Staring at the rising risk of a sovereign default, Pakistan unveiled a 14.5 trillion rupee ($50 billion) budget late last week, much of it to be funded by borrowing. While Finance Minister Ishaq Dar insisted the government had prepared a "responsible budget," experts and even officials are skeptical, warning that it may not help the country secure crucial support from the International Monetary Fund.
This raises the question: Where does Pakistan go from here?
The country remains mired in political and economic crises, amid punishing inflation that neared 38% in May. On Monday, the central bank left its benchmark rate unchanged at a record-high 21%, saying it thinks inflation has "peaked."
But as it is stuck with only about a month's worth of foreign reserves, the nuclear-armed South Asian country home to over 230 million people faces a difficult road and may be forced to rely on top bilateral creditor China.
Here are the five things to know.
How does the budget affect the debt pressure on Pakistan?
Pakistan's budget comes with a huge deficit of 7.5 trillion rupees, to be financed with debt. The government plans to borrow $17 billion from banks in Pakistan and $8 billion from external sources.
But a Pakistani government official, who requested anonymity because he is not authorized to talk to the media, said that without an IMF deal, it will be virtually impossible for Islamabad to borrow the required amount in the coming fiscal year.
Since November, Pakistan has been awaiting the completion of the ninth review of an IMF bailout package that would unlock over $1.1 billion. But time is running out: The agreement expires on June 30.
Pakistan would be borrowing simply to manage its debt load. About half the entire budget is to be spent on debt servicing -- $22 billion for domestic debt and $3 billion for external debt.
Mahfooz Ali Khan, a board member at the State Bank of Pakistan, told Nikkei Asia that under the new budget, Pakistan would be spending a major chunk on nonproductive sectors. "Almost the entire federal tax revenue, after deducting the share of provinces, will be spent on debt servicing," he said.
Would China come to the rescue?
Finance Minister Dar signaled that the current government does not plan to seek a new deal with the IMF after the existing one expires on June 30, although Islamabad wants to complete the program.
The budget documents reveal that Pakistan expects to receive $2.4 billion from the IMF, suggesting that the government is banking on completing the entire remaining Extended Fund Facility. But Uzair Younas, director of the Pakistan Initiative at the Atlantic Council, said the budget "does nothing to improve the likelihood of a successful completion" of the EFF.
After unveiling the budget, Dar said the government is now looking at rescheduling bilateral debts, which make up 37% of Pakistan's external obligations. That turns the spotlight on China, to which Pakistan owes $23 billion, according to the IMF's country report for 2022.
China in the past has promised to help Pakistan -- home to a $50 billion component of the Belt and Road infrastructure initiative -- "stabilize" its economic crisis.
The government official who spoke anonymously said Islamabad expects Beijing to reschedule its debts and prevent a default, even if the IMF does not cooperate. Still, he conceded, "Currently, there is no indication that China will agree to Pakistan's request for rescheduling debt."
Debt negotiations with China have proved challenging for bankrupt neighbor Sri Lanka as well. Meanwhile, after Monday's rate decision, Pakistan's central bank governor denied that there are plans to enter bilateral restructuring "as of now," according to a Reuters report citing unnamed sources -- casting further doubt on how Pakistan might extricate itself from its jam.
Does the budget attempt to appease voters?
Dar insisted the budget was not designed with an eye on polls due later this year. But experts have called it an election budget nonetheless, as the government increased the salaries of civil employees by 35% and boosted the monthly minimum wage to 32,000 rupees.
The government has also allocated 1.1 trillion rupees for subsidies, 1.5 trillion for grants and 1 billion for health insurance for working journalists. All these steps are seen as means to woo voters and the press.
The State Bank's Khan, who also served as secretary of finance in the government of Balochistan province, termed these measures flawed. "The tax incentives and subsidies are for the sectors which do not generate an exportable surplus," he said.
With Prime Minister Shehbaz Sharif's government blocking state elections amid a battle with predecessor Imran Khan, many have questioned the outlook for holding a national vote. The budget does include 48 billion rupees earmarked as election expenses -- a strong indication that the government intends to hold polls within the year through next June.
What about funds for development?
Pakistan's shrinking fiscal space has taken a toll on development outlays. The total federal development budget is 1.2 trillion rupees, or about $4 billion, hardly enough to meet the country's needs, especially after last year's devastating floods.
In the disaster, physical infrastructure suffered an estimated $14.9 billion worth of damages; there was another $15.2 billion worth of economic losses, according to the Pakistan Economic Survey 2022-23.
The SBP's Khan said that not a single macroeconomic indicator shows any positive development, which means Pakistan's economy needs a massive injection of funds to recover.
What happens now?
Far from guiding Pakistan out of its economic crisis, the budget has exposed the government's inability to run its affairs without massive borrowing. Although the IMF outcome remains to be seen, many believe the plan has set the stage for asking China for major concessions. Beyond the question of whether Beijing would play ball, it is unclear what it would demand in return.
While questioning the budget's feasibility, experts like Khan say the only hope for progress is to resolve the festering political crisis, which has already spiraled into violence this year.
"This budget," Khan said, "is not a workable plan to get Pakistan out of economic trouble."
(asia.nikkei.com)
