ISLAMABAD: Pakistan on Wednesday widened its fiscal deficit outlook by a significant margin, citing a shortfall in revenue collection, as the International Monetary Fund (IMF) raised concerns over challenges in the fiscal, energy and external sectors.
“During FY2017, the [fiscal deficit] is now projected to reach 4.1pc of the GDP,” Finance Minister Ishaq Dar said at the conclusion of Article-IV consultations with the IMF in Dubai. This was a departure from the budgeted fiscal deficit limit of 3.8pc of the GDP for the current year, a target which the government had repeatedly said it would meet.
The finance minister admitted that revenue collection faced a Rs100 billion shortfall due to low oil prices and a support package for exports and agriculture, which necessitated an easing of the deficit limit.
“The shortfall that the FBR experienced in the first eight months was due to the pro-growth incentives offered to various sectors of the economy, particularly exports and agriculture; the major revenue gap amounting to Rs100 billion was [caused by] not passing the full impact of increasing oil prices to the common man,” he said.
Dar blames oil prices, agriculture and export support for revenue shortfall
Separately, in a statement issued at the conclusion of the talks, the IMF warned that “a number of challenges in the fiscal, external and energy sectors could affect the hard-won stability gains in the period ahead”, calling “for strong efforts with respect to fiscal consolidation and the implementation of key structural reforms, and vigilance in managing the country’s external position”.
In particular, IMF Mission Chief Harald Finger predicted that the current account deficit could reach 2.9pc of GDP during the current fiscal year, owing to a higher trade balance — in part reflecting increased imports of energy and capital goods — and stagnant remittances.
At the same time, the IMF improved its growth forecast for Pakistan to 5pc for current year and 6pc for the next fiscal, with average headline inflation expected to be contained at 4.3pc.
Despite the finance minister’s optimism, the opposition did not seem convinced.
Former finance minister and Pakistan Peoples Party (PPP) leader Saleem Mandviwalla told Dawn that Mr Dar was boasting on the basis of “this will happen and we will grow that”, while nothing was based on what the government had delivered so far.
“The fact is that the economy is not growing with the direction it should grow,” he said.
He pointed out that two key sectors — agriculture and manufacturing — were not going up. Instead, only the services sector was showing growth, which was a dangerous sign. This is because the services sector is also behind the growth in imports.
“What improvement [is the finance minister] talking about? Exports and remittances are going down, industry and agriculture are not growing and local and foreign debt is increasing,” he concluded.
Pakistan Tehreek-i-Insaf (PTI) MNA Shafqat Mahmood also regretted the decline in the country’s foreign exchange reserves, adding that the persistence of circular debt the increase in overall debt showed there was no substance in the ruling party’s economic policy.
Reasons for shortfall
The finance minister conceded that the current deficit would almost double, with the trade deficit at $20 billion. Despite this, he hoped to manage the challenging situation through improved exports in information technology and diversified markets and product lines next year.
He complained that IT exporters were keeping most of their earnings abroad as official IT exports stood at $600 million or so, against actual exports of $2 billion.
Mr Dar also said his government would reduce net public debt, which stood at 60.2pc at the close of FY2016, to lay the foundations for sustained growth. The minister said that the successful completion of discussions with the IMF indicated the government’s continued commitment to undertake further structural reforms in the areas of energy, monetary policy as well as financial and public sector enterprises.
He said the economy had maintained growth momentum for the third year in a row and was expected to reach 5pc this year. He downplayed the wide gap between increasing imports and declining exports, saying that the 42pc growth in imports was from capital goods – plants and machinery – that would support economic growth and job creation. Export quantities, he claimed, were increasing even through prices were on the decline globally.
Large-scale manufacturing continued to grow at 3.5pc with an increase in production of cement, steel, pharmaceuticals, automobiles, paper and electronics.
Agriculture, he said, was also expected to respond to government support given in the budget 2016-17 and rebound with better cotton, sugar and maize production, alongside increased prospects for wheat production.
The minister said the fiscal deficit did not impact development spending, which had doubled in three years. He said foreign exchange reserves had come down from $23 billion to $22 billion, but were expected to rebound to $23bn by the end of June this year.
The IMF said it expected economic growth to reach 5pc by the end of the year, helped by improving global economic conditions, rising investment related to the China-Pakistan Economic Corridor (CPEC) and the recovering agriculture sector.
“At the same time, slower-than expected growth of large-scale manufacturing and stagnant exports are weighing on growth prospects”.
Over the medium term, growth could accelerate to about 6pc on the back of stepped-up CPEC and other investments, improved energy supply, and continued structural reforms.
“Economic policies in the period ahead need to focus on preserving the hard-won stability and addressing emerging as well as medium-term challenges, notably in the fiscal, external, and energy sectors. Stronger fiscal consolidation efforts will be needed to make up for the lower-than-expected revenue in the first half of this year and achieve a further deficit reduction next year,” the fund said.
The IMF also called for greater exchange-rate flexibility and efforts to improve export sector productivity to address the widening trade deficit as well as strengthen the economy’s ability to absorb medium-term CPEC-related and other capital outflows. Bringing the power distribution sector to full cost recovery will be critical to ensure long-term success of new energy initiatives and minimize fiscal costs, the IMF concluded.
Published in Dawn, April 6th, 2017