The budget 2023-24 envisages 23.7 billion dollars of external borrowing – an amount premised on a rupee dollar parity averaging 290 rupees to the dollar – a condition that would necessitate not being on an International Monetary Fund (IMF) programme, given that the Fund has repeatedly urged authorities to restore the proper functioning of the foreign exchange market, and cited it as one of the key impediments to the successful completion of the ninth review under the 6.5 billion dollar Extended Fund Facility programme.
With the mandatory ninth review stalled since November 2022 (with time running-out as the IMF has indicated it would not extend the duration of the programme) coupled with all three international rating agencies downgrading Pakistan’s sovereign debt to junk status (linked to not being on a Fund programme) to procure the 6 billion dollars budgeted from commercial loans/sukuk/ Eurobonds at affordable rates will be next to impossible.
The government has budgeted 15.3 billion dollars as foreign loans and repayment plus repayment of short term credits and therefore it is imperative that either this amount is earned from (i) a positive trade balance (which registered negative 25.79 billion dollars July-May 2022-23) mainly due to massive import contraction through administrative measures.
The government has yet to undertake a cost benefit analysis of these measures, which have overwhelmingly negatively impacted on the general public – as the cost of a significant reduction in imports of raw materials/semi-finished goods led to a decline in large scale manufacturing growth (negative 9.39 percent for the first ten months of the current year), thereby fueling unemployment and inflation estimated at 38 percent in May 2023; and (ii) remittance inflows declined by 3.7 billion dollars compared to the year before due to the inane policy of artificially controlling the interbank rupee rate.
But are the budgeted 9.2 trillion rupee domestic taxes for next year achievable as failure to achieve this target may well raise the government’s need to borrow domestically – another inflationary policy that was implemented with impunity in the outgoing fiscal year? The answer lies in the five assumptions made by the Federal Board of Revenue (FBR) to attain the target of 9 trillion rupees.
First, an average interbank rupee dollar parity of 290 rupees which, as stated above, appears unlikely if the country is on an IMF programme – be it the ongoing programme or negotiate a new one, the only two options being considered by the current economic team leaders, and supported by domestic independent economists, multilaterals and bilaterals.
Second, import growth of 8.9 percent in dollars equivalent to 32.4 percent appreciation in Pakistani rupees. This would necessitate releasing the existing administrative controls on imports which would fuel the wheels of industry as import of raw materials and semi-finished products would become available, thereby increasing employment opportunities.
However, this would also imply that imports would rise by 4552.9 million dollars during the first eleven months of next year (to 55,709 million dollars) compared to this year while they would rise by 3,899,942 million rupees next year compared to the outgoing year.
Past experience shows that a rise in imports is not followed by a rise in exports but a rise in the trade deficit that, twenty-three times in our short history, has propelled the country towards an IMF programme (of an average duration of three years)
Third, inflation of 21 percent. This appears to be the most unrealistic projection with the Consumer Price Index (CPI) registering a high of 38 percent in May 2023 and rising with the massive rise in domestic borrowing by the government in the outgoing year (to cover the shortfall in foreign aid inflows due to the stalled IMF ninth review); and injected into the economy for current non-development expenditure (a trend that is even more pronounced in the budget 2023-24).
While unlike past budgets next year’s budget documents do not have any medium- term key macroeconomic forecast as a percentage of GDP including inflation yet the FBR claim of 21 percent for next year may be premised on two other sources that obviously lack credibility: (i) Monetary Policy Statement issued by the State Bank of Pakistan on 12 June 2023 notes that “Committee expects domestic demand to remain subdued amid tight monetary stance, domestic uncertainty and continuing stress on external account. In this backdrop, and given the declining m/m trend, the MPC views inflation to have peaked at 38 percent in May 2023, and barring any unforeseen developments, expects it to start falling from June onwards.”
The CPI has risen each month year on year since November 2022 – from 23.8 percent to the current 38 percent. The same trend is evident for core inflation year on year - urban registered 14.6 percent in November 2022 to 20 percent in May 2023 and rural rose from 8.5 percent in November to 26.9 percent in May 2023.
So much for blaming it on the Fund or Dar’s predecessors. SBP maybe basing its overly optimistic inflation projection for next fiscal year perhaps on sensitive price index (SPI) which registered a decline in the rate of rise from 42.67 percent in the week ending 1 June to 39.26 percent in the week ending 8 June – a projection well above the 21 percent projection for the year; (ii) last minute massive upward revision of salaries and pensions in the budget were not taken into account by the MPC as the budget was presented a day later therefore wage push inflation would also be significant; and (iii) while international donor agencies projection for next year is inconclusive as it will be adjusted in the two scenarios notably if the ninth review is successful (highly unlikely as violations of the agreement were identified by the Fund post sharing of the budget) as it would include the impact of the agreed conditions or as indicated by Fund staff suspended end-June 2023.
However, understating inflation is where the FBR will be able to make good on its target because a rise in inflation automatically raises revenue collections given that sales tax is a percentage of the total price of a product. Needless to add, a ten percent differential between the projected inflation and actual inflation would generate at least 300 to 400 billion rupees more in tax revenue though this will be in nominal terms.
Fourth, a GDP of 3.5 percent, which is doable as the low base of 0.3 percent for the outgoing year may make it possible however government policy will dictate whether this growth will be consumption led or productivity led.
The final assumption of large scale manufacturing growth of 3.6 percent against negative 9.39 percent July-April 2023 indicates the government is projecting higher productivity growth – an assumption that would require considerable tweaking of existing budgetary proposals as well as policy measures.
To conclude, one would have to support the Fund assessment of the massive damage to our economy from Dar policies – controlling the interbank rupee rate that continues to lower remittance inflows, a budget that fails to undertake urgently required reforms pledged by Pakistan in the ongoing programme but repeatedly violated by the incumbent finance minister and last, but not least, the insistence by the three friendly countries that Pakistan must remain on the Fund programme as it provides them a comfort level that their pledged deposits will not be frittered away through existing inane policies – more a matter of geo-economics rather than geo-politics.
Copyright Business Recorder, 2023
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