Even as the Pak economy is faced with daunting challenges, the budget for FY
2022-23 is neither innovative nor bold enough to address the structural issues
which are proving a hurdle to economic revival of the country. The economy which
has been continuously facing twin deficit (fiscal deficit and current account deficit)
in the recent past while inflation is getting out of control with an imminent threat of
looming default. The authorities should have endeavoured to take up bold
structural reforms, but the budget disappointed.
It came as a shock to both international and domestic observers as well the
International Monetary Fund (IMF) that Finance Minister Miftah Ismail’s USD 47
billion federal budget for the ensuing fiscal year has done little to address the
fundamental problems facing the economy. Since Pakistan’s traditional partners
are dithering from bailing it out, its only hope is on revival of the scuttled Extended
Fund Facility of the IMF to avert the default, but the IMF expressed its
dissatisfaction and unhappiness over the measures in the budget to meet its
conditionality to revive the USD 6 billion funding.
Although Islamabad subsequently took some tough measures, it failed to satisfy
the IMF. Pakistan’s proposals to mobilize more revenue in the budget were
inadequate according to the IMF. The country needed more revenue efforts as it
faces default and is short of PRs 3 trillion in tax revenue and USD 15-20 billion in
foreign exchange to avert it. The tweaking up of tax rates and the power tariffs
along with reduction in subsidies in the budget proposals would be inadequate to
meet the IMF conditionality. The imposition of super tax on 13 big industries and
petroleum development levy of PRs. 50 per litre besides the budgetary proposals
like raising minimum tax bracket for small businesses, increase in salary class
taxes, expansion of tax net for traders may partially meet the IMF conditionality but
there would be increasing public outcry and protest as the people are already
reeling under rising cost of living and falling incomes.
As far as shortage of foreign exchange reserves is concerned, China’s decision to
rollover USD 2.3 billion of Pakistani commercial debt and Riyadh’s decision to
enhance its oil facility on deferred payments from the current USD 1.2 billion to
USD 3.6 billion could offer Islamabad only temporary relief. The UAE offer to buy
minority shares of 10-12% in publicly-listed government-owned companies at a
negotiated price and a seat in each of the firm’s boards may not be palatable
bargain, given the vastly polarized political scenario in the country.
Driving the Pak economy with the help of external doles is unsustainable and
Pakistan desperately needs structural reforms. The IMF has raised objections to
Pakistan’s loans from China and arbitrarily high payments made to Chinese
independent power producers (IPP), suggesting Islamabad to renegotiate its
energy agreements with Beijing. Pakistan is obligated to pay more than PRs. 350
billion power dues to multiple Chinese IPPs operating in the country. IMF’s demand
follows Beijing’s rejection of modifying the conditions of agreements for projects
under the CPEC.
There are reports that the IMF intends to ban Pakistan from borrowing more from
China and in the wake of this, Islamabad’s plan to seek PRs. 7.9 billion from China
for CPEC projects is now likely to hinge upon the IMF recommendations.
A major part of the budget expenditure PRs 3,950 billion (USD 19.5 billion) – more
than 40% of the total federal budget expenditure (PRs. 9,502 billion; USD 47 billion)
is allocated for debt servicing which is 29.1% rise over the previous year.
The development expenditure is the main pillar of development, but federal public
sector development programme (PSDP) has also gone down by 19.2% to PRs.
727 billion from PRs. 900 in the last year’s budget. Further, provincial PSDP has
been reduced by 16%. Containing deficit is the need of the hour for the country
but its adverse effects on growth would be hard to avoid. This cut in the
development expenditure is to tame the fiscal deficit in the budget proposals.
However, the actual development expenditure is likely to be even lesser as these
cuts are among the foremost measures taken by the government to rein in fiscal
deficit.
Political uncertainties, corruption and poor governance have ruined the prospects
of the Pak economy to attract foreign investment. The inflow of Foreign Direct
Investment (FDI) to the country declined by 5% to USD 1.6 billion over the previous
fiscal year. Further due to rising inflation and prospect in fall in the rate of returns,
the profit outflow from Pakistan also increased to USD 1.6 billion during the first
eleven months of current year, against USD 1.496 billion in the previous year
period. Besides, the IMF has also reportedly asked Islamabad to set up an anti-
corruption task force to review all the existing laws that were aimed at curbing graft
in the government departments, indicating deeper flaws in administration.
Islamabad needs to take bold steps to address its structural problems, particularly
bottlenecks in economic growth to realize growth rate of 5.5%, tame inflation below
10% and to bring it further down besides addressing the problem of ballooning
current account deficit that surged by 131% month-on-month in May while
remittances fell to USD 2.3 billion in the same month. Islamabad needs at least
USD 41 billion in the next 12 months to repay debt and fund imports.
A combination of high inflation which already crossed 20% in the month of June,
steep decline in foreign currency reserves and mounting debt are serious
challenges that Islamabad is facing and are likely to continue unless a more holistic
approach is taken to resolve these issues. Pakistan is bearing the brunt of a global
energy crunch prompted by rebounding post-pandemic demand amidst a squeeze
on fuel supply due to the Ukraine – Russia conflict. The journey ahead is tough and
unfortunately the proposed budget is also unlikely to ameliorate the situation.
Interestingly, Dr Maleeha Lodhi, Pakistan’s ex-Ambassador to the USA and UK,
viewed that Pakistan has confronted and overcome even more imposing
challenges in the past, she emphasized that “What is needed today is political unity
and the will to address the structural economic problems to avoid financial crises
in the future; otherwise Pakistan will lurch from crisis to crisis that obviously has a
bearing on the country’s national stability and security.”