Thursday September 16, 2021

Pakistan-IMF technical talks underway for finalising blueprint of next budget

ISLAMABAD: Technical talks between Pakistan and the International Monetary Fund (IMF) are underway for finalising blueprint and salient features of the upcoming budget for 2020-21 in post COVID-19 pandemic situation.

Top officials said that the IMF has also linked resumption of Extended Fund Facility (EFF) programme with approval of the next budget for 2020-21 in compliance with broader framework on which both sides will agree as consequence of ongoing technical talks. The technical talks are underway through virtual engagements with the IMF team based in Washington DC.

The IMF has estimated that Pakistan requires gross external financing of $29.3 billion in the next budget against $25 billion for outgoing fiscal year 2019-20.

It indicates that Islamabad will have to increase its reliance on foreign borrowing to meet its financing requirements in case the country remains unable to lure non-debt creating dollar inflows that becomes really difficult after outbreak of coronavirus pandemic.

The direction of the upcoming budget will have to be aligned with the structural reforms envisaged under $6 billion EFF programme. The IMF has agreed with Pakistan for revising all macroeconomic and fiscal frameworks in post COVID-19 situation so the revival of EFF requires broader agreement after emerging new realities on the economic fronts. Now the completion of second review under EFF and release of third tranche worth $450 million will be finalised once the budget will be approved by the National Assembly by end of June 2020. It is not yet decided whether the second and third reviews will be clubbed or approved by the Fund’s Executive Board separately. “The technical level talks have already been underway,” said a top official of the Finance Division and explained that these technical talks could only be converted into review talks when the budget would be approved by the Parliament.

The official said that the technical talks were aimed at evolving consensus on macroeconomic and fiscal framework where some numbers were quite crucial such as the budget deficit, primary deficit, FBR’s revenue collection target and major expenditures heads as well as structural reforms related to autonomy of the central banks, tackling of monster of circular debt of power sector and bringing reforms into taxation machinery.

The IMF has given FBR’s tax collection target of Rs5,101 billion for next budget against revised target of Rs3,908 billion for the outgoing fiscal year, indicating that it requires about 31 percent growth for materialising its desired target.

The FBR high-ups argued that the next fiscal year target of Rs5,101 billion could be achieved without additional revenue measures provided the economic activities restored at full swing with start of next fiscal year. However, if the partial lockdown persists till first quarter of next fiscal year, then the FBR will have to take additional revenue measures such as consideration of Super Corona Tax to materialise its desired target.

Dr Khaqan Najeeb, who has served as Adviser in the Ministry of Finance, commented that before going for new taxes, the authorities must use compliance to ensure revenue. He explained that a tax gap of 50 percent existed according to two studies which should help in achieving next year’s target.

One FBR official, when contacted, said that no collection target could be considered as sacrosanct because desired target could not be achieved without having its basis and it could be re-adjusted in line with ground realities. He reminded that the FBR’s target was envisaged at Rs5,555 billion on eve of budget for 2019-20 that was first revised downward to Rs5,238 billion. Then the IMF thought the FBR should collect Rs4,803 billion for the current fiscal, but the FBR was eyeing to collect Rs4,750 in pre-COVID-19 scenario. Now the IMF itself revised downward the target to Rs3,908 billion for end June 2020. The target kept on changing to align with new realities so next fiscal year target will also depend upon the resumption of economic activities.