Between a rock and a hard place: Economists weigh in on ‘one of the toughest budgets in Pakistan’s history’
All eyes are on the National Assembly as the Shehbaz Sharif-led government is set to announce the budget for the next fiscal year on Friday. While citizens are already reeling from the effects of skyrocketing inflation and supercharged petrol prices, the government faces the uphill task of presenting a balanced budget, which not only placates the International Monetary Fund (IMF) but also provides some relief to the common man.
But that is easier said than done. The challenges are aplenty — the global economy is facing a severe downturn, the IMF is breathing down the government’s neck and Pakistan’s own economy is on the verge of collapse. And yet, the coalition government must also keep its voter base happy.
Dawn.com asked economists what they believe the government should and will prioritise in the upcoming budget. Here’s what they had to say:
Sajid Amin Javed
The upcoming budget will be one of the most difficult devised by any government in Pakistan’s history. The reason is simple: whenever a government comes into power, it takes stringent fiscal measures in its first two to three years before giving an ‘election’ budget to placate its voter base when it must venture out to seek votes again.
What is different this time is that the Shehbaz Sharif government inherited a severe economic crisis and doesn’t really have time on its hands. This crisis was unique in many aspects. For example, when the PTI came into power in 2018, it had five years as well as the space to make policy corrections and interventions. Meanwhile, the interest rate stood at 6pc or 7pc, inflation stood at close to 5pc and there was room to allow for the rupee to depreciate.
This time around, however, the situation is the opposite. Hence, the crisis is all the more severe. In such a scenario, the government is stuck between a rock and a hard place and must choose between the IMF and elections. Balancing between the two will be a Herculean task.
Broadly speaking, this will be an IMF budget, indications of which we have already seen in the government’s decision to raise fuel prices twice by Rs30 in less than 10 days. The signs are, therefore, clear that the IMF is on board and that the government is taking economically rational decisions such as removing subsidies from petroleum products.
Having said that, the coalition government will also endeavour to provide relief to citizens where it can. If we look at the track record of the political parties that form the alliance, social spending has been a common feature for many of them. This could mean that funds for sectors like education, healthcare and especially social protection programmes will get a boost in the upcoming budget. The government has already said it will continue the Rs28 billion relief programme announced by the premier, which would require Rs336b at least.
The question, however, is where will the money for these programmes come from?
The answer lies in the subsidies for petroleum products, for which the government spent almost Rs250b over the last two and a half months — funds that could be utilised instead for these social protection protection programmes. In fact, the petroleum subsidies were un-targeted and benefited the rich more than the poor. Converting those funds for use in social protection programmes that provide targeted relief to the poor will also be acceptable to the IMF.
Speaking of targeted subsidies, the government may also provide concessions to farmers with small landholdings, small and medium enterprises (SMEs) and the salaried class. In the case of the former, these concessions could be in the form of subsidies on urea and fertilisers, as well as on the electricity they consume to run water pumps for irrigation. A similar subsidy on power tariffs may be provided to SMEs, besides the provision of easy loans, partially guaranteed by the government, as we saw during the pandemic. For the salaried class, the PML-N government may raise the tax brackets so as to exempt the low-income groups from the tax net, hence slightly raising their real income.
Another focus that we are likely to see in the upcoming budget is on green energy. The government will aim to remove taxes on infrastructure like solar panels in order to mitigate the prevalent energy crisis and promote cheaper, cleaner energy.
One recommendation that has been put forth and is under consideration is a reduction in the taxes levied on food items, which would help drive down the prices of essential food items, even if by a small margin.
Besides, we may witness an increase in import tariffs on various items, which had earlier been banned. The IMF was not particularly pleased with the ban on imports and hence, the increased tariffs may be an alternative employed by the government.
Going by the PML-N’s track record, the upcoming budget may also see a jump in investments in development projects. Ongoing projects may be expanded and some new projects introduced in order to create more employment opportunities.
As per the IMF’s statement on May 25, there will be a lot of focus on fiscal discipline, which is what the government will aim for. In doing so, we will likely see many general subsidies lifted and replaced by targeted subsidies that are aimed at providing relief to the poor.
Sajid Amin Javed is a macroeconomist with a focus on social content in macroeconomic policies. His research primarily explores how design and conduct of macroeconomic policies, particularly monetary and fiscal, influence socio-economic outcomes.
