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There is one point of agreement between government stalwarts and critics alike: it is critical for the government to reach an agreement with the International Monetary Fund (IMF) on the sixth mandatory review or negotiate a new programme that would end well beyond the term of the government - both options consisting of conditions that would almost certainly lead to the ruling party facing debilitating challenges in the 2023 scheduled elections.

Pakistan's economy today is once again in a crisis made all the more untenable due to a massive rise in current non-development expenditure - from the inherited 3.9 trillion rupees (2017-18) to a whopping 6.3 trillion rupees in 2020-21 (61 percent rise) and 7.5 trillion rupees budgeted for the current year (92 percent rise). This is unprecedented in the country's history.

The components of current expenditure reveal that grants/transfers include Benazir Income Support Programme (BISP) as well as transfers/grants to provinces while previous administrations placed BISP under development expenditure outside the Public Sector Development Programme.

Thus for a fair analysis it is relevant to note that in 2017-18, the last year in the tenure of the PML-N government, grants/transfers to others (other than provinces) amounted to 404 billion rupees while BISP was allocated 121 billion rupees or in effect a total of around 525 billion rupees. In the budget for the current year grants/transfers to others is budgeted at 1 trillion rupees or around 475 billion rupees more than in 2017-18. But interestingly the much touted Ehsaas programme indicative of the Prime Minister's sensitivity towards the uplift of the poor, unlike Benazir Income Support Programme (BISP), has no legal identity as it has yet to be passed by parliament; and therefore the budget earmarks 246 billion rupees for BISP which officials revealed to Business Recorder is actually 250 billion rupees with 181 billion rupees earmarked for BISP and the remainder on other programmes including koi bhooka na soye, panagahs, etc.

The remaining budgeted grants/transfers in 2021-22 include: contingent liabilities 440 billion rupees (against 180 billion rupees in the budget 2017-18), Higher Education Commission 65 billion rupees, Azad Jammu and Kashmir 59 billion rupees, Gilgit-Baltistan 47 billion rupees, Railways 42 billion rupees, security enhancement 40 billion rupees and Pakistan Remittance Initiative 19 billion rupees.

Finance Minister Shaukat Tarin's strategy is three-fold, with each fold projected to fuel inflation, as each envisages higher money supply in circulation. The first pillar of the strategy is a bottom-up approach that envisages cheap and/or interest free credit to small and medium enterprises and poor famers (with the salutary objective of ending the generational hold of the aarthis on poor farmers). This, as and when, implemented would fuel inflation at least initially as too much money would be chasing too few goods. And if one takes note of the sustained rise in government's reliance on domestic borrowing during the past three years, a trend that is continuing as per recent data released by the State Bank of Pakistan, then any addition to the existing money supply in circulation should ring alarm bells amongst the policy makers.

Domestic debt inherited by the government was 16.5 trillion rupees and today the figure is 26.2 trillion rupees. It is little wonder that the budgeted markup on domestic debt rose from 1.3 trillion rupees in 2017-18 to a projected 3 trillion rupees in 2021-22 - a rise mainly due to the conversion of short term to long term debt at a time when interest rates were jacked up to 13.25 percent; issuing Pakistan Investment Bonds (PIBs) rose from 3.4 trillion rupees in 2018 to 14.59 trillion rupees in 2020-21. The massive reliance on domestic debt coupled with the bottom-up policy is simply a recipe for rising inflation. Therefore, the speed at which the Khan administration has and is continuing to incur domestic debt to meet its current expenditure needs to be halted immediately.

Secondly, top-down approach envisaging tax relief, utility rate relief and cheaper credit with implications on the budgeted tax target and therefore on the budget deficit - an inflationary policy as and when it reaches an unsustainable level that has been evident for the past three years.

And finally, dealing with inflation through higher subsidies (Tarin mentioned the amount of 100 to 150 billion rupees which would further raise current expenditure) and through administrative measures which have so far proved elusive mainly because the government's reliance on import duties and petroleum levy as sources of revenue raise prices by a lot more than can be brought down by administrative measures alone.

Today political pragmatism dictates that the government's focus must be on reducing inflation and that can only be achieved by a massive reduction in current expenditure given that tax enhancement measures through better enforcement remain pending to this day.

Prime Minister Khan has already exhausted his capacity to decrease current expenditure associated with members of his entire cabinet and the presidency, including sale of a fleet of cars in the Prime Minister's house and water buffaloes. He now needs to focus on reducing other expenditure that has been rising at an alarming rate during the past three years requiring urgent policy changes (for example pension reforms that make the contribution of the employee mandatory as in other countries) and a spirit of sacrifice from both civilian and military personnel.

The magic number given that debt repayment this year as well, second year running, is zero due to the G-7 Debt Relief Initiative to enable poor countries to deal with Covid-19 should ideally be around a trillion rupees. Thus a reduction in current expenditure would almost certainly strengthen Pakistan's negotiating position with the IMF and enable Tarin to have his cake and eat it too.

Today the country is heavily reliant on China as a (i) lender (China made good the shortfall after Saudi Arabia recalled its 3 billion dollar loan procured early 2019), (ii) a foreign investor under the China Pakistan Economic Corridor umbrella though the Chinese Ambassador has reportedly expressed his serious concerns on behalf of the government and the investors for Pakistan not meeting its pledges; and (iii) as a trade partner with Prime Minister's Commerce Advisor and Finance Minister both repeatedly stating that there needs to be a focus on entering the Chinese market. Disturbingly, this fails to take account of China's historically traditional mechanism of extending aid, investment and trade.

To conclude, the way out that is to adopt the mantra slash current expenditure from every single component. This would be politically challenging, though perhaps not so much in terms of voters as in terms of abandonment of the one page policy.

Copyright Business Recorder, 2021


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