocation of resources. This empowers citizens to hold the government accountable, fosters trust in public institutions, and reduces corruption,” suggests the analysis.

Additionally, the OGP membership offers a platform for collaborative efforts with other countries, fostering innovative solutions, sharing best practices, and working towards greater efficiency and effectiveness in governance.

The government formed after the general elections may have to make a serious assessment of its options for debt management. Short-term rollovers will not release the pressure on the fast-piling debt burden for current and future generations. They will only provide a breathing space for one of two quarters, but expectedly, the new government is likely to be hesitant on a large-scale debt restructuring for political reasons, the report says.

The IMF, however, will encourage the government to design the new programme facility, keeping debt levels sustainable. This design phase could take some time, but it is advised that to give markets the right confidence, the waiting period before which a new programme is signed with the Fund should be kept as short as possible, the UNDP publication says.

Debt solvency will require a working economy, which attracts net positive inflows of foreign currency including exports, foreign investments, and remittances. During 2024-25 and 2025-26, the projected debt servicing is expected to be around $25 billion and $23bn, respectively. For this, Pakistan will need a plan that attracts non-debt-creating inflows, the report adds.

Most importantly, it suggests, the new government has to correct the faultiness underlying the chronic debt problem. To address the challenge of inadequate management of public finance, Pakistan should give top priority to enhancing transparency, accountability, and efficiency in its financial procedures.

The implementation of strict budgetary controls, regular audit practices, and the encouragement of fiscal responsibility can be crucial in ensuring the careful allocation and effective utilization of public funds. Additionally, the adoption of modern financial management systems and the reinforcement of government institutions’ capabilities can play a substantial role in advancing public finance management.

“To tackle the revenue challenge, Pakistan should prioritise tax reforms aimed at expanding the tax base and curbing tax evasion. This may entail simplifying the tax code, adopting technology-driven tax collection methods, and providing incentives for informal sector participants to transition into the formal economy.

“Upholding the fiscal responsibility is the most critical driver towards debt solvency. Fiscal accountability will require compliance with the Public Finance Act. Pakistan should implement stringent budget controls and adhere to clearly defined fiscal targets, which is also in the spirit of the Fiscal Responsibility and Debt Limitation Act,” the publication suggests.

In the longer term, to reduce its reliance on external borrowing, Pakistan should explore a range of financing options. This could involve promoting domestic savings, attracting foreign direct investment, and participating in public-private partnerships for infrastructure development. Diversifying funding sources can help mitigate the risks associated with excessive dependence on external loans and grants, the UNDP publication stresses.

Published in Dawn, December 26th, 2023

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