As it fights to stay afloat, it has become evident that Pakistan is on its path to becoming the next Sri Lanka. The foreign exchange reserves have fallen below US$9 billion, which is equivalent to an import cover of just over one month; the Pakistan Rupee (PKR) has breached the level of 216 to the dollar on the open market, down over 33 percent in the last 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 due to difficulties in importing oil; and the Pakistani government has The costs of gasoline and diesel have risen by PKR84 and PKR120, respectively, over the past month, and are projected to climb further, due in part to market reasons and in part to taxes placed on petroleum products. Base power tariffs are expected to increase by nearly 100 percent to stem the financial bleeding of the power sector; inflation is on the rise and, according to independent economists, could reach 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 that the cost of borrowing for the private sector will exceed 15 percent. There is conjecture that the policy rate could increase by another 100 basis points to 14.75 percent, which would have a negative impact on both the private sector and the government of Pakistan’s debt service commitments.
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Approaching bankruptcy
Pakistan has essentially ran out of money. According to a former chairman of the Federal Board of Revenue, Pakistan is bankrupt and “no longer a going company.” This statement was made months before the war in Ukraine and the resulting gasoline and food shortages. The reality that the state is no longer sustainable has been progressively more obvious over the years. Since the early 1990s, Pakistan has seen a boom-bust cycle every three to four years, prompting it to enter 11 IMF programmes in the last two decades and over 20 since 1958. The economy’s profound fundamental flaws have never been adequately addressed. Governments, on the other hand, have chosen to delay reforms. Consequently, each subsequent crisis is more severe than the prior one.
Standard operating procedure in times of crises is to seek financial relief from the IMF. In addition, go begging for money in Saudi Arabia, the United Arab Emirates (UAE), and China, saying that this will be the final time. Once the immediate crisis has passed, it’s back to living lavishly on the money of others. A few years of wastefulness precede the cycle’s repetition. However, the issue is that cheap money is no longer accessible. The Saudis have imposed stringent conditions and asked that Pakistan re-enter an IMF programme prior to providing financial assistance. It is thought that the UAE requested public sector assets from Pakistan in exchange for assistance. In addition, the Chinese have been less transparent and generous than in the past. The majority of aid from these three nations consists of the refinancing of old debt. Pakistan is receiving a negligible amount of new aid.
Pleading with the IMF
Given the magnitude of the situation, it is evident that if the IMF does not intervene, Pakistan will default and become a Sri Lanka-like disaster on steroids. If Pakistan’s ‘Enhanced Fund Facility’ (EFF) programme is to be reinstated, the IMF insists that Pakistan fulfil its pledges in the form of preceding actions. Pakistan’s previous reliance on half-measures or methods that were too smart by half is no longer acceptable. Finance Minister Miftah Ismail believed that by eliminating gasoline subsidies in part, he could convince the IMF to revive the EFF programme. The IMF, however, was not impressed. Over the years, the IMF has grown savvy to Pakistan’s strategy of pleading for leniency in harsh conditions in the name of the country’s poor, only to end up making the poor and the middle class bear the brunt and burden of the adjustment measures, while leaving the elite and ruling classes largely untouched by the suffering that every IMF programme entails.
The ‘elite capture’ of Pakistan is so comprehensive that even while the government exhorts the people to sacrifice for the good of Pakistan and endure the excruciating agony that would be inflicted to them, the elite in government have assured that they do not have to sacrifice. The Budget for FY2022-23 has increased government employee salaries by 15%. In addition, elite government officials (and, presumably, military leaders) receive “an executive allowance equal to 150% of their base wage.”
Over the years, the IMF has become savvy to Pakistan’s strategy of begging for leniency under tough conditions in the name of the country’s poor, only for the poor and middle class to end up bearing the brunt and burden of adjustment measures.
In the meantime, Pakistan eliminated all subsidies on P.O.L. products and decided to increase taxes on petroleum products in its budget for FY2022-23. The IMF showed some leniency only after the Pakistanis pleaded with the United States to convince the IMF to be lenient. In addition to the PKR7 trillion projected in the budget submitted to Pakistan’s National Assembly on 10 June 2022, Pakistan was compelled to revise its revenue projections by a stunning PKR436 billion.
