An economic crisis would usually emerge at the completion of the term in the past but this time the meltdown has taken place when the PTI-led government was ousted by the Pakistan Democratic Movement (PDM) through a no-confidence motion
akistan’s struggling economy is sliding towards the brink of default on repayment of its external loans and obligations mainly because of foreign currency reserves depleting at an alarming pace.
This time, the lingering crisis is multi-faceted owing to persistent uncertainty on the political front coupled with macroeconomic instability. It’s for the first time in the country’s history that both crises have hit simultaneously, making it hard for policymakers to find out solutions and implement those without any delays.
A crisis-like situation would usually emerge at the end of the term of an outgoing government in the past. This time the meltdown has taken place just as the Pakistan Tehreek-i-Insaaf (PTI) led government was ousted by the Pakistan Democratic Movement (PDM) through a no-confidence motion.
The budget deficit, considered the most significant marker of economic woes, ballooned up to 7 percent of gross domestic product (GDP) on average in the last four years. This ploughed the seeds of perpetual economic and financial instability in Pakistan. The budget deficit is defined as the inability of a government to generate taxes from the rich and plunge into an unbridled spending spree for providing surplus money to the affluent and rich segments of the society. With extra money in their pockets, the rich spend more on imported goods. This results in a gaping current account deficit. This crisis erupted mainly from the rising budget deficit. It then converted into the increased current account deficit and now it is going to cause a blow to the economy making it slide towards collapse and default.
Pakistan’s budget deficit is projected to stand at Rs 5,000 billion, equivalent to 7.4 percent of GDP for the outgoing fiscal year following a rebasing of national accounts. This rebasing of national accounts resulted in jacking up the size of the economy from Rs 55 trillion to Rs 67 trillion for the current fiscal year ending on June 30. The budget deficit was initially envisaged in the range of 6.3 percent of GDP but the government provided unfunded fuel and energy subsidies. This caused a hike in the budget deficit in the range of Rs 1,000 billion mainly through inability to fetch petroleum levy and get due GST as well as subsidy amounts. The budget deficit climbed from Rs 3,195 billion to Rs 5,000 billion for the outgoing fiscal year.
The current account deficit climbed to $13.8 billion for the first ten months (July-April) period of the current fiscal year and might be up to $16-$17 billion by the end of June. At a time of yawning twin deficits known as the budget deficit and current account deficit, the foreign currency reserves held by the State Bank of Pakistan (SBP) decreased and now stand below the $10 billion mark. The foreign exchange reserves have depleted by more than $6.5 billion in the last 10 weeks, clearly indicating that a default is knocking at our doors if Islamabad fails to manage substantial dollar inflows in the weeks and months ahead.
Now, what are the options available to the government to avert a balance of payment crisis? A revival of the stalled IMF programme is essential because, without stamped approval of the Fund, the dollar inflows from multilateral and bilateral creditors get choked.
Now, Minister for Finance Miftah Ismail has confirmed that the Chinese have agreed to a commercial loan roll over of $2.3 billion. He is also hopeful that the IMF’s staff-level agreement will be struck by mid-June, after the announcement of the budget for 2022-23.
The International Monetary Fund (IMF) is giving a recipe for suppressing demand through tightening of fiscal and monetary policies in the name of achieving the objective of stabilisation.
Pakistan’s budget deficit is projected to stand at Rs 5,000 billion, equivalent to 7.4 percent of GDP for the outgoing fiscal year following a rebasing of national accounts. This rebasing of national accounts resulted in jacking up the size of the economy from Rs 55 trillion to Rs 67 trillion for the current fiscal year ending on June 30. The budget deficit was initially envisaged in the range of 6.3 percent of GDP but the government provided unfunded fuel and energy subsidies.
The boom and bust cycles continue to haunt the economic managers. The growth rate surpassed the 5 percent mark in two consecutive years and touched 5.97 percent for the outgoing fiscal year 2021-22. This was followed by the surfacing of imbalances on internal and external fronts.
The revival of the IMF programme depends upon the government’s capacity to pursue structural reforms coupled with suppressing of demand. On the fiscal front, Islamabad will have to implement adjustments of almost 2 to 2.5 percent of the GDP in the coming budget. This means that the government will have to take measures for making adjustments close to Rs 2,000 billion through a combination of fetching additional revenues and curtailing unnecessary expenditures. The government had already hiked POL prices.
The IMF is asking Islamabad to end its petrol subsidy of Rs 39 per litre, diesel oil subsidy of Rs 53 per litre, jack up electricity tariff by Rs 7.91 per unit through an increase in base tariff and fuel price adjustments, and hike gas tariff by 20 percent on average to demonstrate its seriousness to undertaking much needed ‘reforms agenda’ under IMF advice.
The Fund has sought a steep and rapid adjustment on the fiscal front in order to bring the economy back on the stabilisation path.
The announcement of a budget (2022-23) aligned with IMF policies will set the stage for the stabilisation path.
The IMF is asking for jacking up FBR’s tax collection target to Rs 7.5 trillion for the next budget and reducing development spending as well as the subsidies. The government will have to impose direct taxes on the rich by making adjustments in personal income tax (PIT) slabs and jacking up the rates. The government also wants to impose a levy on the pattern of Super Tax in the coming budget to fetch additional revenues.
The IMF is asking the authorities to bring down the budget deficit from 7.5 percent of GDP to less than 5 percent of GDP for the coming budget. This requires an adjustment of 2.5 percent of GDP to ensure fiscal sustainability.
The FBR will have to collect additional taxes of Rs 1,200 to Rs 1,500 billion in the next fiscal year for making the fiscal framework sustainable and prudent in line with the IMF prescriptions.
The government will have to pass on the POL price burden to consumers after the announcement of the coming budget.
Despite raising POL prices by Rs 30 per litre, a huge subsidy is being paid. It’s ironic that the sale of petroleum products rose by 28 percent in May 2022 in comparison with the same month in the last fiscal year. The POL products sales increased by 18 percent in the first 11 months of the current fiscal year compared to the same period of the last financial year.
How many countries took the decision to freeze POL prices and provide subsidies? The reply is none but Pakistan. Only in Pakistan was politics allowed to override economic decision making resulting in increased consumption of POL products at a time when prices in international markets were sky high.
Amid rising inflation that has already touched 13.7 percent for May 2022, the inflationary pressures will go up further in the wake of administrative costs of fuel and energy and the imposition of more taxes under the IMF’s prescriptions. Now the government will have to allocate resources for providing targetted subsidies to the poor and vulnerable classes.
The writer is senior staff reporter, The News International, Islamabad