When the finance minister rises to deliver his departing hurrah to the nation in today’s budget speech, he will be third in the line of finance ministers who have given their last budget speech in the shadow of a growing political crisis. The last two of his predecessors — Omar Ayub Khan and Hafeez Shaikh — had to shout to be heard as they read out their final budget amidst thunderous protest in 2007 and 2012, respectively. Mr Dar is unlikely to face such stormy protests, though the opposition could still pull a surprise.
Both preceding budget announcements were made in the context of a political storm, as well as an approaching economic crisis. In 2007, a growing financial crisis in the industrial West was brewing, and few could see that it would reach the scale that it ultimately achieved. But reserves had peaked in that year, and spiraling commodity prices was exerting a growing drain that would ultimately swamp the growth process so proudly touted by the Musharraf regime. That financial year saw the printing of government notes to maintain parity in oil prices at the pump to an unprecedented scale, eventually leaving the incoming government with an overhang of more than Rs700 billion to unwind.
That budget was also announced in the shadow of the May 12 bloodletting in Karachi, and the lawyers movement that was gathering steam, along with the Lal Masjid episode. The assembly thundered with chants of “qatilo, qatilo, khoon ka hisaab do!” (“murderers, murderers, account for the blood you have spilled”). The fiscal year began with inflation at 6pc and saw it touch a peak of 17pc midway through, the single largest spike in inflation in Pakistan’s history.
Hafeez Shaikh had his own difficulties. Although oil prices had stabilised to a level above $100 per barrel, far below the peak they hit in FY2007-2008, they nevertheless served as significant brakes on growth and left a massive circular debt of almost Rs500bn for the incoming government, leaving the power sector crippled and rolling blackouts of more than 12 hours across the country.
The fiscal and economic developments of those respective years had a great bearing on how the elections turned out, although other factors were at play too. Those were years that were buffeted by powerful economic and political factors, as the outgoing government struggled to contain violent challenges to their rule, and storm clouds of economic turbulence.
The finance minister today also stands in the midst of a political crisis, although its dimensions are far tamer than those faced by his predecessors. Violent challenges to his government’s rule have subsided, and the international economy — although stalked by powerful turbulence in the form of events like Brexit — is far tamer by comparison to what his predecessors faced. In short, the minister faces a rare moment in Pakistan’s history: the luxury to present a final budget with relatively fewer constraints than any of his predecessors had to reckon with.
The big question for today, therefore, is how he will use this rare opportunity. There is little the minister can do to change the economic legacy of his government at this stage. The budget can, at best, hope to keep things on an even keel, while pushing on the accelerators of growth that are available to the government. The power sector will require special attention, because a relapse of the circular debt has the potential to bring loadshedding back at a critical moment when the government will be held to its promise to end this menace. And three months prior to the elections, the reins of government will be held by an interim government that is unlikely to take drastic, strategic steps that might be required should the circular debt reach critical proportions again.
The budget will contain plenty of schemes and incentives to spur growth in the hopes of creating some employment, and expanding the play of discretionary disbursement of largesse by selected politicians. Power and patronage will be the priorities, as they have been in the past. Coupled with an expanded development budget, the resultant pressure on government resources will also increase at a time the government can least afford new revenue measures that could stifle growth.
As a result, the minister is likely to yield to the temptation to expand on those revenue heads that have a minimal impact on the poor, and on the immediate prospects for growth. The super tax on giant corporates is one possible target, as well as the withholding tax on banking transactions. Income taxes of salaried people could also be in the line of fire. Beyond these, it will be interesting to see how the minister goes about trying to arrange for the resources for the expected spike in expenditures.
Published in Dawn, May 26th, 2017