A budget packed with holes
The budget was an odd document in and of itself. While it was presented to the National Assembly (and ostensibly passed), it was manifestly designed to secure IMF approval. Almost every significant table in the Budget-in-Brief contains a notation stating “Figures are tentative.” Final figures will be provided during [the] budget session,” or “Figures are provisional and will be finalised following approval by the Federal Cabinet.” Certainly, the numbers in the budget documents are subject to change after a debate in the Senate. However, budget documents have never before been qualified with the aforesaid legends. Ultimately, the budget is presented only after Cabinet approval. In addition, a government’s assertion that final data will be revealed during the budget session shows that the numbers provided were merely suggestive. Typically, budget documents and the Economic Survey contain provisional data, but these are amended after the budget session, not during it.
Revenue estimation error
Even by indicative or preliminary standards, the Budget for FY2022-23 is replete with fantastical revenue and expenditure predictions, and they show the dire situation of the economy. Simply put, the Federal government spends approximately PKR2 for every PKR1 it collects in revenue. The federal deficit is PKR4.6 trillion, with net federal revenues of PKR4.9 trillion and total government expenditures of PKR9.5 trillion. The issue, however, is that the revenue estimates are significantly inflated, resulting in an underestimation of the deficit. The overall revenue consists of PKR7 trillion in tax collections and PKR2 trillion in other revenues. However, the latter is the 750 billion PKR petroleum tax. This will be collected through a tax of PKR50 per litre on gasoline. Nonetheless, the deal with the IMF discloses that this PKR50 will be levied monthly at a rate of PKR5 until it reaches PKR50. In other words, the petroleum levy will fall significantly short of the budgeted PKR750 billion.
There are provisional numbers in budget documents and the Economic Survey, but they are not amended during the budget session.
The budget proposes that the four provinces will generate a surplus of PKR800 billion from their resources in order to satisfy the fiscal deficit target. However, this number is completely fake, as provinces do not produce this surplus. In the budget for fiscal year 2021-22, there was a provision of 570 billion PKR for provincial surplus. The budget for FY2022-23 indicates that this amount was created. The provincial budgets reveal that Punjab had a surplus of PKR116 billion while Sindh ran a deficit of PKR10 billion. Needless to say, the PKR570 billion forecast for the previous fiscal year could not be achieved. While Punjab has provided a budget surplus of PKR125 billion for the next fiscal year, Sindh has planned for a deficit of PKR34 billion, Balochistan has budgeted for a deficit of PKR72 billion, and Khyber Pakhtunkhwa has given a balanced budget. In other words, the federal budget does not reflect a provincial surplus of 800 billion PKR. With the addition of the shortfall from the petroleum levy and the provincial surplus, the federal deficit exceeds PKR 1 trillion.
A fiscal deficit
The inflated revenue projections will have a direct impact on the government’s budgetary health. As things stand, approximately 80 percent, or PKR3.95 trillion, of the net federal revenue of PKR4.9 trillion will be consumed by debt service. Adding the bloated defence budget of PKR1.52 trillion reveals that a substantial portion of the defence budget is made up of borrowed monies. All other government activities, including subsidies, pensions, the operation of the civilian administration, and development projects, are financed by incurring extra debt. If, however, revenues fall short of budget projections, which is highly probable, then the federal government’s revenue will be sufficient to pay the debt and practically the entire defence budget will be funded with borrowed monies. If interest rates rise to combat inflation, this position will worsen in the next fiscal year. Given that the rate of growth of total debt and liabilities exceeds the rate of growth of GDP, Pakistan is currently living off debt and is in a debt trap predicament.
The customs charges, sales taxes, withholding tax, and federal excise duties collected on imports were a substantial portion of the indirect tax revenue as a whole.
The budget for FY22-23 estimates revenue of PKR953 billion from customs duties. The rising Current Account Deficit is one of the key causes for Pakistan’s massive Balance of Payments issue (CAD). During the preceding fiscal year, it is expected that the Pakistan Customs collected around 46 percent of the indirect taxes at the import stage. In other words, the customs charges, sales taxes, withholding tax, and federal excise duties paid on imports constituted a significant portion of the overall indirect tax collection. This indicates that robust revenue collections were based on imports, and that if imports are reduced to reduce the CAD, revenues will decline.
Expecting Pakistan to meet a major IMF benchmark requiring a positive primary deficit is a pipe dream under the current conditions. This can only be accomplished by creative accounting.
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