Uniquely optimistic

The government may have to revise some of the budget numbers to address IMF’s concerns

Uniquely  optimistic


n a typical year, the focus of the debate surrounding the federal budget revolves around assessing various proposals aimed at increasing revenue and reflecting spending priorities. Depending on the measures proposed, the budget is labelled as pro-people, pro-business, pro-industry, pro-reform or a consolidating budget.

In an election year, the budget is scrutinised to determine whether it is a “pre-election” budget and how it might impact the economic decision-making of the subsequent government, particularly in terms of continuing relief measures and managing the fiscal deficit. For instance, the sixth budget of the Pakistan Muslim League-Nawaz (PML-N) in 2018, a pre-election budget, drew criticism for its potential effect on the fiscal deficit.

Uniquely  optimistic

The current year presents a unique situation. It is an election year and the last budget of the PDM coalition government. The government has apparently resisted the temptation to present a populist budget to appease voters. However, digging deep through the numbers, one can find problems with fiscal discipline and prudence.

The government’s net income is insufficient to cover even debt servicing and repayments, necessitating borrowing to meet these obligations. However, this has not dampened its desire to spend on welfare and development. In fact, the government plans to spend more than twice its income and finance the difference through borrowing.

I will delve into the expenditure aspect later. First let me explain the proposed income streams. The government aims to increase its gross revenue (prior to sharing with provinces under the NFC formula) by 38 percent, reaching Rs 12.1 trillion compared to the previous fiscal year’s Rs 8.8 trillion. Gross revenue consists of two types of income: FBR income, which encompasses direct taxes (accounting for 41 percent of FBR income) and indirect taxes (59 percent); and non-FBR income. The government has proposed a 27.7 percent increase in revenue collection through FBR, with a target of Rs 9.2 trillion compared to the previous year’s Rs 7.2 trillion. Additionally, it aims to generate a staggering 88 percent more income through non-FBR revenue, reaching Rs 2.9 trillion.

Now, let’s examine the proposed borrowing plan. The government borrows from domestic banks and from international lenders. Net domestic borrowing from the banks is budgeted at Rs 5 trillion. In contrast, net external borrowing from multilateral and bilateral sources, as well as through the sale of commercial and euro bonds, is budgeted to be Rs 2.5 trillion. The numbers don’t look too scary. Why should that worry us? Let me explain, starting with the external loans.

The government faced a severe challenge of external financing in the outgoing fiscal year. In the outgoing fiscal year, it planned to borrow Rs 5.5 trillion from external sources (multilateral and bilateral) to finance its deficit. It could secure only Rs 3.2 trillion, which was 58 percent of the target. The 42 percent shortfall in the budgeted loans in foreign currency led to a dollar shortage and a massive depreciation of the rupee. The delay in obtaining external financing (rollovers) also caused a delay in completing the 9th review of the IMF programme, which further worsened our economic woes.

Most of the lenders made their assistance conditional on the IMF’s letter of comfort for Pakistan. However, the IMF made its approval conditional on Pakistan’s ability to mobilise its budgeted external finances from the very same lenders. While there is no major change in this “chicken and egg” situation, the government has assumed that it will be able to borrow Rs 6.8 trillion from international lenders during the next fiscal year. For the record, Rs 6.8 trillion is more than double the amount it could obtain from international lenders in the current fiscal year.

Why such optimism? The government assumes that Saudi Arabia and the UAE will provide new commercial deposits of Rs 580 billion and Rs 290 billion, respectively. It assumes that compared to the current fiscal year, China will more than double its deposits, and foreign commercial banks will increase their lending to Pakistan by nearly three times. It also assumes that Pakistan will be able to raise Rs 435 billion through international sukuk bonds, and IMF will lend Rs 696 billion in the next fiscal year.

It is important to mention that before calculating its fiscal deficit, the government assumed a provincial surplus (provincial unspent money with the State Bank) of Rs 650 billion. The number is highly unrealistic as provincial governments are unlikely to leave any surplus in an election year.

Now let us have a quick glance at the expenditures. In my budget commentary for this paper (June 10, What is Budget 2023-24?), I explained how the federal expenditures could be divided into four Ds: debt servicing, defence affairs, day-to-day administration and development. The first three are non-discretionary, meaning that they are fixed or mandatory. The fourth one, development, is discretionary – meaning that it can be adjusted according to the availability of funds. However, the government also has some discretion in managing its debt burden, which requires addressing the holes in Pakistan’s economy. These include reducing the losses of 212 public sector enterprises, improving the efficiency of electricity and gas transmission and distribution, streamlining the federal civil administration in line with the 18th Amendment, reforming the pension system, eliminating elite capture through unjustified non-targeted subsidies and tax exemptions.

The IMF has already expressed dissatisfaction with the federal budget and has raised questions about revenue assumptions and expenditure justifications. Suppose Pakistan wants to continue its engagement with the IMF to secure the budgeted Rs 696 billion in the next fiscal year, it may have to revise some of the budget numbers to address IMF’s concerns, before they are approved by the parliament. Looking at the uncertainties of the revenue stream, the next government will have to present a mini-budget. Given the uncertainty and risk involved in securing external financing, the earlier we adjust our expenditures and reduce our financing requirement, the better it will be for the people and the government of Pakistan.

The writer heads the Sustainable Development Policy Institute. He tweets at @abidsuleri

Uniquely optimistic