Pakistan’s Defense Budget, Economy: Points to Ponder

ISLAMABAD — Pakistan’s upcoming budget shows a 5 percent increase in defense spending, which observers say is mainly due to the continued tensions on its eastern border.

Relations between the two nuclear-armed neighbors (Pakistan and India) have been spiraling downwards ever since the Pulwama attack in Indian Occupied Jammu and Kashmir in February 2019.

Pakistan claimed it was a false flag and expects more such from BJP-led government in Delhi to divert global attention from happenings in the Himalayan Vally which remains under lockdown since August last year.

The blow hot and blow cold forces Islamabad to be operationally well prepared on its eastern border.

It has been helping US-Taliban move forward with the historical peace deal reached in February so that stability returns in its western neighbor Afghanistan after decades of war.

Commenting on the defense budget, an observer said despite regional situation, Pakistan’s defense spending over the last two years averaged 8 percent of its total expenditure — this line item, however, has been increasing. Observers say misgovernance, dysfunctionalism and penchant for borrowing to pay debt markup and fund special development programs created financial indiscipline over the years.

Courtesy: Dr. Farrukh Saleeem tweet

As a result, more than 70 percent of its net revenue on the average has been going toward markup payments while other expenses also increased at a higher rate over the years.

Total public deb now stands around 84 percent of its gross domestic product (GDP), which violates the Fiscal Responsibility and Debt Limitation Act (FRDLA) — it calls for limiting debt to below 60 percent of GDP.

Due to the pandemic, multilateral institutions have given emerging nations breather by deferring payments. Pakistan is among other nations who got some fiscal space. Lower oil prices also helped.

Pakistan primarily generates revenue from indirect taxes due to a very small direct tax based community as its huge business and trading community majorly remains undocumented.

These have reduced due to lower imports, meaning lesser indirect taxes and the pandemic lockdown which curtailed consumer spending — meaning another reduction in indirect taxes.

The country’s Adviser to the Prime Minister on Finance and Revenue Dr Abdul Hafeez Shaikh told a presser in Islamabad on Saturday that the economy was on the right track before it was negatively impacted by the outbreak of the novel coronavirus.

“The most important thing that we cannot get rid of is returning loans. We have to give Rs2,900 billion this year. Reducing that is not within our power, please understand that it is not our fault,” said Shaikh.

“We inherited a broken economy. PTI’s government had to repay billions of dollars in loans. But we still managed to collect Rs1,600bn in non-tax revenues,” Shaikh said, adding that the entire world was “praising” the government’s economic performance.

“The International Monetary Fund (IMF) board praised us. Moody’s increased our rating. Bloomberg called our stock market the best in the world in December 2019. We witnessed a 137 per cent increase in foreign direct investment (FDI),” he told the presser.

“All of these things were happening but then came the coronavirus [outbreak] and that hurt our economy,” he added.

An observer says –other things being equal, without increasing the size of the direct tax base community and documenting the economy, dependence on indirect taxes and meeting the gap through external borrowings and aid, grants, etc. will not help stability and growth.

In his opinion, the economy is a national security issue, just as the pandemic is.

Meanwhile, the country’s civil-military remains on guard for any “misadventure” by Delhi on its eastern border.