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IMF sees sharp jump in fiscal deficit, debt

Updated April 11, 2019

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The International Monetary Fund (IMF) on Wednesday forecast Pakistan’s fiscal deficit continuously elevated at close to 8pc and deteriorating debt-to-GDP ratio to reach 86pc over the next five years. — AFP/File
The International Monetary Fund (IMF) on Wednesday forecast Pakistan’s fiscal deficit continuously elevated at close to 8pc and deteriorating debt-to-GDP ratio to reach 86pc over the next five years. — AFP/File

ISLAMABAD: The International Monetary Fund (IMF) on Wednesday forecast Pakistan’s fiscal deficit continuously elevated at close to 8pc and deteriorating debt-to-GDP ratio to reach 86pc over the next five years.

In its Fiscal Monitor released on the sidelines of spring meetings, also attended by a Pakistani delegation led by Finance Minister Asad Umar, the Fund also bites that performance-based salaries of the Federal Board of Revenue officials significantly contributed to both higher bribes and tax collection.

The IMF estimates the deficit increasing further to 7.2pc in FY19 and then peaking at 8.7pc during FY20, before coming down to 8pc of GDP in FY21, followed by 7.8pc and 7.6pc in FY22 and FY23 and then rising again to 7.7pc by FY24.

The fiscal monitor had put Pakistan’s net debt-to-GDP ratio at 67.2pc in FY18 and estimated it going up to 72.7pc during current fiscal and 75.3pc by end of next year (FY20). It said the ratio will keep increasing to 77.7pc in FY21, followed by 79.6pc in FY22 and 81.4pc in FY23 and then hitting peak at 83.2pc in FY24.

Read: Without reforms, Pakistan’s growth rate to remain at 2.5pc till 2024: IMF

Debt-to-GDP ratio is projected at 72.7pc by end of FY19

Gross general government debt-to-GDP ratio was also estimated at 77pc during 2018-19, 79.1pc in FY20, 81pc in FY21 and 82.6pc in FY22. It is then expected to would further rise to 84.1pc in FY23 and touch 85.6pc in FY24.

This is despite any expectations of significant changes in government expenditure, which the Fund has estimated to stay within a narrow band of 22.2pc in FY19 and 22.4pc by FY24. Government revenue, on the other hand, is forecast to decline from 15.5pc of GDP in FY19 and declining gradually to 14.6pc in FY20 and FY21, then staying flat at 14.7pc over the following three years.

The IMF had also estimated Pakistan’s primary deficit at 2.1pc in FY18 and then come down to 1.7pc during this year before rising again to 2.2pc in FY20, eventually staying almost flat at 2.1pc and 2pc over the next four years.

The fiscal monitor projected Pakistan’s maturing debt during current year at 35.1pc of GDP and total financing needs at 42.3pc of GDP, leaving a fiscal deficit of 7.2pc. In 2019-20, the maturing debt would increase to 37.2pc and total financing needs going up to 46pc, with a fiscal deficit of 8.7pc.

The report noted that many economies saw rising interest burdens, which exceeded 20pc of total revenue in 2018 in Egypt, Pakistan and Sri Lanka. As a result, emerging market economies have become vulnerable to rollover risks if they face large financing needs.

On performance-related incentives, the Fund says, an experiment in Pakistan showed the potential for undesirable consequences. “While performance-based salaries of tax officials led to a significant increase in tax collection (by as much as 50pc), bribe requests increased by 30pc. Some studies suggest that higher wages can be effective if complemented with other institutional features, such as monitoring and sanctions.”

Read: Reforms have increased Pakistan’s tax collection, bribe rates: IMF

Generally speaking, the Fund noted that fiscal policy over the past decade has focused primarily on macroeconomic stabilisation in response to shocks, notably the global financial crisis. Less emphasis has been placed on reforms to foster long-term inclusive growth by adapting to changing demographics, advancing technology, and deepening global integration.

In many countries, public and private debt hover near historical peaks, long-term growth and development prospects are uninspiring, and inequality remains striking. With global growth slowing and uncertainty rising, fiscal policy should prepare for possible downturns — balancing growth and sustainability objectives — while also putting more emphasis on reforms to adapt to a fast-changing global economy.

The reforms will require inclusive and growth-friendly budget re-composition to upgrade tax, social spending, and active labour market policies, as well as investment in infrastructure for better public service delivery. Greater international cooperation was also needed to address multilateral issues, including corporate taxation, climate change, corruption, and, more generally, to achieve the 2030 Sustainable Development Goals.

Published in Dawn, April 11th, 2019