The editorial published in this paper yesterday (‘Budget 2023-24: nobody’s budget’, June 9) correctly pointed out that the finance minister’s attempt to please everyone while preparing the federal budget for 2023-24 ended up displeasing everyone.
Let us see why. First and foremost, the objectives of this budget. Here I am setting aside political economy considerations for a while. The documented guiding principles for the budget are aimed at achieving several goals. These include encouraging industrialization and investment, incentivizing the agriculture sector, promoting energy efficiency and conservation, and advancing digital services.
The industrial sector has been grappling with challenges such as import restrictions and uncertainty surrounding foreign currency exchange rates. While the budget proposes some adjustments to regulatory and customs duties, it falls short of addressing the significant hurdles Pakistan’s industrial sector faces today.
To encourage the adoption of renewable (solar) energy, boost IT exports, and strengthen the agriculture sector, the budget suggests implementing measures such as duty-free import of machinery, equipment, and inputs for solar energy, as well as selected IT-enabled services. Additionally, there are proposals to relax customs and sales taxes on agricultural inputs like seeds, fertilizers, and certain machinery. The budget also proposes extending concessionary loans, particularly in the agriculture sector, which may have positive implications for achieving food self-sufficiency, reducing imports, and fostering rural development.
While the guiding principles outlined in the budgetary papers hold theoretical promise, there is a significant challenge to address. After allocating the provincial share from the federal divisible pool, the federal government is left with a projected net revenue of Rs6,887 billion. However, the projected federal expenditures amount to Rs14,460 billion, resulting in a deficit of Rs7,573 billion.
The government hopes that the provinces will leave some unspent deposits with the State Bank of Pakistan (provincial surplus), which it has budgeted at Rs650 billion. Factoring in this surplus, the government projects a deficit of Rs6,923 billion or an overall fiscal deficit of 6.54 per cent of GDP. Nevertheless, historical trends indicate that provinces rarely leave any surplus, implying that the actual deficit will likely be higher than the projected figures.
Like its predecessors, the current government plans to bridge the fiscal deficit by borrowing from external and domestic sources. These sources include project and programme loans from multilateral and bilateral development partners, such as the World Bank, the Asian Development Bank and China; the Saudi Arabian oil facility, which provides deferred payment for oil imports; Euro Bond and Sukuk bonds, which are issued in international capital markets; and deposits in the state bank from friendly countries such as China and Qatar.
However, many of the funding sources for Pakistan are contingent on the country’s adherence to the IMF programme which demands fiscal consolidation, structural reforms, exchange rate flexibility, and ironically financial assurances from the same friendly nations that require a letter of comfort from the IMF to extend their support to Pakistan.
Simply put, the federal government spends more than twice as much as it earns. To cover this gap, the government needs to borrow money, but it can only do so if it follows the IMF’s rules. Otherwise, it risks losing access to these sources of financing and the crisis worsens.
One way to improve this situation would be to increase revenue, which usually means imposing new taxes. However, since the next general elections are approaching, the government has avoided proposing any new taxes in this budget. Moreover, the government has not announced any plans to tax the ‘known’ tax-evading sectors, such as agriculture, real estate, and wholesale trade; or to privatize the 212 public-sector enterprises that are running at a loss, such as Pakistan International Airlines, Pakistan Steel Mills, Pakistan Railways, and energy distribution companies etc. For comparison, the expected revenue from privatization is only Rs15 billion, which is less than 0.2 per cent of the total budget.
Let us examine this budget from another perspective. Remember, the federal government’s expected income: Rs6,887. Its major expenditures can be categorized into ‘Four-Ds’. The first is debt service and foreign loan repayment, which amounts to Rs7,303 billion. The second is defence affairs and services, which costs Rs1,804 billion. The third is the day-to-day running of civil government, including pay and pensions, which requires Rs1,475 billion; the federal pensions are Rs761 billion, and salaries Rs714 billion. My fourth ‘D’ is development, which includes grants, transfers, subsidies, and the federal public sector development programme (PSDP). All these expenses total Rs2,024 billion.
This means that for the first time in Pakistan’s history, its federal revenue is not enough even to pay its debt obligations. Assuming that the exchange rate (Rs290 per dollar) used to prepare this budget and the interest rate remain constant, we would have to borrow an additional Rs416 billion (Rs16 billion more than the budgeted amount for the Benazir Income Support Programme, which provides cash transfers to poor households) just to service our debt or the first ‘D’ on my list.
After borrowing to pay for debts, the government will have to borrow even more to take care of defence, civil administration, and development. This will result in more debt and more debt servicing in next year’s budget.
But it is important to note that no government can compromise on debt repayment/servicing, defence needs, and the functioning of the government. The only discretionary expenditure is the fourth ‘D’ – development. Therefore, development is always the first to be cut when governments have to reduce their fiscal deficit.
I am thrilled to see the budgeted numbers for the federal PSDP. The federal PSDP includes spending on infrastructure, social sectors, regional development, and other public goods. The PSDP has mainly been aligned with the government’s development framework of five ‘Es’ – exports, equity, empowerment, environment, and energy, as well as reconstruction and rehabilitation of flood-affected areas to regain economic growth momentum. It is higher than the revised PSDP for the current fiscal year 2022-23, which was Rs900 billion. However, I am also mindful that most of it will remain in the budget books, as whatever we borrow will be spent on meeting the first three ‘Ds’.
Some of the schemes in the PSDP must remain unspent. For instance, discretional development funds to parliamentarians through the ‘Pakistan Sustainable Development Goals and Community Development Program’. It has been criticized for being opaque, discretionary, patronage-based, and misaligned with Pakistan’s SDGs priorities. Despite these criticisms, this scheme is to continue. Moreover, the federal government has also approved the visibly ‘pre-election’ annual development provincial plans (ADPs) of Punjab and Khyber Pakhtunkhwa.
Compared to the revised costs of ADPs in Punjab and KP, Rs702 billion and Rs340 billion respectively in the current fiscal year, their caretaker governments have proposed ADPs worth Rs426 billion and Rs268 billion respectively for the first four months of the next fiscal year. If we extrapolate these numbers for the whole fiscal year, the ADP cost for Punjab (Rs1,278 billion) will exceed the total federal PSDP.
I understand the importance of Punjab in the current political landscape. However, spending money lavishly when the country is facing one of the worst fiscal deficits in its economic history would only create another kind of deficit: a trust deficit between the external partners and the government. Almost all of our lenders have emphasized that we have to put our house in order to avoid a fifth ‘D’: disappointment and despondency when they refuse to bail us out.
However, let me conclude by appreciating that, despite some appetite for lavish spending, the current budget is not as bad and expansionary as the pre-election 2018 budget of the PML-N. When there is no money in any case, there is little the finance minister can offer. Moreover, one should not take the budget very seriously as I see it getting revised at least twice (immediately after the elections, and possibly before June 30 to address the IMF’s objections on its calculations). One hopes that after revisions, it will come close to our economic realities.
Dr Abid Qaiyum Suleri, "What’s in Budget 2023-24?," The News. 2023-06-11.
Keywords: Economics , Economic growth , Economic history , Revenue , Exports , Saudi Arabia , China , GDP , IMF