Budget Advancer: A rough ride ahead to salvage economy

ISLAMABAD: Prime minister Shehbaz Sharif’s first budget today after taking charge will come with a few comforting lines for mainstream households as Pakistan races against time to return to disbursements under a U$6bn IMF loan program. Though the budget has been preceded by official claims of returning stability to Pakistan’s economic outlook, the downside risk is hard to ignore.

Ahead of Pakistan beginning its new financial year next month (July), independent economists have begun forecasting inflation over the next 12 months rising as high as 20 per cent, at least for many key areas. This is clearly a staggering jump from the expected inflation of over 13 per cent in the financial year ending this month.

The coming jump will be driven mainly by the recent price increase of about a third in domestic fuel prices, a coming gas tariff increase of 45 per cent and a rise of 40 to 50 per cent in the cost of electricity.

Together, Pakistan’s increasingly expensive energy mix will inevitably force middle and low-income households to tighten their belts as never before. The spillover is set to be witnessed in increasingly expensive essential services such as the cost of healthcare and education — just two key ingredients in the life of any mainstream family. Any amount of sugarcoating is set to fail as Pakistanis embark on one of the toughest roads ahead in recent memory.

The heavy cost of a return to normalised relations with the IMF following such unpalatable measures may appear to some as a bitter pill not worth swallowing. However, it is the inevitable bitter pill that Pakistan must swallow to save it from short-term economic ruin. The next IMF disbursement of U$1 billion on its own seems far too modest by comparison to the painful measures about to be inflicted on millions of households. But the value of a restored relationship with the Washington-based lender will come through Islamabad heading successfully towards accessing other sources of loans. On Thursday, finance minister Miftah Ismail used his pre-budget news conference to announce an imminent increase likely in Pakistan’s existing foreign currency reserves by about 25 per cent to U$12 billion in the next few days, on the back of a Chinese loan of U$2.4 billion.

Yet, the budget will present Pakistan with two recurring challenges – the matter of meeting tax collection targets and narrowing the divide between exports and imports, to protect the country against another balance of payments crisis. On both of these counts, a restored relationship with the IMF provides a few assurances of Pakistan successfully overseeing sweeping reforms to make a difference. For prime minister Shehbaz Sharif, leading a government which is not too far from the next elections, hardly helps.

Already, the twin combinations of sharply rising inflation and energy shortages displayed in daily lives through the dreadful reality of frequent loadshedding has hardly helped to blocked official credentials from heading southwards.

In the coming months, Pakistan’s continuing economic challenges will likely deepen the pressure on the Sharif government to maintain recent curbs on imports, to narrow the international trade gap. This will inevitably become the outcome of a situation where Pakistan’s space to pump up its exports will remain limited. The difficult challenge of import curbs is also set to remain in place as the world witnesses high global oil prices with no end in sight to their return to more affordable levels.

And Pakistan’s economic pain will likely remain in place, and possibly even aggravate, in the presence of high interest rates. If inflation continues to rise as predicted by many independent economists, the State Bank of Pakistan will come under pressure to further raise its interest rates.

Meanwhile, Pakistan’s continuously rising political pressure for the foreseeable future is set to undermine the country’s economic journey. Former prime minister Imran Khan’s continuing clamour for parliamentary elections ahead of summer 2023, will likely keep the country’s overall atmosphere on the boil. Even if the Sharif government remains in place till next year, its prospective stability will be undermined by Khan’s activism, with an obvious fallout for the economy.

When finance minister Miftah Ismail rises in the parliament on Friday to present the budget, he may well find comfort in delivering his speech uninterrupted in the absence of opposition members. Yet, beyond a relatively smooth delivery of the budget speech, the road ahead is set to be tougher than witnessed ever before in recent times.