ISLAMABAD: Projecting stagnant tax-to-GDP ratios over the next five years, the International Monetary Fund (IMF) on Wednesday estimated Pakistan’s fiscal deficit — the gap between total resources and expenditures — for the current fiscal year at 7.4 per cent of GDP, almost 1pc higher than 6.5pc target set by the federal government.

On the positive side, however, the fund anticipates a gradual decline in debt-to-GDP ratios and general government expenditures over the medium term. Also, the primary fiscal balance has been estimated to remain 0.4 to 0.5pc of GDP over the next five years, compared to a 0.9pc primary deficit in FY23.

The centre had estimated the overall fiscal deficit at Rs6.9 trillion for the current fiscal year (6.53pc of GDP) on the anticipation that provinces would offer Rs600bn surplus to scale down the federal deficit otherwise estimated at Rs7.5tr or 7.1pc of GDP. The IMF had previously projected the fiscal deficit at 7.6pc of GDP in October last year but has since revised it to 7.4pc, apparently based on the latest data shared by the government last month as part of a quarterly review.

In its fiscal monitor released on Wednesday as part of spring meetings of the IMF and the World Bank currently in progress in Washington, the fund forecast fiscal deficit declining 7.3pc of GDP in FY25 — significantly higher than its 6.9pc forecast made in October last year. In the same direction, the IMF made upward adjustments in deficit estimates for Pakistan.

IMF says revenues to stay stagnant despite falling expenditures in five years

In doing so, the fund forecast a 5.8pc fiscal deficit for FY26, followed by 5.1pc in FY27 and staying at 4.6pc in FY28 and FY29. In October last year, the IMF predicted Pakistan’s fiscal deficit to be 6.9pc in FY25, 5.4pc in FY26, 4.4pc in FY27 and 4.4pc in FY28.

The fiscal monitor for April 2024 also put primary budget surplus — the difference between revenues and expenditures excluding interest payments — at 0.4pc of GDP for FY24, followed by 0.5pc in FY25 and then staying stable at 0.4pc over the next three consecutive years and again at 0.5pc in FY29. In October last, the IMF had pitched a primary deficit for FY23 at 1.2pc of GDP compared to 0.5pc claimed by the government, which turned out to be a 0.9pc deficit, according to the latest statement of the IMF.

Referring to the revenue side, the IMF projected general government revenue to be 12.5pc of GDP for the current fiscal year ending June 30, up from 11.4pc last year. The fiscal monitor predicts general government revenue at 12.4pc for the next two fiscal years, FY25 and FY26, 12.3pc in the following two years, FY27 and FY28, and then back to 12.4pc in FY29.

The fund has not changed its revenue-to-GDP ratio estimates for all these years.

On the expenditure front, the fiscal monitor estimates general government expenditure at 19.9pc of GDP for FY24, significantly higher than 19.2pc in FY23. It then anticipates a gradual yearly decline over the medium term as debt servicing costs ease. The general expenditure will drop to 19.6pc in FY25), followed by 18.1pc in FY26, 17.5pc in FY27, 17pc in FY28 and 16.9pc in FY29. The fund has slightly revised its previous forecasts about the expenditure to GDP ratio by 0.2 to 0.3pc for these years.

Falling govt debts

Likewise, the IMF expects the gross government debt to ease down to 71.8pc of GDP at the end of the current fiscal year from 77.1pc last year. It anticipates a declining trend, but more is needed to eliminate vicious violations of the Fiscal Responsibility & Debt Limitation Act (FDRLA), which seeks to ensure that debt always remains below 60pc of GDP.

The IMF projects the gross government debt-to-GDP ratio to come down to 69.4pc next year, followed by 68.4pc in FY26 and 66.8pc in FY27. The debt is expected to drop to 64.8pc in FY28 and 63.1pc in FY29.

The fund noted that Pakistan would be among the economies with relatively high deficit levels and projected to undergo rapid fiscal consolidation over the medium term.

Published in Dawn, April 18th, 2024

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