Risk of slippage under IMF programme: Centre sounds alarm over Punjab, Sindh spending

ISLAMABAD: The federal government has raised a red flag over excessive expenditures in the two largest provinces, Punjab and Sindh, in the first two months (July and August) of the current fiscal year, posing risks of slippages under the IMF program.

There are two potential risks of slippages on the fiscal front for the current fiscal year in line with the agreement struck with the IMF. One risk belongs to the Centre in the shape of rising debt servicing bills while the second one is related to the provinces where expenditures have ballooned, which might result in breaching the target agreed with the IMF.

“The Ministry of Finance has raised a red flag to this effect and also decided to convey to the respective provinces to manage the expenditure front cautiously,” one official source said.

The risks have surfaced despite the fact that the FBR surpassed its target with a margin of Rs63 billion for the first quarter by achieving net growth of 24.1 per cent, but it required growth of 31 per cent. Therefore, moving forward, materializing the FBR target of Rs9.4 trillion might become problematic in coming months.

Top official sources confirmed to The News on Wednesday that the Ministry of Finance released funds for both development and non-development expenditures by utilizing extraordinary care to restrict the deficit of federal government within the envisaged limits agreed under the IMF Standby Arrangement (SBA) programme. “There has been one potential risk of breach on account of debt servicing as the last auction of Treasury Bills (T-bills) was standing at 22.8 per cent against the Ministry of Finance projection of cut-off rate at 21 per cent for the current fiscal year,” a top official of the Ministry of Finance conceded while talking to The News.

The estimates worked out by the Ministry of Finance suggested that the one per cent hike in policy rate translated into increasing the debt servicing to the tune of Rs600 billion per annum. If there is a consistent policy rate ranging from 22 to 23 per cent, the debt servicing bill might escalate from the budgeted amount of Rs7.3 trillion to Rs8.5 trillion for the current fiscal year.

Punjab planned restricting expenditures to the tune of Rs369 billion for the first quarter of the current fiscal year but in the first two months, 65 per cent of expenditures were incurred. The same trends were witnessed in the case of Sindh. It caused an alarm among the dwellers of Q Block (Ministry of Finance).

The government had envisaged a budget deficit target of Rs6.9 trillion or 6.53 per cent of the GDP for the current fiscal year. It is projected that the federal fiscal deficit would stand at Rs7.5 trillion while the provinces would throw a surplus of Rs0.6 trillion, so the consolidated fiscal deficit would be restricted to Rs6.5 trillion. The government sought a primary surplus of Rs0.397 trillion or a surplus of 0.4 per cent of the GDP for the current fiscal year.

The IMF, in its report on Pakistan, has categorized that the financial volatility raises risk aversion, causing financing pressures and capital outflows from emerging markets, including Pakistan. The spending pressures or lower growth weaken the underlying fiscal position. Weaker confidence and supply disruptions lead to a drag on economic growth.

In its policy recommendations, the IMF has asked Pakistan to implement strong policies and strengthen institutions as a foundation of strong and sustainable growth, scale up targeted social assistance and resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability. The IMF has also suggested building fiscal and external buffers.