Govt’s ‘debt-driven budget’ draws criticism ahead of elections

As the general election approaches in October-November, the cash-strapped government has unveiled a budget that has been labelled as populist, debt-driven, non-progressive, and imbalanced. Experts argue that the budget's numbers contradict the expectations of the International Monetary Fund (IMF), raising concerns about its viability and long-term consequences.

One of the key points of contention is the government’s ambitious tax collection target of Rs9.2 trillion. Critics argue that rather than implementing measures to increase the number of taxpayers in the country, the government has chosen to burden the already overtaxed corporate sector. This approach overlooks the opportunity to broaden the tax base and ensure a more equitable distribution of the tax burden.

Meanwhile, the proposed fiscal deficit of Rs6.9 trillion (6.5% of GDP) has raised alarm bells. The government plans to finance this deficit by accumulating both local and foreign debt, despite grappling with the challenges of repaying existing debt and the looming risk of defaulting on foreign debt obligations. The government aims to secure a large portion of the new foreign financing through commercial borrowing and the issuance of Euro bonds. However, these plans face significant difficulties due to the delay in reviving the IMF program worth $6.5 billion.

Arif Habib Limited, Head of Research Tahir Abbas expressed scepticism regarding the fiscal numbers presented in the budget. He highlighted that the revenue collection target is overestimated while expenditures are underestimated for the FY24 budget. He believes that the IMF is unlikely to accept these figures, making it difficult for the government to gain IMF approval based on the current numbers. Abbas suggested that the government may need to revise the budget in consultation with the IMF before it takes effect on July 1, 2023.

Head of Research at Ismail Iqbal Securities, Fahad Rauf echoed similar concerns about the large fiscal deficit. He pointed out that the government’s announcement of a significant increase in pay, pensions, and subsidies for its employees will require budget amendments in consultation with the IMF before it becomes effective.

Overseas Investors Chamber of Commerce & Industry (OICCI), Secretary General, M Abdul Aleem observed that the budget appears to be an interim solution with short-term measures targeting specific sectors, but it lacks comprehensive measures needed to stabilise the economy. While positive measures for the IT and agriculture sectors, as well as for the promotion of SMEs, were appreciated, Aleem underscored that no specific bold measures were announced to support the ambitious revenue targets or broaden the tax base. The absence of measures to incentivise investment in manufacturing and job-creating sectors, as well as the lack of initiatives to attract substantial foreign investment, were also noted.

The increase in salaries and pension of government employees, partially justified, will have a snowball effect on the economy and should have been accompanied by measures to improve productivity and reduction in huge cost of governance in Pakistan, he said.

Khurram Schehzad, CEO of Alpha Beta Core, criticised the government for its short-term focus, suggesting that it lacks a long-term vision. He questioned how the government plans to achieve the ambitious tax collection target of Rs9.2 trillion amid high inflation and low growth, particularly as it has announced no plans to reopen imports. Schehzad highlighted that last year’s tax target of Rs7.4 trillion was missed by a significant margin despite the highest inflation in recent years. He raised concerns about the government’s ability to justify the budget to the IMF in light of these challenges.

Highlighting the IMF’s expectations for the budget to align with the objectives of the programme, Muhammad Sohail, CEO of Topline Securities, said the IMF’s country report on Pakistan in September 2022 projected a budget deficit of 4.0% of GDP and a primary surplus of 0.5% of GDP for FY24. In contrast, the government is targeting a fiscal deficit of 6.5% and a primary surplus of 0.4% for the same period. The IMF is also waiting for credible financing commitments and the proper functioning of the foreign exchange market.

The government faces the daunting task of repaying external loans estimated at around $22 billion in FY24. The implications of this repayment on the local currency, interest rates, and the stock market remain uncertain.

As the government grapples with mounting questions about the justification and feasibility of its budget, it remains to be seen how it will address these concerns and navigate the complex economic landscape ahead.