The foreign exchange reserves have fallen below US$9 billion, i.e., an import cover of just over a month; the Pakistan Rupee (PKR) breached the level of 216 to the dollar in the open market, down over 33 percent in the last one year; banks have stopped opening letters of credit for importers to save foreign exchange; foreign banks are demanding 100 percent cash margins for oil imports; oil refineries are on the verge of closing down because of problems in importing oil; power outages of 10–12 hours have become the norm affecting business and industry, and with it exports; petrol prices have gone up by PKR84 and diesel prices by PKR120 in just the last month and will most likely rise further, partly because of market factors and partly because of taxes imposed on petroleum products; base power tariffs are expected to rise by almost a 100 percent to stop the financial bleeding of the power sector; inflation is spiking, and according to independent economists, it could touch 25 percent in the fiscal year 2023; the policy interest rate of the State Bank of Pakistan (SBP) is already 13.75 percent, which means the cost of borrowing for private sector would be upward of 15 percent.
There is speculation that the policy rate could go up another 100 basis points to 14.75 percent, which will have an adverse effect on not just the private sector, but also the debt servicing obligations of the Government of Pakistan.
To put it simply, Pakistan has run out of money. According to a former Chairman of the Federal Board of Revenue, Pakistan is “no longer a going concern” and is bankrupt. He made this statement months before the Ukraine war and the fuel and food shocks caused by this crisis. The fact is no longer a viable state is something that has been increasingly becoming apparent over the years. From around the 1990s, Pakistan has been in a constant boom-bust cycle every three-four years, forcing it to go into an International Monetary Fund programme—11 in the last two decades, and over 20 since 1958. The deep structural problems in the economy have never really been addressed. Governments have, however, preferred to kick the can of reforms down the road. As a result, every successive crisis is even more serious than the previous one.
The standard operating procedure during every crisis is to approach the IMF to get some breathing space. Alongside, go with hat in hand to Saudi Arabia, the United Arab Emirates (UAE), and China to get some free money promising them that this will be the last time. Once the immediate crisis is over, its back to living it up on other peoples’ money. The profligacy lasts a few years before the cycle repeats itself. The problem, however, is that easy money is no longer available. The Saudis have imposed stiff conditions and demanded that Pakistan get back into an IMF programme before they give money. The UAE is believed to have asked for some Pakistani public sector assets in exchange for assistance. The Chinese have also not been as forthcoming or generous as they have been in the past. Most of the assistance from these three countries is in the form of roll-over of old debt. Very little additional assistance is being given to Pakistan.
Imploring the IMF
It is clear that without the IMF coming to the rescue, Pakistan will default and become a Sri Lanka-like crisis on steroids given the scale of the problem. However, the IMF is insisting that Pakistan fulfil its commitments in the form of prior actions if the ‘Enhanced Fund Facility’ (EFF) programme has to be restored. Half measures or even the too clever by half measures that Pakistan resorted to in the past are no longer acceptable. Finance Minister Miftah Ismail thought that by partially reducing subsidy on fuel, he will be able to convince the IMF to restart the EFF programme. However, the IMF wasn’t impressed. Over the years, the IMF has become wise to Pakistani tactics of pleading for relaxation in harsh conditions in the name of the poor of Pakistan, but ending up making the poor and the middle class bear the brunt and burden of the adjustment measures, whilst leaving the elite and ruling classes largely untouched by the pain that every IMF programme entails.
The ‘elite capture’ of Pakistan is so complete that even as the government is exhorting the people to sacrifice for the sake of Pakistan and absorb the horrendous pain that will be administered to them, the elite in government have ensured they don’t have to give any sacrifice. The Budget for FY2022-23 has increased salaries of government employees by 15 percent. In addition, top civil servants (and presumably armed forces officers) “an executive allowance equal to 150 percent of the basic salary”.
Meanwhile, desperate to get the IMF money, Pakistan removed all subsidy on P.O.L products and even agreed to raise taxes from petroleum products in the budget for FY2022-23. It was only after the Pakistanis pleaded with the United States to get the IMF to cut some slack that some flexibility was shown by the IMF. However, even this came with forcing Pakistan to re-do the revenue estimates in the budget by a whopping PKR436 billion in addition to the PKR7 trillion shown in the budget presented in Pakistan’s National Assembly on 10 June 2022.
A budget riddled with holes
The budget itself was a pretty strange document. Whilst it was presented before the National Assembly (which they supposedly passed), it was clearly aimed at winning the approval of the IMF. Virtually every major table given in the Budget-in-Brief document has a footnote saying “Figures are provisional. Final figures will be provided during [the] budget session,” or that the “Figures are provisional which will be finalised after approval of [the] Federal Cabinet”. No doubt, the numbers in the budget documents can change after debate in the Parliament. However, never before has any budget document been qualified with the legends cited above. After all, the budget is approved by the Cabinet before being presented. And, for any government to say that final figures will be provided during the budget session suggests that the numbers were only indicative. Normally, budget documents and Economic Survey do have provisional numbers, but these are revised later, not during the budget session.
Even as indicative or provisional numbers go, the Budget for FY2022-23 is not just full of fanciful figures of both revenue and expenditure estimates, but worse, reveal the terrible state of the economy. Simply put, for ever PKR1 that the Federal government earns as revenue, it is spending nearly PKR2. The net federal revenue is PKR4.9 trillion, whilst the total federal expenditure is PKR9.5 trillion leaving a federal deficit of PKR4.6 trillion. The problem, however, is that the revenue figures are grossly overestimated which means the deficit number is underestimated. The total revenue includes PKR7 trillion in tax revenues and PKR2 trillion in non-tax revenue. However, the latter amount the petroleum levy of PKR750 billion. This will be collected by imposing a PKR50 per litre levy on petrol. Nonethless, the agreement with IMF reveals that this PKR50 will not be levied in one go, but PKR5 per month until it reaches the PKR 50 level. In other words, the petroleum levy will fall far short of the PKR750 billion proposed in the budget.
