Shahid Sattar and Absar Ali

Before Pakistan can embark on the long and tedious journey of structural reforms, fiscal discipline must be embraced wholeheartedly.

Fiscal discipline refers to the practice of governments maintaining sound financial policies related to government revenue, expenditures, and debt. In the context of Pakistan, fiscal mismanagement by successive governments has resulted in a chronic crisis characterized by low government revenue, high and structurally rigid expenditures, large and persistent fiscal deficits, and mounting public debt that has constrained welfare and development-related spending required for economic growth.

Pakistan has one of the lowest government revenue to GDP ratios in the world (see figure below). The fiscal sector exhibits a high reliance on indirect taxes, which account for between 40 to 50 percent of annual general government revenue since FY15, while more efficient and equitable direct taxes, and non-tax revenue account for 25 to 30 percent each. For comparison, direct taxes account for between 50 to 60 percent of government revenue in India.

Moreover, tax regimes are overly complicated, and rates are high with frequent ad hoc changes, while tax administration and compliance are weak. Over time, these factors have created a culture of tax evasion and broadening the tax net has become a major challenge because of strong incentives for tax avoidance and generally low per capita income levels.

At the same time, government expenditures are at par with other developing and emerging market economies, and high in the context of Pakistan’s overall fiscal position. Several components of current expenditures exhibit structural rigidities that make them difficult to meaningfully curtail.

For instance, given the geopolitical situation and security risks—particularly on the eastern front with India—the government allocates a significant portion of its budget to defense, which accounts for 12 to 14 percent of annual general government expenditures, and 2 to 3 percent of GDP since FY15. In the energy sector, deep-rooted inefficiencies and misaligned policies have built up a circular debt of over Rs. 4 trillion, where different entities owe money to each other, leading to a vicious cycle of growing debt that is increasingly difficult to break.

Discretionary and politically motivated fiscal policies are a major reason for the dire state of the fiscal sector. Pakistan’s fiscal deficit exhibits a strong correlation with the political business cycle (see figure 2). In the lead up to election years, governments — incentivized by electoral gains—increase spending on popular and often short-sighted initiatives and decrease revenue by providing tax breaks to politically favored segments. Low revenue collection and rigid current expenditures mean increased spending must be financed through borrowing. This causes the fiscal deficit to widen and increases debt servicing costs for future governments.

When new governments come in, they are faced with a difficult fiscal situation that requires them to curtail the deficit. Coupled with a vulnerable external sector and frequent external balance shocks, this often requires the help of international financial institutions like the IMF and other bilateral partners. The situation is brought under control through unpopular and ad hoc austerity measures that provide short-term relief but create longer term distortions. Austerity measures are abandoned shortly thereafter, in the same ad hoc manner in which they were first introduced, as the next elections appear on the horizon. And the cycle repeats itself.

Frequent political turmoil and interruptions in the tenures of elected governments also hamper long-term fiscal planning and create an uncertain policy environment that deters foreign investment. These trends have culminated in a situation wherethe government sector is now consuming around 70 percent of domestic banking credit, with annual debt servicing costs for FY24 budgeted at Rs 7.3 trillion — almost 40 percent of budgeted government revenue.

With a significant portion of its population living in poverty, Pakistan needs to spend on social welfare and development programmes to achieve sustainable economic growth. However, fiscal constraints due to low revenue collection, high debt servicing costs and rigid current expenditures have limited the scope of spending on growth-oriented initiatives, which in turn has negative implications for future fiscal sector outlooks.

Moving forward, fiscal discipline must be embraced immediately to create room for growth-oriented spending. This requires setting time-bound targets to rein in fiscal deficits and public debt, and creating fiscal rules that place ceilings on fiscal deficits and public debt and rationalize government revenues and expenditures to ensure long-term and intergenerational debt sustainability.

Fiscal rules must be accompanied by a multipronged overhaul of the tax regime towards a growth-friendly structure, and a shift from reliance on indirect taxes and non-tax revenue towards direct taxes by reducing tax rates and expanding the tax base. Structural reforms in other sectors, such as civil service must be simultaneously pursued to address the structural rigidity of current expenditures.

This will help achieve fiscal sector stabilization, an imperative for long-term economic stability and prosperity, by stimulating economic growth rather than at the expense of an already highly burdened tax base, as is the status quo.

By Shahid Sattar

The economy is headed towards a deep recession. Only a well-targeted fiscal stimulus can avert the incoming crisis. Petroleum prices have increased once again, and further hikes in electricity tariffs are on the table.

The exchange rate continues to face upward pressures, largely due to the release of pent-up demand as import restrictions are withdrawn amid a limited supply of foreign exchange. At the same time, the rise in international fuel prices is expected to continue over the course of this year.

While global food prices have come down from their 2022 peak, they remain elevated at around 2021-levels. All these factors have a high pass-through to inflation, and it is safe to say that inflation is likely to increase further in the near term.

