In a normal year, Pakistan’s federal budget is typically presented by inflating income and deflating expenses to meet the predetermined fiscal deficit target.

However, during election years, the government tends to inflate both income and (pro-people) expenditures to present a “pre-election” budget that focuses on being “pro-poor,” and providing “relief” to the citizens.

Good old days

In the past, it was relatively easier for the Pakistan People’s Party’s (PPP) 2008-2013 and the Pakistan Muslim League-Nawaz’s (PML-N) 2013-2018 governments to present pre-election budgets during the final year of their tenure.

It was because their respective International Monetary Fund (IMF) programmes had concluded much earlier than the legislative assembly’s tenure, allowing them the flexibility to present “populist” budgets. Any resulting fiscal deficit from implementing those budgets was handled by their successors. 

Unlike the PPP and PML-N governments, the PTI government (2018-2022) waited almost a year before joining the IMF programme. This aligned the programme’s conclusion with the fourth year of the national assembly’s tenure.

Challenged by IMF

After assuming power in 2022, the budget presented by the government of Pakistan Democratic Movement (PDM), the multi-party ruling alliance, was challenged by the IMF, which found the revenue estimates to be unrealistic and the expenditure estimates to be underrepresented. The budget had to be revised thrice.

Considering the state of the macroeconomy, Pakistan extended the IMF programme by one year (taking it to the last year of the national assembly’s tenure). On Pakistan’s request, the IMF also increased the loan limit by $1 billion. At that time, there was optimism about obtaining maximum loan tranches by June 2023, enabling PDM to present its second budget as a pre-election populist budget, even if it meant sacrificing the last tranche of the IMF programme.

Dud pledges

However, things did not go as planned. Super-floods and political instability forced the government to violate certain clauses of the IMF programme, particularly concerning foreign currency exchange rate management. 

This considerably delayed initiation of the critical 9th IMF review to release the next tranche. Keeping in mind the expected payments of Geneva pledges for flood relief from the international community, the government was optimistic about the inflow of dollars. 

However, those pledges, mainly from multilateral lenders, also failed to materialise for want of an IMF letter of comfort. Hence rupee kept on depreciating, and dollars remained scant.

Political tinderbox

In the meantime, the growing political crisis exacerbated the economic crisis, leading to further chaos in the economic situation. Friendly countries adopted a “wait and see” approach, and the delay in securing financial assurances from them put the IMF programme in limbo. 

While Pakistan has managed to avoid default so far, the next government should negotiate another IMF programme to be able to mobilise $77-80 billion in external financing (loans) over the next three years, with $24 billion required in the next fiscal year alone.

Options and outcomes

Regarding the existing IMF programme, the PDM government has two options.

First, let the programme conclude prematurely and get out of IMF’s “scrutiny”. In such a case, the government is not obliged to share its budget framework with the IMF and can present a “pre-election” budget to please its voters. 

This gamble may or may not work for the current government. Under this scenario, whoever wins the next election will be supposed to start it afresh with the IMF.

Abort mission

As a rule of thumb, concluding an IMF programme prematurely or failing to fulfil commitments in one causes the next to become more stringent and challenging. 

Many of the unmet commitments become prior actions for the subsequent programme. This means that following the above option, the next government may have to implement one of the harshest IMF programmes in Pakistan’s history.

Deliver goods

The second option is to remain engaged with the IMF to secure another loan tranche from the fund before June 30. 

 In this case, the budget is to be prepared in consultation, if not in full conformity with what has been already agreed upon in the existing IMF programme then there will be very little, if any, room for populist budgetary stunts.

Die another day

It appears that the government has chosen the second option, although there is still no agreement between the government and the IMF regarding the budgetary framework or the completion of the ninth review. 

Govt’s willingness to remain in IMF programme implies that it will exercise caution in providing unrealistic pre-election “relief” for people on June 9

Nevertheless, the government’s willingness to remain in the programme implies that it will exercise caution in providing unrealistic pre-election “relief” for the people on June 9. 

By remaining engaged with the fund, the next government will have a comparatively easier time negotiating with the IMF for the next loan.

PDM’s game?

One may wonder why the PDM government would put its political capital at stake by not presenting a pre-election budget and why it would undertake actions that benefit its successors. Allow me to explain.

The economy and politics are intertwined. The disintegration of the PTI due to the departure of many of its leaders following the tragic attacks on state infrastructure on May 9 has significantly reduced its chances of forming the next government. 

This means that the likelihood of one, some, or all of the parties in the PDM coalition being part of the next federal government is quite strong. 

As we have previously discussed, the next government will need to request a bailout from the IMF. Therefore, the PDM coalition aims to avoid complicating its post-election situation by presenting a realistic budget at this time. 

Even if a populist budget were to be presented on Friday, it would ultimately need to be abandoned in order to qualify for the bailout package.

Four big Ds

Now let us move to the provincial budgets. The caretaker governments in Punjab and Khyber Pakhtunkhwa will only present provisional budgets for up to four months. 

The new governments in these provinces will subsequently revise these budgets, which will have an impact on the assumptions and numbers, such as provincial surplus, in the federal budget as well.

Would you like to know where exactly in the federal budget? I categorise expenses in the federal budget as “four Ds”; debt service, defence, day-to-day administration, and development. 

The first three Ds are nondiscretionary and mandatory; no government can compromise on them. The fourth one, development, is the only discretionary expense and always gets compromised as always.

Opportunity for PM

Finally, there is an opportunity for the prime minister amidst all this chaos. He can and should build consensus on a Charter of the Economy, not only among the 13 members PDM coalition but also with any new political party(ies) that may emerge in the run-up to the election. 

The economic mess Pakistan has gotten into due to political instability would only be addressed through political wisdom.