A mission-oriented Budget

Never before in 75-year history of the country has Annual Budget been so important. Now that Pakistan has struggled to restart the International Monetary Fund (IMF) programme even though it implemented virtually all of its austerity-based procyclical programme conditionalities, it may be time to prepare a Budget that internalizes a no-IMF programme reality for the next fiscal year, approaches meeting the debt repayment requirements beyond this June – for which apparently financing/rollover support is available with the government.

Accordingly, Budget will need to be appropriately based on understanding that debt will need to be rescheduled/restructured, and that inflation will have to be tackled more though fiscal/governance policy, given the policy of monetary- and fiscal austerity has already led to lot of sacrifice of economic growth, and buildup of domestic debt, while inflation has continued to increase since it has significant supply-side and over-profiteering influence.

A mission-oriented Budget needs to be given because a routine, run of the mill Budget will not be able to sustain a non-austerity, counter-cyclical policy, which is badly needed since economic challenges are huge, and political instability has kept significant the element of uncertainty, which has a negative fallout for level of economic exchange for both domestic markets and exports, domestic resource mobilization, transaction costs, and investment decisions.

Hence, both the ministry of finance and State Bank of Pakistan will have to coordinate meaningfully, so that a matching monetary and fiscal policy basis is in place for delivering such a mission-oriented, non-austerity and counter-cyclical Budget can be given.

Firstly, the policy rate needs to be decreased and SBP and government should plan the Budget accordingly. Hence, the government should use the Budget to significantly move towards meeting its financing needs through a broad-based, and progressive taxation policy, and not from private savings or in other words, bank/non-bank borrowing/loanable funds.

The government is currently the biggest borrower, and reduction in demand from its side will, in turn, allow a significant reduction in policy rate, which, in turn, will also lower its domestic debt borrowing needs, given lower interest rates.

Reduced policy rate will provide the government greater fiscal space to make counter-cyclical development expenditure, while together with lesser government borrowing, will enable greater private sector lending, and that too at lower rates, giving in turn much-needed impetus to their purchasing power. Higher public and private investment will allow boosting economic growth, which has nose-dived and dipped deeply over the last twelve months or so, and lower interest rate will also help improve inclusivity, and inequality.

Taking on board SBP, the government should also take a conscious decision to not chase foreign portfolio investment (FPI), whereby the current policy of pretty much increasing policy rate – in addition to raising it to curtail aggregate demand – when main central banks like the US Federal Reserve, or the European Central Bank (ECB) raise policy rate – which they have been raising quite drastically for many months now to check high inflation, although going over-board given a strong supply-side nature of inflation – to compete for FPI or ‘hot money’ to basically buildup foreign exchange reserves.

Raising policy rate for the specific purpose of attracting otherwise highly fickle/volatile FPI has been counter-productive for broader negative consequences of high policy rate for both macroeconomic stability, and economic growth.

Through the channel of raising cost of borrowing capital for exports, they also make them both less competitive internationally – not to mention the negative consequence on exports volumes – and hence, reduction in exports reduces a rather much reliable source of foreign exchange reserves buildup.

Moreover, a higher policy rate also raises the external debt burden for the country, which is a highly important focus area for the upcoming Budget, given Pakistan has huge external debt liabilities over the next few years.

Also, the buildup of reserves will also improve the strength of the rupee against the US dollar, which in turn will give relief on the import payments, and will also help weaken the otherwise strong imported inflationary channel, especially in the areas of food – particularly wheat, given large import needs in the wake of war in Ukraine, and unprecedented floods in the country last year – and energy.

Secondly, Budget needs to make the economy more resilient. When the pandemic hit back in around early 2020, the country had little capacity of the public health sector in both rolling out inoculation, dealing with flux of patients, and weak capacity to prepare vaccines. Given the likelihood of more pandemics, due to the underlying mainly climate change-induced Pandemicene phenomenon, it is important that health sector receives strategic investments from both the upcoming federal budget, but also provincial budget since health is mainly a provincial subject after the 18th Constitutional Amendment.

Moreover, last year’s largely climate change-induced catastrophic floods brought to surface serious infrastructural shortcomings like drainage canals, supportive ecosystems, overall disaster preparedness in terms of early warning systems, machinery, and technical staff.

Since Pakistan is one of the top ten climate vulnerable countries with low forest cover and large glaciers, and given the fast-unfolding climate change crisis, it is highly important that climate change related investments are budgeted.

Here, there could be introduction of a special climate change/pandemic tax on the windfall profits and high-income groups to finance this, not to mention improving economic diplomacy to unlock much greater climate finance from rich countries, and in pushing IMF, as has been suggested by PM of Barbados, Mia Mottley in the ‘Bridgetown Initiative’, for yearly issuance of climate-related special drawing rights (SDRs) by IMF to highly climate vulnerable countries.

A May 17, 2023 ‘Al Jazeera’ published article ‘Rich nations urged to pay $13 trillion in pledges to Global South’ pointed out the serious lack of provision of climate finance by rich countries, which they had pledged over a decade ago, in the following words: ‘Rich G7 nations owe poor ones an estimated $13 trillion in unpaid development aid as well as support in the fight against climate change, British charity Oxfam says.

Instead of fulfilling their obligations, the International Group of Seven nations and their banks are demanding debt repayments of $232m per day, the organisation said on Wednesday. …Developed countries promised in 2009 to transfer $100bn annually between 2020 and 2025 to vulnerable states hit by increasingly severe climate-linked impacts and disasters – but that target was never met.

The G7 leaders are expected to reaffirm their climate goals during a summit in Hiroshima, Japan, from May 19-21.Developing countries say they need far more support from rich nations – responsible for most greenhouse gas emissions – otherwise they cannot afford to cut CO2 emissions.’

Moreover, mission-oriented economic diplomacy is also pursued to push the IMF to provide meaningful SDR allocation – but with better allocation criterion – on the lines it provided back in August 2021 – to allow developing countries to have more fiscal space, less pressure on foreign exchange reserves, and weaker imported inflation to effectively deal with extraordinary global crises like pandemic, high borrowing costs, difficult debt repayments situation faced by a number of developing countries, including Pakistan. This support will also support the country in making a much-needed non-austerity, counter-cyclical Budget.

Here, a much more focused, well-articulated role of Ministry of Foreign Affairs also needs to come to the fore, with better coordination in this regard with the Ministry of Finance, Ministry of Economic Affairs, and State Bank of Pakistan. This in turn is another aspect of a mission-oriented approach that the economic policy needs to take.

Copyright Business Recorder, 2023