The government is expected to present the budget for the next fiscal year in the first week of June. Budgets in Pakistan have always been quite an event with lobbies of trade and industry hustling around for favorable concessions, speculators hoarding their commodities in expectations of windfall profits upon variations of duties and taxes, whereas, the government holding pre-budget parleys with chambers of commerce and industry and other stakeholders to seek their inputs.
Insofar as this budget year is concerned, however, not much enthusiasm has been demonstrated by any of the said stakeholders.
There could be multiple reasons for this indifference to the budget of fiscal year 2023-24. Of these, three reasons pop out. The first is a demoralized market sentiment, which has been bashed left and right for over a year to the extent that the hope of a turnaround for the better in the near future has been sucked out.
The second is the budget being presented in the absence of IMF programme coverage. It will be more of a people friendly budget. It may hold good only until the time the country remains out of the IMF programme, which cannot be for long.
The third reason is: the second or last half of fiscal year 2023-24 could well be an election period, adding to uncertainty in the market. Moreover, the new government will be adjusting the budget to its needs and priorities for obvious reasons. Accordingly, businesses seem to have decided to abstain and continue to sit on the fence or avoid making a decision or choice.
Aisha Pasha, the State Minister for Finance is reported to have stated that “ the Finance Division and the FBR are constantly engaged with the IMF and do not want to detract after incurring a heavy political cost and sacrifices by the people and that the government wants to take the IMF program along and efforts are being made to reach an agreement with the Fund”. Meanwhile, the IMF has stated that “fresh financing requirements remain unchanged”.
Pasha further stressed that “the biggest relief to the people in the next budget would be to control the budget deficit because avoiding further loans is the biggest relief as borrowing to finance the deficit would further fuel inflation. The inflationary expectations of borrowing are so embedded and deep-rooted that they cannot be removed easily.
Although the economic situation is very difficult, the government would try to provide relief to the extent that there is no additional burden on the people”. Expressing her concerns, she said: “an increase in the tax-to-GDP ratio is very critical”.
She lamented that “the FBR tax-to-GDP ratio is even below double digits and that the priority of the government is broadening the tax base by controlling smuggling and bringing the informal sector into the tax net”. Revenue generation shall remain a challenge for the government as the tax out of the formal sector has also dried out.
On the other end, the former finance minister, Miftah Ismail, presented a bit longer perspective while addressing a seminar recently. He is reported to have stated: “The economic situation is going to be very difficult in coming months, with liquid foreign exchange reserves of the central bank likely to drop below the critical level of $2 billion by the end of September. So by October 1, we’d probably have less than $2 billion. How long we can survive after that, only Allah knows.
Things will get very difficult for Pakistan temporarily”. He warned that “the ongoing economic crisis is not like the old recessions we had”. With the $7bn International Monetary Fund (IMF) loan programme in abeyance for months on end, the central bank’s liquid foreign exchange reserves have dropped to $4.4 billion.
According to Ismail, Pakistan has to pay $3.7 billion in amortization debt repayments and $400 million in interest payments within the next two months.
It increasingly appears that the incumbent government will be able to present a people-friendly budget and extract some political mileage out of it. Beyond that, it would have an insignificant impact on the economic landscape of Pakistan with no change on lending rates, PKR-USD parity, inflation and similar performance indicators.
Beyond July, the financials of the country would be back to square one with the finance managers once again scrambling to avert default. Those would be real testing times as the patience and pockets of lenders have timed out.
Much will depend on political situation after the passage of FY24 budget. If the government opts for general elections in October 2023 then there will be a caretaker government between July and September and the next government will be taking time to settle in. The July-December period will be posing to the country’s political, fiscal and economic health the most challenging times.
Copyright Business Recorder, 2023