Pakistan’s unsustainable budget deficits can be sourced to the never to be satisfied thirst of all administrations, past and present - civilian, military, hybrid, caretaker - to borrow to fund ever-rising current expenditures which, in turn, fuels the mark-up component of already unsustainable, though grossly understated, deficits at the time the budget is presented to parliament.
In the current year the budgeted mark-up as a percentage of current expenditure is 55 percent and 50.5 percent of the total budget. If past precedence is anything to go by, this percentage will be a lot higher by the end of the fiscal year. Last fiscal year, for example, mark-up as a percentage of current expenditure was budgeted at 45.3 percent but by the end of the year it registered at 52.4 percent.
Budget deficits (including grants) as per the International Monetary Fund’s (IMF’s) Stand By Arrangement (SBA) documents uploaded on the website in July 2023 indicate that they have been unsustainable since 2018-19: 7.9 percent in 2018-19, 7.1 percent in 2019-20, and 6.1 percent in 2020-21, lower than previous years due largely to the deferment of interest payments and principal due by G-7 countries to help debtor nations better deal with Covid19 challenges.
In 2021-22 the deficit was 7.9 percent attributed by the Shahbaz Sharif-led government to former Prime Minister Imran Khan’s unfunded subsidy on electricity tariff and on petroleum products effective 1 March 2022 till his removal on 9 April 2022 while conveniently ignoring the fact that the subsidy continued for an additional six and a half weeks, a duration that exceeded the five weeks that can be laid at the doorstep of Khan administration.
This subsidy was withdrawn in two stages - on 30 May and 6 June, a withdrawal that not coincidentally was an outcome of the then ongoing negotiations on the seventh/eight review under the then ongoing IMF’s Extended Fund Facility programme.
In 2022-23 the budgeted deficit was 4.9 percent while the revised (IMF) figure is 7.6 percent (a rise attributable to the devastating floods in the summer of 2022 which destroyed crops, livestock and infrastructure) as well as due to the patently flawed and economically extremely unsound Ishaq Dar policies particularly: (i) injecting 110 billion rupee unfunded tax payers’ money to subsidize electricity to incentivize exports that Dar announced on 6 October 2023, a little more than a week after he took oath as the country’s finance minister, while 33 million poor Pakistanis slept under the open sky due to the floods.
In spite of this largesse, exports declined from 31.7 billion dollars in 2021-22 to 27.7 billion dollars in 2022-23; and (ii) controlling the interbank rupee-dollar parity without the foreign exchange reserves to intervene in the market which led to multiple exchange rates and the resurgence of the hundi/hawala system accounting for a decline of 4 billion dollars in official remittance inflows compared to the year before. Cumulatively, the Dar months (27 September 2022 to end of the fiscal year on 30 June 2023) led to a loss of earned (defined as not borrowed) foreign exchange earnings of a whopping 8 billion dollars.
In addition, these two inane policies led to the cessation of all aid inflows that was preceded by a delay and then suspension of the ninth review under the then ongoing EFF, that was dealt the usual economically unviable way: slashing budgeted development outlay and not by reducing current expenditure outlay funded by an increased reliance on domestic borrowing.
This enhanced reliance to the tune of 3.7 trillion rupees last year was available at an extremely high rate of interest and its impact was twofold: (i) it fuelled inflation and (ii) crowded out private sector borrowing (which declined by 98.2 percent compared to the year before with a consequent negative impact on growth and employment).
Sadly, the caretakers have massively increased borrowing from the domestic market, as Pakistan’s rating remains frozen in spite of the recent staff level agreement reached on the first Stand-By Arrangement review, with State Bank of Pakistan website noting that the government borrowed 3.585 trillion rupees from 1 July 2023 to 8 December 2023. A more economically sound and humane approach would have been to reduce current expenditure.
IMF has projected a budget deficit of 7.5 percent for the current year, subject to meeting all SBA conditions that include: (i) administrative measures to increase the price of electricity and gas to achieve full cost recovery, though instead of implementing structural reforms to reduce sector inefficiencies the entire onus is being passed onto the consumers through higher tariffs, as in all previous administrations; and (ii) raising existing taxes to create fiscal space; however, 80 percent of all tax revenue is from indirect taxes whose incidence on the poor is greater than on the rich with obvious implications on poverty levels; and consistently raise the threshold of petroleum levy, an indirect tax, with 869 billion rupees budgeted for this year from this source against 542 billion rupees realized last fiscal year. To date all administrations, including the incumbent one, continue to pass the onus of generating revenue onto the general public instead of onto the ‘ïnfluentials’ defined as the major recipients of current expenditure.
These measures should be a cause of serious concern for all stakeholders mainly because the capacity of lower to middle income earners, leave alone the vulnerable, to meet their kitchen budgets remains severely compromised due to a persistently high inflation rate – an average of 25.14 percent last fiscal year and 28.61 percent during the five months (July-November) of the current year.
It is relevant to note that headline inflation for November was higher than the July-November average at 29.2 percent. The year on year Sensitive Price Index for the week ending 7 December was a high of 42.68 percent. In other words, there is a real danger of a possible socio-economic upheaval that may spill-over on the streets of the country as the purchasing power of each rupee earned erodes almost daily.
The question is why does administration after administration ignore the ramifications of an unsustainable deficit on the economy in general and the general public in particular? The answer sheds a spotlight on an extremely disturbing fact: political considerations read, perpetuity of rule, with no exceptions, prevails over economic considerations.
And the objective of showing a budget deficit lower than what is obviously realistic at the time the budget is presented, is nothing more than an attempt to appease international creditors that fiscal and monetary discipline will be exercised. Sustained failure to meet these pledges, account for post 2018 refusal of not only multilaterals but also bilaterals to extend assistance without implementation of harsh upfront conditions.
So, is there a way out for the Pakistani public? Warren Buffett in 2011 rather simplistically stated: “I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for re-election.”
Pakistan is a country where parliamentarians have successfully resisted all attempts to tax rich landlords at the same rate as those applied to the much poorer salaried class because of self-interest and half -hearted attempts to name and shame those who do not file their returns have consistently failed. This does not imply that the source of income and wealth of parliamentarians is not routinely challenged by members of the opposition but once they come to power all cases against them miraculously evaporate as the state abdicates its responsibility to prosecute and withdraws its case.
In the past allegations were summarily dropped as and when a party returned to power (pre-2018); however, the recent overturning of convictions with the investigating agency and the government’s legal team withdrawing all charges should be a source of serious concern to the stakeholders.
The world is continuing to tighten anti-money laundering and combating financing terrorism laws, particularly with respect to politically exposed persons, which includes placement on the grey list by the Financial Action Task Force, and therefore acquittals must be seen to have been well earned.
Copyright Business Recorder, 2024
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