As the October-November general election draws near, the financially constrained government has revealed a budget that has received criticism for being populist, debt-driven budget, non-progressive, and imbalanced. Experts argue that the numbers presented in the budget contradict the expectations of the International Monetary Fund (IMF), raising concerns about its viability and long-term consequences.
Tax Collection Target and Corporate Burden
One major point of contention is the government’s ambitious tax collection target of Rs9.2 trillion. Critics argue that instead of implementing measures to increase the number of taxpayers, the government has chosen to burden the already overtaxed corporate sector. This approach overlooks the opportunity to broaden the tax base and ensure a fairer distribution of the tax burden.
Fiscal Deficit and Debt Accumulation
The proposed fiscal deficit of Rs6.9 trillion (6.5% of GDP) has raised alarm bells. The government plans to finance this deficit by accumulating both local and foreign debt, despite the challenges of repaying existing debt and the risk of defaulting on foreign debt obligations. The government aims to secure a significant portion of the new foreign financing through commercial borrowing and the issuance of Euro bonds. However, these plans face significant difficulties due to the delay in reviving the IMF program worth $6.5 billion.
Experts Express Concerns
Arif Habib Limited’s Head of Research, Tahir Abbas, expressed skepticism regarding the fiscal numbers presented in the budget. He highlighted that the revenue collection target is overestimated while expenditures are underestimated for the FY24 budget. He believes that the IMF is unlikely to accept these figures, making it difficult for the government to gain IMF approval based on the current numbers. Abbas suggested that the government may need to revise the budget in consultation with the IMF before it takes effect on July 1, 2023.
Fahad Rauf, Head of Research at Ismail Iqbal Securities, echoed similar concerns about the large fiscal deficit. He pointed out that the government’s announcement of a significant increase in pay, pensions, and subsidies for its employees will require budget amendments in consultation with the IMF before it becomes effective.
Lack of Comprehensive Measures
The Overseas Investors Chamber of Commerce & Industry (OICCI) observed that the budget appears to be an interim solution with short-term measures targeting specific sectors, lacking comprehensive measures needed to stabilize the economy. While positive measures for the IT and agriculture sectors, as well as the promotion of SMEs, were appreciated, no specific bold measures were announced to support the ambitious revenue targets or broaden the tax base. The absence of measures to incentivize investment in manufacturing and job-creating sectors, as well as the lack of initiatives to attract substantial foreign investment, were also noted.
CEO of Alpha Beta Core, Khurram Schehzad, criticized the government for its short-term focus, suggesting that it lacks a long-term vision. He questioned how the government plans to achieve the ambitious tax collection target of Rs9.2 trillion amid high inflation and low growth, particularly as it has announced no plans to reopen imports. Schehzad raised concerns about the government’s ability to justify the budget to the IMF in light of these challenges.
IMF Expectations and Loan Repayment
The IMF expects the budget to align with the objectives of the program. Muhammad Sohail, CEO of Topline Securities, highlighted the IMF’s projections for a budget deficit of 4.0% of GDP and a primary surplus of 0.5% of GDP for FY24. In contrast, the government is targeting a fiscal deficit of 6.5% and a primary surplus of 0.4% for the same period. The IMF is also waiting for credible financing commitments and the proper functioning of the foreign exchange market.
The government faces the daunting task of repaying external loans estimated at around $22 billion in FY24. The implications of this repayment on the local currency, interest rates, and the stock market remain uncertain.
As the government grapples with mounting questions about the justification and feasibility of its budget, it remains to be seen how it will address these concerns and navigate the complex economic landscape ahead.
Published in PakWeb, June 9th, 2023.
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