ISLAMABAD, May 18: The International Monetary Fund has expressed concern over widening budget deficit and asked the government to seriously look into the issue failing which Pakistan’s credit rating could be downgraded by international credit rating agencies.
Informed sources told Dawn on Thursday that IMF officials feared that Pakistan’s budget deficit would swell to over 4.2 per cent of GDP against the target of 3.8 per cent set for the current financial year.
The government believes that its budget deficit could reach four per cent by June 30 this year.
Although the government is no more seeking any financial assistance from the IMF after the expiry of $1.4 billion Poverty Reduction Growth Facility (PRGF) programme in 2004, Pakistan cannot ignore the Fund’s advice under article IV of annual consultations, the sources add.
The IMF suspected that Pakistan could go back to its previous position when its fiscal deficit had become a serious problem a few years ago.
Keeping in view the government’s expanding development priorities especially in the budget for 2006-07, the Fund officials have asked the government to keep a check on its rising budget deficit so as to ensure certain financial discipline in the country.
“If the current trend of widening fiscal deficit continues, the IMF may be constrained to give an unfavourable report which will be surely picked up by the international credit rating agencies to lower our credit rating,” a source said.
In the recently concluded talks held in Washington between the senior Pakistani officials and IMF authorities, the issue of intensifying budget deficit reportedly came under discussion.
The IMF advice on budget deficit, the sources said, would have to be taken into account by the government if at all Pakistan continued to look for an improved credit rating, especially from New York based Standard & Poor’s and Moody’s International credit rating agencies.
The sources said that budget planners were facing difficulties in proposing viable recommendations for lowering the rising budget deficit in 2006-07. “President Musharraf says at least one big dam must be initiated during the next financial year for which the government requires minimum Rs60 billion,” another source said, adding that the minimum cost of each bigger dam ranges between $5 and $7 billion.
If two dams are to be started in 2006-07, he said, the government would need a minimum Rs120 billion expenditure for one year alone. “And by spending this money, you would be in fact further increasing your budget deficit and the IMF will certainly object to it,” he said.
Under these circumstances, the government had been advised by the IMF to increase its revenues which were still low in terms of tax-to-GDP ratio, the source added. The CBR’s tax-to-GDP ratio is expected to reach 9.4 per cent from nine per cent by June this year.
However, the Fund officials wanted Pakistan to improve its overall tax-to-GDP ratio to 13 per cent if not 17 per cent, which is prevalent in many other developing countries.
The sources said that for bigger dams the government would have to seek additional foreign assistance and that funds allocated through the Public Sector Development Programme (PSDP) for this purpose would create problems for the government.
The IMF, the sources pointed out, was also objecting to CBR Chairman Abdullah Yousuf’s recent statement in which he said that due to introduction of the tariff based system, there would be a slight increase in customs duties for import of new cars.
