Far be it from me to add to the reams of newsprint and hours of air time devoted to the federal budget 2022-23 presented by Finance Minister Miftah Ismail in the National Assembly on Saturday, June 11, 2022. In any case, this traditional outpouring of analysis and comment is led by many much more competent than me in this field.
However, it behoves me to touch on at least the most pertinent and important points of the budget in order to buttress my argument that Pakistan has incrementally over time arrived at an unsustainable model of economic development.
First, the facts. In their integrity statement to parliament required under the Public Finance Act as part of the federal budget, Miftah Ismail and his Secretary Finance Hamed Yaqoob Sheikh conceded that their mismanagement of contracts in their previous tenure was a major source of the current energy sector challenges.
Further, the statement identifies domestic political uncertainty, the Ukraine war, higher provincial deficits and significant (continuing) losses and debt of state-owned enterprises as key risks to the budget and the medium term economic outlook.
The statement goes on to argue that subsidies, debt servicing and lower revenue collection because of import and demand contraction pose substantial risks to economic growth and the credibility of the budget’s fiscal and monetary projections.
The power sector’s woes are highlighted as the high cost of generation, attributable to costlier (out of date?) technology and poorly designed contracts that result in exorbitant profits for private investors and front-loading of debt repayments during the first 10 years of plant operation, above average transmission and distribution losses and below average recovery of electricity bills. As a result of all these factors, the power sector is the largest recipient of subsidies currently.
Oil, gas and coal imports constitute a large portion of our import bill. Their global prices affect the price of various goods and services. The current volatility in the prices of these fuels is a major factor in burgeoning inflation, with its fallout on interest and exchange rates.
Rising global prices of fuel and a falling rupee could produce lower GDP and revenue growth, feed into a higher current account and fiscal deficit, and increase public debt. The statement admits we do not have in place any fiscal buffers or a risk management framework for dealing with adverse shocks in the price of imported fuels.
While it is a given that the PML-N-led coalition government’s hands were tied to a considerable extent by the legacy of the Imran Khan government’s mismanagement, the critical question is whether the budget finds favour with the International Monetary Fund (IMF), without whose imprimatur we cannot hope to receive financial aid from other multilateral lenders nor our bilateral friends and allies. Already, the IMF has indicated the total unacceptability of the government’s proposed relief in Personal Income Tax (PIT) of Rs 47 billion. The government will have no option but to change this proposal if it hopes to see desperately needed money rolling in.
Despite the budget’s claims of taxing the rich and giving relief to the poor, the people by and large are not impressed because their day to day lives and experience confront prices beyond the reach of the average household, with little or no hope of improvement in the foreseeable future. This federal budget has been dubbed a survivor’s budget.
‘Survival’ underlines the allocation of 57 percent of the budget’s outlay of Rs 9.5 trillion for debt interest payments (Rs 4.0 trillion) and defence (Rs 1.5 trillion). Since the remaining 47 percent is not enough, Rs 740 billion additional taxes have been imposed, of which the fuel levy alone will fetch Rs 300 billion (this levy having been raised from Rs 30 per litre to Rs 50). The banks and real estate, arguably two flourishing sectors in the present economic scenario, will be subjected to higher taxation. Meanwhile, the inflation target of 11.5 percent seems unrealistic and not credible, judging by present trends.
The shape of the real economy is at the heart of this seemingly endless economic crisis. Agriculture has suffered neglect and mismanagement over many years, resulting in, amongst other problems, inadequate water and fertilizer for food crops (particularly wheat, so much water having been diverted wastefully to sugarcane, driven by vested interest).
The famed ‘bread basket’ of the entire Subcontinent in the past is today forced to contemplate import of even this essential staple food crop, wheat. Surviving industry in almost a half century of deindustrialisation in Pakistan remains uncompetitive internationally and therefore addicted to rent-seeking from the state in the form of various concessions (the textile industry first and foremost).
Pakistan has now solidly arrived in what is known as a debt trap: borrowing in order to repay past loans. In the absence of a turnaround in the real economy, Pakistan will continue to flounder, dependent wholly on the goodwill of the international lenders and those friends and allies still willing to bail us out (again and again). How long is this economic path (calling it a ‘model’ may be misplaced) sustainable and at what cost?
Copyright Business Recorder, 2022