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Govt on fiscal tightrope as IMF talks set to begin today

Official says average time to maturity will be stretched as much possible in order to reduce over debt servicing bill in remaining period of current fiscal year

By Mehtab Haider
November 02, 2023
The International Monetary Fund (IMF) logo is displayed outside its headquarters in Washington, DC, on October 8, 2022. — AFP
The International Monetary Fund (IMF) logo is displayed outside its headquarters in Washington, DC, on October 8, 2022. — AFP

ISLAMABAD: The IMF’s upcoming review mission is expected to take up the deteriorating fiscal position whereby the debt servicing consumed the net revenue receipts of the federal government in the first quarter of the current financial year. 

Despite choking the releases of development projects and curtailing subsidies to the lowest-ever ebb, the government has been thumping on restricting budget deficit within the desired limits and especially converting the primary deficit into surplus for the first quarter of current fiscal year. “The IMF might raise the sustainability of such a tight fiscal position at a time when the government released development spending of just Rs40 billion against the allocation of Rs950 billion and restricted subsidies at Rs2.5 billion against budgetary allocation of over Rs1,002 billion,” top official sources confirmed while talking to The News here on Wednesday.

However, the Ministry of Finance high-ups argued that they were expecting downward revision in the policy rates in the coming months, so they were planning for financing of budget deficit on preferably longer periods instead of relying upon shorter periods of treasury bills and domestic bonds.

“The average time to maturity will be stretched as much possible in order to reduce the over debt servicing bill in the remaining period of current fiscal year,” said the official. The official claimed that debt servicing bill would be curtailed within the allocated limit of Rs7.3 to Rs7.5 trillion for the current fiscal year.

The debt servicing consumed Rs1.4 trillion in the first quarter of the current fiscal year amid the policy rate standing at 22 percent, which was kept unchanged. The State Bank of Pakistan (SBP) on Wednesday raised Rs1,148 billion against the target of Rs975 billion, Rs173 billion higher than the target. The 12-month yield declined by 40 basis points. The 3-month yield stands at 21.94 percent, 6 months at 21.98 percent, and 12 months at 21.99 percent. So overall, the market is indicating a slight reduction in the policy rates. However, the question arises how the government would materialise its increasing revenue and expenditure requirements in the remaining months of the current fiscal year. How long the payment of subsidy bills will be blocked? How long development budget will be strangulated? How the provinces will be curtailed to throw revenue surplus amid huge statistical discrepancy committed by the Punjab? The IMF may come up with its prescription of reducing the expenditure or raising more tax revenues in order to restrict the budget deficit within the desired limits for the current fiscal year. When contacted, Dr Khaqan Najeeb, former adviser to the Ministry of Finance, said an IMF programme is managed through prior actions, structural benchmarks, indicative targets, and performance criteria. It is safe to presume that first-quarter targets agreed with the IMF on fiscal, energy, monetary, and external are likely to be largely met. The fiscal shows a lower deficit at 0.9 percent vs last year and a primary surplus of 0.4 percent. The figures for meeting spending on income support of Rs87.5 billion are also likely to have been met. The SBP is yet to publish details of net international reserves, net domestic assets and SBP’s stock of net foreign currency swaps. But we are being assured that numbers are looking comfortable. There is probably no new borrowing by the government from SBP and the amount of government guarantees is also within the agreed limits. Hopefully, energy benchmarks are also within agreed limits.

He said it is also the quality of adjustments by Pakistan in reaching the 1st quarter targets that would be reviewed by the IMF. This review will affect the determination of how FY24 numbers will be met. There will likely be a dialogue on the external side where debt flows and exports are slower than anticipated. There is likely to be a discussion by the IMF of risks to the FBR collection target of Rs9,400 billion, which now requires a high growth of 33 percent over last year, along with expediting refund allocations.

Increased spending requirements on debt servicing of more than Rs1,000 billion compared to the budgeted amount of Rs7,300 billion along with a likely shortfall of exaggerated Rs600 billion provincial surplus will come under scrutiny by the IMF. This will set the tone for the updated Memorandum of Economic and Financial Policies, he concluded.