When officials of the ministry of finance briefed caretaker Prime Minister Mir Hazar Khan Khoso last week on the current economic situation and next year’s budget-making, the key fiscal parametres of the budget strategy paper, approved by the former cabinet on March 7, had already changed.

That made it difficult for the caretaker prime minister to make a reasonable choice for his economic ministers — finance and energy — who could manage dwindling foreign and domestic resources and sail through the political transition without too many economic bumps over a limited period, possibly less than 60 days.

He is reported to have been informed that Pakistan State Oil alone would need to be provided at least Rs120 billion over the next 45 days to keep loadshedding at ‘a manageable level’ along with higher water releases from dams for hydropower generation and ensuring improved gas supplies.

With foreign exchange reserves down to a level enough to cover less than seven weeks of imports, and increasing bank borrowing to cover state expenditures, and thus increasing the debt servicing cost to a critical level, the anticipated current account and fiscal deficits seem to be facing serious challenges haunting the budget makers.

When the former cabinet approved budget strategy paper (BSP), the economic managers had forecast total subsidies amounting to Rs345 billion for the current year, up from original budgetary estimates of Rs237 billion. As it turned out two weeks down the road, the power sector subsidies alone have been worked out at Rs450 billion. The overall circular debt for the current year has been estimated at Rs592 billion.The expenditure had shot up estimates by about Rs200 billion or little less than one per cent of GDP in two weeks. The BSP had not taken into account a number of politically motivated expenditures — 20 per cent increase in salaries for officials of federal ministries and divisions, and other departments where employees were encouraged to take to the streets to get special packages in the last few days of the PPP government.

Also, a number of approvals by the former government for small scale development schemes for various constituencies were not unanticipated by the relevant ministries when the BSP was approved. The caretaker government may be forced to cut back on strategic Public Sector Development Pogramme (PSDP) to reign in its size within budgeted stipulations.

Coupled with this extravaganza is the usual parking of different expenditures outside the budget books by the finance ministry. The fiscal deficit may be set on a course to exceed eight per cent of GDP that would have to be consolidated sometime in the middle of the next fiscal year.

But before that, history may repeat itself. Like former Finance Minister Ishaq Dar did in 2008, a new democratic government may like to consolidate hidden expenditures and make them public to come clean on where it started its fiscal journey. Mr Dar had jacked up fiscal deficit for that year to about eight per cent by recognising various expenditures that had not been on the books of the previous government that projected fiscal deficit at about five per cent.

The Planning Commission had raised its concerns over the BSP saying it did not address critical structural issues confronting the national economy over the past few years. A lacklustre performance by Federal Board of Revenue that showed absolute revenue growth at about seven per cent instead of projected 26 per cent, and resultantly falling behind current year targets by almost Rs200 billion, was just one example.

While the commission had grudgingly criticised the BSP approval without its input, it put on record in writing that three-year medium term framework was not based on proper analysis of the critical challenges facing the national economy. It said the BSP projected revenue deficit over the next three years, but it did not articulate any strategy to deal with the situation and instead followed the ‘past practice of timid reform and unrealistic budgeting’.

Ambitious revenue targets, lower expenditures and a lot of reform has always been the talk of annual budgets every year. But, in reality, the major causes of higher expenditure — random subsidies for commodity operations throughout the year and no-progress on controlling ever increasing losses of the public sector enterprises — have never been addressed. In fact, billions of rupees worth of such expenditures are then added to the fiscal operations as ‘one-time adjustment’ every year, resulting in two simultaneous fiscal deficits — a real deficit and a quasi-deficit which becomes real at the end of every fiscal year.

On top of that, given a squeeze on Coalition Support Fund (CSF) inflows, the out-of-book security expenditure to the extent of Rs200 billion would have to be brought on books going forward. The initial defence allocations of Rs545 billion this year is expected to go up to Rs570 billion. About Rs200 billion worth of ‘other grants’ are being provided to security forces on part of proceeds of the CSF, as security expenditures remain unchanged despite drying out of US-backed CSF disbursements.