EDITORIAL: Federal budget 2023-24 was passed by the National Assembly on Sunday without any meaningful discussion on the 215 billion rupees additional taxes and 85 billion rupees cut in expenditures, but not in development expenditure, proposed a day earlier.
That key macroeconomic indicators have worsened considerably during the past eight months is patently evident from the data available on the website of the Finance Division, the Pakistan Bureau of Statistics and the State Bank of Pakistan: in September, growth was projected at between 3 to 4 percent, however, by fiscal year end, the projection is 0.03 percent (downgraded by all independent economists into the negative realm), in September 2022, the Consumer Price Index registered a rise of 23.2 percent against April 2023’s 36 percent, large scale manufacturing growth in September 2022 was plus 0.01 percent as against a very disturbing negative 25 percent in March 2023, remittance inflows declined by 3.7 billion dollars from the year before due to the flawed policy of controlling the rupee-dollar parity that accounted for the decline in foreign exchange reserves from 7859.7 million dollars in September 2022 to 3536.9 million dollars as of 16 June 2023.
Given this extremely distressing data, for the Finance Minister to claim in his concluding remarks that the country has achieved economic stability to a great extent may reflect his usual spirited defence of his own flawed policies, many of which are at variance with the agreement signed with the International Monetary Fund (IMF) and constitute one of the reasons behind the stalled ninth review - the other two being failure to secure external financing pledges and sustained control of the rupee-dollar parity, yet in no way does it absolve the rest of the members of parliament of their responsibility to represent the interests of their electorate, including PML-N parliamentarians tasked to defend the budget at all cost as well as the other ten coalition partners and the toothless opposition.
It is being speculated that the State Bank of Pakistan’s decision to withdraw all administrative import restrictions dating back to 20 May 2022 was under IMF pressure. This withdrawal will weaken the external rupee value further and bring the country closer to the threshold of default given the halving of reserves since August of last year – from 7809.9 million dollars on 19 August 2022 to 3536.9 million dollars today.
The seventh/eighth review IMF documents dated August 2022 reveal that the government had requested more time to eliminate all remaining administrative restrictions when the balance of payment conditions permit by the end of the programme at end-June 2023.
With just less than a week remaining till the end of the fiscal year the decision to withdraw all restrictions may have been an IMF precondition to the success of the ninth review, however, the staff exhortation that “more prominence should be given to exchange rate flexibility as a means to address balance of payment pressures rather than to administrative and exchange measures” remains unmet.
The 9 June 2023 budget announced a 9.2 trillion rupee tax target which Federal Board of Revenue (FBR) scaled down to 9 trillion rupees contingent on five rather challenging assumptions. First, large-scale manufacturing growth of 3.6 percent, a growth unlikely unless the government desists from raising input costs further, including borrowing costs as well as crowding out private sector credit (a decline of more than 80 percent was registered under this head in the outgoing year).
Second; import growth of 8.9 percent in dollar terms and 32.4 percent in rupee terms which may account for the decision to withdraw the administrative measures or else this FBR assumption would have compromised the revenue target at the start of the year; but without adequate reserves this is going to remain a challenge.
Third; average exchange rate of 290 rupee to the dollar is unrealistic which, as per independent economists, should be around 322 rupees to the dollar today and which is likely to further lose value next fiscal year.
Fourth; 3.5 percent real GDP growth may be possible, given an extremely low base this year. However, in the event that the IMF ninth review is declared a success, the expansionary pro-growth policies envisaged in the budget are likely to be reversed.
Finally, inflation of 21 percent, which is grossly understated, given today’s data, but which from a government perspective will give a boost to tax revenue. In other words, tax revenue will rise in nominal terms only.
The budget amendments with respect to additional taxes are not an attempt to widen the tax net, a long-standing demand of the lenders as well as the hapless public due to the sustained inordinate reliance on indirect taxes whose incidence on the poor is greater than on the rich, but an attempt to plug in a number that most likely has been agreed with the Fund.
And the 85 billion rupee cut in expenditure has yet to be identified but which too is an insignificant an amount to merit any comment as it is around 0.6 percent of total budgeted expenditure.
At face value these amendments (revenue rise or expenditure cut) are not enough to appease domestic economists’ serious concerns about the budget being anything other than an exercise in accounting.
Whether this will appease the Fund prompting it to declare the ninth review a success remains to be seen, however, whatever the outcome a non-partisan look at the state of the economy indicates without a shadow of doubt that the situation has worsened since 27 September 2022 and the insistence on implementing flawed policies that not only violate basic economic principles but also the agreement with the IMF, coupled with the periodic bursts of bravado, have placed an unbearable burden on the country’s general public as well as on the economy.
Copyright Business Recorder, 2023
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