Economists have rightly pointed out that the budget for the 2023-24 fiscal, due to be presented next week, must balance expectations in an election year with the conditions of the International Monetary Fund, all while tackling inflation, a foreign exchange crisis and an expected revenue shortfall. Balancing public satisfaction and making hard choices to protect the economy is never easy. In the past, we've seen election year budgets often prioritise the former.
Before the election, all governments want to give a budget that satisfies the people. The financial situation, fiscal deficit, and trade deficit combine to mean the opportunity to deliver a budget that pleases too many is very limited for the government. Dr Debapriya Bhattacharya, distinguished fellow at the Centre for Policy Dialogue, has warned trying to defy this reality may end up having a negative impact overall, on the economy, which the country can scarcely afford at this moment.
Most economists agree that compared to any other year, this year's budget has to be prepared in a very complicated situation. As it is, this budget will be implemented by two governments, neatly split pretty much down the middle by the election expected in December/January. That means flexibility must also be preserved. If the government makes too many big promises, there might be doubt as to how much they can implement. In previous years, even if there would be a deficit in terms of income and expenditure in the country, there would be comparative relief in terms of foreign transactions - thanks to strong growth in exports and remittances. But this year we have been witnessing a certain moribund state on the remittance front, while the government is straining hard to depress imports in relation to exports.
According to the central bank's data released this week, opening of letters of credit (LCs) for imports dropped to $56.36 billion in the July-April period of the current fiscal, falling by over $20 billion from the corresponding period of the last one. Imports declined drastically as the central bank asked banks to provide advance notifications for any LCs worth more than $3 million. The dollar situation means the government will have to continue this policy of controlling imports and limit its investment program. The growth target for next year may have to be moderated.
The major challenges will remain controlling inflation, increasing revenue collection and reducing expenditures, reforming the financial sector, the balance of payments, and maintaining a steady supply of energy for the economy.
Amid the continued fallout of the Russia-Ukraine war, and the lingering effects of the pandemic even, uncertainty on the international front can be expected to continue. The IMF's presence meanwhile, pervades almost every sphere of economic policy like the proverbial elephant in the room. But we have a good foundation, and perhaps a slowing down in nominal GDP does not have to be the disaster some may think. The test ahead will be one of economic resilience, and by drawing on our national character and summoning unity, we can overcome the difficulties.
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