EDITORIAL: In an overarching drive to launch development projects before the term of the government expires, a drive reminiscent of the usual practice when elections were imminent, but what is no longer economically tenable today, given the current appalling state of the economy subsequent to budget deficits at unsustainable levels for the past five years.
The Public Sector Development Programme (PSDP) has been budgeted at 950 billion rupees, up from 714 billion rupees in the revised estimates of last year – a 33 percent rise indicative of an election year allocation rather than of available fiscal space – while provincial PSDPs have been reduced to 1.55 trillion rupees for the current year against the revised estimates of 1.59 trillion rupees last year. And, the largest increase under federal PSDP has been earmarked for National Highway Authority, 55 percent rise from the revised estimates of last year, reflective of a PML-N’s long-standing overarching objective.
The Prime Minister’s initiatives are budgeted to receive 80 billion rupees, against zero allocation last year, and 51 billion rupees were approved for schemes recommended by parliamentarians on 24 July this year, a vote influencing scheme that has been the usual practice during the run up to previous elections as well.
One would urge the 70 plus Cabinet members to take account of the existing four extremely daunting ground realities that should, one would have hoped, set the stage for a revisit to the budget 2023-24 – in-house as opposed to what was insisted upon under the Stand-By Arrangement (SBA) agreed with the International Monetary Fund which would have increased the country’s leverage with domestic and external borrowers.
The SBA documents note that “the cost of domestic and external borrowing increased, the interest bill reached 6.6 percent of GDP and absorbed 2/3rd of the tax revenue. In addition, market issuance has become increasingly challenging, with several unsubscribed Treasury auctions during FY23 and the issuance of domestic debt tilted heavily towards floating rate instruments.”
The staff rated overall risk of sovereign stress as high in the medium term, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserve buffers. These risks are mitigated by fiscal adjustment safeguarded under the SBA continuing in the medium term, financial commitments by bilaterals and the ability of the banking sector to roll over existing domestic debt. And of course, in the long term the risk is assessed as moderate if the SBA is implemented consistently and macroeconomic prudence continues in the medium term the debt path will remain on a downward trajectory.
Second, the staff report as well as the pledge by the authorities notes that achieving sustainable growth and development objective, amongst others, envisages streamlining Foreign Direct Investment (FDI) approval process, an objective government sources claim would be achieved with the recently established Special Investment Facilitation Council (SIFC), to be staffed with civilian and military personnel in different sectors, that would be a game changer commonly referred to as Plan B (in the event that Plan A, IMF support, was not approved).
In the seventh/eighth review documents, the Fund projected higher gross financing needs for each of the years noted: 36.6 billion dollars 2023-24 against 28.3 billion dollars in the SBA, 35.7 billion dollars in 2024-25 against 27 billion dollars in the SBA, 38.4 billion dollars in 2025-26 against 31.8 billion dollars in the SBA, and 39.2 billion dollars in 2026-27 against 28.8 billion dollars in the SBA.
Government sources claim the lower requirements are due to the projected success of Plan B; however, IMF projections indicate that there would be lower available financing from FDI under SBA relative to the seventh/eighth review: in 2023-24 as per the seventh/eighth review FDI was projected at 2.7 billion dollars against the SBA projection of only 173 million dollars, in 2024-25 of 4.6 billion dollars against the SBA projection of 1.5 billion dollars, 4.6 billion dollars in 2025-26 against 1.6 billion dollars under the SBA and 4.8 billion dollars in 2026-17 against 2.25 billion dollars in SBA.
Third, remittance growth rate has been projected at 14.2 percent in 2023-24 in the seventh/eighth review while inexplicably it is projected at 21.6 percent in the SBA – a rise that presupposes that the market-based exchange rate agreed to under the SBA would reverse the negative 13.5 percent growth last fiscal year, however, this would imply the capacity of the government to choke the hundi/hawala system, which is easier said than done. After the post-Covid-19 revival, and in years to come, the rise in remittances is projected at a higher rate in the SBA relative to the seventh/eighth review.
Fourth, the budget deficit will be contained with the government agreeing not to approve any supplementary grants, put a ceiling on government guarantees, get approval for the circular debt management plan from multilaterals (with the target date 31 July) and zero ceiling on accumulation of external payment arrears by the government and state-owned entities.
The ideal way forward would have been to make appropriate reforms in the tax system that remains skewed in favour of the non-compliant and the elite, to make drastic changes in the budgeted expenditure priorities and not to support the antiquated belief that political considerations must always transcend economic considerations and thereby to create leverage with the lenders (multilaterals and bilaterals) instead of further enmeshing the economy in a budget that sustains rather than dissolves dependence on external dictates.
Copyright Business Recorder, 2023