The federal budget document serves as an estimate of income and expenses for the upcoming fiscal year, with fiscal deficit arising when expenses exceed income.In a normal year, Pakistan’s...
The federal budget document serves as an estimate of income and expenses for the upcoming fiscal year, with fiscal deficit arising when expenses exceed income.In a normal year, Pakistan’s budget is typically presented by inflating income and deflating expenditures to meet the predetermined fiscal deficit target. However, during election years, the government tends to inflate both income and (pro-people) expenditures to present a pre-election budget that focuses on being pro-poor, and providing relief to the citizens.In the past, it was relatively easy for the PPP (2008-2013) and PML-N (2013-2018) governments to present pre-election budgets during the final year of their tenure. This was because their respective IMF programmes had concluded much earlier than the legislative assembly’s tenure, allowing them the flexibility to present populist budgets.
Any resulting fiscal deficit from those budgets was handled by their successors.Unlike the PPP and PML-N governments, the PTI government (2018-202) waited almost a year before joining the IMF programme, aligning the programmes conclusion with the fourth year of the National Assembly’s tenure.After assuming power in 2022, the budget presented by the coalition government was challenged by the IMF, which found the revenue estimates to be unrealistic and the expenditure estimates to be underrepresented. The budget had to be revised three times.Considering the state of the macroeconomy, Pakistan extended the IMF programme by one year (taking it to the last year of the National Assemblys tenure). On Pakistans request, the IMF also increased the loan limit by $1 billion.
At that time, there was optimism about obtaining maximum loan tranches by June 2023, enabling the PDM to present its second budget as a pre-election populist budget, even if it meant sacrificing the last tranche of the IMF programme.However, things did not go as planned. Superfloods and political instability forced the government to violate certain clauses of the IMF programme, particularly concerning foreign currency exchange rate management. This considerably delayed initiation of the necessary IMF review (the ninth review) to release the next tranche. Keeping in mind the expected payments of Geneva pledges for flood relief from the international community, the government was optimistic about dollars inflow. However, those pledges, mainly from multilateral lenders, also remained out of reach for want of an IMF letter of comfort. And so the rupee kept on depreciating, and dollars remained scant.
In the meantime, the growing political crisis exacerbated the economic crisis, leading to further chaos in the economic situation. Friendly countries adopted a wait and see approach, and the delay in securing financial assurances from them put the IMF programme in limbo. While Pakistan has managed to avoid default so far, the next government should negotiate another IMF programme to be able to mobilize $77-80 billion in external financing (loans) over the next three years, with $24 billion required in the next fiscal year alone.Regarding the existing IMF programme, the PDM government has two options.
The first is to let the programme conclude prematurely and get out of the IMFs scrutiny. In such a case, the government is not obliged to share its budget framework with the IMF and can present a pre-election budget to please its voters. This gamble may or may not work for the current government. Under this scenario, whoever wins the next election will have to start it afresh with the IMF.
As a rule of thumb, prematurely concluding an IMF programme or failing to fulfill commitments in one programme makes the next one more stringent and challenging. Many of the unmet commitments become prior actions for the subsequent programme. This means that following the above option, the next government may have to implement one of the harshest IMF programmes in Pakistans history.
The second option is to remain engaged with the IMF to secure another loan tranche from the fund before June 30. In this case, the budget is to be prepared in consultation, if not in full conformity with what has been already agreed upon in the existing IMF programme (disciplined) -- meaning very little room for populist measures.
It appears the government has chosen the second option, although there is still no agreement between the government and the IMF regarding the budgetary framework or the completion of the ninth review. Nevertheless, the government’s willingness to remain in the programme implies that it will exercise caution in providing unrealistic pre-election relief for the people on June 9. By remaining engaged with the Fund, the next government will have a comparatively easy time negotiating with the IMF for the next loan.One may wonder why the PDM government would put its political capital at stake by not presenting a pre-election budget and why it would undertake actions that benefit its successors. Allow me to explain.Economy and politics are intertwined. The disintegration of the PTI due to the departure of many of its leaders following the tragic attacks on state infrastructure on May 9 has significantly reduced its chances of forming the next government. This means that the likelihood of one, some, or all of the parties in the PDM coalition being part of the next federal government is quite strong.
As discussed, the next government will need to request a bailout from the IMF. Therefore, the PDM coalition aims to avoid complicating its post-election situation by presenting a realistic budget at this time. Even if a populist budget were to be presented on Friday, it would ultimately need to be abandoned in order to qualify for the bailout package.Now let us move to the provincial budgets. The caretaker governments in Punjab and Khyber Pakhtunkhwa will only present provisional budgets for up to four months. The new governments in these provinces will subsequently revise these budgets, which will have an impact on the assumptions and numbers, such as provincial surplus, in the federal budget as well.I categorize expenses in the federal budget as the four Ds -- debt service, defence, day-to-day administration, and development. The first three Ds are non-discretionary and mandatory; no government can compromise on them. The fourth one, development, is the only discretionary expense and always gets compromised. Finally, there is an opportunity for the prime minister amidst all this chaos. He can and should build consensus on a charter of economy, not only among the 13-party PDM coalition, but also with any new political party/ies that may emerge in the run-up to the election. The economic mess that Pakistan is in due to political instability will only get addressed through political wisdom.
The writer is executive director of the Sustainable Development Policy Institute. He tweets Abidsuleri