The International Monetary Fund and the PTI-led government has yet to fix a timeline for its next round of talks under a $6 billion stalled bailout program. Though Pakistan had recently increased electricity tariff by Rs1.98 per unit and FBR also exceeded tax collection target in the first seven months (July-Jan) period of the current fiscal year 2020-21 -- two major conditionalities from the Washington-based Fund, the program has not yet been revived.
It indicates that Islamabad will have to take more tough measures to bring the IMF back on the table as the indebted nation needs a financing backstop from the Fund in order to stabilize its shrinking economy.
With the planned protest in Islamabad by the Pakistan Democratic Movement (PDM), the rising political temperature is set to unveil another era of political instability which is likely to dent an already fragile economic recovery during the Covid19 pandemic.
Some positive indicators did appear on the economic horizon of the country on account of Large Scale Manufacturing (LSM) and a surpassed FBR collection target, but the wish list from the IMF is long and it is more likely that Islamabad will have to go on a roller coaster ride to achieve the desired results.
The IMF is still awaiting steps on account of withdrawal of corporate sector income tax exemptions, for which the government will have to promulgate a Presidential Ordinance, to abolish crucial exemptions, in order to satisfy the Fund’s Executive Board.
Although, the withdrawal of income tax exemptions will have an impact on businesses from the next fiscal year, it will demonstrate ‘political will’ of the government about its seriousness for undertaking key reforms on taxation front.
The government will have to lay down the State Bank of Pakistan (SBP) amendments bill before the parliament and it will be a cumbersome task for the incumbent regime to get this crucial legislation pass from both houses.
It will be hard to achieve a political consensus on certain proposed amendments for key changes on wishes of the IMF dictates in the name of granting autonomy to the central bank. So there still is a long list of tasks to accomplish before the revival of the stalled IMF program under the Extended Fund Facility (EFF).
On the external front of the economy, the current account balance that remained surplus in the first five months has now turned into a deficit in the sixth month in the wake of increased imports and higher global oil prices.
While on the internal front of the economy, the blooming budget deficit is causing worry for the PTI regime. Pakistan’s budget deficit rose to Rs1,137.925 billion, equivalent to 2.5 percent of the gross domestic product (GDP), in the first half (July-Dec) of the current fiscal year against 2.3 percent of the GDP in the same period of the last fiscal year.
The widening budget deficit, gap between total revenues and total expenditures of the country, remained on the higher side because the revenue collection witnessed a growth of 4 to 5 percent while expenditures overruns at a more accelerated pace.
The overall budget deficit had climbed to Rs3,376.3 billion or 8.1 percent of the GDP in the last fiscal year 2019-20, mainly because of the eruption of Covid-19 pandemic in the second half (Jan-June) in the wake of increased expenditures. However, it would be difficult for the PTI-led regime to keep the fiscal deficit within the desired limits of 7 percent of the GDP, keeping in view the performance of the first half of the current fiscal year.
According to provisional figures, the country had fetched total revenues of Rs3.351 trillion in the first six months of the current fiscal year, out of which, the FBR collection stood at Rs2,210 billion and the provincial taxes Rs245 billion. The non-tax revenues collection stood at Rs895 billion as non-tax collection at federal level fetched Rs848 billion, while the provincial non-taxes brought Rs47.218 billion.
However, two major non tax revenue spinners helped the government to contain the budget deficit. The major revenue spinners of non-tax revenues are the surplus profit of the SBP, up to Rs372 billion, and the second highest revenue getting sector is the petroleum levy up to Rs275.317 billion in the first six months of the current fiscal year.
The debt servicing and defense expenditures remained on the higher side in the first half of the current fiscal year, while development spending touched the lowest ebb among expenditure heads.
The utilization of the Public Sector Development Program (PSDP) at the federal level stood at Rs175 billion in the first six months.
The development spending stood at Rs403 billion at the national level but at the federal level, the development spending has been just Rs175 billion, while the provincial spending has been Rs227.6 billion in the first six months of the current fiscal year.
The total expenditures stood at Rs4.489 trillion in the first six months of the current fiscal year, out of which, the current expenditures had been standing at Rs4.02 trillion. The mark-up payments remained the highest among expenditure heads as it stood at Rs1.475 trillion, while the defense spending stood at Rs486 billion. The development and net lending stood at Rs457 billion and the statistical discrepancy was standing at just Rs1.898 billion. However, the primary balance remained positive at Rs337.233 billion in the first six months of the current fiscal year.
The budget deficit of about Rs1.4 trillion was financed through external borrowing of Rs0.454 trillion and domestic borrowing of Rs0.683 trillion.
The country’s economy still possessed potential risks where fiscal deficit might escalate further and the government would have to take measures to contain the budget deficit within the desired limits of 7 percent of GDP. So the budget deficit might go up to 7.5 percent or beyond for the current fiscal year. When the budget deficit will exceed then it will ultimately put more pressure on the current account deficit after a certain time lag.
The writer is a staff memeber