IMF asks Pakistan not to bet on external financing

ISLAMABAD: The International Monetary Fund (IMF) has restricted Pakistan from depending too much on uncertain external sources for financing the budget deficit in the next financial year, leaving no other option for Islamabad but to resort to bank borrowing, officials said.

Finance ministry officials said that “the friendly warning” was given to Pakistan during talks in Doha, Qatar earlier this week. The deliberations were held to discuss broader parameters of the financial year 2010- 11 budget, but they remained inconclusive due to differences over the Value Added Tax and the budget deficit target. The IMF staff has informed Pakistan that “external financing for the budget deficit should not be more than one per cent of gross domestic product (GDP),” an official said, adding the vulnerability linked to the external financing may disturb the fiscal plan, as has happened during this fiscal year.

Acting upon the advice will mean that the government will have to borrow from domestic sources to bridge the gap between its incomes and expenditures, which will squeeze bank credit for the private sector. Officials said that depending on the outcome of talks between Pakistan and the IMF the next fiscal year’s budget deficit target would be between 4.2 per cent of the GDP or Rs700 billion and 4.5 per cent or Rs750 billion.

One per cent deficit is equal to around Rs167 billion and the government will have to arrange Rs500 billion through borrowing from banking and non-banking channels. Officials said the IMF asked Pakistan not to rely too much on external financing keeping in mind the current year’s worst experience as bilateral and multilateral donors showed reluctance due to the Greece debt crisis. According to budget documents, for the outgoing financial year 2009-10, the finance ministry had estimated Rs722 billion budget deficit, of which 70 per cent (Rs510.4 billion) was expected to be met through external receipts.

However, due to less-than-expected external flows the government had to revise the external portion to Rs310 billion. So far, the government has acquired Rs440 billion in loans from domestic sources to meet the yawning expenditures, sources said. The bank borrowing target for the year was Rs145 billion. During 2010-11, other than borrowing from banks the government will take a significant share from the National Savings Schemes for budget financing. So far, the government has borrowed Rs230 billion under the schemes and estimates say that the figure may touch Rs260 billion by the end of the fiscal year in June.

“It has never happened in the past that the government prepared the budget on the basis of non-firm financing,” said Dr Ashfaque Hasan Khan, former adviser to the finance ministry. He said excessive borrowing from domestic sources would reduce the availability of funds for the private sector. “A rational approach is that the budget deficit should not be more than four per cent of the GDP,” said Dr Ashfaq. Taking a realistic approach, officials said, the finance ministry has decided that it would not count any more on the pledges made by the Friends of Democratic Pakistan in Tokyo conference.

The government had estimated that during 2009-10 it would get $2.5 billion under the Tokyo pledges but so far the amount stands at less than $650 million.