The balancing act

Sustainable progress requires an element of bipartisan support for reform

The balancing act

Federal budgets in Pakistan have historically been interpreted differently by various stakeholders. Governments invariably claim that their budgets are pro-people and pro-growth, while opposition parties criticise them as ‘anti-poor.’ The general public, meanwhile, feels that the expenses that affect them the most—such as electricity tariffs, petroleum prices, gas prices and the overall cost of living—are addressed nowhere in the voluminous budget documents. Instead, key rates are changed every now and then by the NEPRA, the OGRA, and the State Bank’s monetary policy committee. The federal budget for 2024-25 is no exception.

In our daily lives, budgeting often involves aligning expenses with income; if there is a discrepancy, either income must increase or expenses must decrease. However, for the government of Pakistan, the situation is more complex. Expenses consistently surpass income. This year, out of the net federal revenue of Rs 10.3 trillion, a staggering Rs 9.77 trillion has been allocated for debt servicing. This leaves the government with a deficit of Rs 8.5 trillion for its other expenses. To manage this deficit, the government will have to resort to borrowing. Any shortfall in revenue mobilisation will only exacerbate the deficit, necessitating further borrowing.

For many years, China has been Pakistan's lender of first resort and the International Monetary Fund the lender of last resort. However, since 2020-21, even bilateral lenders like China and Saudi Arabia have linked their support to Pakistan with IMF programmes. The IMF insists that Pakistan secure assurances from bilateral lenders to roll over their deposits in Pakistan’s central bank and not force a default by abruptly discontinuing this facility. This places Pakistan in a difficult situation, needing to balance between the Western-dominated multilateral lenders (such as the IMF and the World Bank) and China amidst Western countries’ attempt to de-link and de-risk their economies from China.

It is widely speculated that one of the key factors for Pakistan’s high-level delegation’s five-day visit to China just before the budget presentation (which was deferred from June 8 to June 12) was the IMF’s insistence that Pakistan secure an extension on IPP arrears (capacity payments) from China. This cannot be officially verified since China does not publicise such favours to avoid extending them to its other partners. The geopolitical context has added another layer of complexity to budget-making in Pakistan. The measures proposed in the federal budget are also aimed at demonstrating Pakistan’s seriousness and resolve to align its economic policies with its commitments to its lenders.

Implementing such measures is not as straightforward as it sounds. It is often challenging for governments in Pakistan—regardless of which political party/ parties is/ are in power—to follow the lenders’ prescriptions. This is sometimes due to the fear of losing political capital and public backlash, the potential loss of support from coalition partners when the government lacks a majority in the house, or the influence of entrenched interests benefiting from the status quo.

The political economy of budget-making in Pakistan is such that almost all political parties understand what is wrong with the economy and how to fix it. However, when in opposition, they tend to oppose the same corrective measures they sought to implement while in power. This cyclical behaviour aggravates the country’s economic woes, making it difficult to achieve lasting reforms.

Almost all political parties understand what is wrong with the economy and how to fix it. However, when in opposition, they tend to oppose the same corrective measures they sought to implement while in power, and vice versa. This cyclical behaviour aggravates the country’s economic woes, making it difficult to achieve lasting reforms.

Another dimension is the issue of elite capture and rent-seeking behaviour, where powerful business and political elites manipulate fiscal policies to serve their interests. Even in the current budget, certain loopholes benefit a small segment belonging to the sectors that were touted to be taxed at any cost, while the broader population bears the brunt of austerity measures.

The budget can and should address economic inequality, and promote social justice. Budgets (federal and provincial) that prioritise social protection, education and healthcare can help reduce economic disparities and promote inclusive growth. However, in our case, resource allocation in federal and provincial budgets often reflects patronage politics, where funds are directed to projects that benefit specific political constituencies. This leads to inefficiencies and inequities in public spending, as resources are not necessarily directed towards areas with the greatest need or potential for development, leading to regional disparities.

Greater public involvement and transparency in the budget-making process can lead to more equitable and effective budget outcomes. However, it is easier said than done in Pakistan. Historically, even the members of the treasury benches have been unaware of the budget proposals, let alone engaging the public. This was evident on the budget day when the PPP, an important ally of the coalition government, publicly complained that they were not consulted on budget-making.

Political instability and uncertainty can also disrupt budget implementation. Political instability can lead to short-term fiscal measures focusing on immediate political gains rather than long-term economic stability and growth. Stable governance and consistent economic policies are crucial for effective budget management.

While the federal budget aims to address critical economic issues, the true test will be its implementation. The people of Pakistan, already bearing the brunt of inflation and economic instability, hope for effective measures that will lead to a better future. If these measures fail, it could erode public trust in the state and the system, creating a lose-lose situation.

Finally, the efficacy of any budget hinges not merely on its ambitious goals but on the practicality and enforceability of its policies. Addressing structural issues, ensuring robust tax collection, fostering a conducive environment for investment and prioritising human development are critical. Without practical enforcement and genuine commitment to these reforms, the budget's potential to drive sustainable growth and improve living standards may remain unrealised. The real test lies in translating policy into action, where intentions meet reality.

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

The balancing act