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Monday March 04, 2024

Pakistan, IMF agree to revise budget numbers

It is expected current account deficit will be reduced, so import compression will be used to minimize external financing gap

November 14, 2023
A pedestrian walks past the International Monetary Fund headquarters in Washington, DC. — AFP/File
A pedestrian walks past the International Monetary Fund headquarters in Washington, DC. — AFP/File

ISLAMABAD: With the start of policy-level parleys on Monday, Pakistan and the IMF have agreed to revise the fiscal and external framework in a bid to strike a staff-level agreement under the $3 billion Standby Arrangement (SBA) program.

The policy level parleys would conclude on Wednesday (tomorrow). The IMF has so far expressed concern over the exchange rate in the context of a free market-based mechanism, materialising all required dollar inflows, and hiking of electricity and gas tariffs.

It is expected that the current account deficit will be reduced, so import compression will be used slightly to minimize the external financing gap.

The government will have to hike the gas tariff in line with the calculation worked out by the regulator. The electricity tariff in line with fuel price adjustment and quarterly tariff adjustment will have to be increased. The FBR’s envisaged tax collection target was proposed to remain unchanged at Rs9.415 trillion. However, the IMF asks for Plan-B in case of revenue shortfall in the current fiscal year.

In a separate meeting, Caretaker Prime Minister Anwaar-ul-Haq Kakar approved five major steps in order to overhaul the taxation system and broaden the tax base to bring 1.5 million new taxpayers into the tax net.

The FBR has undertaken spade work to identify transactions-based data of one million non-filers out of which 0.5 million will be brought into the tax net.

With the digitization of economy and introduction of a simplified regime for retailers, which was already permitted by the Parliament on the eve of the last budget, the government is expecting to fetch Rs200 billion in order to bridge any shortfall in achieving the desired tax collection target. For restructuring of the FBR’s administration, the policy and operation will be separated.

For five major steps, including the digitization of withholding taxes, digital invoicing of Sales Tax, broadening of tax base and introduction of simplified retailers’ scheme, anti-smuggling crackdown, and digitization of under-invoicing, would be undertaken in the current fiscal year to get the desired results.

Under the proposed revision in the fiscal framework, the budgetary numbers will be changed in the wake of ballooning debt servicing bills on both domestic and external loans in shape of principle and mark-up. Secondly, for rationalization of the expenditure, the subsidy amount might be reduced. The Public Sector Development Program (PSDP) at the federal level will also be slashed down for the current fiscal year in a bid to re-align the expenditure side.

When a senior official was contacted, he said the IMF did not show an increased external financing gap.

“Debt servicing is estimated to escalate to Rs8.3 to Rs8.6 trillion for the current fiscal year against the initial budgetary estimates of Rs7.3 trillion so this bill will balloon in the range of Rs1000 to Rs1300 billion,” top official sources confirmed while talking to The News on Monday.

Keeping in view the escalated debt servicing bill, the IMF asked Islamabad to rationalise expenditure on the PSDP for the current fiscal year.

The government had allocated Rs950 billion for the current fiscal year and the Planning Ministry was assigned to work out exact proposed reduction in the PSDP spending. It is expected that the PSDP might be slashed down from Rs950 billion to Rs750 to Rs800 billion for the current fiscal year.

Secondly, the government allocated Rs1064 billion for subsidies out of which the government utilized Rs2.5 billion in the first three months of the current fiscal year. In the first week of October 2023, the government released Rs70 billion subsidy amount for the power sector. However, the subsidies allocated funds might be reduced from Rs1064 billion to Rs850 billion.

The government has envisaged non-tax revenue target of Rs2.96 trillion out of which the petroleum levy would fetch Rs0.869 trillion for the current fiscal year.

The government has fetched Rs0.468 trillion so far as non-tax revenue in the first quarter of the current fiscal year. The collection of petroleum levy stands at Rs0.222 trillion in the first three months of the current fiscal year.

On development framework, the IMF has asked for developing a new five-year strategy identifying major projects across all sectors and funding sources to guide sectoral investment plans.

With Pakistan’s highly constrained budgetary resources, selecting the right projects for funding becomes even more critical. The PFM Act requires that all projects must be technically approved before receiving funds in the budget. This is a good practice and should be maintained. However, the other selection criteria to guide the allocation of limited budget resources are not in place and would help ensure projects are aligned with the policy goals, including Pakistan’s climate commitments.

Pakistan’s tight fiscal environment generates acute challenges for the implementation of investment program. The funding allocated for the ongoing projects in the PSDP is insufficient to meet the project implementation plans and leads to slowing down the delivery of projects (both between and within the budget year).

More broadly, the PSDP is unaffordable and should be reassessed. The total cost to complete projects in the PSDP is Rs10.7 trillion, more than 14 times the budget allocation of Rs727 billion in 2022-23. Notwithstanding intentions to prioritize the completion of ongoing projects, new projects with a total cost of Rs2.3 trillion were added by the government in the last budget.

In addition, separate preparation and oversight of the current budget and development budget by the Finance Division and the Planning Commission respectively can lead to inconsistent and sub-optimal decision-making. The government may consider imposing windfall tax on lofty banks profits.