The policy rate, the primary tool to curb inflation, is already at a high of 23 percent, and monetary policy is largely constrained.

The effectiveness of interest rates hikes is also highly questionable at this point since inflation is entirely supply driven, while the mechanism that connects interest rates to inflation is on the demand side. And demand is difficult to curb further since it is already low and relatively inelastic because a large part of household consumption expenditures—especially for the lowest income groups—is being spent on foodstuffs and energy costs, both of which are very basic necessities.

Production in the textiles sector has been down by over 30 percent since March, production capacity in the automobile sector has remained highly underutilized, and business leaders are now warning that over 50 percent of industry across the country is headed towards closure. This has further implications for upstream and downstream sectors such as retail and domestic manufacturing of intermediate inputs, respectively.

Not only are we faced with an increase in prices and erosion of real wages, but also massive joblessness that is placing unbearable pressures on lower- and middle-income groups.

This puts our already struggling economy in an extremely grim position. Amid an already weak and persistently weakening demand, large-scale closure of industry and massive joblessness, and a looming crisis in the financial sector, Pakistan is undoubtedly headed towards a deep recession that will take years to come out of and will cause unimaginable pain and human suffering.

However, there is still time to avert the incoming crisis. The economy needs a stimulus and needs it fast. Yes, fiscal policy is constrained by the IMF SBA, but not to the extent that we have been made to believe. The agreement only prohibits unbudgeted and untargeted subsidies. This means that any stimulating measure will need to be accompanied by a revenue increasing or expenditure decreasing measure.

Since taxes have already been increased considerably in the FY24 budget, revenue increasing measures will only increase the tax burden on already unfairly and highly burdened classes and create further incentives for tax avoidance unless they are imposed on untaxed segments.

The alternative to this is an expenditure decreasing measure, where fiscal space for the stimulus is made by decreasing the government’s current expenditures. The latter is preferable.

The stimulus must also be targeted. The optimal audience is industry—ideally less protected and export-oriented sectors. This will achieve several objectives. First, it will allow firms to resume production, which will address joblessness in both the targeted sectors as well as in upstream and downstream sectors, thus averting the loss of wages.

Second, it will stimulate export creation and relieve pressures on the exchange rate, thereby providing some relief in terms of inflation pass-through. If the stimulus is carefully designed, it will also facilitate the economic adjustment away from protected industries towards productive export sectors reducing the costs of deeper structural reform.

Finally, export earnings will also push up real wages through second- and higher-order effects, providing further relief from inflation.

The final question is of the mode of stimulus. This can take multiple forms such as direct transfers or concessional financing to firms. However, these will have unintended consequences such as an increase in inflation through money supply and are also made complicated by the government’s commitments to the IMF.

The best way to stimulate industry is through the provision of competitive input prices. As we have already argued, exports are collapsing under the power sector’s burden and this effect is spreading to other sectors as well. Provision of cost-of-service tariffs to B3 and B4 export-oriented consumers, that excludes economic inefficiencies like stranded costs, cross-subsidies to lifeline consumers and distribution losses, will provide a large enough stimulus since, for instance, electricity costs account for around 30 to 40 percent of total conversion costs in the textile sector. There is no other option.

By Shahid Sattar and Amna Urooj

However, the initiative faces challenges such as ensuring quality seeds, adopting advanced farming techniques, and addressing water scarcity and pest control. Collaborative efforts between the government, research institutions, and farmers are essential for success. If executed effectively, this cotton revival has the potential to make Pakistan a major player in the global cotton market, strengthening the economy and fostering self-reliance.

In addition to the minimum selling price, the Punjab government has taken further steps to stabilize cotton rates and compensate cotton farmers for their efforts. The successful conclusion of the cotton campaign, which witnessed a significant increase in the sowing of over 4.8 million acres of land, marks a major achievement for Punjab’s agriculture sector.

The projected yield of around 8 million bales of cotton represents a remarkable 170% increase compared to the previous year’s production, indicating the positive impact of the government’s initiatives. By encouraging and assisting cotton farmers during the campaign with timely crop advisories, necessary inputs, and financial support, the government has laid the foundation for a sustainable future for both the textile and agricultural sectors in Pakistan.

Cotton ‘crisis’: challenges, opportunities, and way forward–I

Another opportunity for Pakistan’s cotton sector is the establishment of APTMA Cotton Foundation (ACF). It is a pro-poor initiative aiming to revive the cotton crop industry in Pakistan. APTMA has also formed a Cotton Task Force and seeks international collaborations to enhance seed development technologies and bilateral trade. ACF plans to revolutionize cotton farming by introducing innovative practices, providing technical training to farmers, and improving crop productivity and yield.

