ONCE again Pakistan is unlikely to be able to contain its fiscal deficit within the budgetary limit set for the current year — at 4.1 per cent of gross domestic product (GDP) — despite healthy revenues and expenditure control. Economic growth, too, is estimated to stay short of the 6pc target.

The above is now an officially confirmed position. Meeting the budgeted target “is now difficult under the circumstances”, conceded Secretary Finance Shahid Mahmood. The situation has changed significantly since June when the budget was announced, he said.

That is an area the International Monetary Fund (IMF) has also flagged as a weakness, along with external-sector vulnerabilities, in recently concluded talks with Pakistan under the first post-programme monitoring of the $6.4 billion Extended Fund Facility completed in September last year.

It advised Pakistan to act decisively and immediately on both fronts to protect hard-earned gains of the last four years as the country moves towards uncharted pre-poll waters.

Mr Mahmood said the government was committed to taking every possible step to ensure the country did not conclude the fiscal year with a gap like the last year, which ended up at 5.8pc of GDP instead of the budgeted 3.8pc. He believed the primary focus of the government would be to control the fiscal deficit in a manner that did not impact economic growth.

The Fund advised Pakistan to act on fiscal and external fronts to protect hard-earned gains as the country moves towards general election

To ensure that the slippages on the fiscal side are minimal, Mr Mahmood said a well-thought-out plan was ready for formal approval of the prime minister because the Federal Board of Revenue (FBR) has to deliver more on top of the 19.5pc revenue growth achieved in the first five months of the year. “Revenues are improving, but the FBR has to do much more,” he said.

The main reason behind the last year’s significant slippage on the revenue front was the inability of the tax machinery to maintain the 20pc growth trajectory of the first three years of the current government. The revenue growth last year was a paltry 8pc, even lower than the combined automatic impact of 5.3pc economic growth and about 4pc rate of inflation.

This is in line with assessments of the IMF, which believed that Pakistan had the potential to achieve a tax-to-GDP ratio of 22pc with right policies and reforms.

Both the IMF and the government agree that controlling fiscal and current-account deficits with commitment would be vital to minimising transitional shocks.

The government estimates that a significant impact of CPEC-related imports on account of energy plants and machinery was now tapering off after peaking last year, whereas the imposition of regulatory duties would also start showing results with a lag effect, making unnecessary imports expensive.

Remittances grew 1.3pc in the first five months of the current fiscal year compared to a 3.8pc decline a year ago. Full-year remittances are now officially estimated at $20bn.

With an 11.2pc growth in exports during July-November, the government expects a further pickup on the back of increasing growth prospects the world over, particularly the advanced economies, which are the main destinations of Pakistani products, to be supported by the ongoing currency adjustments.

“We have a plan ready (on the external side), but it is not advisable to go into details at this stage. A few things are in the pipeline,” the secretary finance said, indicating that the feedback on recent bonds would help the successful launch of another international capital market transaction that could materialise by the end of the next month.

On a positive note, the IMF noted that Pakistan’s economic developments had been decoupled from political uncertainty, and said the economy would be growing at the rate of 5.6pc compared to last year’s 5.3pc despite difficult political and security situation.

The IMF was, however, a bit perturbed over the slow or negligible structural reforms in Pakistan, with losses of public-sector entities increasing, privatisation plan hitting a dead end and revenue generation far lower than the country’s peers and its real potential.

The Fund noted that it had been a historically chronic problem for Pakistan that reforms took much longer than anticipated because they needed the support of political parties, organs of the state and the public at large.

Managing political risks in the near term could be partly done through addressing weaknesses on the fiscal and external sides, along with preparing for structural reforms.

The preparedness and success here would suggest if Pakistan could stand on its own feet without another bailout programme after June next year. The IMF said Pakistan needs substantial reforms to ensure debt sustainability and external stability to spur higher economic growth that is inclusive, job creating and poverty elimination.

For now, Pakistan and the IMF did not discuss any possibility of another IMF programme, as the Fund welcomed the currency depreciation as long overdue and in the right direction, but independently taken by the central bank as a point of strength after the successful launch of $2.5bn bonds and amid low inflation.

The IMF and the authorities did also not discuss issues relating to fiscal federalism that would be part of the upcoming Article-IV consultations. The focus in the meanwhile should be on policies to address external and fiscal imbalances.

Published in Dawn, The Business and Finance Weekly, December 18th, 2017