The government is presenting its first budget. People think it is time to deliver on promises made during the election. Therefore, they will wait for the budget, expecting the government to present a people-friendly budget. It will relieve common citizens by lowering inflation, creating livelihood opportunities, and finding a way for sustainable development. They are also expecting that the budget will find a way to control electricity and petrol prices. However, the data suggests that it would be extremely difficult, if not impossible, for the government to deliver on promises and meet people’s expectations. Let’s analyze the situation to understand the limitations of the government and rationalize the expectations. More importantly, what policy space does the government have to make people-friendly decisions?
First, Pakistan is facing a financial crisis—one of the most severe in its history. Despite all efforts, the debt and interest payments are on the rise. Pakistan has to pay around US$10 billion during June-July 2024. The country is struggling to arrange funds to repay its loans and the mounting interest on them. This situation has put Pakistan under immense pressure. Pakistan is looking towards friends to help it avert this crisis. This dire situation sets the stage for a challenging budget presentation.
Second, Pakistan’s circular debt is mounting with every passing day. The latest data shows that the total circular debt of Pakistan is 5.7 trillion PKR. This has created multifaceted challenges for Pakistan, including a financial and energy crisis. The government has to increase energy prices regularly. It has greatly affected the competitiveness of the Pakistani industry and products. It is expected that problems will be further complicated after the IMF program. The IMF has asked the government to depreciate the rupee by 10 percent. If the government agrees to the demand of the IMF, then it will increase import and energy bills. It will also push the government to increase the electricity and petrol prices. Furthermore, the circular debt will continue to inflate, and there may be a payment crisis.
Third, the alarming inflation levels are eroding the purchasing power of the middle and lower classes, with the depreciation of the Pakistani rupee poised to exacerbate the situation. This impending wave of inflation is set to disproportionately affect the poor, painting a stark picture of the economic challenges that Pakistan is grappling with.
Fourth, the GDP growth rate paints a scary picture of the economy. Policy choices have further deteriorated the economy. With the present policy framework, undue interference from the IMF, and government attitude, all the predictions show that it will take time to put the economy on a fast track.
Fifth, last fiscal year’s budget document showed a 2 trillion Pakistani rupees gap in revenue and expenditure. Pakistan had to borrow to meet the gap and fulfill its commitments at the global level. The gap is expected to increase due to lower revenue, higher expenditures, increased debt payments, and the depreciation of the Pakistani rupee. Therefore, the government will have to borrow money. That’s why Pakistan is working to secure a new program from the IMF.
Sixth, the IMF is continuously encroaching on policy space in Pakistan. The IMF is on do more mode and does not ready to listen to Pakistan. The IMF, in collaboration with international donors, is exerting a significant influence on Pakistan’s economic policies, a situation that significantly limits the country’s ability to make independent decisions. The IMF’s approach, often characterized by a one-size-fits-all mentality, fails to consider the unique ground realities and domestic needs of each country. This approach, which has been likened to shock therapy, has the potential to destabilize and undermine the economy. Unfortunately, Pakistan is currently experiencing the same methodology.
The IMF knows that Pakistan needs money. So, it is high time to compel Pakistan to follow its instructions. Even the IMF has started interfering in Pakistan’s bilateral relations and at the micro level affairs, like the tax rate, where to spend money, how to trade, etc. This makes it difficult for Pakistan to make a budget according to its needs and ground realities. It will hinder the government’s efforts to revive and stabilize the economy.
In a nutshell, while Pakistan prepares to present a new budget, it is confronted with a complex and difficult question: with the government having to borrow money to meet its expenses and debt obligations, what policy space does Pakistan really have to make independent decisions? This question underscores the significant challenges that Pakistan is currently facing, painting a stark picture of the uphill battle that the upcoming budget presentation will be.
However, a wise policy and people-centric governance approach can help reverse the process and create ample policy and decision-making space. For that purpose, Pakistan will have to make some prudent decisions. First, Pakistan will have to eliminate all non-development expenditures. Pakistan should start with the eradication of all types of subsidies for the elite class. A few years back, a UNDP report indicated that Pakistan provided 2 trillion PKR as a subsidy to the elite class, which means Pakistan provides US$7.20 billion (US$ 1=278, current prices) as a subsidy annually. This is exactly equal to last year’s budget outlay shortfall. To compensate for the shortfall, Pakistan has to borrow money. So, Pakistan lost US$ 7.20 billion to the elite and borrowed US$ 7.20 billion to bridge the gap, which doubled the impact. However, the UNDP study calculated these prices during the last decade, which means the exchange rate of the Pak rupee was around 140 PKR per US$. It means Pakistan was providing more than US$ 14 billion as a subsidy to the elite class.
This year again, after providing subsidies to the elite class, Pakistan is negotiating a new program worth US$ 8 billion with the IMF, and the IMF is encroaching on policy space and compelling the government to meet its demands. Thus, one decision can help Pakistan significantly lower the impact of the financial crisis rather than help reverse the crisis.
Second, the government should leave the IMF formula, which will not help Pakistan reverse the crisis. The budget should be prepared with the counter-cyclic approach at the center. Pakistan will have to increase spending on development infrastructure projects, which can help productive sectors perform better. Therefore, it is advised that the government should invest more in agriculture, agriculture-related infrastructure, and procedures for that purpose. Investing in agriculture can positively impact the economy within a year. Simultaneously, Pakistan should invest in industry, industrial processes, and related infrastructure. Moreover, the tax structure should promote investment, not fear. These interventions will boost business activities, create employment and livelihood opportunities, and lower inflation.
In conclusion, Pakistan will have to consider these options to get rid of the IMF’s influence. Otherwise, the IMF will continue to tighten its grip on policy, and inflations will be out of control. The production sector will suffer, and unemployment will continue to increase. Ultimately, there would be an increase in poverty, and the economic crisis would be worse.
