FeaturedNationalVOLUME 18 ISSUE # 31

The urgent need for economic reforms

The current economic landscape demands immediate attention as the budget for 2023-24 fails to curtail expenditure and presents unrealistic revenue targets. This situation has led to heavy domestic borrowing, inflationary pressures, and an impasse that is pushing more people into poverty each week. The country’s economic team leaders and independent economists agree that engaging with the International Monetary Fund (IMF) is the only viable option to unlock pledged assistance and negotiate better terms.

The expenditure-curbing efforts of the 2023-24 budget have fallen short. Instead, current expenditure has increased by 26.5 percent compared to last year’s revised estimates and by 52.9 percent compared to the budgeted amount for the previous year. This has led to significant domestic borrowing, contributing to high inflation. Moreover, the budget lacks a realistic revenue target for the Federal Board of Revenue and external loans, which would have provided leverage for renegotiating with the International Monetary Fund (IMF) on some of the upfront conditions of the ninth review or a new program.

The government has two options to meaningfully address the economic crisis, which is pushing more people below the poverty line every week. The first option is to revise the budget in alignment with the previously agreed IMF programme, supported by both the previous and current administrations. However, this option does not appear to be under consideration. The second option is to wait for the next administration to renegotiate a new, potentially more stringent IMF programme.

It is crucial to highlight that two former finance ministers managed to reach staff-level agreements, the current finance minister has not been able to do so due to policy implementations that violated the terms of the ongoing programme. These policy decisions resulted in adverse consequences, such as controlling the value of the external currency, causing a loss of remittance inflows and exceeding the budgeted current expenditure by a significant amount. This excessive expenditure was funded through ill-advised domestic borrowing, including unfunded electricity subsidies for exporters and additional subsidies beyond the budgeted amount.

Therefore, the current state of the economy is worse than what the government inherited. Both the incumbent economic team leaders and independent economists agree that re-engaging with the IMF is the only option. This could involve reaching a staff-level agreement on the ninth review, as time is running out with the programme set to expire on June 30, 2023. Alternatively, it may require engaging with the IMF on a new plan.

Some economists argue that the main issue lies in the National Finance Commission award, which reduces the Federal Board of Revenue’s revenues, leaving an insufficient amount for the federal government to cover the projected loan interest. However, this argument fails to consider the significant increase in domestic borrowing by the federal government to fund the rise in current expenditure during the previous year.

Furthermore, the budget for 2023-24 relies heavily on external loans amounting to $23.7 billion, of which approximately $15.5 billion is allocated for foreign loans and repayments. However, this level of borrowing is unlikely to materialize unless the country enters into an IMF program, as it anticipates around $13 billion from sources directly linked to such a program.

Government supporters argue that the country experienced a primary surplus (excluding debt servicing) of 0.5 percent, contrary to the budgeted deficit of 0.2 percent. While this surplus suggests contractionary policies, such as a high discount rate and fiscal measures implemented in February, the irresponsible domestic borrowing to fund the significant increase in the budget deficit from the budgeted negative 4.9 percent to the revised negative 7 percent undermines the significance of this statistic.

The Finance Minister’s claim that bilateral debts will be rescheduled, possibly as part of a Plan B without IMF support, pertains to the budgeted $10 billion rollovers, along with additional deposits, from countries like China, Saudi Arabia, and the UAE. However, these amounts alone are not sufficient to prevent the country from looming towards default. While it is a step in the right direction, it falls short of resolving the economic crisis.

The second aspect of Plan B mentioned by Dar refers to the substantial value of assets held by the government, implying that these assets can be utilized to easily repay external debt. However, the budget reflects a more realistic approach by estimating privatization proceeds of only 15 billion rupees for the next year, indicating limited marketability of assets.

The budget components, including the continued control of the interbank exchange rate, shifting the burden of poor sectoral performance onto consumers instead of undertaking necessary structural reforms, and the government’s persistent confidence in negotiations with the IMF, have all contributed to a decline in market perceptions, rising unemployment, and inflation.

It is clear that urgent action is needed to address the worsening economic situation. Re-engaging with the IMF, either through a staff-level agreement on the ninth review or by entering into a new programme, appears to be the only viable solution. This would require revisiting the budget and aligning it with the agreed-upon IMF program, as advocated by the country’s economic team leaders and independent economists. Failure to take decisive measures could result in further economic deterioration, pushing more people into poverty and exacerbating the already alarming unemployment and inflation rates.

The government must recognize the gravity of the situation and the urgency of implementing effective measures. The current economic impasse is causing thousands of individuals to fall below the poverty line each week, with negative growth in the large-scale manufacturing sector and soaring inflation rates. The consequences of inaction are severe, impacting the livelihoods of the people and the overall stability of the economy.

It is imperative for the current administration to consider revising the budget and aligning it with the IMF programme that was previously agreed upon. This approach has garnered support from both the previous and incumbent administrations, emphasizing its significance in unlocking pledged assistance from other multilateral and bilateral sources. By embracing this option, the government can leverage the IMF programme to negotiate better terms and conditions, potentially mitigating some of the upfront harsh conditions and paving the way for a more sustainable economic recovery.

Alternatively, waiting for the next administration to renegotiate a new programme is a risky proposition. It is anticipated that the conditions attached to any future programme could be even more stringent and demanding than the existing one. This delay could further exacerbate the economic challenges, making it increasingly difficult to achieve a swift and stable recovery. Furthermore, it is essential to acknowledge the role of structural reforms in addressing the economic crisis. Merely relying on external loans and domestic borrowing is not a sustainable solution. Implementing comprehensive reforms across various sectors, such as taxation, energy, and governance, is crucial for long-term economic stability and growth.

The government must also address the issue of the National Finance Commission award, which significantly reduces the revenues available to the federal government. Finding a balanced approach that ensures adequate resources for the federal government while also considering the needs of provincial governments is essential for fiscal sustainability.

The current economic situation demands decisive action. Revisiting the budget and aligning it with the IMF programme, coupled with comprehensive structural reforms, is the most viable option to navigate the economic impasse. It is crucial for the government to prioritize the well-being of its citizens and work towards sustainable economic growth, alleviating poverty, and creating employment opportunities. Time is of the essence, and concerted efforts are required to steer the country towards a path of economic recovery and stability.

In conclusion, the gravity of the economic crisis necessitates swift and decisive action. Revising the budget to align it with the IMF programme, along with undertaking structural reforms, is essential for sustainable recovery and stability. Waiting for the next administration to renegotiate a new programme carries significant risks, while timely engagement with the IMF can provide leverage for favorable negotiations. It is imperative for the government to prioritize the well-being of its citizens, implement prudent fiscal policies, and work towards creating a favorable business environment. By embracing these measures, the country can pave the way for economic stability, poverty reduction, and the restoration of investor confidence. The time for action is now.