In this episode of New Wave Global, host Nauraiz Rana speaks with Haroon Khawaja, President and CEO of the Maverick Foundation and former advisor to the Prime Minister of Pakistan and the Chief Minister of Punjab. They discuss Pakistan’s economic challenges and opportunities, beginning with the recent approval of a $7 billion IMF bailout and whether it can help the country break free from its perpetual cycles of financial assistance.
When asked if Pakistan will be able to comply with the IMF's conditions this time, with hopes that the country won't need to seek IMF support again, Khawaja pointed out that the root of the problem is the fiscal deficit. The fiscal deficit is essentially the difference between government income and expenses, and since the Pakistani government's expenses consistently exceed its income, there has been a persistent deficit of over 7% for many years. To bridge this gap, the government resorts to borrowing, which contributes to inflation, he added.
“This is why any sensible government, whether in a developed country or a developing nation like Pakistan, prioritizes controlling inflation. With a fiscal deficit exceeding 7% and continuous borrowing, Pakistan's Fiscal Discipline and Debt Sustainability Act mandates that the debt-to-GDP ratio should be around 57% by 2024. Currently, however, it stands at 78%, indicating that the government is not adhering to its own laws and constitutional requirements,” he stressed.
On the external side, the situation is similarly concerning: the dollars earned from exports are significantly less than the dollars being spent, with every dollar earned resulting in three dollars going out, he explained.
This creates an external financing gap that necessitates seeking help from multilateral institutions. Unfortunately, the country has reached a point where lenders are reluctant to provide assistance without stringent conditions, he added.
To address these issues, Khawaja emphasized the need to tackle the fiscal deficit directly. Solutions include increasing taxes, broadening the tax base, and enhancing government revenue. Despite efforts over the past 70 years, Pakistan has struggled to expand its tax base.
He said the Federal Board of Revenue (FBR) has failed to adapt to changing circumstances, and many taxpayers feel discouraged about contributing. They question why they should pay taxes when the government is perceived as ineffective, with individuals having to bear the costs of private education, personal security, generators for electricity, and filtered water.
Khawaja concluded by stressing the importance of devising a comprehensive plan with a long-term vision of five to seven years. He underscored the necessity of a multi-faceted approach to address both the balance of payments and current account deficits, which are primarily driven by imbalances within the government.