Budget 2022-23: evaluation in perspective

The Federal Budget 2022-23 is one of severe austerity. It could have been worse: there could have been oil rationing to stench the bleeding from the current account which is making the rupee tumble down the hill breaking Jack’s crown.

TV analysts and economic commentators, the way they appear going for the budget with tongs and hammers, give the impression as if it was normal times and the annual financial statement of the government deserves no let or reprieve. It seems as if there is a lack of appreciation of the severity of the economic crises that this government has inherited or in their uncalibrated enthusiasm the media continues in the mode of the unreserved critics who measure each and all with the same rod irrespective of context or historicisity.

The first and rather simple fact but one that is being ignored or deliberately underplayed with unexplained motives or with the implicit urge to indulge in unfair political point scoring is the fact that this budget is the artifact of a coalition government that has only been in office for no more than two months and therefore cannot in all reasonability be held accountable for the serious crisis-like situation it has inherited, especially the one relating to oil prices and the falling rupee value with depleting reserves.

The previous government, after entering into a solemn agreement with IMF to reduce oil subsidies by Rs4 per month until raising prices by Rs30 per litre by June 2022, reneged on its commitments which led to the IMF bailout package being put on hold giving one hard blow to market confidence delivering a mortal blow to the rupee value, already hit hard by a fast deteriorating current account. This was when its value fell by nearly Rs12-14 per dollar fuelling inflation unabated.

It is no coincidence that the relief on oil prices was given on the very eve of the no-confidence vote which was certain to pass. Although it was claimed that this bailout was backed up by available resources, the next government has not been able to identify the same except that it led to adding to the budget deficit.

This accentuated the already intense pressure on trade deficit due to unparalleled increases in international oil prices occasioned by both higher commodity prices as well as the oil crunch due to the Ukraine war.

The other facet of the budget is the very little resource space for development or poverty alleviation that is available due the near doubling of the debt burden. In the very beginning of its tenure, the PTI government without demure accepted two IMF conditions that has brought the economy to the present plight.

Firstly, the bank rate was increased from around 7 to nearly 13% in one go. While this was apparently done to arrest inflation and invite hot money, it led to debt liabilities to increase by nearly 100%. As a result during FY2022-23 out of the expected revenues of nearly Rs7.4 trillion, a whopping Rs3.6 trillion is taken up for debt servicing. Had the bank rate been kept around 8-9%, the debt liabilities would have been around Rs2.4 trillion which would have allowed oil prices to have been kept at around Rs180 instead of Rs240 per litre. The pressure on overall inflation would thus have been much lower and one could have avoided placing an expected higher burden on the common man. In addition poverty alleviation programmes, social spending, expenditures on agriculture and water resources development could have been enhanced.

At the outset of the previous government, the free floating of the dollar was implemented as an IMF conditionality. It goes without saying that IMF has always insisted as part of its stabilisation assistance programmes the determination of exchange rate by market forces. However, the strictness with which this condition has been enforced has often reflected the affability or otherwise of the recipient country’s relations with America with its well-known influence over international financial matters or relations. Had our relations been on sound footings with powers-that-be, our then finance minister Shaukat Tareen would not have openly conceded that the attitude during negotiations of the IMF with the Pakistan team was unduly unmalleable.

Decontrol of exchange rates has its pluses and minuses. In an underdeveloped market, the extent to which exports can be increased thereby has to be weighed against the impact of devaluation on prices and the standards of living of the common man, particularly in the case of a low growth environment. Unfortunately due to structural and productivity issues neither exports and growth showed any considerable increase nor could inflation be contained. Inflation in Pakistan was the third highest in the world and the late withdraw of oil subsides will further fuel it. The targeted subsidy to the underprivileged is thus just and appropriate.

During the last four years our national debt has increased by $20 billion, compared to the cumulative level of $35 billion ever since 1951. This sharp rise in indebtedness was mainly due to steep increase in the bank rate besides large increases in commodity prices, particularly oil. But avoidable economic mismanagement by the previous government in not placing orders to purchasing oil when its prices had come down as low as $35-40 per barrel and failure to place LNG orders at the right time led to considerable avoidable losses as well as power loadshedding during the hot season.

The budget 2022-23 thus must be analysed and evaluated in its proper economic and political context. That a political coalition whose main partners, undergoing unprecedented penal and legally questionable hardships during the last four years, finding an apolitical establishment, staked its all in trying to jack up an economy literally in the doldrums, with all its concomitant serious political costs, must have had very strong reasons of political survival and success to have hitched its horses to this rickety cart.

Thus this is a budget of holding ground, of avoiding the worst, of severe austerity. The political fallout can be serious for the government in case of rampant inflation and low growth. But the government must have calculated the pros and cons as even an alternate set-up would have had to face the same uphill task. What is of critical importance is to put back the country on IMF rails, to establish political stability and to give ample opportunity to the government to restore economic health, to creep back to growth and poverty alleviation and to hope for improvement of world commodity prices. In equal measure there is need to restore healthy democracy and become a robust economy and an acceptable normal partner in the international comity.

Published in The Express Tribune, June 14^th, 2022.

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