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Budget 2023-24: Pakistan’s proverbial D-day

by Muhammad Ragheeb-ud-din
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The upcoming budget is bound to be one of if not the most important budget in the history of Pakistan. The country is at a defining moment as it is beset by a delayed IMF program, repayment of 75 billion dollar debt in next 3 years, record high inflation, collapsing currency and a huge economic slowdown that could see the country slip into recession for the first time in history. The IMF program needed to ensure financial viability is nowhere in sight but the lender of last resort has released projections for the economy which we will analyze in this piece to determine if next year will be one of respite or more hardships.

Tax collection is being estimated at around 9.2 trillion rupees by the government whereas the IMF desires it to be 9.8 trillion. This is required in order to cater with ballooning debt repayments which are projected to be around 8.5 trillion in the upcoming fiscal year or equivalent to around 90% of projected government revenue. Around 6.3 trillion is also to be transferred to the provinces under NFC award from this 9.2 trillion meaning the federal government will finance everything from salaries to development expenditure to defense via loans completely for the first time in history. Rising interest rates are the primary factor in this 50% plus increase in debt repayments in one year with the budget deficit projected to hit 8.6% of GDP. Increasing taxation however requires the state to expand its tax base to retailers, agriculturalists, wholesaler’s and others who have historically been outside the tax net. The World Bank projects that 2 trillion additional revenue can be arranged by bringing them in the tax net. Current policies rely on further burdening the salaried class or increasing indirect taxes such as GST or corporate taxes which are unfair as well as already some of the highest in the world need to be abandoned. Increased domestic borrowing from banks by government will also crowd out private sector financing and increase money supply in system leading to higher inflation. To counter this, expenses need to be cut by shutting down or selling off loss making state owned enterprises which cost 500 billion in current fiscal year as well as ending energy sector losses of around 300 billion. Federal subjects which should have been shifted to provinces after 18th amendment but continue to remain with federal cost 360 billion as well and need to be devolved as per constitution. Subsidies to bureaucracy, judges and military personnel also need to be cut along with to certain export groups and industries as well as a targeted reduction in gas sector losses which are now cumulatively around 1.4 trillion through price hikes and theft reduction.

GDP is forecasted to grow 3.5% as per the IMF partly because of low baseline due to expected negative growth rate in current fiscal year. The agricultural sector suffered greatly due to floods last year and is projected to show growth in upcoming one due to greater cotton, rice and wheat output. The industrial sector also fell showing a 25% fall in March Year on Year and overall in past 10 months the QMI is showing a decline of around 10%. This is due to import restrictions initiated to protect dwindling reserves by reducing the current account deficit, which show no signs of abating anytime soon thus leading to gloomier projections for industry in the year ahead as well. Construction, transport, retail and wholesale sectors are painting a similar picture leading to fears that even the 3.5% growth target will not be met. FDI was down more than 40% in the current year and it seems it will remain low in next one as well given no major projects announced by China or Gulf States in the immediate future. This means that reserves will also remain under pressure unless IMF program is resumed and loans received from various parties.

Annual inflation is projected to fall from 27% to 21 % in the coming year signaling some relief for the masses. The figure of 27% is already understated with actual inflation estimated to be more than 29%. The IMF projects global commodity prices to fall due to economic slowdown in the world economy which is a reprieve for import dependent countries like Pakistan. However devaluation was more than 38% in the ongoing fiscal year and should issue with reserves continue another round of it should be expected pushing up projected inflation from 22 to 25%. It is also not clear if the increased borrowing by government has been factored into inflation rate calculation meaning it could go even higher. Lastly there is the current account projection which is estimated to be 2.4% of the GDP which is close to 2.3% of GDP this year. Due to lower growth of international trade at 3% and lower prices a 10% increase in import volume is projected compared to 20.8% contraction so far. Exports are projected to grow by 18% against a decline of 6.5% this year but due to falling prices in international markets and increased production cost for exporters it is doubtful if Pakistan’s exports will remain competitive. A 2.4% current account deficit is still 8 billion dollars and it is doubtful if this can be financed given low credit rating by international agencies, higher cost of commercial debt and less willingness to bail out Pakistan with free money by friendly countries. Prioritizing imports of export based industries over those catering to domestic demand as well as limiting non necessary imports will continue most likely to save precious reserves for debt repayment.

To conclude Pakistanis must prepare for another difficult year ahead in which it is likely that increased prices and declining incomes will continue as the trend along with flawed policies. As they say records are meant to be broken and several were this year with none of them being good ones. What’s worrying is that more record breaking may still be on the cards.

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