EDITORIAL: Prime Minister Shehbaz Sharif stated on the floor of the House after the wind-up speech of the Federal Finance Minister, Mohammad Aurangzeb, that his administration was forced to make the budget with collaboration of the International Monetary Fund (IMF) to ensure its alignment with the Fund requirements and that he would refrain from making any premature statements but hopes for good news from the Fund on Wednesday (yesterday). His statement generates two extremely disturbing observations.
If the IMF approved the budget presented on 10 June, then many domestic economists should take strong exception to the rise in current expenditure of 21 percent (with Benazir Income Support Programme raised by 27 percent though the amount reflects a 0.1 percentage decline as a component of total current expenditure compared to the revised estimates of 2023-24), and domestic debt servicing is projected to rise also by 21 percent that indicates an 80 percent rise in government borrowing, which will cripple credit to the private sector and fuel inflation.
And if the Fund, as one would expect, will review the few adjustments that were announced by Aurangzeb in the finance bill after incorporating some recommendations made by the Senate Finance Committee members to determine whether contingency measures envisaging the imposition of a raise in the GST rate as and when there is a shortfall would be a component of the successor programme’s agreement then one can only hope that the focus of the Fund shifts from revenue generation to expenditure cuts.
It is important to note that the Finance Minister did not share specifics with parliament or the general public as to the impact of each finance bill amendment on revenue, a failing that one would not expect the Fund team to overlook, which would imply revisions to the budget proposals.
Aurangzeb in his winding-up speech insisted that reforms would be ongoing, implying that the reforms were what generated much angst within the general public and the Prime Minister’s subsequent address indicated that the government did not have any choice but to follow the Fund lead.
There are some concerns with respect to the ongoing nature of these reforms that require some consideration.
First; pension reforms, or employee contributions would begin with all new recruits, which implies that the impact will commence after three to four decades.
It is relevant to point out that pension reforms are limited to just 7 percent of the total labour force of the country defined as all those who are paid at the taxpayers’ expense. Second; power sector reforms are focused on (i) increasing generation capacity, including from renewables, but at present Pakistan’s generation capacity is more than demand - the issue is the contracts that were signed with Independent Power Producers (IPPs) under the China Pakistan Economic Corridor umbrella that account for the inability of the government to meet capacity payments and repatriate profits and compelling the government to raise tariffs as per lender conditions to achieve full-cost recovery and in this instance that implies consumers pay for the sector inefficiencies; and (ii) the focus on privatisation of distribution companies is severely flawed without first abandoning the policy of extending tariff differential subsidies, which continue to be extended to K-Electric that was privatised in 2005 because of administered uniform tariff.
The Finance Minister warned that all traders who do not register under the Tajir Dost Scheme will be dealt with (so far less than one percent of the 3.2 million small traders have registered) - a threat his predecessors made but could not follow through due to organised resistance, and that blocking of SIMs of non-filers or freezing their bank accounts would be only after first engaging with them - a measure that may open avenues for corruption and, in addition, may be challenged in court.
Aurangzeb also pledged reforms in the state-owned entities (SOEs) and talked of changing the board members. This precise approach was evident during previous administrations; however, it made little difference in most of the SOEs financial statements.
Privatisation has certainly been effectively launched in other countries and has not only reduced the burden on the exchequer but has led to greater efficiency.
However, what is critical to note is that not all sell-off deals have been deemed a success after empirical studies were undertaken and without such in-depth analysis it would be counterproductive to engage in blanket privatisation without changing the present regime of tariff determination and application.
The government must, therefore, accept that its leverage with the Fund or with any other lender depends on its capacity to slash its own expenditure and that is not evident at all in the budget 2024-25.
Copyright Business Recorder, 2024
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