Whither the economy

EDITORIAL: The budget for 2023-24 fails to curtail expenditure (and instead raised current expenditure by 26.5 percent from the revised estimates of last year and by 52.9 percent from what was budgeted for the outgoing year which in turn accounts for heavy domestic borrowing that has been highly inflationary) or present a realistic revenue target for Federal Board of Revenue/external loans that would have provided leverage to re-negotiate with the International Monetary Fund (IMF) on some of the upfront harsh ninth review conditions or on a new programme.

The country’s economic team leaders have repeatedly indicated that the only option is to be on a Fund programme which alone may unlock pledged assistance from other multilaterals and bilaterals.

The two options available to the current administration to deal meaningfully with the economic impasse that is pushing thousands more under the poverty line each week (with rising unemployment as large scale manufacturing sector registers negative 8.1 percent growth and 38 percent headline inflation in May) is to either revisit the budget and pass one more in synch with the IMF programme agreed not only by the previous administration but also by the incumbent administration, an option that does not appear to be on the table, or wait for the next administration to renegotiate another programme, which is expected to be even more harsh and upfront than the existing programme.

In this context, it is relevant to note that the then two finance ministers Shaukat Tarin and Miftah Ismail and incumbent finance minister Ishaq Dar attempted to renegotiate with the Fund with the objective of phasing out the harsh upfront conditions but to no avail.

It is critical to note that while Tarin and Ismail did successfully conclude staff-level agreements Dar has not, mainly because he implemented policies which violated the terms of the ongoing programme and for which the country paid a heavy price — controlling the external rupee value that accounts for 3.7 billion loss of remittance inflows through official channels in eleven months of this year or, in other words, this amount would have been added onto the 3.9 billion dollars existing foreign exchange reserves coupled with the surpassing of the budgeted current expenditure by 1.57 trillion rupees in the outgoing year, funded by ill-advised domestic borrowing, that included unfunded electricity subsidy to exporters as well as 439 billion rupees additional subsidies than budgeted.

Thus, clearly, the economy today is in much worse shape than what the Shehbaz Sharif-led government inherited, a trend that has worsened significantly since 27 September when Ismail was summarily dismissed in favour of Dar.

The incumbent economic team leaders as well as independent economists are agreed that there is no option but to re-engage with the Fund — either to reach a staff-level agreement on the ninth review for which the clock is ticking away as the government has been informed that the programme is not going to be extended beyond 30 June 2023 or, as appears likely, engage with the Fund on a new programme.

Supportive economists point out that the fault lies not in policies of the past eight months but on the National Finance Commission award that takes away a major chunk of FBR revenues, leaving about 6.88 trillion rupees with the federal government, which is insufficient to meet the projected 7.3 trillion rupee markup on loans.

This argument does not take account of the massive rise in domestic borrowing from what was budgeted by the federal government (on which it pays the mark-up) to fund the rise in current expenditure in the outgoing year.

Nor does it take account of the 2023-24 budgeted reliance on external loans to the tune of 23.7 billion dollars (out of which 15.5 billion dollars approximately are budgeted for foreign loans and repayments and repayment of short term credits), which is simply not realisable unless the country goes on a Fund programme as it envisages around 13 billion dollars from sources directly linked to being on a Fund programme.

In addition, they argue that the country experienced primary surplus (minus debt servicing) of 0.5 percent as opposed to the budgeted deficit of 0.2 percent. The surplus suggests contractionary policies (discount rate at 21 percent and fiscal measures in February this year); however, the irresponsible domestic borrowing to fund the massive rise in budget deficit — from the budgeted negative 4.9 percent to the revised negative 7 percent — makes this hardly a statistic to boast about.

The claim by the Finance Minister that bilateral debt will be rescheduled (and one may well assume this is a component of Plan B that envisages no Fund support) refers to the budgeted 10 billion dollar rollovers (plus additional deposits) by China, Saudi Arabia and the UAE, countries that have repeatedly stated they would engage with debtor countries through multilaterals — are not enough to get the country out of the looming threat of default though it is a start in the right direction but not enough to bring the economy out of the woods.

Second part of ‘Plan B’ touched on by Dar is to refer to the trillions of rupees of assets held by the government implying thereby that the country can easily repay all its external debt. The budget has been more realistic in terms of the marketability of assets as privatisation proceeds next year are given at 15 billion rupees only.

The budget components, the continued control of the interbank rupee rate, passing on the buck for poor sectoral performance onto the hapless consumers rather than undertaking structural reforms and the sustained bravado with respect to negotiations with the Fund are factors responsible for a marked decline in market perceptions, rising unemployment and inflation.

Copyright Business Recorder, 2023