IN the backdrop of spiking global oil and food prices, as well as mounting pressure from a relentless Imran Khan to force early elections, Fina­nce Minister Miftah Ismail seems to have done a fair job in putting together a budget — no matter how inflationary — to satisfy the IMF on key differences relating to fiscal consolidation and energy pricing.

Though Miftah didn’t mention this in his budget speech (for obvious reasons), the budget documents show that he has agreed to recover petroleum development levy (PDL) to the tune of Rs750 billion and 17 per cent sales tax on fuels from consumers. “We have made some tough decisions and this will continue [next year],” he said in his speech, hinting at the upcoming increase in the fuel prices and imposition of the taxes.

Other measures the government has decided to implement to meet the requirements of the IMF programme include containment of its subsidy bill to Rs699bn, production of a primary surplus — or the fiscal balance adjusted for the net interest payment on public debt — of 0.2pc, and imposition of significant tax on the ‘unproductive’ real estate holdings of the wealthy.

Besides, the government has also decided to raise the electricity and gas prices starting from next month in order to slow down increases in the energy sector’s circular debt. All these measures are going to help it revive the suspended IMF funding, as well as unlock financing from other multilateral and bilateral lenders, needed to stabilise the country’s deteriorating external sector and shore up its depleting foreign exchange reserves that dropped to just above $9bn last week on rising trade deficit.

As a balancing act to help the low- and middle-income segments of society stave off the inflationary impacts of IMF-mandated ‘stabilisation policies’ – projected to produce much higher inflation than the targeted 11.5pc – Miftah has also sought to provide a little bit of relief to salaried persons, pensioners, savers and small businesses by cutting their existing income tax burden and raising salaries of civil servants.

But the question remains: will these goodies save the vulnerable groups from the inflationary storm the increase in the energy prices, not to mention other stabilisation measures, are going to unleash? The bigger question is whether this will help coalition partners, especially the PML-N, preserve their political capital for next elections.

A lot will depend on global commodity prices, as they will determine the outlook on Pakistan’s macroeconomic indicators, as well as the ease with which the government can achieve its budgetary targets for the next financial year, Umair Naseer, financial analyst at Topline Securities, wrote in his note on the budget. Others agree.

“The coalition government is walking on a very tight rope. It has tried to meet IMF conditions while giving something to the middle classes. But if the political situation changes – because of the upcoming spike in the price inflation starting from next month or other factors – or the global oil and commodity prices do not relent, it will become very difficult for the government to continue with these (IMF-mandated) measures. We may see the ruling alliance go back on its commitments with the IMF or at least seek some concessions from it to help the people if things don’t go according to the plan,” argues Fahad Rauf, the head of research at Ismail Iqbal Securities.

The previous government of Imran Khan had also faced a similar situation. His finance minister Shaukat Tareen had designed the current year’s budget on the assumption that global commodity prices would ease and he would be able to recover Rs610bn in PDL from consumers, besides charging sales tax on petroleum products. Nonetheless, he began first slashing PDL and sales tax to share the burden of surging oil prices and then suspending collection once the global markets went through the roof.

He had also agreed with the IMF to incrementally boost PDL to the maximum of Rs30 a litre in January but again suspended the collection after the prices hit close to $100 a barrel even before the PTI government froze the power and fuel prices from March 1, leading to the suspension of the Fund’s programme. The government has merely recovered Rs135bn against the PDL target for the year.

“The decision to implement the levy and tax will be hard for the coalition to follow through if global oil prices rise further or stay at the current level, or even if it comes down to $100 a barrel,” said a senior foreign banker.

“For the last year of the present term of the assemblies, it never is easy for any government in Pakistan to execute such a decision, especially when the people have already been coping with high energy and food inflation for the last three years. It doesn’t matter to the ordinary people whether it is global inflation fuelling the increase in domestic prices or not; they want relief… The tax relief announced by Miftah for the middle classes reflects this reality.”

Opinion is also divided over if the next budget has anything to tackle the inherent structural imbalances in the economy that are the main cause of frequent boom and bust cycles, and Pakistan’s return to the IMF for its dollars to support its external sector.

Most agree that it isn’t realistic to expect the coalition government facing a serious political challenge with the next elections just round the corner and the opposition PTI threatening to return to the roads to produce a ‘reformist’ budget. Others feel that the effort to tax real estate and the earnings of above Rs300 million of individuals and businesses are the first step towards reforms.

“You cannot expect a government to fix the longstanding and deep-rooted imbalances in one budget. That they have done something despite difficult circumstances is better than doing nothing and it must be appreciated,” said a chief financial officer (CFO) of a large bank.

The argument may look pretty much plausible to most of us. Still it is pretty much disappointing to see a finance minister criticizing his predecessors all along for not fixing the structural imbalances in the economy and stopping short of creating new shock absorbers to shield the people.

Published in Dawn, June 11th, 2022