In developing economies it’s a very common claim or slogan that the budget is pro-growth and people-friendly. Special focus is placed on rebuilding the economy, infrastructure development, modernisation of agriculture and to attain critical objectives, extra incentive is offered to the manufacturing sector. It is true that every government in Pakistan wants to give its best to people who are the voters. They want to take care of the poor by helping them with various types of stimulus packages, containing inflation, reducing poverty, and improving their standard of living and social well-being.
Pakistan’s per capita income may have gone up, but the distribution of income has been unequal, which is why the wallets of a large part of the population, especially of those belonging to the lower and lower middle classes, have become lighter. It is caused by a highly volatile inflationary environment that was seen recently, causing price uncertainty that had also impeded growth.
The good news is the sharp rebound of Pakistan’s economy, which was helped by a lower base rate, suspended debt servicing, and stimulus support provided by the central bank and donors. And of course, in the midst of the most difficult period home remittances that broke all previous records, outstripped total exports, providing a lifeline to the economy in difficult times.
The biggest challenge for the budget-makers will be whether they are able to provide relief to the nation by containing inflation through administrative measures, as they cannot always solely rely on the central bank to use its inflation reduction monetary tool.
Despite the breach of Fiscal Responsibility and Debt Limitation (FRDL) law by the government, which is a fiscal problem, the SBP has to oblige the request to arrange funding because parliament has never discussed or debated on the compliance issue. In the country’s best interest, fiscal policy needs to be redesigned.
Over the years, instead of lowering public debt to 60% of the GDP, which is the FRDL limit, it has surpassed 87% and is likely to reduce slightly due to appreciation of rupee and suspension of debt service. Any reduction will not be because the economy is generating enough profits to meet the financing requirements. The most important assignment for the budget managers is to reduce the revenue deficit and later transform it into revenue surplus.
Fiscal and monetary policies need to be revisited by setting targets rather than making accounting adjustments. We must not lose sight of the fact that we have made a shift towards a cash economy, which is why our currency in circulation has surpassed the Rs 7 trillion mark. This is a very alarming sign.
The window of government borrowing is now shut. The question how the funding requirements will be met has no easy answer? The government paper or the size of GOP holding is still on the rise. This is why the size of Open Market Operations (OMOs) has surged sharply and is currently at Rs 2.33 trillion.
SBP is in a fix and since long it is unable to provide the required amount of liquidity to the banking sector as it has to manage Net Domestic Asset (NDA) ceiling limit. To provide funding and stimulate the economy it needs sufficient Net Foreign Asset (NFA) funding. A meagre growth in exports does not help.
Derivatives are another area that will apply a hint of pressure on SBP. Monthly forward position will give sense how effectively it is managing forex reserves and rupee liquidity that often causes volatility.
There is a severe liquidity crunch in the banking system due to low income generated by the economy. It will not get better unless the economy is able to produce enough money so that the spending does not exceed the earnings, which will not be possible without improving the taxation system, transformation of the economy through structural changes. Automation and frequent use of technology will only make production more efficient.
Despite tough conditions, budget makers will have to proceed ahead with a clear intent with a view to ensuring that FY22 budget is not a routine budget.
Through budgetary control they should provide the tonic for both spending and consumption to give a boost to the economy that will help in job creation, raise standards of living and reduce poverty and ease social unrest.
It is the right approach to address the agriculture sector as food security is a global problem and the nation cannot rely on external sources. But the agriculture sector requires sizable funding, as our agricultural economy is worth nearly Rs 9 trillion and the formal credit availability is not of more than Rs 1.5 trillion.
Crop protection amount should be substantially increased. An increase in agriculture research budget and a renewed focus on biotechnology will help farmers move towards modernization. Road infrastructure and Silos are the two key areas that need to be upgraded.
The bottom line is that the base of the financial sector should be broadened. Over a decade the support provided by banks to the private sector is woefully low. In a difficult environment, by Contribution microfinance banking is satisfactory to a certain extent, but it is stagnant and needs to be encouraged to expand by more than threefold to nearly 30 to 35 million clients in quick succession as more than half of the population needs a helping hand.
Simultaneously, commercial banks cannot get out of the loop unless GOP Holdings of government papers are capped and the size of banks’ investment is reduced. Only then will much-needed liquidity be made available to stimulate the economy.
We have to realise and understand that Ehsaas money is a temporary stop-gap short-term arrangement. So far globally, over $ 16 trillion has been spent, which is nearly the size of the GDP of Europe or the USA and yet the Biden administration is asking for another $ 1 trillion plus stimulus package. Western economies can print notes and buy back bonds. SBP OMOs help bring the NDA within the agreed limits, but cannot print money like Western economies.
This writer is not too excited about the FY22 budget but surely expecting increased economic activity once the country is done with the IMF. The then Finance Minister, Ishaq Dar, was smart enough to get as many as 12 IMF waivers. Let’s see where the incumbent finance minister ends up.
(The writer is former Country Treasurer of Chase Manhattan Bank)
Copyright Business Recorder, 2021