As a rule of thumb, the higher the level of fiscal and monetary coordination in an economy the better it is for budget making and, of course, for the targeted economic progress.

The FY19 budget, a large part of which has become known thanks to media leaks, is likely to suffer on this count.

For overcoming external sector problems, the government will have to borrow billions of dollars before the close of this fiscal in June. And, it seems to be almost a certainty that the government will also have to borrow from international financial institutions including the International Monetary Fund (IMF).

Any balance of payment support programme of the IMF would this time come tied with stricter requirements of greater fiscal discipline, exchange and interest rates flexibility, reforms in power sector, revenue generation, running and privatisation of public sector enterprises etc; bankers, central bankers and senior officials of the Ministry of Finance say.

“Which means the authorities will have to review some of the promises it makes in the budget after a few months, in light of emerging ground realities. These may include also readjustment in sector-wise development outlays,” fears a senior central banker.

“How doing so will help maintain the spirit of the budget and the effectiveness of its use as a tool to meet the growth target is a serious question.”

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Similarly, a planned launch of dollar-based saving certificates for overseas Pakistanis will have its own ramifications on the domestic debt profile, the government capacity to service it, composition of local and forex deposits of banks and their forex holding, net foreign assets and net domestic assets of the central bank and currency in circulation etc.

Bankers fear if projections being made now for external borrowing don’t materialise, the new political government might find it tempting to repeat the PML-N’s folly

“Whether the government will be able to launch these bonds during the remaining two months of this fiscal year, or whether they will become a reality next year, will make a lot of difference in the budget making exercise,” admits a senior official of the Ministry of Finance without disclosing what is more likely.

Keeping the rupee overvalued was the PML-Nawaz government’s policy during four out of five years of its present term. Exports suffered, imports of non-essential items grew several fold. And, as a result, trade deficit increased and the current account deficit expanded.

In just nine months of this fiscal year, the C/A deficit has risen to $12 billion just below $12.6bn for the whole of last year and 50pc higher compared to a year-ago period.

Besides, the central bank had to pump dollars into the interbank market to keep the rupee artificially stable, a move that gradually reduced the State Bank of Pakistan’s (SBP) own forex reserves to below the critical level: an amount equivalent to three months of imports.

Bankers fear if projections being made now for external borrowing don’t materialise, the new political government formed after the upcoming elections might find it tempting to repeat the PML-N’s folly.

Has the fiscal and monetary coordination board considered this and similar scenarios as part of their pre-budget brainstorming? And, has the board even met in recent days to make the upcoming budget a synchronised document with full input of fiscal and monetary authorities?

These are important questions that cannot be ignored before budget making if the policymakers want to achieve budgetary targets that put the economy onto a sustainable growth trajectory.

One prominent example of past failures in fiscal and monetary policy frameworks is the imposition of withholding tax on banking transactions. This tax was introduced to increase the number of taxpayers without success. Instead, the use of cash went up in financial dealings of individuals and small businesses.

Now, the SBP has proposed the government reduce the rate of this tax from the existing 0.3pc to 0.1pc for income tax filers. Central bankers fear that if the proposal is turned down it will be difficult for the central bank to contain expansion of currency in circulation and, in return, its impact on inflation and on expansion of the grey economy.

We already know, through leaked parts of the budget strategy paper that in FY19, the minimum taxable limit will be enhanced significantly, tax rates will go down and salaries of government employees will get a handsome rise.

Such populist measures are bound to impact fiscal accounts and, along with higher cost of local and foreign debt servicing, higher defence expenses and a greater need for financing more ambitious public sector development plans, can push up fiscal deficit.

That means greater government borrowings from the central bank and the banking system.

“So, there will possibly be issues of the private sector crowding out in the first case and a build-up in inflationary pressure in the second,” worries a senior central banker. “The SBP might have to respond with policy rate hikes pushing up interest rates. Can the private sector, afford it? I don’t know.”

In Pakistan’s context, cuts in the government’s development expenditures increases unemployment. During the last nine months, total release of development funds stood around 60pc of the Rs1 trillion allocated for fiscal year 2017-18 and a slippage in the full year target is very likely.

This, along with lower than targeted economic growth of 6pc, is believed to have already affected the employment level adversely.

“So, in the next year there will be a need for an even larger allocation of development funds and their fuller utilisation. How will that be possible without boosting the services sector and small and medium enterprises that serve as a conduit for job growth via higher public sector spending?,” asks a senior executive of a large local bank.

Published in Dawn, The Business and Finance Weekly, April 23rd, 2018