Virendra Pandit
New Delhi: Pakistan, which is in talks with the International Monetary Fund (IMF) for a fresh loan of between USD 6 and 8 billion to avert a default for its nearly bankrupt economy, is now preparing a budget for the current financial year that would reflect these contingencies.
Islamabad’s coalition government, led by Prime Minister Mohammed Shehbaz Sharif, is expected to lay out fiscal targets in the new budget for the next financial year (July 2024 to June 2025), to be tabled in the National Assembly on Wednesday, which could help strengthen its case for a new bailout deal with the global lender, the media reported on Monday.
Pakistan is trying to avert a default for a sluggish economy growing at the slowest pace in South Asia.
“The budget holds critical significance for Pakistan’s IMF program and must close the gap between our revenue collection and total expenditure; it is thus likely to be contractionary,” Ali Hasanain, who heads the economics department at the Lahore University of Management Sciences, was quoted as saying.
Pakistan narrowly averted a default last summer because of a short-term IMF bailout of USD 3 billion over the last nine months.
While its fiscal and external deficits have been checked, it came at the expense of a sharp drop in growth and industrial activity and high inflation, which averaged nearly 30 percent in the last financial year and 24.52 percent over the past 11 months.
The growth target for the upcoming year is likely to be higher at 3.6 percent compared to 2 percent this year and economic contraction last year.
PM Sharif has committed to tough economic reforms since being elected in February elections, but high prices, unemployment and a lack of new job opportunities have piled political pressure on his coalition government.
According to Standard Chartered, fully implementing all the measures that the IMF is likely prescribing, such as increasing revenue through widening the tax base and power tariff hikes, will be tough for the Sharif government.
“A weak coalition government, a vocal and popular opposition, and the difficulty of implementing deep-rooted structural reforms were seen as reasons for caution,” it said last month.
“A key concern among local stakeholders was the risk that front-loading tough fiscal measures could face a backlash from the public,” it added.
The coming budget will also be the first test for new Finance Minister Muhammad Aurangzeb, a former Habib Bank Ltd chief, who was inducted to formulate fresh policy solutions to address persistent problems in the tottering USD 350 billion economy.
His predecessors avoided taking thorny steps like cutting subsidies, reducing government spending, and increasing tax revenues from politically sensitive sectors such as real estate, agriculture, and retail.
Mustafa Pasha, chief investment officer at Lakson Investments, said taking such steps would be difficult.
“Any attempt to tax agriculture, retail, and real estate will likely be poorly structured and face legal challenges which will prevent any collection,” he said, adding that failure to address IMF demands would likely lead to a delay in a new program which Pakistan cannot afford for long.
Another key point in the new budget could be the targets set for proceeds from privatization. Pakistan is looking to make its first major disinvestment in nearly two decades as it offloads a stake in its national airline.
It is expected to be the first in a series of sales of loss-making entities, particularly in the troubled power sector.