More of the same, or worse? What economists expect from upcoming budget

"One hopes that the conversation moves beyond the superficiality of dollar rates and short-term relief," says economist Ali Hasnain.
Published June 6, 2023

Last year we thought the government was going to announce ‘one of the toughest budgets yet’, and yet, here we are once again, at the same point, but worse.

The coalition government is set to announce the federal budget for the fiscal year 2024 on June 9. Since the beginning of the year, each month seems to compete with the last to climb the inflation ladder, reaching a record 38 per cent in May.

In the midst of political chaos, the watchful eye of the International Monetary Fund (IMF) (which has requested to review the budget), Pakistan’s debt servicing obligations, and an election year, asked economic experts what they expect from the upcoming budget.

Dr Aqdas Afzal

This budget will be presented against the backdrop of the most challenging political and economic environment this country has witnessed since 1971. Where Pakistani people are facing the highest-ever inflation at almost 38pc, poverty and unemployment have been steadily increasing.

Moreover, tight fiscal and tight monetary policy coupled with import compression have dented revenues and exports while grounding GDP growth and job creation.

While economic problems started with the global commodity supercycle, domestic political considerations also prevented this government from taking optimal policy decisions.

Given that the government is still hoping to sign on the dotted line with the IMF, this budget does not provide much fiscal room for providing relief.

Still, in this budget the government is going to try its utmost to provide maximum relief because not only are the people genuinely suffering, but also because this happens to be an election year.

Most likely, the allocation of Benazir Income Support Programme (BISP) will be increased (5-10pc) as this will not only assist additional poor families, but may also assist the government in regaining some of its lost political ground.

The Public Sector Development Programme’s (PSDP) pie will also be enlarged (20-25pc) owing to the importance of infrastructure projects in channeling investment, economic growth and jobs.

The government will also likely announce some schemes that will distribute laptops, smart phones to the youth as young people could use such technology to generate incomes in these stagflationary times.

Given the lack of fiscal room, one way in which the government could pay for this extra spending could be through cutting costs by encouraging various departments of the state to become agile and efficient.

In order to achieve sustainable economic growth in the medium term, however, Pakistan’s policymakers will have to institute serious reforms in public finance, governance and contract enforcement.

But, in an election year, don’t hold your breath.

Dr. Aqdas Afzal finished his PhD in economics on a Fulbright scholarship. He teaches at Habib Univeristy and also writes for Dawn. He tweets @AqdasAfzal.

Afshan Subohi

The immediate announcement of the election timeframe can deliver more for the economy and the people than anything that the government intends to offer in the forthcoming budget. The ruling coalition has so completely been sucked in the post-May 9 narrative that its hierarchy couldn’t sense the desperation in the market or hear the cries of the distressed businessmen to end political uncertainty. The IMF watching Pakistan closely had to intervene to press the government for the election schedule, without explicitly saying so, last week.

The election date would certainly set the ball rolling. Without spending a dime, the government will earn goodwill, absolutely critical at this point, to lend some stability in the market. The economic downturn is distressing but the current phase of uncertainty has stretched a bit too long, piling an intolerable pressure on investors.

The budget 2023-24 is expected to offer some relief to poor and middle-class households through targeted subsidies, and increasing the threshold level for income tax, though the chances of any increase in development spending are slim. The revenue measures will continue reliance on indirect taxes and higher collection from large taxpayers through higher rates. Unfortunately, the chances of meaningful expansion in the tax net are remote.

In the current scenario it would be lame to expect measures to address major structural flaws or decisive steps to curb dependence on donors or powering the growth engine for a turnaround.

Development today is gauged on multiple global indices. Pakistan has a long way to go to catch up on development targets even if the leadership magically adopts an apt strategy and decides to be diligent and consistent in its implementation. The litmus test of claims of better economic management, however, is simple. One needs to look at the rate of inflation, unemployment and currency valuation. Without an informed public debate and arriving at a minimum consensus economic plan, sustainable progress is hard to imagine. A competitive market, innovations and gains in productivity and trade are vital to harness the development potential in Pakistan.

Afshan Subohi is an economic and business journalist since 1985. Subohi has previously served as the business editor for Dawn Newspaper and the Business and Finance Weekly magazine.

