An exercise in futility at best, extreme folly at worst, are the most appropriate epithets for the budget 2023-24 delivered by Finance Minister Ishaq Dar yesterday.
The budget documents do not contain the macroeconomic and fiscal framework that provides key indicators for the outgoing year (growth, inflation, FBR tax as percentage of GDP) and projects them for the next three years.
Fiscal deficit, primary deficit (total and as a percentage of GDP) and projections for next year alone are included in the budget in brief rather than in the Medium Term Budgetary Statement which contains generalities such as “increasing revenues over medium term is critical to meet burgeoning expenditures” and “the government is ensuring rationalization of non-essential spending with austerity measures in place.”
The rupee exchange rate used is 284 rupees to the dollar, close to the existing interbank rate today, however with the IMF resident representative in Islamabad stating that one of the three pre-conditions for a staff level agreement on the pending ninth review is proper function of the foreign exchange market it is baffling how the government can insist that it has met all pre-conditions.
The Prime Minister stated before the budget was presented to parliament that he expects the staff level agreement within the week.
This sentiment is perplexingly shared in the budget documents which envisage 696 million rupees from the IMF as well as a rise in external loans to 68,745,426 million rupees next fiscal year from the revised estimates of 3,208,140 million rupees in 2022-23 – a rise of 114 percent contingent on the staff-level agreement and budgeted almost 25 percent higher for next year compared to the budgeted amount for the outgoing year.
External loans envisage zero from Saudi Arabia oil facility but a doubling of the Kingdom’s time deposit – from 447 billion rupees in the outgoing year to 870 billion rupees next year – and SAFE China Deposit from 596 billion rupees in the current year to 1.16 trillion rupees next year. It is unclear whether these deposits will be withdrawn if the ninth review agreement is not reached.
The budget, as widely expected, purports to generate revenue from sources that are unrealistic (due to an overstated growth rate in tax paying sectors, shrinking capacity of existing tax payers due to 38 percent consumer price index May 2023, negative 8.1 percent large scale manufacturing growth July-March 2023 and legal challenge to some revenue measures) and envisages an even greater rise in current expenditure than usual (a major contributory factor to current runaway inflation), a foregone practice in an election year, as well as development expenditure which is even more overstated than in past years almost certainly due to the forthcoming elections (though it is likely to be mercilessly slashed to ensure a more sustainable budget deficit – a consideration that is more relevant when the country is on an IMF programme).
Given the ongoing severe economic impasse simply balancing the two sides of the budget’s accounting sheet without structural reforms would be rightly challenged not only by domestic economists but more disturbingly by the IMF irrespective of whether the ongoing programme will reach its scheduled end or suspended with the next programme to be negotiated by the next elected government.
While at the start of the speech Dar engaged in his usual self-aggrandizement during his previous tenure, based on economically severely flawed comparative analysis of 2017 and 2022, he placed the entire onus of the ninth review still pending on Shaukat Tarin’s calls to the Punjab and Khyber Pakhtunkhawa finance ministers urging them to inform the IMF that the agreed provincial surplus would not be forthcoming due to the floods (an obvious fact that accounts for the budgeted provincial surplus of 750 billion rupees revised downward to 459 billion rupees for the outgoing year).
Dar yet again ignored the fact that he inherited from his predecessor Miftah Ismail a budget document that was approved by the Fund, that led to augmentation and extension of the scheduled end of the programme and a tranche release in the first week of September.
Where did Dar go wrong compared to what was budgeted by Ismail, his predecessor and fellow party member, for 2022-23: (i) a budgeted deficit as a percentage of GDP of 4.9 percent was negative 7 percent by year end with the primary budgeted deficit of 0.2 percent revised to negative 0.5 percent; (ii) Dar exceeded current expenditure by a whopping 1.819 trillion rupees with the bulk associated with a rise in mark-up payments due to a massive rise in domestic debt that not only crowded our private sector borrowing (which declined by 80 percent during the first ten months of the year) but also fueled inflation to 38 percent in May; subsidies were doubled - from the budgeted 553 billion rupees to 1.103 trillion rupees, again an inflationary policy – the highest raise was in untargeted subsidies notably to Wapda/Pepco a raise of 222 billion rupees from what was budgeted, KESC by 113 billion rupees, petroleum by 31 billion rupees; (ii) additional for floods was disbursed 44 billion rupees though it is unclear whether this is amount is included in the Benazir Income Support Programme which was revised upward to 408 billion rupees against the budgeted 360 billion rupees, a rise necessitated by the floods and approved by the IMF; (iii) total budgeted Public Sector Development Programme (PSDP) of 727 billion rupees was as per budget documents revised to 714.17 billion rupees though this data is yet to be backed up by the Ministry of Planning, Development and Special Initiatives website; and (iv) tax revenue had a shortfall of 270 billion rupees.
The budget for next fiscal year projects a current expenditure rise of 26.5 percent from the revised estimates of this year, so much for austerity, (and a rise of 53 percent from what was budgeted for the outgoing year), a PSDP 31 percent higher (though Dar revealed that the provincial PSDP is for four months), with revenue from direct taxes to rise by 25.5 percent (with the bulk from withholding taxes in the sales tax mode, an indirect tax, whose incidence on the poor is greater than on the rich and this in spite of exhortation by the Auditor General that FBR should desist from inaccurately crediting sales tax under direct taxes) and indirect taxes budgeted to generate 25 percent additional revenue again the bulk from sales tax.
Benazir Income Support Programme is budgeted to rise to 450 billion rupees only from the revised estimates of 408 billion rupees – unlikely to meet the needs of the growing ranks of unemployed.
Federal Board of Revenue’s revenue projections for next year are premised on 8.9 percent import growth in US dollars, 32.4 percent growth in rupees (which would imply a considerable easing of administrative measures that would be a challenge as reserves are at present 4 billion rupees, not enough for even a month of imports), average exchange rate of 190 rupees to the dollar (that would necessitate the continued control of the rupees external value without the reserves to intervene in the market), inflation of 21 percent (unlikely in the face of the massive rise in the budgeted salaries and pensions that would fuel wage push inflation) , GDP growth of 3.5 percent (maybe possible due to the low base this year) and LSM growth of 3.6 percent (which appears optimistic given the negative 8.1 percent growth during the first ten months of the year) to generate total 9 trillion rupees tax revenue for next fiscal year.
Dar leaves for his successor a set of budgetary expenditure and revenue targets that would be an impossibly difficult sale to the Fund not only in terms of being unrealistic but also in terms of his projection of an unsustainable negative 6.5 percent fiscal deficit for next year premised entirely on the restoration of the Fund programme that has close to zero probability with this budget.
Copyright Business Recorder, 2023
Comments
Comments are closed.