EDITORIAL: The budget exercise, an economic treatise of the administration for a year, remains in limbo not only because of the prevailing political uncertainty in the country with the focus of all on the vote of no-confidence expected to be held early next week, but also because of pending endorsement by the International Monetary Fund (IMF), indicated by reaching an agreement on the mandatory seventh quarterly review, which is considered critical to generating the external financing requirements for next year, as per a senior official of the Ministry of Finance while talking exclusively to Business Recorder.
The sixth review consensus reached between the Pakistani authorities and the IMF envisaged external gross external financing requirements of a whopping 35 billion dollars for next year – up from 30.4 billion dollars in the current year (10.1 percent of Gross Domestic Product).
The itemization of this requirement is as follows: amortization of previous loans would account for 21.79 billion dollars, short-term borrowing would reach a historic high of 16.97 billion dollars, long-term borrowing (non-IMF) 12.87 billion dollars and bonds/debt equity 4.8 billion dollars. Available financing is estimated at 33.4 billion dollars with disbursement from official creditors to public sector accounting for 12.4 billion dollars and from private creditors to public sector 9.4 billion dollars (including syndicated loans and Eurobonds) and rollover of short-term debt projected at 10 billion dollars.
The large amount of borrowing required to meet the expenditure requirements would be at lower rates if the Fund seventh review talks are successful but at an exorbitant rate of interest if they remain stalled. In addition, without an agreement on the seventh review, the likelihood of the rating agencies downgrading Pakistan would be high which would, in turn, further raise interest on borrowing.
The lacuna in the seventh review talks as per Finance Ministry officials is the funding of the Prime Minister’s 28 February relief package (envisaging a 10 rupee reduction in petroleum and products and 5 rupee reduction in per unit electricity tariff to be applicable till 30 June 2022 that requires additional subsidy that cannot be quantified but is expected to be high with the ongoing Russia-Ukraine war) and the industrial package that envisages exemptions (regarded as a disincentive to honest taxpayers) as well as an amnesty scheme opposed by the Fund, which would further raise concerns within the Financial Action Task Force (FATF).
However, the problem is that once extended the relief package cannot be easily withdrawn due to political considerations irrespective of the success or otherwise of the vote of no-confidence.
So what are the possible options, given these legitimate political concerns? First, the sixth review envisages 7.5 trillion rupees current expenditure and 559 billion rupees Public Sector Development Programme (which would have implications on growth and hence on revenue collections). Thus the onus of sacrifice rests with current expenditure and significant sacrifices have to be made by the recipients. The interest on loans payable by the federal government for 2022-23 is projected at 3.5 trillion rupees which of course cannot be cut without going into default which is not acceptable.
Defence is budgeted at 1.58 trillion rupees next year – which may be difficult to curtail given the resurgence in the war on terror in Pakistan but which would have to be curtailed to the extent that procurement is minimized. Other items need to be severely curtailed, including pension reforms that envisage a contribution by the employee as well that would reduce the need for borrowing.
Revenue is projected by the Fund in sixth review documents at 8.6 trillion rupees with Federal Board of Revenue targeted to raise 7.25 trillion rupees during the year and provincial revenue to 836 billion rupees. Clearly, provinces need to raise their revenue generating capacities particularly by raising the farm income tax to the same rate as income tax payable by the salaried class.
Non-tax revenue is projected for next year at 1.5 trillion rupees which again needs to be upped through privatization if possible which incidentally is projected at zero for this year as well as in 2022-23 because the climate, global and domestic, is simply not conducive for it.
There is, therefore, an urgent need to continue engagement with the Fund and as the government’s response on its funding sources for the relief package have not satisfied the Fund staff it is time to make adjustments irrespective of the political cost and the Finance Ministry needs to make two budgets – one with the IMF next tranche disbursement but with significant curtailment of the current expenditure projections noted in the sixth review documents and, another, without it, with even higher curtailment of projected expenditure.
Whoever holds the reins of government post-vote outcome must realize that the time for deferring politically unpopular economic policy decisions is long past and any further deferral would simply raise the cost to the general public that will in time have political repercussions.
Copyright Business Recorder, 2022
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