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Friday March 29, 2024

To curtail budget deficit: Development spending, subsidies may be cut

By Mehtab Haider
September 07, 2019

ISLAMABAD: Pakistan is left with limited options to curtail yawning budget deficit in line with IMF agreement and the possible choice on cards is slashing down development spending, subsidies and other contingent liabilities, it is learnt.

The IMF team is due in Islamabad from September 16 for discussing with Pakistani authorities for taking immediate steps that could avoid derailing of the IMF sponsored $6 billion program under Extended Fund Facility (EFF).

“There is no room for increasing tax rates at this juncture as the economy is already in ICU and cannot absorb further burden and suffocation,” former finance minister and renowned economist Dr Hafeez A Pasha said when The News contacted him for seeking his comments on Friday.

However, both the IMF and Ministry of Finance have conveyed displeasure over breaking of news about SOS visit of IMF team but when inquired whether this upcoming visit of Fund team was scheduled, both sides did not reply. However, one senior official of Finance Division contacted to this scribe on Friday and said that it was a routine visit and there was nothing special in it.

Apart from making efforts from both sides to show that there is nothing unusual going on but those who knew working of IMF argued that the very basis of the Fund programme had already shattered because of worsening fiscal situation, so the IMF team was visiting to make adjustments on internal and external fronts of the economy in such a way that the economy could be given some direction and envisaged targets could become attainable.

At the moment the fiscal adjustment of 3 percent of Gross Domestic Product (GDP) equivalent to Rs1,300 billion simply looks impossible. The primary deficit that was envisaged at 1.8 percent for the last fiscal year climbed to 3.6 percent of GDP and under the IMF programme it was envisaged to slash down to 0.6 percent of GDP in the current fiscal year. “The massive adjustment of 3 percent of GDP cannot be done,” said the official sources.

Talking to this scribe, Dr Hafeez A Pasha said that the primary deficit became unattainable, so the IMF team was coming to adjust the Fund’s programme in such a way that its desired targets could be aligned with ground realities. He said that the possibility of adjustment lied only towards expenditures side because if anything was done to raise taxation then it would have disastrous effects for the economy. He said that development spending could be slowed down and the federal government would have to bring down subsidies and other contingent liabilities. He said that there was no justification for increasing some expenditures by 40 percent when the government was undertaking austerity. He said that the foreign inflows were not up to the mark despite having good news that the current account deficit decreased. He said that the government would have to arrange massive foreign inflows to the tune of $20 billion but so far the pace was slow.

He said that the development spending of the provinces were quite crucial for boosting economic activities as the provinces possessed surplus money, so they must focus on accelerating their development. “With spending of every rupee it caused positive impact of Rs2 on economic activities” said Dr Pasha and added that Punjab being the biggest province of the country would have to take lead on utilising more resources on development.

However, Ministry of Finance in its statement said on Friday that the reforms agenda being pursued by the government with the support of IMF Extended Fund Facility (EFF) is aimed at putting the economy on a sustainable growth trajectory and the progress on nearly all the performance and structural benchmarks during Q1 FY20 is so far very encouraging with strong indication that all the targets will be met.

“The Finance Ministry is fully committed along with the IMF towards the ongoing reforms programme. The reforms programme has 7 performance criteria, 5 indicative targets and 13 structural benchmarks and the progress on all of them is very encouraging,” it said.

The ministry also dispelled the impression created in a section of the media claiming that the government will face a gap of up to Rs1 trillion in the FY20 fiscal framework saying that it was not based on facts.

The Finance Ministry maintained that the FY19 Fiscal outcomes were due to concerns over slowdown in growth and there were three key factors including Monetary & Exchange rate corrections, need for protection of citizens from rising oil prices and expanding social safety nets, and escalation on border with India which contributed to the fiscal deficit rising to 8.9% of GDP against target of 7.2%.

The SBP has taken a policy direction in FY19 to correct the large trade deficit and shore up forex reserves. These measures have helped reduce the current account deficit to $13.5 billion in FY19, down from $19.9 billion in FY18. However, the rise in interest rates and a weaker rupee have led to a significant jump in the government’s debt servicing costs. These contributed Rs104 billion to the overall slippage. On the other hand, the devaluation of the currency eroded profits of the SBP for FY19, with a shortfall of Rs135 billion in non-tax revenue of the government.

Non-tax revenue shortfall was exacerbated by the litigation by the telecom operators on renewal of the 3G/ 4G licences, and revenue of Rs80 billion did not materialise in FY19. This matter is now partially resolved with telecom operators depositing Rs70 billion as first instalment in September 2019. Federal government also faced a shortfall of Rs85 billion from interest receipts from PSEs (NHA, Wapda etc.).

FBR tax revenues shortfall of Rs 321bn in FY19 was the single biggest reason for the increase in the fiscal deficit and it was driven by a fall in imports (which account for 45% of total FBR tax collection in customs duty, GST and excise). However, other key factors also contributed. Most notably, the decision of the government to shield domestic consumers from rising oil prices resulted in over Rs 100bn shortfall in GST collection.

Against a revised target of 7.2% of GDP (published in April 2019), at the outset of the programme - the fiscal year FY19 closed at 8.9% of GDP indicating a slippage of Rs686 billion.

While revenue shortfalls contributed significantly to the rise in deficit, the expenditure overruns were also necessitated by the need to expand social safety nets and higher investment spending (PSDP). If the government had decided to curtail these expenditures further, it would have led to further slowdown in GDP growth and caused a hard landing for the economy already undergoing major monetary and exchange rate adjustments.

The attack on Pakistan by Indian forces and the standoff at the border has also resulted in significant escalation in the FY19 expenditures, all of which are necessary to ensure safety of citizens.

The Ministry of Finance maintained that while targets under the IMF programme are ambitious, there is no need to renegotiate. Similarly, while the fiscal deficit overrun in FY19 was due to macro adjustments in the economy and the need to protect citizens from rising oil prices, it is believed that it will have a material impact on the budget outcomes for FY20.

The payments from telecom operators and privatisation of the two RLNG plants are likely to materialise in the current fiscal year and will help the government to reduce the fiscal deficit in FY20 to 7.3% of GDP. The results of the first two months are encouraging with FBR revenues posting increase of 28% y/y. The reforms agenda pursed by the Government of Pakistan and supported by the IMF Extended Fund Facility (EFF) are target oriented but necessary to put the economy on a sustainable growth trajectory. The reforms program has 7 performance criteria, 5 indicative targets and 13 structural benchmarks.

The progress on nearly all the performance and structural benchmarks during Q1 FY20 is encouraging and targets will be met. The ministry said it is fully committed along with the IMF towards the ongoing reforms programme.

Next week the ministry will welcome Mr Jihad Azour, Director of the IMF Middle East and Central Asia Department and apprise him on the results achieved so far. However, this is not an IMF review mission as certain segments of the media have suggested in their publications.

IMF technical levels talks are expected be held at a later stage after completion of Q1 FY20 and will provide both teams the opportunity to review progress made to date.