IF fiscal prudence is a virtue then Pakistan’s budgets have been an exercise in vice for the last many years. This is evident from the high, unmanageable fiscal deficits that successive governments have persistently been running to finance their lavish spending for the last decade and a half. The nation’s headline fiscal deficit has averaged over 6.3pc of GDP per year since 2010 and nearly 7.4pc in the last five years, leading to the accumulation of massive debt during this period. Though the government has pledged to bridge the deficit to little below 6pc during the present fiscal under an agreement with the IMF, its budget is still facing a gaping hole of Rs8.5tr, up from last year’s deficit of Rs8.3tr, which it must fill through more borrowing. In fact, it has to borrow extensively — either in the form of rollover of existing debt or fresh loans — to pay the existing external debt maturing during the current year.

Thus, the government’s plan to borrow Rs32tr during the present fiscal year to fund its budget and pay off maturing foreign loans does not come as a surprise. Nonetheless, it does show that Pakistan’s annual gross financing needs have shot up to 26pc of GDP, underlining the fact that the country’s debt burden has already become unmanageable. The implementation of this plan largely hinges on the approval of the recently concluded $7bn deal by the IMF Executive Board as well as Beijing’s willingness to roll over $7.9bn in debt. While the government is very optimistic about the chances of Pakistan clinching the IMF deal and securing the rollover of Chinese debt, the reality is that it is facing significant challenges on both fronts. The fiscal crisis we are facing today has not been created overnight. Years of lavish spending to support the lifestyle of our ruling elites, bad policy decisions, structural flaws and economic underperformance have led us to where we stand today. Support from the IMF and China will provide only limited and brief respite. Long-term debt sustainability and economic recovery depends on our ability to reduce the country’s runaway deficit to below 3pc by boosting tax revenues and cutting the wasteful expenditure that props up the lifestyle of the rent-seeking classes. This, however, is a test that our politicians and economic policymakers have repeatedly failed year after year.

Published in Dawn, August 22nd, 2024