To meet the fiscal deficit target, the budget has proposed that the four provinces will generate a surplus of PKR800 billion from their resources. However, this is a totally fictitious figure because the provinces just don’t generate this surplus. In FY2021-22, the budget had a provision of PKR570 billion under the head of provincial surplus. The FY2022-23 budget claims that this amount was generated. However, the budgets of the provinces reveals that Punjab had a surplus of PKR116 billion, but Sindh ran a deficit of PKR10 billion. Suffice to say, there was no way that the PKR570 billion estimated in last fiscal was going to be achieved. For the next fiscal again, while Punjab has once again presented a surplus budget of PKR125 billion, Sindh has budgeted for a deficit of PKR34 billion, Balochistan for a deficit of PKR72 billion, and Khyber Pakhtunkhwa has presented a balanced budget. In other words, there is no PKR800 billion provincial surplus that has been shown in the federal budget. Just add the shortfall of the petroleum levy and provincial surplus and there is a yawning gap of over PKR1 trillion in the federal deficit.
A fiscal blackhole
The impact of the exaggerated revenue estimates will be directly felt on the fiscal state of the government. As things stand, out of the PKR4.9 trillion net federal revenue, debt servicing alone will gobble up almost 80 percent or PKR3.95 trillion. Add the bloated defence budget of PKR1.52 trillion and it means that even a large part of the defence spending is being made from borrowed funds. Every other government activity—subsidies, pensions, running of civilian government, development projects is being funded by taking on additional debt. If, however, the revenues are not as per estimates given in the budget, as is quite likely, then the federal government’s revenue will be enough to service the debt and almost the entire defence budget will be met from borrowed funds. This situation will get worse in the next fiscal if interest rates rise to dampen inflation. In any case, given that the rate of growth of total debt and liabilities is outstripping the GDP growth rate, it means Pakistan is now living off debt and is caught in a debt trap situation.
The FY22-23 budget has estimated earning PKR953 billion from customs duties. One of the primary reasons why Pakistan is facing a huge Balance of Payments crisis is because of the ballooning Current Account Deficit (CAD). In the outgoing fiscal, it is estimated that a huge proportion of the indirect taxes – almost 46 percent—were collected by the Pakistan Customs under at the import stage. In other words, the customs duties, sales taxes, withholding tax, and federal excise duties collected on imports were a big chunk of the total indirect tax revenue. This means that the healthy revenue collections were dependent on imports, which in turn means that if imports are cut to reduce CAD, then revenues will fall.
Under the circumstances, expecting Pakistan to fulfil a critical IMF mandated benchmark of ensuring a positive primary deficit is nothing short of a pipe dream. The only way this is going to be possible is through some imaginative accounting.
Unreal macro-economic framework
Apart from all the other fundamental problems that dog the budget, it is the macro-economic framework under which the budget has been prepared that is completely unrealistic. Take for example the PKR-Dollar parity that has been assumed while preparing the budget. At a time when the PKR-Dollar parity in the inter-bank market has breached the 210 level, the budget calculations have been made on the basis of a dollar rate of 183. However, this isn’t the only bizarre number that has formed the basis of budget calculations. Inflation has been estimated at 11.4 percent for FY23, when it is already over 13 percent and expected to rise further as a result of the hike in fuel, power tariffs, and higher taxes. Similarly, the budget is based on a real GDP growth of 5 percent which is highly unlikely. In fact, most independent economists expect growth to tank and fall to between 2.5 percent to 3 percent. The more optimistic ones think it could go up to 4 percent.
A lot of the growth in exports happened on the back of subsidies, which are going to be cut going forward. Pakistan just cannot afford giving export subsidies in which the benefits to the economy are less than the concessions given. The CAD which is around 5 percent of GDP is expected to around 3 percent in the next fiscal. But how? The estimates of customs duties don’t match up to the huge 2 percent adjustment in CAD in one year. The budget deficit, which in the outgoing fiscal is expected to be close to 9 percent, is to come down to just under 5 percent, i.e., an adjustment of around 4 percent of GDP. Simply put: It is not going to happen.
Rearranging the deck chairs on the Titanic
Pakistan is broke. That much is clear from the numbers, even the fudged ones. In fact, numbers are generally fudged when an entity is on the brink of bankruptcy. The problem is that the focus in Islamabad is primarily around saving the moment and avoiding the economic meltdown that will come if Pakistan defaults. There is a sense that, if Pakistan tides over the current crisis, all will be well. It might well be so, but only for a couple of years. After that, it will be back to square one. The trouble is no one in Pakistan is ready to bite the bullet of deep, sweeping structural reforms that will put the country on a sustainable glidepath.
Pakistan’s proclivity to live beyond its means, punch way above its weight, and indulge in expensive foreign policy adventures are all coming home to roost. They thought victory in Afghanistan over the US will make Pakistan a regional superpower. However, Afghanistan is now a huge drain on Pakistan—sucking out dollars and food grains, which Pakistan is no longer self-sufficient in and has to import. Trade with Afghanistan is in local currency even though the goods traded are being bought in precious foreign exchange. Even so, many Pakistani analysts often express confidence that the world will not allow a nuclear weapons state to collapse, forgetting what had happened to the erstwhile Soviet Union. They also believe that their friends will save them. But increasingly the ‘friends’ are becoming parsimonious and asking Pakistan to set its house in order. The free lunches have ended, only scraps are being thrown Pakistan’s way.
Sushant Sareen is Senior Fellow at Observer Research Foundation. Views are personal.