In a typical year, Pakistan’s federal budget is usually presented by increasing revenue and reducing expenditure to meet a predetermined fiscal deficit target.
However, during election years, the government increases both revenue and (pro-people) spending to present a “pre-election” budget that focuses on being “pro-poor” and providing “relief” to citizens. .
The good old days
In the past, it was relatively easy for the Pakistan People’s Party (PPP) 2008-2013 and Pakistan Muslim League-Nawaz (PML-N) 2013-2018 governments to present pre-election budgets during the last year of their tenure. .
This was because their respective International Monetary Fund (IMF) programs had ended long before the term of the Legislative Assembly, giving them the flexibility to present a “captive” budget. Any fiscal deficit arising from the implementation of these budgets was handled by his successors.
Unlike the PPP and PML-N governments, the PTI government (2018-2022) waited almost a year before joining the IMF programme. It coincided the end of the program with the fourth year of the National Assembly term.
The challenge from the IMF
After assuming power in 2022, the budget presented by the Pakistan Democratic Movement (PDM) government, a multi-party ruling coalition, was challenged by the IMF, saying that revenue projections were unrealistic and expenditure projections were understated. was done. The budget had to be revised three times.
Considering the macroeconomic condition, Pakistan extended the IMF program by one year (taking it to the last year of the National Assembly term). On the request of Pakistan, the IMF also increased the loan limit by one billion dollars. At the time, June was hopeful of securing maximum loan tranches by 2023, allowing the PDM to present its second pre-election budget as a populist budget, even if it meant sacrificing the final tranche of the IMF program. be
Dud commits.
However, things did not go as planned. The superflood and political instability forced the government to violate certain provisions of the IMF program, particularly those related to foreign exchange rate management.
This significantly delayed the start of the IMF’s 9th major review to issue the next installment. The government was optimistic about the inflow of dollars, considering the expected payments from the international community for the Geneva pledges for flood relief.
However, those pledges, especially to multilateral lenders, also failed to materialize due to the lack of a letter of relief from the IMF. So the rupee continued to depreciate, and the dollar remained low.
A political tinder box
Meanwhile, the growing political crisis exacerbated the economic crisis, which made the economic situation more chaotic. Friendly countries adopted a “wait and see” approach and delays in obtaining financial assurances from them doomed the IMF’s program.
While Pakistan has so far been able to avoid default, the next government should negotiate another IMF program to mobilize $77-80 billion in external financing (loans) over the next three years, including $24 billion is needed in the next fiscal year alone.
Options and Consequences
Regarding the current IMF programme, the PDM government has two options.
First, allow the program to expire prematurely and exit the IMF’s “scrutiny.” In such a case, the government is not obliged to share its budget framework with the IMF and can present a “pre-election” budget to please its voters.
Will this gamble work for the current government or not? Under this scenario, whoever wins the next election will have to start anew with the IMF.
Finishing the mission
As a rule of thumb, ending an IMF program prematurely or failing to meet commitments in one causes the next one to become more stringent and challenging.
Many unfulfilled promises become precursors to a later program. This means that in pursuing the above option, the next government may have to implement one of the toughest IMF programs in Pakistan’s history.
Deliver the goods
Another option is to engage with the IMF to get another loan tranche from the fund before June 30.
In this case, the budget is to be prepared in consultation, if not in accordance with the pre-agreed agreement in the current IMF program, then there will be little room for populist budget stunts.
die another day
The government appears to have opted for the second option, although no agreement has yet been reached between the government and the IMF on the budgetary framework or completion of the ninth review.
The government’s willingness to stay in the IMF program means it will be careful to provide unrealistic pre-election “relief” for people on June 9.
However, the government’s willingness to stay in the program means it will be careful to provide unrealistic pre-election “relief” to the public on June 9.
By staying tied to the fund, the next government will have a relatively easy time negotiating with the IMF for the next loan.
A game of PDM?
One may wonder why the PDM government would risk its political capital by not presenting a budget before the elections and why it would take steps that would benefit its successors. Let me explain.
Economy and politics are intertwined. The disintegration of the PTI, with the departure of many of its leaders following the tragic attacks on state structures on May 9, has significantly reduced its chances of forming the next government.
This means that the possibility of one, some, or all of the parties in the PDM coalition being part of the next federal government is quite strong.
As we discussed earlier, the next government will need to request a bailout from the IMF. Therefore, the PDM coalition aims to avoid complicating the post-election situation by presenting a realistic budget at this time.
Even if a populist budget were to be presented on Friday, it would ultimately have to be abandoned to qualify for a bailout package.
Four major ds
Now coming to the provincial budget. Caretaker governments in Punjab and Khyber Pakhtunkhwa will present interim budgets for four months only.
New governments in these provinces will later revise these budgets, which will affect assumptions and figures such as provincial surpluses in the federal budget as well.
Would you like to know exactly where the federal budget is? I categorize spending in the federal budget as the “Four Ds”; Debt servicing, defense, day-to-day administration, and development.
The first three Ds are non-discretionary and mandatory. No government can compromise on them. The fourth, development, is only discretionary spending and is always compromised.
Opportunity for Prime Minister
Amidst all this chaos, there is finally a chance for the Prime Minister. He can build a consensus on the Charter of Economy and not only in the 13-member PDM coalition but also with any new political party(ies) that may emerge before the election.
The economic crisis that Pakistan has suffered due to political instability will be resolved only with political wisdom.
Dr. Abid Qayyum Saliri is the Executive Director of the Sustainable Development Policy Institute. He tweets @Abidsuleri.