Budget politics

The economic situation is presenting a mix picture. If on the one hand the implementation of programme conditionalities is getting traction, on the other, new challenges are emerging. For the second consecutive week, the stock market continued to show a rising trend while the rupee made handsome gains against the dollar. Reportedly, remittances showed handsome growth of 10-15 percent, which played a role in the rupee’s gains. The exchange rate adjustments, it thus seems, have been internalized by the market.

Another major move to meet the conditionality of the IMF programme was seen in the massive reduction in government borrowings from the central bank. In a treasury bills auction held on May 22, 2019, the government lifted Rs3.2 trillion in three-month TBs against a target of Rs600 billion. Such a mammoth purchase of TBs is unprecedented. It has been made possible by the phenomenal increase in the policy rate, which was further raised by 150 bps in the last monetary policy committee meeting.

This was followed by another successful auction of Pakistan Investment Bonds (PIBs), where the government picked up Rs121 billion against a target of Rs100 billion. This was a major break from the nearly three-year streak of such auctions where bids were mostly rejected in favor of shorter-term borrowings mostly picked by the central bank. Even though all these auctions were priced at rates substantially higher than in the past, restoration of order in the money and bonds markets is an equally important need to bring stability in the economy.

While these developments are encouraging, more worries were added to the accumulated imbalances in the economy. The first data point in the 11-month economic performance was released on June 1, 2019 concerning revenue collection by the FBR. The year is set to be the darkest year in the FBR’s history. Against a target of nearly Rs4.4 trillion, the 11-month collections have amounted to Rs3.3 trillion. A huge gap of Rs447 billion has already occurred compared to the 11-month target. This will have adverse implications for the revenue effort for the next year.

In this backdrop, we approach the most critical phase of the programme: Budget 2019-20. Many prior actions would be delivered as part of the budget, especially the taxation and expenditures measures leading to a primary deficit of 0.6 percent of GDP. Apart from the budget, gas and electricity prices adjustment will also be due. The budget will impose a burden on the people, and it is important to carefully craft a message of hope and promise so that it is not discredited by the opposition.

Yet, amid the budget session of the National Assembly, we unfortunately see the political temperatures rising which would be unhelpful in securing public approval of likely budgetary measures. For a number of reasons, the budget session will likely be quite stormy. First, a finance minister is missing. The past practice is that the adviser is advised not to present the budget as it would invite undue ire of the assembly members. The Abbasi government cleverly administered oath to Dr Miftah Ismail a day before the last budget; this was done under Article 91(9), which allows a non-member of parliament to be a cabinet member for a period of six months. Dr Ismail did not need even six months as the assembly was being dissolved sooner.

It is not clear whether the current government would like the adviser to be made member of parliament for the next six months so that he can present and defend the budget before the assembly. In his absence, as in the past, one of the ministers of state will present the budget. The present MOS (Revenues) is a natural choice if given the additional charge of finance also. He is a very sensible young person and should be able to do a reasonably good job under the circumstances.

Second, the opposition looks all set to play a disruptive role during the session, given the treatment it was given in the last such session. Indeed, the list of its stated grievances is expanding in the aftermath of the PTM issue and references against the judges. Efforts should be made to reach out to the opposition for a smooth holding of the budget session.

Third, there may be any number of groups who would be affected from the measures and policies announced in the budget. A clear group that is set to react strongly against its privileged position is the textiles industry which feels the removal of its zero-rated status – which has been agreed with the Fund – is a red-line that would invite its reaction through lock-down and strike. As much as possible, the government should address such potential negative reactions in advance through dialogue; otherwise, it will encourage others to raise demands and join the agitation.

Even though IMF programmes have been painful, none has ever resulted in popular reactions. This is so because imbalances in Pakistan have never reached a level that would require back-breaking adjustments. The Egypt example, for instance, was that of a very long delayed adjustment programme where fuel prices, interest rates and exchange rate were allowed for a long time to remain markedly out of line with the underlying costs, and thus posed massive adjustment costs.

Yet, minor sparks could turn into big flames if not handled properly. The key to the success of the programme, as we have been stressing for quite some time, is its ownership within the highest ranks of the government and communication with the people, markets and investors. Of late, some efforts have been made but a lot more needs to be done, especially in the aftermath of the budget when the main conditionality of the programme will be unfolded. If the opposition chooses to discredit the programme conditionality, a robust defense has to be mounted to assure the people of its desirability and efficacy to lift the country from its current economic morass.

The writer is a former finance secretary. Email: waqarmkn@gmail.com