Tuesday December 06, 2022

On reading the budget

June 11, 2022

The concluding statement of the talks held in Doha between the government of Pakistan and the IMF Mission last month reads: “The [IMF] team emphasized the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve program objectives.” This statement highlights the importance of FY2023 budget measures to regain the trust of the IMF for the resumption of the ongoing extended fund facility programme.

Before any comment on the finance minister’s budget speech, let us recall the IMF’s latest advice to its members amidst the food and fuel crisis.

For countries with developed social safety nets, the IMF suggests temporary cash transfers to vulnerable groups while allowing domestic (commodity) prices to adjust (pass on full costs to consumers). For other countries (like Pakistan), it advises “a more gradual adjustment of domestic prices and the use of existing tools to help the most vulnerable during this crisis, while taking steps to strengthen safety nets. The IMF also advises focusing on the most “urgent spending needs” and “raise revenue” to pay for them.

The government aims to raise revenue by Rs1175 billion over last year’s collection of Rs5829 billion. It has rightly targeted non-productive assets (those with more than one property worth Rs25 million, and those buying and selling their properties within six years) and upper-middle/upper-income earners to fetch additional revenue. However, the flip side is that discouraging people from investing in real estate, in the absence of any other feasible investment option, may lead to dollarizing the economy where people would start buying dollars as an investment.

The measures not included in the budget – such increase in petrol, diesel, electricity, and gas prices – will pinch the people the most. However, these measures will also help the government generate additional revenue. So, meeting the revenue target committed with the IMF should not be difficult.

The challenging part is identifying the “urgent spending needs.” After giving the provincial share, our net federal revenue for the next fiscal year (after giving the provincial share) is Rs4904 billion. Our total spending (including a Public Sector Development Program (PSDP) worth Rs808 billion) is Rs9502 billion, which means we would start our fiscal year with an assumption that the government will arrange for (mainly borrow) Rs4598 billion to meet its expenses.

One can propose a simple solution of matching the expenditures with the income by reducing them. While there is undoubtedly some space to reduce our expenditures, the life of the finance minister of Pakistan is not that easy. I classify our current expenditures into ‘4Ds’ – debt servicing (Rs3950 billion), defence (Rs1523 billion), day-to-day running of the civil government, including pay and pensions (Rs1180 billion), and development through subsidies and grants (Rs2041 billion). And then there is the PSDP.

Except for development, the rest of the spending is not only ‘urgent’ but non-discretionary too. No government can default on its sovereign loans, and compromise on its defence requirements, and pay and pensions. After debt servicing, the government would be left with Rs954 billion to meet all other expenses. The result would be more loans and additional interest payments that successive governments would keep on paying until our economic plans and policies are overhauled.

In addition to such overhauling, to overcome the chronic budget deficit, the federal government will have to initiate a dialogue with the federating units to start sharing some responsibility for debt servicing and defence expenses. However, the current government cannot take these initiatives in the run-up to elections and amidst such extreme political polarization.

Within the above-mentioned non-flexible framework, there is very little room to experiment with innovative ideas. The budget-makers evidently aim to stay within the permissible fiscal deficit limit afforded by an IMF programme. The revenue is estimated on the higher side, and the expenditures are understated to meet the fiscal deficit target agreed with the IMF. At least, this is how it is estimated till the final consolidated figures are presented in the next budget.

The government has rightly proposed to give agricultural machinery, agri-inputs, and solar panels exemption from the general sales tax – there are also tax breaks and exemptions for the film industry. However, this may not go well with the IMF, which had made the previous government withdraw all GST exemptions through an amendment in the finance bill (mini budget).

To achieve what the finance minister termed ‘inclusive growth’, which does not lead to a current account deficit, the government would have to focus on agricultural-import substitution, export promotion, reducing dependency on fossil fuels, and attracting investment – which again seems non-pragmatic given the short time this government has.

With a bit of rebranding and relabeling, some of the previous government’s initiatives for agricultural transformation and youth employment seem to be retained, which would lead to policy consistency and must be appreciated. Likewise, the increased allocation for the Benazir Income Support Program (increased from Rs250 billion to Rs364 billion) and the Higher Education Commission are steps in the right direction. The laptop scheme for the youth is back, which would help in today’s way of living online.

However, despite all these initiatives, the measures in the budget will not reduce the menace of inflation (the budgeted target of 11.5 per cent is unrealistic) that will continue to haunt the people. All multilateral development agencies and development partners are warning of a global recession and an emerging food crisis amidst the Ukraine war.

If I have to prioritize a single ‘urgent spending need’ the government should devote its resources to next year, I would pick food security for which provinces also have to play their role. Let us wait for the provincial budgets and let us hope that the government will be able to win back the trust of its lenders.

The writer heads the Sustainable

Development Policy Institute. He tweets @abidsuleri