On June 10, Pakistan’s newly elected government presented a 9.52 trillion Pakistani rupee ($47 billion) budget for the fiscal year 2022-23. The budget aims at tight fiscal consolidation and to achieve 5 percent economic growth, which is lower than the 5.97 percent growth in the outgoing year.
Finance Minister Miftah Ismail, who presented the budget vowed to remove fuel and energy subsides to revive the International Monetary Fund (IMF)’s stalled $6 billion bailout package. The revival of the IMF program is crucial for Pakistan as the country faces a balance of payments problem. There are concerns that Pakistan may face a default like situation if the IMF bailout package is not revived in the coming weeks.
Earlier, Ismail had said that reforms, which were being introduced in the new budget will please the IMF, taking the country closer to finalizing a staff level agreement with the lender. However, it appears that the proposed budget has not pleased the IMF.
In a statement following the budget presentation, the bank’s resident representative in Pakistan said that additional measures will be needed to bring the budget in line with the main objectives of the IMF program. “Our preliminary estimate is that additional measures will be needed to strengthen the budget and bring it in line with key program objectives,” Esther Perez Ruiz told Reuters.
Reportedly, the IMF is demanding a further boost in tax rates and wants the country to collect more direct taxes and remove remaining fuel subsidies. As per the proposed budget, the government aims to collect Rs 7 trillion ($34.6 billion) in taxes through the Federal Board of Revenue (FBR). Pakistan has increased the tax rate on banking companies from 39 percent to 42 percent, which is likely to bring Rs 15-20 billion ($74.2-$98 million) in additional revenue. The tax on immovable property assessed above Rs 25 million ($0.127 million), will also be subject to tax now. “The major part of the wealth of rich people is parked in the real estate sector in Pakistan. This is a double-faceted menace,” the finance minister said in his budget speech, pointing out that “it leads to the accumulation of unproductive assets and raises the prices of housing for the poor and lower-income groups.”
Out of the total annual budget, around 40 percent is reserved to make foreign and domestic debt payments. This means that the country’s debt servicing is expected to climb up to $23 billion in budget 2022-23. Last week, foreign exchange reserves held by the central bank stood at $ 9.2 billion, which is enough to cover 45 days of Pakistan’s import bill.
The proposed budget has not been able to reignite confidence in the market. The Pakistani currency on Tuesday crossed Rs 205 against the U.S. dollar for the first time in history. Analysts believe that stability will return to the Pakistani market once there is a staff level agreement with the IMF. “The delay is not good for the markets,” Ministry of Finance’s former adviser Dr Khaqan Najeeb told Express Tribune, adding that the “markets are uncomfortable due to the uncertainty about the IMF loan programme.”
The existing fiscal crisis has also had an impact on Pakistan’s defense spending. Director-General of the Inter-Services Public Relations (ISPR) Major General Babar Iftikhar said on Tuesday that the allocation for defense has decreased if issues such as rising inflation and currency depreciation were taken into account. Budget allocation has decreased from 2.8 per cent of the GDP to 2.2 per cent, he said.
Pakistan’s economic woes are not expected to ease in the coming weeks. The country’s import bill continues to balloon due to oil imports and other expenditures, while exports have failed to bring a balance. Lack of international support has further worsened the situation. The budget shows that the new government has its work cut out as it rushes to bring stability to the markets.