Budget 2023-24: more business as usual

Budget 2023-24 can be celebrated for its bravado or mourned for its lack of seriousness. The economy is in deep trouble; with the Economic Survey 2022-23 depicting recessionary conditions.

Every sector and sub-sector, except finance and real estate, has shown negative growth. In particular, large-scale manufacturing has declined by 8.0 per cent, imports are one hundred and fifty times more than exports, the rupee has depreciated by 50 per cent and inflation has hit 38 per cent.

While policymakers, economists, bankers and the media are engaged in hyperactive debate over the numbers, the real impact of exploding unemployment and inflation on affected families, particularly with respect to the effect on daily food intake, appears to be overlooked. There are now middle-class families, with a salary as the sole source of income, who are now unemployed because of business closures and are unable to purchase basic needs.

The economy is perched on the edge of an abyss and, given the scale of the crisis, it was expected that Budget 2023-24 will signal course correction. That, most unfortunately, is not the case and the budget represents ‘business as usual’, with official speeches laced with swagger and responses to media questions bordering on flippancy.

One fact appears to be clear. The present budget is mere window dressing, aimed at the elections, and at least three mini-budgets can be expected to follow over the course of the year: one before dissolution of parliament, another by the caretaker government, and yet another by the spring of next year.

The most serious aspect of the national economy, as depicted in Budget 2023-24, is the stark fact that over 50 per cent of the budget is devoted to debt servicing which will consume 105 per cent of net federal revenues. It appears that the national economy is now functioning primarily to service debts. This situation is a product of years – rather, decades – of fiscal mis-management through debt financing, rather than strengthening the productive base of the economy.

Of the total Budget 2023-24 amount of Rs14.5 trillion, interest payment liability on past loans is Rs7.3 trillion. Net federal revenue receipts are projected at Rs6.9 trillion, which is Rs400 billion less than interest payments. Accordingly, additional debt of Rs7.2 trillion will need to be incurred to finance the balance expenditure, including the civil and military payroll. This spiral of sinking deeper and deeper into the debt hole can only be addressed by curtailing the need for debt financing of new expenditures.

Budget 2023-24 has however failed to curtail any debt financing for new expenditures. The present government has no control over interest payments, which is projected to grow at 32 per cent over 2022-23. However, it has also abdicated control over civil administration and defence expenditures, projected to grow at 29 per cent and 19 per cent, respectively. Alarmingly, both surges will be debt-financed. It would have been prudent to hold both these expenditures at the nominal level of 2022-23.

The same line of argument holds for foreign debt payments. If imports continue to exceed exports by a wide margin and remittances are insufficient to fill the gap, imports will need to be curtailed so as not to add further to the external debt to finance the increment to the trade deficit. The budget does not offer any meaningful measures in this regard.

The question of feasibility of such drastic reductions in government expenditure and imports is not relevant. A poverty-stricken, debt-ridden family with limited income has no choice but to settle for two meals a day instead of three, if that is all it can afford on current resources. The state of Pakistan and the elite will have to do just that.

The critical problem facing the economy is availability of foreign exchange. All efforts in addressing this issue appear to be concentrated on the now-hackneyed ad-hoc solution – more debt.

However, a rational approach requires that the thrust is on growth in exports. And, given that over 75 per cent of Pakistan’s exports comprise manufacturing products, emphasis needs to be on promoting manufacturing, particularly large-scale manufacturing (LSM). Budget 2023-24 misses this point entirely.

Budget 2023-24 projects LSM to increase by 3.2 per cent, but provides little fiscal support for the same. In 2022-23, the Industrial Support Package was allocated Rs7 billion and zero-rated industries received a subsidy of Rs64 billion, as against Rs20 billion in the budget. No concrete measure has now been announced to boost LSM output from negative 8.0 per cent in 2022-23 to 3.2 per cent in 2023-24. Instead, the subsidy given to K-Electric for Industrial Support has been reduced from Rs13 billion in 2022-23 to Rs7 billion in 2023-24 and there is no allocation for zero-rated industries.

Provisions for SMEs – increasing the turnover threshold from Rs250 million to Rs800 million and bearing the risk of up to 25 per cent of refinance loans by government – are welcome; although it is a moot point whether the measures will cross the goalpost. SMEs function largely as direct and indirect subcontractors to LSM and, with the manufacturing sector facing GST at a punishing18 per cent, achieving this target seems questionable.

Prima facie, there are some other positive elements that merit mention. They are allocation of Rs30 billion to shift 50,000 tube wells to solar energy and customs duty exemption on import of raw material for solar panels, inverters and batteries; increase in amount allocated for agriculture loans from Rs1,800 billion to Rs2,250 billion, including Rs10 billion for small farmers on low mark-up; slashing of all taxes on import of seeds; and Rs5 billion for concessional loans to agro-industry and a five-year tax exemption to units with turnover up to Rs800 million.

The increase in allocation to BISP from Rs360 billion to Rs400 billion is also laudable. The big question, however, is: where will the resources for all of the above materialize from?

Kaiser Bengali was a member of the 7th NFC and is now a member of the 10th NFC.

He tweets @kaiserbengali

Iffat Ara is an economist specializing in fiscal policy.