The upcoming budget

EDITORIAL: Reports indicate that the budget 2022-23 holds the key to the success of the International Monetary Fund’s (IMF’s) seventh review that would release a 900 million dollar tranche and, more importantly, provide a comfort level to other multilaterals/bilateral/foreign commercial banks/debt equity through issuance of Sukuk and Eurobonds that the authorities are embarked on a reform agenda that will not be derailed by political compulsions and/or elite capture.

Those speculating on the possibility of technocrats being installed to ensure that political compulsions are not paramount and elite capture forsaken as a policy option must look at the country’s past history where technocrats installed as caretakers and/or as finance ministers during the tenure of an elected government singularly failed to: (i) implement the necessary reforms identified by numerous studies over decades (particularly in the power sector with a projected 3 trillion rupee circular debt by the end of the current fiscal year) as well as losses by state-owned entities which account for heavy reliance on borrowing, domestically and externally, leading to unsustainable budget deficits; (ii) widen the tax structure and raise reliance on income tax, based on the ability to pay rather than on indirect taxes whose incidence on the poor is greater than on the rich.

In this context, it is relevant to note that petroleum levy is an indirect tax and reliance on this was upped to 610 billion rupees in the current year though this target was abandoned as the international prices of oil and products made it politically unfeasible; (iii) Pakistani authorities have continued to mollycoddle the elite — be it due to their long established influence in the corridors of power irrespective of whichever government is in power, civilian or military, or be it due to their ability to disrupt routine activity through launching nationwide strike action possible due to the existence of powerful associations in most sectors. These associations have ensured that their members continue to get tax relief/refunds, cheap utilities to ostensibly allow local firms to compete internationally, export rebate for sugar exports, easy access to credit and last but not least, the ability to make windfall profits; and (iv) massive budgeted outlay for specific items in the budget is believed to be critical for the continuation of the tenure of an incumbent government/technocrat and has accounted for a consistent rise in current as opposed to development expenditure.

So the question is, what can one expect of the budget that will be presented by finance minister Miftah Ismail on 10 June this year? He is on record as having stated that the country needs to borrow 36 to 37 billion dollars for next fiscal year. In his words delivered at a virtual webinar on “National Dialogue on Economy: The Way Forward for Pakistan” he remarked injudiciously that the country needs 36 to 37 billion dollars, adding that “all roads lead to the IMF” because Pakistan’s dollar bond was trading at 70 cents when the coalition government came to power in the middle of the second week of April 2022 and it is now trading at 65 cents — a decline partly attributable to the widening trade deficit as well as the inordinate delay in implementing the necessary reforms subsequent to the success of the vote of no-confidence against Imran Khan in parliament. This, Ismail correctly argued means that “we cannot float Eurobonds in the world market to raise fresh funds, nor can we go to (global) commercial banks right now,” and as “Pakistan is to repay USD 21 billion in foreign debt in the next fiscal year, so it is a must to enter the IMF loan programme to arrange the required financing.”

If repayment requires 21 billion dollars then one would assume that the remaining 14 to 15 billion dollars would be required to shore up reserves by (estimated) at 4 to 5 billion dollars next year whose need should decline over the year as contractionary monetary and fiscal policies, as prior conditions for the success of the seventh review, should dampen imports significantly, thereby constricting the trade deficit, and for budget support of 9 to 10 billion dollars.

A finance minister should be reticent about sharing details with the general public as his statements can markedly alter market perceptions, for the worse in this case; however, Ismail should also be called upon to justify the 9 to 10 billion dollars budget support he envisages for next year. The Khan administration borrowed from external sources about 15 billion dollars in three years and six months for budget support not just the one year. Next year should be a year of savings and sacrifice by all recipients of current expenditure, barring the Benazir Income Support Programme recipients.

Copyright Business Recorder, 2022