As part of its new $7 billion loan facility to Pakistan, the International Monetary Fund (IMF) has asked Pakistan to rein in its fiscal deficit (which is the excess of government expenditure over and above the revenue it collects), and this is partially to be done through cutting back on its flagship Public Sector Development Programme (PSDP) -- which is what it spends on social development and major projects.
Pakistan’s federal budget for the fiscal year 2024-25 estimates total expenditures of Rs18.8 trillion – of this, 51.78% will be spent on interest payments for loans owed by the federal government. This means over half of the federal budget for the ongoing fiscal year will be spent on a completely non-productive endeavour, but which the government cannot get out of because of its debt repayment commitments.
The other big chunk of federal government expenditure is Rs2.122 trillion on defence – which amounts to 11.24% of the total budgetary allocation. PSDP spending comes in third with Rs1.4 trillion or about 7.42% of the total federal budget. As it is, social sector development spending comes in a distant third – with interest payments and defence taking up over 63% of federal expenditures.
A good measure of the financial strength, or otherwise, of any economy is its tax-to-GDP ratio, and Pakistan has historically had one of the lowest in the region and even amongst other developing countries
As part of the new IMF programme, the government has agreed to implement a host of new measures to raise new taxes in the current fiscal year. A good measure of the financial strength, or otherwise, of any economy is its tax-to-GDP ratio, and Pakistan has historically had one of the lowest in the region and even amongst other developing countries. In fact, for the most recent fiscal year 2023-2024, it was a miserly nine percent, far lower than the ideal ratio of 15%. Therefore, Pakistan has agreed to new tax measures of some Rs1.75 trillion in the current 2024-25 fiscal year.
However, it has also agreed to cut back on some of its expenditures so that the gap between what it collects in revenue and what it spends can be narrowed. As part of this commitment, it has agreed to reduce the size of the PSDP, which is already a mere 7.42% of the federal budget – and therefore its reduction is going to affect the government’s commitment to improving the quality of social sector services in the country – services that are seen as key to improving the quality of life of citizens.
In effect, the impact of raising new taxes worth a staggering Rs1.75 trillion, at a time when those who are paying tax are already overburdened with a sharp rise in income tax and all kinds of indirect taxes, and with the cut in social development spending is – at least in the short term – going to reduce the quality of life for millions of Pakistanis.
And that is one of the biggest costs of getting the new IMF loan of $7 billion. The government says that in the current financial and economic situation, that programme was essential to stabilise the economy and put it on the trajectory of long-term sustainable growth, but that will provide little comfort to millions of ordinary Pakistanis, who feel squeezed further.