The key question from an economic perspective is not whether the budget 2023-24 is pro-poor, pro-business, pro-growth, or even an election year budget but whether it has the key ingredients that would unshackle the stalled International Monetary Fund (IMF) ninth review which, in turn, will unleash multilateral/bilateral assistance (awaiting the comfort of a rigidly monitored Fund programme) and ease foreign market concerns to enable the government to borrow from the commercial banking sector abroad as well as incur debt equity through issuance of sukuk/Eurobonds at affordable interest rates.
A major revelation by Finance Minister Ishaq Dar post-budget speech is deeply concerning – much more than the unrealistic budgeted expenditure and revenue figures that may adhere to accounting principles but reflect little, if any, economic considerations.
He stated that the IMF is unwilling to extend the ongoing programme beyond the rescheduled end of 30 June 2023. That leaves two possibilities from the government’s perspective.
First, the Fund may agree to club the remaining reviews and release the total remaining programme lending of 2.6 billion dollars - the Fund has already disbursed 3.9 billion dollars to-date out of a total lending programme of 6.5 billion dollars (6 billion dollars envisaged in 2019 augmented by half a billion dollars in the seventh/eighth review dated September 2022 which was negotiated by the incumbent government’s first economic team leaders).
This option is unlikely to be on the table at this stage especially as the Fund staff’s trust deficit with the incumbent economic team leaders remains severely compromised due to not only unnecessary offensive statements that continue to this day but, more importantly, implementing policies violative of the seventh/eighth review agreement with the Fund as well as violative of basic economic principles.
Second possibility is to reach the ninth staff level agreement that would disburse the envisaged tranche of 894 Special Drawing Rights (as stipulated in the seventh/eighth review) or a bit more depending on the agreement that would unshackle bilateral and multilateral assistance envisaged in the budget at 6,874,426 million rupees (24.2 billion dollars if the exchange rate is 284 rupees to the dollar as envisaged in the budget documents) against less than half realized in the outgoing year due to failure to reach the ninth review agreement originally scheduled for November 2022.
Budget documents reveal that in the outgoing fiscal year, a total of 558 billion rupees was budgeted from the IMF but only 172.8 billion rupees was disbursed as per the revised estimates (on 1 September 2022 after the IMF board approved the seventh/eighth review) however 696 billion rupees are budgeted for next fiscal year, an amount that at the budgeted rupee-dollar parity comes to around 2.4 billion dollars or almost the entire undisbursed amount of IMF’s Extended Fund Facility (EFF) programme.
The confusion over the exact amount in dollars maybe deliberate as unlike past budgets, 2023-24 budget documents do not identify the actual amount in dollars.
And the statement by a senior Fund staff a week ago that one of the preconditions for the ninth review is the proper functioning of the foreign exchange market raises legitimate questions of how much would the applicable rupee dollar parity have to be adjusted to satisfy the Fund.
Total envisaged external loan inflows of 24.2 billion dollars are budgeted to be used as follows: 4,398,068 million rupees (around 15.4 billion dollars) would be required for foreign loan interest and repayment next fiscal year while repayment of short term credit is 46,690 million rupees (164 million rupees) or, in other words, the remaining 8.8 billion dollars will be used to strengthen foreign exchange reserves (at a low of 4 billion dollars today), current account support which the government claims will be half of what was envisaged in February at around 6 billion dollars with almost nothing left for budget support.
So where is this external borrowing sourced from in the budget documents: (i) the time deposit by Saudi Arabia of 870 billion rupees (around 3 billion dollars), which is almost double the amount in the revised estimates for 2022-23 of 447 billion rupees.
However, given that the Saudi Finance Minister, without naming Pakistan, explicitly stated during the World Economic Forum at Davos that “we used to give direct grants and deposits with no strings attached (Pakistan was the recipient of 1.5 billion dollar of assistance in 2014) and we are changing that.
We are working with multilateral institutions to actually say we need to see reforms.” Thus the ninth review staff level agreement maybe a critical factor for this amount to be rolled over.
In addition, new deposits of 580 billion rupees are budgeted from the Kingdom (2 billion dollars); (ii) SAFE China deposits of 1.16 trillion rupees (4 billion dollars) next fiscal year again almost double the amount from the revised estimates of this year of 596 billion rupees.
China is a member of all multilaterals and is proactively seeking to enhance its voting strength and has launched the Asian Infrastructure Investment Bank which indicates that the country is moving towards working through multilaterals; and (iii) new deposit from United Arab Emirates of 435 billion rupees (1.5 billion dollars) likely to be linked to the realization of the budgeted time deposits from Saudi Arabia.
The budget for next fiscal year also envisages a whopping 1.3 trillion rupees from commercial bank borrowing (4.59 billion dollars) against the 521.5 billion rupees in the revised estimates of the outgoing year and 435 billion rupees of equity borrowing (issuing sukuk/Eurobonds) estimated at about 1.5 billion dollars.
The onus of these borrowings on current expenditure (under the head of markup) is unclear because a favourable borrowing rate will require a staff level agreement on the ninth review with the IMF that would trigger an upgrade of the current almost junk status rating by the three international rating agencies.
Domestic borrowing (mainly through government securities) is budgeted to rise to 5 trillion rupees against the budgeted 1.17 trillion rupees in the outgoing fiscal year which would have a massive inflationary impact of at least an additional 20 percent over and above the optimistic budgeted 21 percent.
To conclude, the budgeted external revenue sources are unlikely to be realized while domestic sources will trigger inflation that would push millions of more families below the poverty line (without taking account of the rise in salaries of government servants that would trigger wage push inflation). The budget 2023-24 is extremely disturbing and evocative of Macbeth’s cry it is a tale full of sound and fury signifying nothing.
Copyright Business Recorder, 2023
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