With elections imminent, gains from several policies may be compromised
s expected, it is a short-term management budget. Any expectations of laying out long term agenda or policies for reforms such as expanding the tax base and rolling out privatisation were misplaced in any case. So is all analysis on those grounds. A budget announced by a government going into elections in three to four months hardly ever has any value for the entire year, let alone long-term policy reforms.
The budget was neither meant for structural reforms, nor attempts any. That job has been left for the next government. Rightly so. Whoever forms the next government must have the opportunity to lay down its agenda. Hence, a mini budget is already expected. This budget is primarily for the first quarter of the financial year.
The budget seems to be guided by two major concerns: not to annoy the IMF; and to provide some relief to the citizens. The latter is intended primarily to pacify people with elections in mind. Unaware of the exact position of the IMF on the proposed budget, one can only speculate. Apparently, the government has tried to continue engagement with the IMF for the ninth review.
The continuation of the measures introduced in the mini budget presented in February 2023 is apparently aimed at securing a $1.1 billion deal with the IMF. The government has not reversed any of the measures implemented through the bill. Among other things, the bill raised the GST tariff to 18 percent from 17 percent. Importantly, the staff level agreement on the ninth review is still pending.
The government has persisted with the mini budget of February 2023, with a GST of 18 percent extended to the financial year 2023-24. It brought Rs 55 billion in four and half months. This shows the intention of the government to work with the IMF. A populist approach would have been to bring down the GST to 17 percent.
A 1 percent raise in GST tariff adds Rs 140 to Rs 150 billion in indirect tax revenue. Most of the burden tends to be on the poor. It is interesting that some government leaders have claimed that no new taxes have been levied. The government has, in effect, imposed the indirect tax for the whole year by legislating it in February 2023 instead of June 2023.
Some of the targets set in the budget appear overstated in an attempt to reduce the estimated current account deficit and the associated external financing needs. The government says it expects exports to rise $25 billion in FY2022-23 to $30 billion in FY2023-24, resulting in an increase of $5 billion. It has also budgeted an $8 billion increase in remittances, from $25 billion to $33 billion.
These numbers do not sound reasonable. If the recent trends are any guide, both these targets are likely to be missed. The $35 billion exports target for FY23 had been clearly missed as Pakistan’s exports for July-April were recorded at $23.174 billion. The remittances expectation of $33 billion also sounds unrealistic.
Exchange rate volatility and political and economic uncertainty can compromise the gains from incentives — the diamond card and dollar amnesty — driving these projections. Notably, the remittances in the outgoing fiscal year are projected to be around $25 billion with a downward trend. During July-April FY2023, workers’ remittances posted a negative growth of 11 percent.
If the government misses half of the projections, it will create an unbudgeted financing gap of $6.5 billion. Missing all the targets, will likely bring this gap to $13 billion. This gap may be even wider if imports projections do not match the GDP growth target.
July-April imports stood at $41.5 billion, with an average of $4.15 billion per month. On this account, total imports in FY2023 may stand around $49.3 billion. This is the size of imports at a time when the growth rate has declined from 6 percent to 0.29 percent. Surprisingly, the government has projected a growth of only $9.4 billion, from $49.3 billion to $58.7 billion, for a twelve-fold increase in GDP growth from 0.29 percent to 3.5 percent.
One must remember that the import controls were implemented through administrative measures like refusing to open LCs. As the economy moves towards growth, the imports may grow substantially. A low projection for imports and a corresponding higher projection for exports and remittances can leave the current account deficit projections redundant. This can shake the basis of meeting all obligations even without IMF support.
If exports and remittances remain around $28 billion and $30 billion, respectively, and imports do not rise beyond the projected $58.7 billion, the CAD will be $11 billion, almost double than projected. This will require the government to take tough measures.
If the past is any guide, the government may revert to import controls. That may bring the deficit down by a couple of billion dollars but will suppress the overall growth. GDP growth may then end between 2 percent and 2.5 percent. A higher CAD will also exert pressure on the rupee, pushing the State Bank of Pakistan (SBP) to respond through policy rate hike. Keeping in mind another IMF programme, policy rate may touch 25 percent by the end of FY2023-24. This will further suppress the growth.
Revenue and other targets seem achievable at a growth rate of 3.5 percent and an inflation of 21 percent. A drop in GDP growth, however, can have a chain effect. It can disturb the fiscal deficit target. The government is targeting a fiscal deficit of 6.54 percent of the GDP for the FY2023-24, slightly lower than the current year’s revised estimate of 7 percent.
If growth remains around 2 percent, according to the World Bank’s estimates, the government will not be able to achieve the fiscal deficit target. It could rise to more than 7 percent owing to downward revisions in tax revenue of $9.2 trillion, projected at a growth rate of 3.5 percent, inflation rate of 21 percent and the larger increase in spending.
Government’s reliance on borrowing from banks will continue to fuel inflation. Out of a revenue and expenditure gap of Rs 7,573 billion, the government has budgeted a borrowing of Rs 3,124 billion from banks. This amounts to 41 percent of the deficit. Money supply growth is therefore likely to continue this year. Inflation target may reach somewhere around 25 percent.
The fact that the government will be gone in three to four months can compromise the gains from several policies. Take the example of the dollar amnesty. On one hand, the IMF may not like it. On the other, it may not attract significant dollar declarations. Businesses and people may prefer to keep their remittances abroad due to economic and political uncertainty.
Also, they are aware that this government may be leaving in a few months. They might like to wait and see if the new government continues these policies.
Incentives like Diamond Card generally help. But the impact of these incentives in attracting remittances will depend on the exchange rate stability. The difference between interbank and open market will be decisive. The budget can potentially discourage remittances through legal channels despite the apparent incentives.
The writer is a deputy executive director at the SDPI. The opinions expressed are personal and do not necessarily reflect the position of the SDPI