Approaching budget

Published June 10, 2024

THE constitution of the National Economic Council to review and approve the macroeconomic budgetary framework, as well as proposed federal and provincial development spending plans for 2024-25, gives hope that the announcement of next year’s budget will not be delayed beyond June 12.

Considering that the Annual Plan Coordination Committee had firmed up its macro targets for FY25 at the beginning of this month, the delay in the announcement has been surprising, if not perplexing.

Apparently, it was done to facilitate Prime Minister Shehbaz Sharif undertake his China visit, which had many guessing about its purpose just ahead of the budget presentation. Rumour has it that the visit was undertaken in connection with IMF-dictated budget targets and programme goals concerning Chinese debt and power purchase agreements with Chinese companies.

That the government is making its budget in exceptionally challenging conditions is an understatement. The present macroeconomic environment is probably the most demanding any government has faced in years — despite the newfound economic stability under the IMF’s short-term SBA facility. Macroeconomic conditions remain vulnerable to the slightest shock.

Politically, too, the situation is tough. On the one hand, a court decision has, at least for now, deprived the fledgling government of an absolute majority in parliament. On the other, it must find a balance between stringent IMF demands and the public’s expectations of relief. Caught between a rock and a hard place, the finance managers have repeatedly reassured the people that the burden of ‘adjustments’ to be made in the budget under an agreement with the IMF would fall on the affluent.

Yet few have faith in those commitments, given the stern IMF conditions that would require drastic direct and indirect taxation and withdrawal of subsidies in the next budget, and a significant increase in energy prices at the beginning of FY25 to qualify for a new bailout.

In this context, the government’s budget priorities are clear: economic stabilisation by containing the current account deficit in the balance-of-payments, and reduction in the budget deficit and borrowing requirements through primary budget surplus. Stabilisation is crucial for Pakistan to make its external debt payments on time, bring up its dwindling foreign exchange reserves to a safe level, and achieve debt sustainability by narrowing the gap between its income and spending by mobilising additional tax revenue and cutting public expenditure.

It goes without saying that these goals require extensive policy reforms. Both the prime minister and finance minister have time and again expressed their commitment to carrying out the required structural reforms under the new IMF programme. The budget for the next year will be their first test. Many are sceptical of them translating their words into well-defined actions in the budget. Will they prove their doubters wrong?

Published in Dawn, June 10th, 2024

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