EDITORIAL: Senate Standing Committee on Finance and Revenue, which was chaired by Salim Mandviwalla, reviewed suggestions by different trade and industry representatives to jump-start the economy who pointed out that economic activity in the country was severely depressed due to dwindling foreign exchange reserves, impeding private sector efforts to import raw materials/semi-finished products, coupled with the sensitive price index rising to 48.02 percent year on year in the week ending 11 May 2023 and a Consumer Price Index of 36.4 percent in April 2023.
These twin prevailing issues of low output and high inflation, defined as stagflation in economic theory, would require a pro-growth budget, trade and industry representatives further contended. The question is if such a budget is possible at this time?
It is by now fairly well established that in the event that the ninth International Monetary Fund (IMF) review remains pending, international pledges by donors/bilaterals (as well as friendly countries who may revisit existing assistance including rollovers) will remain suspended, pushing the country towards possible default in the new fiscal year starting 1 July 2023.
While there is considerable angst against this condition by the Fund, with the government claiming that it is akin to the chicken and egg syndrome as without the ninth review being declared a success the government will not be able to procure the external loans that it requires, yet disturbingly debate within the cabinet and parliament has yet to focus on a recent IMF press release warning against not following the macroeconomic framework already agreed – a warning which reflects Fund apprehensions, based on a widening trust deficit with the economic team leaders, that the budget may violate the framework.
This view is strengthened by senior PML-N leadership stating in no uncertain terms that the budget would be an election year budget.
An election year budget typically releases development funds to parliamentarians, which will fuel inflation as growth stagnates with large-scale manufacturing industry continuing to register rising negative growth, raising public sector salaries and the minimum wage for the private sector, together with failure to widen the tax net for political reasons which would imply higher taxes on existing taxpayers who are already overburdened (notably the general consumers as sales tax remains the highest revenue earner and on industry, a major output outlet in the country) - elements that would have further negative repercussions on poverty levels and output.
The tendency of the government to follow the same old policies to promote growth that have never been empirically tested (for example fiscal incentives including electricity subsidy to exporters and a low discount rate to encourage private sector borrowing though it is heavy government today at rates well above the 21 percent discount rate that are crowding out private sector borrowing) need verification through empirical studies.
It is by now patently evident that Finance Minister Ishaq Dar is following his own past flawed policies by falsely insisting that the fault lies with his successors’ policies – a stance without corroborating empirical evidence.
It is important to note that the IMF website has downgraded the growth rate for the current year to 0.5 percent (the government has downgraded it to 0.8 percent) while next year’s projection is 3.5 percent – a projection that would be updated as and when the ninth review is declared a success and most likely revised downward in the ninth review documents that would be uploaded only after the review is declared a success.
If the Fund’s input into the budget, as required under the terms of the programme, is taken into account the government will be unable to include elements of an election year budget. And if the government presents a budget that violates the framework agreed then the possibility of a ninth review success will be pushed further into the future leading to the possibility of default sometime around the scheduled elections in October.
To conclude, the Finance Ministry may well rely on overstating revenue and understating current expenditure to convince the Fund that it has followed the agreed framework or may pledge mini-budgets at a later stage to contain the deficit.
Whatever option is taken the government will praise the budget as pro-poor (through raising allocation for Benazir Income Support Programme) and pro-growth (by extending fiscal and monetary incentives to some sectors led by the elite) though they would be the same past flawed policies at a great cost to the general public, which would fuel unemployment and inflation.
Copyright Business Recorder, 2023
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