ISLAMABAD: Pakistani authorities are undergoing a “very tough” second quarterly review with visiting staff of the International Monetary Fund (IMF) as the country’s fiscal deficit breached 2.3 per cent of GDP in the first half of 2019-20 despite a tight control on the government’s expenditure.
Informed sources told Dawn on Wednesday that fiscal deficit in July-December 2019 amounted to about Rs995 billion (2.3pc of GDP) — up from just 0.6pc in the first quarter ending in September — owing to a massive revenue shortfall of about Rs290bn in corresponding period.
This is despite the fact that the federal government was able to restrict its expenditure at Rs183bn in July-December. This worked out at about 42pc of the annual target of about Rs440bn set in the budget.
“There was not a single supplementary grant allowed in first six months on the civil expenditure and austerity was religiously followed,” a senior official is said to have reported to the IMF.
During the same period of 2018-19, fiscal deficit had stood at 2.7pc of GDP or about Rs1.03 trillion but then the annual fiscal deficit had gone to 8.9pc as against a budgeted estimate of 4.9pc.
“In absolute terms, the deficit is almost there again,” he said, adding the gap is just Rs34bn. The fund had projected 3.2pc deficit for the first half of the year.
He said the government had overperformed on primary balance benchmark under the programme but this has not impressed the staff mission. “They [IMF staff] think this is neither sustainable nor desirable” because most of it came from one-off rollovers from last fiscal year and has not been supported by revenue growth.
The tax shortfall is going to be more than Rs750bn, an official who has been part of the talks with fund mission said. According to him, the questions of further fiscal adjustment and additional revenue measures have briefly cropped up during the initial talks but would be deliberated as part of the policy level discussions expected to begin on Tuesday (February 11). “The chances of additional tax measures are 50:50 for current year,” given the weak economic conditions, he said.
Responding to a question, an official said the prospects of a further downward revision in the revenue target were no more than 10-20pc because the IMF had already allowed a reduction in tax target to about Rs5.270tr from Rs5.503tr announced in budget.
Officials said the non-tax revenue could be enhanced to almost Rs1.6tr as against a budget estimate of about Rs895bn that had already been revised to Rs1.2tr on account of recovery of telecom revenue, SBP profits and so from the previous year. Further revisions in petroleum levy and gas infrastructure cess rates, privatisation proceeds and profits of the central bank and dividends from the public sector entities on the back of higher oil prices would help in this regard, the official suggests.
According to them, not only the revenue side but also the energy sector performance was behind schedule. The authorities had not been able to arrest the flow of circular debt as committed while also falling behind schedule on notifying second quarterly adjustment on electricity tariff to cover capacity payments of the power producers.
The completion of the review on a successful note on February 13 against a significantly modified 39-month programme would determine if the government would secure disbursement in March of another tranche of about $450 million direly needed to build market confidence and foreign exchange reserves. Pakistan has so far secured about $1.44bn through an upfront release of $991 million in July and first instalment of $452m in December 2019.
Of the total $6bn Extended Fund Facility, the country would actually receive net inflows of about $1.65bn until 2023 as it would be repaying around $4.36bn to the IMF during the same period.
The IMF staff had flagged in its quarterly review report in December 2019 the risks stemming from the composition of adjustment programme, and had “cautioned that fiscal consolidation must be achieved on the back of high-quality measures to ensure the sustainability of the adjustment.” This meant increase in revenues through expansion in the tax net and revenue reforms. The revenue slippages have continued since then while reforms have struggled to take off.
The key challenge for the government at this stage is the limited space available in the economy to boost revenue collection through additional measures as the Federal Board of Revenue has already opposed any additional taxation for being counterproductive.
The two sides are in the process of finalising a mid-year review of the macroeconomic performance for presentation to the parliament by end of the current month. They would discuss how to ensure fiscal consolidation without a further cut on development and are expected to discuss proposals for the next year budget due in June.
Published in Dawn, February 6th, 2020