Page 77 - CMA Journal (Mar-Apr 2026)

None of these core weaknesses has been tackled with the Pakistan's repeated return to the International Monetary
seriousness they require. Instead, policy has largely Fund (IMF) is another sign of this fragility. Since its rst
defaulted to one familiar response: extract more from those Standby Arrangement in 1958², Pakistan has entered more
who are already in the tax net. than two dozen IMF programmes. After so many
programmes, nancial self-reliance should have been within
A more credible strategy would begin with expenditure
reach. It has not been. IMF arrangements have instead
rationalization, improvements in institutional efficiency and
become recurring stabilization anchors whenever the
restructuring of persistently loss-making sectors. Instead,
system nears crisis.
the state continues to raise direct and indirect taxes while
resorting to borrowing to ll the remaining gap. The latest Extended Fund Facility (EFF), approved in 2024, is
meant to address familiar structural weaknesses: a narrow
The relationship between tax collection and nancing needs
tax base, losses in the energy sector, and sizeable tax
makes this imbalance evident.
expenditures. It has helped improve in ation, external
Tax collection has risen sharply in recent years, with average
balances, and reserves, but these gains remain conditional
annual growth exceeding 20 percent, yet borrowing remains
on reforms that Pakistan has repeatedly committed to but
heavy. That is the central point: higher collections, by failed to deliver.
themselves, have not produced scal stability. They have
Of all the weaknesses in the system, the energy sector
merely coexisted with a continuing dependence on debt.
remains the most damaging. More than a decade of circular
The consequences are serious. Development spending is
debt is not merely a nancial backlog; it is proof of failures in
squeezed, investor con dence weakens, and social
pricing, governance, cost recovery, and policy discipline.
expenditure remains constrained. Fiscal risk management,
According to IMF assessments, the combined circular debt of
therefore, cannot remain a matter of routine budgeting; it
the power and gas sectors had reached about Rs 4.7 trillion
must become a long-term exercise grounded in
by December 2025³. That burden does not stay con ned to
the sector. It spills into the wider scal system through
subsidies, guarantees, and payment arrears, making every
claim of consolidation inherently fragile.
The tax system compounds these distortions. Pakistan relies
excessively on withholding taxes and on revenue drawn
from organized, visible segments of the economy. The result
is a narrow and unequal burden carried largely by salaried
persons, documented businesses, and other captive
taxpayers.
FBR data for FY 2024–25⁴ shows that a large share of direct
taxes was collected through withholding.
Once indirect collections through petroleum products and
electricity are added, the dependence on captive bases
becomes even starker. This is not a sign of administrative
strength. It is a sign that the tax machinery still struggles to
transparency, risk anticipation and sustainability. One of the
reach sectors where real untaxed capacity lies.
clearest expressions of this stress is the mounting cost of
debt servicing.
An ever-larger share of tax
revenue is being consumed by
debt servicing, leaving little
scal space for development
and welfare. In some years, debt
servicing has approached —
and even exceeded — total tax
collec tion. That is not a
temporary strain; it is evidence
of a deeply distorted scal
structure.

75 ICMA’s Chartered Management Accountant, Mar-Apr 2026