Fiscal and monetary policies are in contradiction to each other, which has negative implications for achieving the macroeconomic and fiscal targets presented by the government in the Federal Budget 2023-24.
The budget portrays a weak resource mobilisation strategy, where net revenue receipts of the federal government are not enough to cover even the interest payments.
These remarks were made by experts at a seminar that was organised by the Applied Economics Research Centre (AERC) and the Social Policy & Development Centre (SPDC) at the University of Karachi.
AERC Assistant Professor Dr Tehseen Iqbal said that after the announcement of an expansionary budget, the State Bank of Pakistan (SBP) announced a strict monetary policy stance, maintaining the policy rate at a high level of 21 per cent.
Therefore, he pointed out, the objectives and the current paths of both macroeconomic stabilisation policies contradict each other. He said that while the SBP expects a reduction in inflationary expectations through contractionary policies, the fiscal policy simultaneously fuels inflationary expectations. He added that it targets a higher growth rate by increasing current and development expenditures. He also said that in a period characterised by stagflation, effective communication and coordination between monetary and fiscal policies are crucial for managing twin deficits and exchange rate volatility.
AERC Assistant Professor Dr Aamir Siddiqui said that measures introduced in the budget reflect a hybrid import substitution industrialisation strategy broadly similar to that adopted during 1955-68, except that the new strategy is contextualised with a new liberal policy regime, while the former used import licensing and exchange rate management.
He said that similar to the earlier strategy, the new regime is likely to fail because there is no motivation for moving from low productivity to high productivity for capital goods industries, or to set up the domestic supply chain for exportation, or to set up a monitoring and evaluation system for assuming the maturing of the new strategy.
Presenting the fiscal scenario, SPDC Principal Economist Muhammad Sabir said that the Federal Budget 2023-24 was presented against a challenging macroeconomic backdrop and a complex political situation by an outgoing government, as the tenure of the current assembly is set to end on August 13.
Consequently, he said, effective implementation of the policy measures introduced in the budget would depend on the ownership of the future government. He said the budget is expected to take decisive steps towards fiscal sustainability by ensuring a primary surplus, reevaluating the debt-servicing strategy and rationalising the public sector development programme.
However, he added, the Federal Budget 2023-24 presents an entirely contrasting picture. He said that the matter of particular concern is that the federal government’s net revenue receipts are budgeted to be Rs6.9 trillion, which is even lower than the budgeted interest payment of Rs7.3 trillion. This alarming situation implies that borrowing would be required to finance a part of the markup payment and the rest of the total federal expenditure, he added.
Government of Pakistan former chief economist Dr Pervez Tahir stressed the need for the government to focus on the expenditure side to keep the fiscal indicators under the desirable limits.
Dr Tahir said the government has been pursuing the goal of increasing the tax-to-GDP ratio for several decades now. In the 1990s, the tax-to-GDP ratio was over 13 per cent, which has steadily declined to below nine per cent, he added. He said that this implies our tax-collecting system has failed to achieve the desired objectives. Therefore, he added, the government should focus more on containing expenditures, which would need the strong political will of the government to introduce fundamental reforms in government departments for cutting expenditures. participants. SPDC Managing Director Muhammad Asif Iqbal delivered the vote of thanks.