Some key budgetary magnitudes

The Federal Budget for 2024-25 has been examined by the Parliament and following some amendments it has been implemented from the 1st of July for the whole year of 2024-25.

The objective of this article is to highlight some key budgetary magnitudes which have perhaps not been adequately highlighted and discussed in the media.

The first expenditure focused on in the article is the burden imposed on the Federal budget of 2024-25 by the multitude of State-Owned Enterprises (SOEs).

The budgetary allocations for SOEs are from different expenditure heads including subsidies, grants and transfers, loans and current investments. The largest allocation is from subsidies, followed by grants.

The subsidy bill for 2024-25 on SOEs is estimated at a huge sum of Rs 1267 billion, representing a massive jump of 104% from the level in 2023-24. This is necessary if there is to be no increase in the circular debt of the power sector, which is likely to be a pre-condition for finalization of the next IMF programme.

Within grants, the other lumpy expenditure next year on SOEs is in contingent liabilities of Rs 270 billion. This is the servicing of debt guaranteed by the Government on behalf of the SOEs.

There are also allocations for miscellaneous grants of Rs 132 billion and Rs 64 billion to Pakistan Railways. Overall, the growth rate of grants to SOEs is expected to be a modest 12%.

The overall burden imposed by SOEs on the Federal government in 2024-25 is likely to be Rs 1848 billion, with a big jump of over 52% over the level last year. It will preempt over 10% of the total budgetary resources and be equivalent to over 1.5% of the GDP.

The second large budgetary head which needs to be quantified is the cost of defence affairs and services. It includes the payment of salaries and allowances, pensions, running costs, acquisition of equipment and the cost of combined civil armed forces.

The total budgeted allocation for defence expenditure in 2024-25 is Rs 3101 billion. This will imply a growth of 18% over last year’s level of expenditure. It will correspond to 2.5% of the projected GDP in 2024-25. It is the second largest expenditure head in the Federal budget after the outlay on debt servicing.

Turning to the inflow of external financing, much less information is in the 2024-25 budget documents about the composition of this financing. Apparently, the exchange rate is projected at Rs 295 per dollar.

Consequently, the gross inflow is estimated at $19.3 billion, including probably the likely roll-overs.

The quantum of foreign loan repayment in 2024-25 is estimated at $16.9 billion, including again the likely roll-overs.

Therefore, the net inflow of external assistance is estimated at only $2.4 billion. This could rise somewhat if the IMF programme becomes operative early in 2024-25.

A comparison with the likely inflows in 2023-24 highlights the magnitude of the external financing problem. The gross inflow is estimated at $17.8 billion.

As such, the expectation is that it will increase by $1.5 billion in 2024-25. The quantum of foreign loan repayment is $8.4 billion. It is projected to double to $16.9 billion in 2024-25 for reasons which are not clear.

Overall, the net inflow of external assistance is estimated at $9.4 billion, which is expected to be lower by as much as $7 billion next year. Consequently, there is likely to be much greater risk in sustaining the level of foreign exchange reserves next year.

There is also a need for the Ministry of Finance and the Ministry of Economic Affairs to ensure consistency in their estimates of the gross and net external assistance inflows.

There is some very surprising news about the net budgetary cost of debt servicing. Due to inter-bank operations and borrowings by the commercial banks from the SBP to buy Government treasury bills and bonds, there is a net profit generated by the central bank, which is sent onwards annually to the owner, the Government of Pakistan. There are also other smaller sources of SBP profits.

An appropriate measure is to derive the budgetary cost of debt servicing net of SBP profits received by the Federal government. The estimate of SBP profits is Rs 972 billion in 2023-24. It is expected to go up by over 157% to Rs 2500 billion in 2024-25.

Consequently, the net domestic debt servicing of bank borrowing level will actually fall from Rs 6122 billion in 2023-24 to Rs 5183 billion in 2024-25. This is perhaps too good to be true.

The next critical budgetary magnitude is the size of the combined cash surplus of the four Provincial governments in 2024-25. It is estimated optimistically at Rs 539 billion in 2023-24. The expectation is that it will be more than double, with an increase of 126%, and reach Rs 1217 billion in 2024-25. This is indeed a very optimistic expectation.

Cash surpluses are generated largely by the two bigger Provincial Governments. During 2022-23, the total cash surplus was only Rs 154 billion, 91% of which was generated by the Provincial governments of Punjab and Sindh.

The 2024-25 budgets have been announced by all the four Provincial governments. The only government which has announced a sizeable cash surplus is the Punjab government of Rs 650 billion.

Sindh has opted for a balanced budget, implying a zero cash surplus. Overall, it is extremely unlikely that the overall Provincial cash surplus will jump up to over Rs 1200 billion in 2024-25.

The shortfall in this magnitude is likely to bring down the targeted primary surplus of Rs 2492 billion and raise the budget deficit by almost 0.5% of the GDP.

Overall, there is need to fully recognize the quantum jump of the burden imposed by the SOEs on the federal budget of over 1.5% of the GDP in 2024-25. The cost of defence affairs and services will continue at close to 2.5% of the GDP.

However, the de facto net cost of debt servicing will be substantially less due to the projected quantum jump in the SBP profits. External financing is likely to be much smaller than in 2023-24.

The Federal budget has an unusually large number of risk factors, which in the presence of an IMF Programme, could require frequent emergency measures to ensure adherence to the budget deficit and primary surplus targets.

Copyright Business Recorder, 2024