The project’s goals include introducing improved and advanced genetically modified seeds, restructuring variety approval systems, and implementing measures for emergency cotton research. By achieving these objectives, ACF aims to alleviate poverty, meet domestic cotton demand, reduce import costs, and boost Pakistan’s export-led economic development.

These concerted efforts not only ensure self-sufficiency in cotton production but also reduce the country’s dependence on costly imports, leading to substantial savings in foreign exchange and bolstering the overall economy.

The cotton crop production assessment for 2023-24 also presents an opportunity for Pakistan’s cotton sector, with positive indicators particularly in Punjab and Sindh. Punjab is close to achieving its proposed target with a 97% progress rate, which could result in a substantial production of 8.09 million bales. Sindh, though at 93% of its target, still expects a production of 3.73 million bales.

KPK and Baluchistan have also shown impressive growth, surpassing their targets by 150% and 138%, respectively. Overall, the total production is estimated to reach 12.41 million bales, indicating a potential boost in the cotton industry for the country. This assessment highlights the possibility of enhanced economic prospects, increased textile production, and improved livelihoods for farmers in Pakistan.

Way forward:

A good cotton crop in Pakistan has the potential to inject substantial money into the rural economy, benefiting the impoverished population the most at the grass root level. Higher yields lead to increased farmer revenues, empowering investments and modernization in agriculture. This success creates more job opportunities, stabilizes wages, and stimulates local businesses, fostering economic growth. Improved incomes enhance educational and healthcare services, laying the foundation for a brighter future in rural communities.

“The success of Punjab’s ambitious cotton revival project hinges on strong collaboration and cooperation between the government, research institutions, and farmers. A cohesive approach that involves all stakeholders is essential to effectively address the challenges faced by the cotton sector and ensure the long-term sustainability of the initiative.”

Research institutions play a crucial role in providing valuable insights and innovative solutions to enhance cotton yields and combat pests effectively. Through collaborative research and development programs, these institutions can contribute to the identification of resilient cotton varieties, advanced farming techniques, and pest management strategies. The government must actively support and fund such research endeavors to equip farmers with the knowledge and tools they need to thrive in a changing agricultural landscape.

To ensure the success of the cotton revival initiative, adequate support, training, and infrastructure are paramount. Farmers need access to modern agricultural practices and technologies that can optimize their cotton cultivation processes. Training programs can empower farmers with the necessary skills and knowledge to implement sustainable farming practices, manage resources efficiently, and improve the quality of their yield.

Additionally, investing in agricultural infrastructure, such as irrigation systems and storage facilities, can help mitigate water scarcity issues and post-harvest losses. The government should prioritize allocating resources and funds to upgrade rural infrastructure and establish a robust support system for cotton farmers, ensuring their success and resilience in the face of challenges.

Continuous monitoring and adjustments are critical to maximizing the impact of the cotton revival initiatives. Regular assessments of the project’s progress, challenges, and outcomes can identify areas for improvement and optimization. Based on these evaluations, necessary adjustments can be made to ensure that the project remains dynamic and responsive to changing circumstances.

The cotton crisis in Pakistan has deeply affected the rural economy, but with the concerted efforts of the government and its projects, there is hope for a brighter future. The urgency to address this crisis and support cotton growers cannot be overstated, as their livelihoods and the stability of the rural economy hang in the balance.


Through sustainable solutions, ongoing support, and continuous monitoring, the cotton revival project has the potential to not only revitalize the rural economy but also contribute significantly to Pakistan’s self-reliance and economic growth. By addressing challenges and fostering collaboration between all stakeholders, the cotton industry can regain its footing and reclaim its status as a major player in the global market. With dedication, perseverance, and innovation, the cotton revival project can be the catalyst for positive change, bringing prosperity and stability to the lives of farmers and the nation as a whole. As Punjab embraces this transformative endeavor, there is optimism that the cotton sector will thrive once again, fostering a more resilient and prosperous future for Pakistan.

APTMA, being a strong advocate of policies that support the growth and development of the sector, is taking pro-poor initiatives to revive the cotton crop, aiming to uplift Pakistan’s economic outlook and benefit future generations. Its strategic alliance with the Punjab government and establishment of Cotton Task Force to revamp cotton production and yield is something to look forward to.

APTMA has also sought seed development technologies, research affiliations etc., through various avenues. It has also established a Cotton Control Room with a team of dedicated researchers and consultants. Their participation in monthly Cotton Crop Assessment Meetings further strengthens their impactful presence as the largest association.

The government-owned research organizations’ abysmal performance has contributed to the decline of the cotton industry, necessitating a reevaluation of their structure. To rectify both the cotton sector’s issues and boost the economy, it is proposed that the responsibility of running cotton-related research centers may be transferred to APTMA. By entrusting APTMA with this task, there is hope for more effective and industry-tailored research, ensuring a stronger future for Pakistan’s cotton industry and overall economic growth.