Uzair M. Younus
Pakistan’s economy is currently like a leaky boat out in the high seas during the perfect storm. With the world experiencing a commodity super cycle and central banks led by the US Federal Reserve tightening monetary policy, the global macro environment could not have been any harder. But global macro conditions have been worse in the recent past and countries have over the years developed buffers to deal with such developments.
Pakistan’s tragedy is that despite going through recurring crises, its policymakers have not made any serious efforts to build buffers and capabilities to weather these recurring storms.
The outcome is yet another crisis, on the back of another crisis in 2018 and the coronavirus pandemic, meaning that citizens burdened by over 40 per cent inflation since January 2019 are now going to be pummelled by rising petroleum and electricity prices.
The passthrough of these hikes will unleash more inflation, bringing about a significant decline in the purchasing power of millions of households — inflation reaching close to 20pc cannot be ruled out in the near-term.
This need not happen time and time again.
The blueprint is there. But executing this requires sacrifice, not from the many, but the few. A kleptocratic elite, which has become fat by extracting rents, must bear the burden of shock and awe reforms. Some $17 billion a year are doled out to this class every year, meaning that Pakistan’s problem is more of a resource allocation problem.
So long as the country’s elite refuses to do the needful to restructure this ossified, extractive economy, we will continue talking and writing about recurring crises for years to come. But will elites show foresight and restructure the status quo economy from which they benefit?
They must. Because if they do not, the crisis may soon engulf them and their wealth.
The upcoming budget is an opportunity to show that the government is serious about altering the status quo. Ending subsidies and tax breaks given to the rent-seekers, for example, can indicate that efforts are being made to restructure the economy.
However, if they default to the decades-long policy of relying on regressive taxes to raise revenues, we know that things aren’t going to change any time soon.
Uzair M. Younus is the director of the Pakistan Initiative at the Atlantic Council’s South Asia Center and host of the podcast Pakistonomy.
Considering the prevalent economic situation and continuously shrinking fiscal space, the budget for 2022-23 is expected to be a difficult one.
Due to the IMF's conditions, we have already witnessed skyrocketing oil and electricity prices, and the next expected increase is in the prices of food commodities, including wheat. One cannot also ignore how adversely the private sector will be affected — facing difficulty even to maintain the working capital with the escalated oil and electricity prices.
The obvious outcomes are unemployment and a reduction in economic activity. The incumbent government is in a complex situation because the economy cannot afford any popular initiatives right now. On the other hand, one shouldn't expect any substantial measures to improve fiscal discipline or management from this political government because they have to maintain their popularity in the upcoming elections, which aren’t too far away.
To improve the fiscal space, the government will have to take tough decisions, including removing subsidies, giving tough targets of reduction in losses to state-owned enterprises and increasing taxes. The expected inflationary burden and pressure on the value of the rupee will bring challenges for middle- and lower-income groups.
Dr Asma Hyder is a Professor and Dean of the School of Economics and Social Sciences at the Institute of Business Administration, Karachi. She is has previously served as Member Social Sector & Devolution at the Ministry of Planning Development & Reform.
Ammar H. Khan
The government’s fiscal position is constrained. Its ability to extend concessions or relief is restricted as the country recovers from yet another balance of payments crisis.
The budget will try to maximise relief, whether that is through direct transfers, or through rationalisation of tax rates either on income, or on key inputs that can reduce inflationary pressures.
Double digit inflation, possibly in excess of 20pc during the next few months will further erode purchasing power. Ensuring a soft landing for households, and avoiding a full-blown crisis would be key objectives of the budget.
A contractionary monetary policy will force the government’s hand in moving towards a contractionary fiscal policy — it will depend on how the government is able to generate more revenue, whether that is through super taxes on sectors that have been benefiting from the commodity crisis, and high interest rates, or through bringing new sectors into the tax net, which can be real estate.
A medium-term objective for the government would be to reallocate capital such that it moves from non-productive sectors to export-oriented investments — such reallocations should form a major part of the budget, otherwise we will be looking at yet another balance of payments crisis within the next three years.
Ammar H. Khan is an economist and currently serves as the chief risk officer for Karandaaz Pakistan, an organisation that seeks to promote financial inclusion in Pakistan. He has previously worked at several financial institutions in Pakistan, both in commercial banking and capital markets.
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