SENATOR Ishaq Dar may hold the distinction of having presented more budgets than any other Pakistani finance minister in history, but even he would balk in the face of the extraordinary challenges that the country currently faces.
The budget this year is not about only balancing the books, but also navigating the cross-purposes of avoiding sovereign default, winning the upcoming elections and keeping a multiparty coalition intact.
In a few days, Senator Dar will present the federal budget for FY2023-24 before parliament.
Yet, the sources of foreign funding — a key requirement for multilateral, bilateral and commercial lenders to commit their resources for future external financing needs — remain uncertain given a continuing ambiguity over relations with the International Monetary Fund (IMF).
Balancing populist requirements with mobilising additional revenue streams, restoring international trust seen as major challenges
On domestic front, the prime minister swung into budget-making mode almost a week ago, but the majority of the eight committees he constituted on sectoral priorities are yet to complete their tasks and none of them are revenue- and expenditure-neutral.
What is clear at this stage is that Pakistan needs inflows to the tune of at least $25 billion over the next fiscal year to stay afloat on external debt obligations. It is also obvious that the country’s domestic resources are insufficient to cover the ever-rising debt servicing costs, what to speak of funding defence and development costs and meeting other expenditures like running the government, doling out subsidies and grants etc.
Until a few years ago, domestic resources used to cover at least two components — debt servicing and defence — but no more. Interest payments have increased manifold, mainly because of the steep depreciation of currency, a surge in the central bank’s policy rate and other factors such as rising subsidies and the added liabilities of state-owned entities, to name a few.
Therefore, the ruling coalition which consists of nearly all mainstream political parties — save one notable exception — finds itself in a proverbial Catch-22; how to present a budget realistic enough to pacify international lenders and avoid default, while at the same time remaining reasonably populist, in an election year, to satisfy an electorate suffering from hyper-inflation.
The much-talked about reining in the current account deficit — the difference between foreign inflows and outflows of all sorts — is unlikely to hold ground once import restrictions imposed under extraordinary conditions are removed. The situation could get out of hand if the IMF is not onboard with the budget making process.
This is why the authorities have already shared budget details with Fund staff, as per Minister of State Dr Aisha Ghous Pasha, who has made it emphatically clear that there is no other plan being considered, except the IMF plan.
After all, neither multilaterals like World Bank and Asian Development Bank, nor bilateral friends like Saudi Arabia and UAE, or commercials like Swiss and Middle Eastern banks invest in conventional and Islamic bonds unless the IMF’s umbrella is available.
This is in contrast to the failure of the Ministry of Finance to share next year’s budget strategy with parliament, as required under the Public Finance Act 2019.
By rights, the National Assembly’s Standing Committee on Finance has to clear the proposals by April of each year. But given the uncertainties associated with the IMF’s recipes for the upcoming budget and at least eight committees constituted by the prime minister still ‘work-in-progress’, the economic team could hardly be expected to take the parliament into confidence in time.
The ground reality, however, is that expenditures are to be made and the budget has to be formulated, and given the bloated expenditure estimated in the face of record interest payments, the challenge will be to mobilise additional revenue streams at a time when the economy is reeling in the face of an unprecedented credibility deficit with international stakeholders.
The delay in approval of a ready loan for Resilient Institutions for Sustainable Economy (RISE) by the World Bank and absence of rollovers of routine credit lines from foreign banks are just a few examples of their waning trust in Pakistan.
While there are indications that the Federal Board of Revenue (FBR) will setting a target of Rs9tr — in contrast with the estimated collection of Rs7.2tr this year – it is still unclear if the additional revenues are to be generated through broadening of tax base to area like property, assets, transportation and agriculture, as well as the coverage of the undocumented expansion in economy or FBR’s ability to check tax evasion and avoidance.
The political will of the ruling coalition would be put to test here as we see how effectively and fairly the revenue policy is put in place ahead of elections. Keep in mind that budgets made in election years also, unfortunately, have to create fiscal space for election expenditures of those eyeing parliamentary seats and their backers in business, industry and agriculture.
Against an anticipated budget size of about Rs14.5tr, more than half of this amount — at least Rs7.5tr — is estimated to go down the drain as interest payments, compared to Rs3.2tr in FY2021-22 and Rs3.6tr in first nine months of the current fiscal year.
It would be no mean feat if the multi-party government is able to contain defence expenditures below Rs1.9tr and convince employees in civil and uniformed sectors to settle for anything less than a 20pc pay raise in challenging times, when average annual inflation is on the higher side of 29pc.
Around Rs1.2tr for various subsidies and an almost similar amount for grants, particularly to loss-making entities, are a stark reminder that the state of Pakistan — whether ruled by one party or another or a dictator — has been squarely misgoverned and kept on delaying long outstanding structural reforms in taxation, energy, SOEs and expenditure management.
In such an environment, the government’s hands would remain tied in offering relief to the inflation-stricken 245 million people, unless the ruling parties chose the most irresponsible route of announcing a populist budget, divorced from ground realities and goes into election mode immediately.
But that would surely drive away the international community. A further delay in structural reforms could only expose the country to foreign-imposed expenditure cuts that may not suit any of the powerful stakeholders.
Published in Dawn, June 6th, 2023