Status quo budget

Pakistan’s budget for 2023-24 is considered an exercise to mark time as the financial managers of the coalition government could practically do nothing but to wait for a positive nod from the IMF.

The budget speech of the incumbent finance minister in an otherwise quiet house speaks volumes about the growing helplessness of the incumbent administration that has absolutely no clue about the political future of the country. It must be borne in mind that highlighting the fact that there were no new taxes levied is more of a myth and is largely used as a political slogan simply because the periodic increases in prices and rates of almost all means of existence bear witness to the fallacy of ‘tax-free’ budget.

This contradiction is also aptly reflected in the rampant inflation now visiting the benighted people of Pakistan who find it extremely difficult to let both ends meet. On top of all was the unending hubris of the incumbent finance minister who spent most part of his speech shifting on the blame of economic disaster towards the previous regime compltely ignoring the fact that it was his predecessor Miftah Ismail who put back the IMF programme on the rails that he (Ishaq Dar) has again de-railed due to his intransigence.

The current situation required reduction in fiscal deficit and bring inflation down but the financial policy makers decided to aim for moderate-to-low growth largely funded by debt that may actually increase the financial burden.

The impression conveyed by the budget is that deficit financing through debt will continue and more inflation and pain will be inflicted on ordinary citizens in the months to come.

The budget has a total outlay of Rs.14.46 trillion without detailing convincing revenue streams to support the amount. In this context it is pointed out that more than half of which will effectively be utilised to service debt.

Going into the detail it could be figured out that almost 80 per cent of all taxes that are expected to be collected will be used to pay mark-up payments on existing debt. As far as the collection of revenue is considered the federal government will end up spending almost 97 per cent to fund mark-up payments as well as debt servicing requirements.

It is pointed out that a potential increase in inflation may lead to further revision in these estimates, resulting in higher spending that will result in higher fiscal deficit. Just to divert attention an ambitious Public Sector Development Programme (PSDP) of Rs.950 billion has been announced that may certainly not materialise keeping in view the acute financial constraints.

The budget has projected GDP growth at 3.5 per cent with the finance minister emphasising that the budget is not an election budget and instead focuses on elements of the real economy without specifying the elements he was emphasising.

The budget promises relief measures such as increase in Benazir Income Support Programme to Rs.450 billion, increasing the minimum wage to Rs.32,000 from the current Rs.25,000, 35 per cent ad-hoc increase in the salary of government employees of grades 1-16 and 30 per cent for grades 17-22 public officers, 17.5 per cent increase in public servant pensions along with certain concessionary schemes for the youth.

These measures may be good but with a little over three million government employees constituting less than two percent of the population getting some benefit, the rest of population already overburdened by back-breaking inflation is left in the cold grappling with economic difficulties.

There is hardly any doubt that the coalition government is walking a tight rope in this budget as it looks to meet the requirements of the International Monetary Fund (IMF) as well as provide some relief to the public in what is an election year. Getting the IMF on board is critical as the risk of default on sovereign debt is rising with the economy creaking under twin deficits and record high inflation.

The coalition government is hoping to persuade the IMF to unlock at least some of the $2.5 billion left in a $6.5 billion programme that expires at the end of this month. The country missed almost all of its economic targets set in the last budget, most notably its growth target, which was initially set at 5 per cent, revised down to 2 per cent earlier this year.

Growth is now projected to be just 0.29 per cent for the fiscal year ending 30 June. Foreign exchange reserves have dipped below $4 billion enough to cover barely a month of imports. The government has no fiscal space to introduce popular measures that will win it votes or a stimulus to spur flagging economic activity with limited avenues for raising revenue in the short term and domestic and international debt obligations continuing to mount.

The key proposals of the budget include some special measures taken for the agricultural sector, primary among which was increasing agricultural loans from Rs.1.8 trillion to Rs.2.25 trillion. The budget has proposed no increase in duties on import of essential items and no new taxes for the upcoming year.

Exemption of customs duties on import of seeds for sowing to promote growth in the agricultural sector. Withdrawal of capping of the fixed duties and taxes on the import of old and used vehicles of Asian Makes above 1300CC, services provided by restaurants including cafes, food (including ice cream), parlours, coffee houses, coffee shops, food huts, eateries, resorts and similar cooked and prepared or ready-to-eat food service outlets are proposed to be taxed at 5 percent if payment is made through debit or credit cards, mobile wallets or QR scanning.

There is also a grant of exemption of sales tax on contraceptives and accessories. It has also proposed increase in withholding tax rate from 1% to 5% on payment to non-residents through debit/credit or prepaid cards.

Exemption of customs duties on import of shrimps/ prawns/juvenile for breeding in commercial fish farms and hatcheries. For the first time ever, Rs.1 billion has been allocated for health insurance of working journalists.

The other significant measures suggested in the budget are that the tax collection target for the FBR has been set at Rs.9,200 billion that is 23 per cent higher than last year’s target. It is required to be seen of the FBR has the necessary wherewithal to meet this target as it is reportedly going to miss the target set in the previous year. The budget deficit is budgeted at Rs.6,923 billion which is 82% higher than last year’s Rs.3,797 billion.

This year, fiscal deficit is 6.54% of the GDP and last year the deficit was 4.9% of the GDP.

Following last year’s actual high inflation at 28.2% the government has set a target of 21% for the next fiscal year that is highly unlikely to be achieved. This reality is borne out by the finance minister himself who said that the government had realised it would have to take extremely painful steps for economic rehabilitation adding that doing so would cause poverty and inflation to increase.

Total allocations for the Public Sector Development Programme (PSDP) have been budgeted at Rs.2,709 bn up 25% from Rs.2,158.8 billion last year.