Uzair M. Younus

Every elected government since Pakistan began its transition to democracy in 2008 has gone to the IMF. However, the austerity imposed by the IMF gave way to pre-election budgets that provided handouts in a bid to bolster popularity.

This time around, however, the Pakistan Democratic Movement (PDM) government will be significantly constrained on the fiscal side, as indicated by the IMF’s desire to review the upcoming budget.

As such, the government will find it extremely challenging to provide some form of “relief” to boost its popularity ahead of polls.

It is also important to note that it is extremely likely that a new government (provided elections are held in accordance with the Constitution) will have to roll out a new budget and engage with the IMF for a new program that is likely to be north of $10 billion. This is primarily because Pakistan has significant external financing needs in the coming fiscal year, which will require additional support from the IMF and strategic partners.

Given this reality, the scale of adjustments required in the coming months will inflict even more misery on a populace that is already on the ropes. As such, post-victory celebrations for the party that emerges victorious in the coming elections will be extremely short-lived.

Uzair M. Younus is the director of the Pakistan Initiative at the Atlantic Council’s South Asia Center and host of the podcast Pakistonomy.

Ammar H. Khan

The upcoming budget is expected to be inflationary, and potentially run a sizeable fiscal deficit. Historic high inflation levels (general inflation has crossed 37pc, and food inflation has crossed 50pc on a year-on-year basis) will necessitate an increase in salaries, pensions, and other operating costs of the government.

An increase in these costs may not necessarily be accompanied by a corresponding increase in tax revenue. As expenses increase, and the room to further squeeze incremental taxes out of already overstretched taxpayers is minimised, the government will have little room to manoeuvre, other than to expand the tax net.

Successive governments have failed to expand the tax net, and the current government does not seem to be an exception. The inability of the tax authorities to even match growth in tax collection with inflation during current fiscal year testifies to the same.

As the fiscal deficit expands further, so will the reliance of the government on bridging the deficit through debt. The government being the largest borrower in the country, will have an even greater appetite to borrow in the upcoming fiscal year, at ever increasing interest rates.

As borrowing increases further, and available capital remains constrained, interest rates may only increase further, which will essentially feed into a doom loop, where increasing interest expenses will make up an even greater proportion of available federal revenue, requiring even more debt to be serviced. It is estimated that mark-up payments for the next fiscal year may exceed 70pc of the total tax collected, leaving little room for the government to fund either development, or its current expenditure through [available] revenues.

Ammar H. Khan is an independent macroeconomist. He has previously worked at several financial institutions in Pakistan, both in commercial banking and capital markets.

Dr Ali Hasnain

The coming budget will be many things, but it is unlikely to be shaped by a broader strategy.

Rapid economic decline is the eye of the polycrisis storm Pakistan has suffered since September 2021. It can only be countered by a medium-term reform strategy that signals the willingness and ability of the state to change the basic architecture of the economy and government through multiple allied reforms, to wit: a medium-term plan to roll back unsustainable debt levels; a roll-back of the various biases that impede exports and over-stimulate real estate and construction; some movement on rationalising the tax structure; and a start to correcting long-standing issues in energy, education and state-owned enterprises that have been bleeding us.

Destiny-altering reforms of the sort that Pakistan now needs simply to survive have two prerequisites. First, they require buy-in by the country’s elite on the broad contours of reforms. Regrettably, in the last two years, much has been made of a ‘Charter of Economy’ without a serious debate about the possible contents of that Charter. Second, they require the elite to be able to credibly commit to those reforms — which in turn requires political and institutional stability.

Perhaps that stability will come this year. Perhaps it will come next year. Whenever it happens, one hopes that the conversation moves beyond the superficiality of dollar rates and short-term relief, and that our leadership finds the ability to ask basic questions, such as: Why has the share of the export sector halved since 1992? Why can nearly half the children in class five in rural Pakistan not read at class two level? Why do our planes get seized abroad for unpaid dues?

Dr Ali Hasnain is the Head of the Economics Department at the Lahore University of Management Sciences. He is a member of EGAP, a Senior Research Fellow at the Mahbub ul Haq Research Center, and a faculty advisor at the Technology for People Initiative.

Header Illustration: Dawn Cartoon May 16, 2023. — Zahoor/Dawn