Pakistan: In nutshell; another ‘unimaginative’ budget fuelled by debt


The budget announced for the upcoming fiscal year of 2023-24 is not just unimaginative, it has the unique distinction of also being pro-incompetence.

At a time when there was a dire need to reduce the fiscal deficit and bring inflation under control, the budget has effectively been designed to attain moderate-to-low growth, largely funded by debt.

The total outlay for the budget stands at Rs14.46 trillion, more than half of which will effectively be utilised to service debt. Digging deeper, however, it is clear that almost 80 per cent of all taxes that are expected to be collected will be used to pay mark-up payments on existing debt. If net federal revenue is considered, almost 97pc of the same would be used to fund mark-up payments, and debt servicing requirements.

The budget also envisages a marked increase in the allocation for pensions, which now stands at Rs761 billion, while defence expenditure has been increased to Rs1.8 trillion. A potential increase in inflation may lead to further revision in these estimates, resulting in higher spend, and eventually a higher fiscal deficit.

An ambitious Public Sector Development Programme (PSDP) of Rs950 billion has also been announced. However, it remains to be seen how much of it actually materialises given fiscal constraints.

Old debts and new debts

In essence, all taxes that the sovereign will collect will be used to service debt, while the rest of the government’s expenses will be covered through additional debt. As the sovereign takes on additional debt in an environment where fiscal space is already scarce, there is a potential of increasing interest rates.

To make matters worse, the imposition of 0.6pc withholding tax on cash withdrawals will lead to a potential exodus of deposits from the formal financial system, resulting in an increase in currency in circulation. As the quantum of deposits from the formal financial system reduces, the availability of capital that would be borrowed by the government would become more scarce, resulting in potentially higher interest rates. With the increase in currency in circulation, and the central bank continuing to print more money, it will fuel inflation further.

It is also essential to consider that an increase in wages in the budget will trigger a price-wage spiral, resulting in higher wages across the board, which will further fuel inflation.

Any external shocks related to commodity prices can further exacerbate inflationary pressures, making it difficult to bring the same under control. The budget documents assume an inflation rate of 21pc, which is unlikely to be met considering the inflationary and debt-fuelled nature of the budget.

The additional taxes to be levied in lieu of the super tax will weigh heavily on the already stressed formal sector, which has slumped in recent months, as demonstrated by a contraction in Large Scale Manufacturing (LSM). Imposing additional taxes will further hinder investment, growth and job creation, leading to increased unemployment in an already stressed stagflationary environment.

Overtaxation ultimately results in prices being passed on to the final consumer, resulting in lower sales volumes, lower profitability and ultimately, missed tax collection targets. The formal economy continues to contract, and will be squeezed further due to imposition of additional taxes, while severely constraining any employment growth.

Tax net

This budget contributed little to the widening of the tax net. The retail, wholesale, and agricultural segment largely remain untaxed, and provide an avenue for currency in circulation to be parked, thereby triggering inflation.

Pakistan has the fastest population growth rate in the world, even higher than the projected economic growth rate. Real incomes for the last five years have stayed stagnant — in such a scenario, the current budget will further strain real incomes, as expected inflation will reduce real disposable income.

The inability to provide the necessary foreign currency liquidity has already caused many factories to close, leading to significant job losses. Plans to arrange foreign currency, as envisaged in the budget, seem to be a fantasy at best, considering the high risk associated with the sovereign at this stage. The inability to close the IMF programme and accelerating availability of foreign currency liquidity will continue to exert pressure on the country’s growth prospects, and make stagflation worse.

Little regard to fiscal discipline

The context for the current budget was that of a country going through a polycrisis, barely averting an external default, and squeezed by stagflation. A responsible growth strategy would have curtailed fiscal deficit through the expansion of the tax net, while incentivising private sector investment to drive growth, and job creation.

What has been proposed is essentially yet another budget fuelled by debt at historically high interest rates, with little regard given to fiscal discipline.

The inability to understand the unintended consequences of policy actions may push the country towards a potential restructuring of its external and domestic debt, or a potential hyper-inflationary episode.

In both scenarios, the people of the country suffer the most while the game of political musical chairs continues — the music for the people of the country stopped a long time