IMF’s condition: Pakistan agrees to slice budget deficit target

This will result in a sharp cut of Rs130 billion on budget approved by parliament.

ISLAMABAD:

Pakistan has agreed to the International Monetary Fund’s (IMF) condition to lower its annual budget deficit target to 5.8% of the total size of its economy.

This will likely result in a sharp cut of a minimum Rs130 billion on the budget that parliament approved just over two months back.

As against parliament’s approved budget deficit target -gap between national income and expenditures, of 6.3% of Gross Domestic Product (GDP) or Rs1.651 trillion, Pakistan will now be required to restrict the gap to 5.8% of GDP or Rs1.470 trillion – a difference of approximately Rs180 billion, according to IMF-released documents.

The agreement with the IMF on budget deficit target is contrary to the public position that Finance Minister Ishaq Dar has taken so far.



In case Pakistan misses this key condition, a waiver will be required from the IMF’s Executive Board in order to qualify for the next tranche.

To fill this overall gap of Rs180 billion, the government wants to introduce gas levy by December this year, which will fetch about Rs52 billion from January to June of this fiscal year. The remaining amount of Rs130 billion will be saved out of the budget, said senior officials of the Finance Ministry.

To adjust the impact, the government will have to reduce the total size of the budget from Rs3.591 trillion to Rs3.46 trillion, raising questions over the whole exercise of seeking parliament’s approval for the budget.

The sources said the first easy target will be development budget, as the government has decided that it will cut Rs115 billion out of the Rs540 billion federal Public Sector Development Programme.

In the PSDP, Rs115 billion has been kept in “pool allocation” and even after a lapse of over two months, the government has not yet indentified the projects against this huge chunk, which will make it easy for the government to slash this budget.



The government has claimed that as a result of 30% cut on non-salary budget of the ministries, it will save about Rs40 billion.

The impact of gas levy will be neutral, if the government misses this year’s growth target, which will mean a lower size of the economy. For the current fiscal year, the government estimated that the economy will grow at a rate of 4.5% and estimated size of GDP will be about Rs26.2 trillion by end of current fiscal year.

In this case 1% of GDP will be equal to Rs262 billion. However, the IMF has assessed that Pakistan’s economy will grow by 2.5% and its estimated total size will be Rs25.3 trillion, with 1% of GDP being equal to Rs253.5 billion.

The IMF has fixed the budget deficit target in terms of percentage of GDP and if the IMF’s assessment comes true, the gap between the IMF and Pakistan’s assessed budget deficit will be around Rs50 billion that the government will have to adjust from the budget.

The cut on the budget will be sharper if the government gives power subsidies more than what it had budgeted, the officials added. The chances of overspending on account of power subsidies were significant.

The government increased tariffs for industrial, commercial and bulk consumers from August while the domestic consumers’ tariffs will be increased from next month. However, it budgeted subsidies on the assumption that tariffs will be increased from July.

Published in The Express Tribune, September 10^th, 2013.