There is hardly any doubt that the budget 2023-24 was an exercise in desperation with the PDM coalition government completely unsure about the situation. The government tried everything to net the IMF in but failed miserably partly due to the intransigence of the incumbent finance minister Ishaq Dar and partly because of erratic policies it pursued.
The fluctuation in policy pursuance occurred due to pressure it faced to pander to the wishes of the electorate in an election year but these considerations went against the promises it made with the IMF.
It is so clear that the budget lacks a well-thought-out strategy to steer the country out of its current crisis and put it on the path of economic stability and debt sustainability. It is also very visible that by overlooking the documentation of the economy and privatising loss-making State Owned Enterprises (SOEs) the coalition government failed to turn a crisis into an opportunity.
The result was that the budget appears to be an effort to balance some populist measures and that too half-hearted that are neither here nor there. Most observers are of the view that the budget reflected fiscal irresponsibility as it did nothing to cur tail the budget deficit. It will certainly increase the already high-running inflation and will make life miserable for people.
There is hardly any doubt that the budget irritated the IMF and the international lender came out in open to point out that they aired their reservations in public. Not only the disagreements with the IMF but the government also failed to explain how the government intends to meet the other crucial IMF condition of commitments to cover the financing gap of $6 billion.
In this context the financial managers did not give the IMF a credible plan aimed at bringing about a paradigm shift in how they will manage the debt-ridden economy otherwise there are no easy fixes available.
The impression conveyed is that the government is under mistaken belief that it can revive the competitiveness of a broken economy and stimulate growth through large but borrowed development stimulus and the distribution of freebies. It is more than clear that the economic policy makers are left with no option but to go for tough choices but the budget makes it abundantly clear that they have no inclination to take that difficult path as they are caught in a time warp and do not have the required wherewithal to take the bull by the horns.
It was therefore expected that the IMF would air its view and it did so rather forcefully. The international lender accordingly raised issue about the budget by pointing out that what it needed was to satisfy the IMF on the budget before its board will review whether to release at least some of the $2.5 billion pending disbursement under the 2019 Extended Fund Facility (EFF) that will expire at the end of this month.
To begin with, the IMF categorically stated that a new tax amnesty scheme proposed by the government in the budget sets a damaging precedent and runs against the programme’s conditionality though it did not specify which particular scheme the Fund was taking issue with.
It also noted that the draft budget misses an opportunity to broaden the tax base in
a more progressive way and the long list of new tax expenditures reduced further
the fairness of the tax system and undercuts the resources needed for greater
support for vulnerable BISP recipients and development spending.
Moreover it mentioned that measures to address the energy sector’s liquidity pressures could be included alongside the broader budget strategy.
These reservations could be the reason that even after a delay of almost 8 months the due tranche did not materialise as the IMF says Pakistan has been unable to meet important prerequisites. With the programme just weeks away from its expiry the ninth review is still in doldrums while the tenth review, which was originally part of the plan, is all but out of question.
The IMF is worried about the 53 per cent higher expenditure, as very large. It is pointed out that the budget is an eye-wash before elections and that the government will bring a mini-budget soon after the elections.
One source described that the budget as an effort to save political capital. It is now pointed out by no less a source than Moody’s that time is running out for Pakistan to convince the IMF to release the remaining $2.2 billion out of the $6.7bn bailout programme before 30 June. The rating agency has expressed fear that the country might face default in case of failure of the IMF programme and the things are going from bad to worse that despite the incumbent finance minister holding several sessions with the IMF officials, nothing came out
of all these efforts as he failed to convince the top IMF officials for the completion
of the 9th review essential for securing a staff-level agreement for the release of the $1.1 billion tranche. Only two weeks are left for Pakistan to reach a deal with IMF or face failure that would have serious consequences for the economy.
Almost all top world rating agencies downgraded Pakistan’s economy several times during the current fiscal year. Most of the macro indicators remained negative while the poor foreign exchange reserves kept the economy under pressure during the entire fiscal year.
The government struggled to avoid sovereign default with help from the friendly countries and donor agencies but the poor economic performance was a strong indicator for the helpers to keep a distance. The latest government estimate is 0.29 per cent economic growth for FY23 but independent analysts believe contraction in the range of 2 to 3 per cent.
The rating agency has mentioned that without an IMF programme Pakistan could default, given its very weak reserves as they stand at below $4 billion.
Along with the Moody’s, other rating agencies have been warning that Pakistan could default in case IMF refused to complete the bailout package.
Interestingly, both Pakistani prime minister and finance minister have announced many times that Pakistan has met all pre-conditions for unlocking the IMF loan and their pronouncements agree with them as they point out that on IMF demand the record high 21 per cent policy rate and huge cut on imports have practically crumbled the economy and the people have been paying heavy costs with 38 per cent inflation and loss of millions of jobs.
Moody’s said that Pakistan’s financing options beyond June are highly uncertain even as its external repayments will remain significant over the next few years.
The financial sector in Pakistan believes that failure of the bailout package would put the country in hot water while the new government expected to come after general elections by the end of this year would not find it easy to steer through the disastrous economic conditions.
The sensitivity of the situation has compelled many observers to remain pessimistic about Pakistan’s chances of receiving the remaining two tranches from the IMF and of getting a new assistance package. They however express their view that the need was to focus on long-term reforms that can get the country future IMF programmes.
The fact is that current government completes its tenure in about 60 days and there is no clarity about the next elections as to when they will take place.
