EDITORIAL: The rating agency Fitch reaffirmed Pakistan’s rating at CCC reflective of continuing external funding risks amid high to medium term financing requirements over the Eid holidays while stating that the budget 2024-25 strengthens the prospects for an International Monetary Fund (IMF) deal.
This assessment is baffling as Fitch itself terms the proposed budget as an ambitious plan projecting that a politically weak government will miss several set targets, including economic growth, tax collections, non-tax revenue, fiscal deficit, primary deficit and expenditure.
The agency also predicts that arranging the required external financing estimated at $20 billion, including rollovers, will remain a key challenge in FY25.
The budget itself in no way indicates any significant change from previous years – current expenditure has been upped by 21 percent (from 14.232 billion rupees in the revised estimates of last year to 17.203 billion rupees this year) which constitutes (i) 27 percent raise in subsidies though sadly roughly half of this amount is earmarked for tariff differential subsidy in spite of the fact that distribution companies work independent of each other and incur different costs - a pricing that could be justified when Wapda was the sole generator and distributor of electricity in the country but not after it was unbundled at a foreign donor’s insistence, an insistence that indicates that homegrown solutions should be preferable to multilateral conditions.
The budget has earmarked 86 billion rupees for FATA subsidy arrears and an additional subsidy (not clarified) of 120 billion rupees; (ii) domestic debt servicing is projected to rise by 21 percent reflective of bank borrowing rise to 5142 billion rupees next year against 2860 billion rupees budgeted for the outgoing year, a highly inflationary policy that would also negatively impact on credit to the private sector, impacting on growth.
Foreign debt mark-up is budgeted to decline by 1231 billion rupees next year on the back of no projection of an IMF loan next year and, even more disturbingly, a reliance on commercial and Eurobonds budgeted at 676 billion rupees that, unless the country’s credit rating improves, would be at a high rate of return and almost definitely increase the mark-up on foreign debt significantly from what has been budgeted; and (iii) Benazir Income Support Programme, the only targeted pro-poor programme, accounts for 592.483 billion rupees next year and though the government is focused on patting itself on the back as this amount envisages a 27 percent rise from last year’s revised estimates yet this is a mere 3.1 percent of total current expenditure - 0.1 percent lower than the 3.2 percent in the outgoing year. Given the 41 percent poverty levels as calculated by the World Bank last year, a figure than many believe has risen since then, this amount is pathetically inadequate.
In terms of revenue generation the budget document does not indicate any major change in reliance on indirect taxes, up to 75 to 80 percent of all revenue collected by the Federal Board of Revenue, whose incidence is greater on the poor than the rich.
The direct tax collections have, as in previous years, been erroneously upped by 40 percent next year by adding on withholding taxes that are imposed in the VAT on purchases, an indirect tax.
And to add to the sustained reliance on indirect taxes petroleum levy has been budgeted to rise from 960 billion rupees last year to 1281 billion rupees next year under other taxes, though this is clearly an indirect tax.
The Fitch assessment is disturbing because it reflects the agency’s focus — similar to what has been noted with multilaterals — on total expenditure and revenue collections rather than on what has been allocated for which sector and the source of revenue.
The budget deficit is projected at 6.9 percent next year, considered unsustainable in economic terms, against 7.4 percent this year in the revised estimates.
Given that last year it was budgeted at 6.5 percent and it overshot the budgeted deficit by a whopping 1.1 percent even if one concedes that the current dispensation is more able to better manage the deficit and would contain the deficit to half of what was the case in the outgoing year, a more realistic projection may be 7.4 percent (6.9 plus 0.5 percent).
Primary deficit (minus the servicing) has been budgeted at 2 percent, against 0.4 percent in the revised estimates of the outgoing year, which incidentally is sure to come up for discussions with the IMF in the forthcoming talks on the next loan package.
There is, therefore, clearly a worsening trend in terms of budgeted allocations and revenue sources and this is in spite of almost daily claims by both the Prime Minister and his cabinet colleagues in all interactions with the public, directly or indirectly through the media, that the government will remain firm on reforms, which are politically severely challenging. These claims would have been more credible even if one could have been shown a mere glimpse of these reforms in the budgeted figures.
Copyright Business Recorder, 2024