A ‘bold' budget for next FY

Business Recorder

30-05-2025

EDITORIAL: Finance Minister Muhammad Aurangzeb while addressing an event organised by Karandaz Pakistan and Pakistan Banks Association claimed that macroeconomic stability has been achieved.
However, this stability, as per the October 2024 documents relating to the approval of the ongoing Extended Fund Facility programme are, is disturbing as the country's vulnerabilities continue to persist.
The Fund document notes, 'A large part of the economy is uncompetitive, propped up by the extensive use of protection, subsidies, and tax concessions, which have undermined the tax base. Protectionism, including from new entrants in domestic markets has undermined competition, leading to inefficiency and low productivity.
A difficult business environment and weak governance have hindered investments, which remain significantly lower than peer countries, further undermining competitiveness. Economic volatility has only increased over time, with a tight correlation between Pakistan's boom-bust economic outcomes and its macroeconomic policies. The repeated attempts to boost economic activity through fiscal and monetary stimulus have not translated into durable growth, as domestic demand increased beyond Pakistan's sustainable capacity, resulting in inflation and depletion of reserves, given a strong political preference for stable exchange rates. Each subsequent bust has further harmed Pakistan's policy making credibility and investment sentiment.'
Aurangzeb further stated that the government is preparing to introduce 'bold measures' in the budget with a focus on strategic direction. One must welcome this orientation that was lacking in previous budgets as the focus was on balancing the books through raising the target revenue to an unrealistic level that was rarely if ever met by the end of the year, and adjusting the shortfall through slashing the Public Sector Development Programme (PSDP). In addition, domestic and external borrowing was increasingly relied on to meet our external financing needs (read repayment of interest and principal as and when due on foreign debt) as well as the budget deficit targets agreed with the IMF; and in this context it is relevant to note that in the current fiscal year the budgeted external borrowing has not yet materialised, partly due to global factors but partly due to Pakistan's high-risk rating that continues in spite of claims of having achieved economic stability. Next year's foreign borrowing requirements are projected at 19.3 billion dollars, which no doubt would limit the government's capacity to introduce some 'bold measures' unless of course the government is able to slash current expenditure at best or keep it at 2024-25 levels at worst.
The minister proceeded to aver that rather than making the math work the government intends to make the budget more strategic. This too must be appreciated though the recent statement by the Finance Ministry delivered during the meeting of the sub-committee of the National Assembly on Commerce should be a source of concern; notably, the acknowledgement that there was a disagreement with the Fund over some key budgetary figures including subsidy allocation. There is overwhelming evidence that Pakistan has almost no leverage with the Fund at present that would allow the authorities an element of phasing out the harsh up-front conditions without proactively exercising leverage through either pension reforms (with the start of employee contributions) and resisting a pay raise for the 7 percent of the workforce which receives a salary at the taxpayers' expense, a policy that no previous administration has been able to implement, and to strictly adhere to the math behind the budget document by adhering to the expenditure and revenue sources identified in the budget.
The minister also claimed that Pakistan has achieved macroeconomic stability and emphasised the need for avoiding past mistakes that accounted for the boom-bust syndrome. There is no doubt that in the past the 'sugar high' he referred to was a factor that led the country to repeat the same mistakes over and over again: pumping liquidity into the market (through mainly government expenditure on industrial incentives and subsidies), which led to sustaining an industrial base (that envisages exporting the surplus rather than producing for export) that requires massive imports which, in turn, led to periodic balance of payment issues requiring IMF programme loans.
The challenges facing the country's economy are immense and one can only hope that the finance minister stays the course, with full support from all stakeholders, otherwise the country would be pushed deeper into the mire with the prospect of success even more difficult.
Copyright Business Recorder, 2025