Was set at 4.9% of GDP; may need IMF waiver for next loan tranche. STOCK IMAGE
Pakistan may have to seek a waiver from the International Monetary Fund (IMF), as it is going to miss the key condition of reducing budget deficit to 4.9% of national output. This will occur due to the lower economic growth rate that squeezed its financing space by Rs78 billion.
Under the three-year IMF bail-out programme, Pakistan is supposed to bring down the overall budget deficit – gap between national income and expenses – to 4.9% of Gross Domestic Product (GDP) by the end of the current fiscal year 2014-15. The gap is filled by borrowings, largely from domestic and partially from external sources.
At the time of announcing the budget, the government had set the economic growth target at 5.1%. However, the actual growth rate remained at 4.2%, as per estimates of the National Accounts Committee.
Based on 5.1% growth, the government had estimated the size of the economy at slightly over Rs29 trillion, translating into Rs290 billion when equivalent to 1% of GDP. However, due to 4.2% growth, the size of the economy has now been reduced to Rs27.4 trillion and 1% of GDP now amounts to Rs274 billion.
In the last fiscal year, the size of the economy was Rs25.4 trillion.
Overall, this has suddenly reduced the financing space of the finance ministry by Rs78 billion, adversely affecting its efforts to keep the overall budget deficit to 4.9% of the GDP, said sources.
On the basis of Rs290 billion, the federal government had estimated Rs1.421 trillion budget deficit that on the revised size of the economy will come down to Rs1.342 trillion. Due to the relatively small size of the economy, the budget deficit in the first nine months of the fiscal year would now stand at 3.8%, 0.2% up against provisional estimates that the Ministry of Finance released this month.
So far, the government was confident that like the previous fiscal year, it will again meet the budget deficit target. The budget deficit target is one of the five criteria that Pakistan has to meet for the next IMF loan tranche. In case any of these five are missed, Pakistan has to request the Executive Board of the IMF to grant a waiver.
During the last two reviews, Pakistan did not seek any waiver from the IMF, unlike the first five reviews when the Washington-based lender gave 10 waivers.
After the recent development, the Ministry of Finance has slightly softened its stance on the issue of the budget deficit, although it still hopes to remain closer to the target. “The government is well positioned to achieve the 5% budget deficit target,” said Finance Minister Ishaq Dar on Saturday.
Earlier, the government was expecting to remain within the permissible limit of 4.9%. The relaxation of 0.1% means an additional spending of Rs27.4 billion.
Another senior official of the Ministry of Finance said that at the current pace of expenditures, the ministry was estimating the budget deficit around 5.2% of the GDP.
Despite surge in security-related spending and a whopping Rs200 billion shortfall in Federal Board of Revenue’s tax collection, the government was expected to remain closer to the target. A 2% cut in policy rate by the central bank until March and privatisation proceeds had helped the government to recoup the losses.
Only because of the reduction in discount rate, the Finance Ministry saved Rs55 billion in domestic debt servicing cost, said Finance Secretary Dr Waqar Masood on Thursday. As against the estimated Rs1.224 trillion debt servicing cost, actual expenses may remain around Rs1.169 trillion, said Talib Baloch, the advisor budget to Ministry of Finance.
Dar said that the floods, political upheavals and reduction in commodity prices pulled back the GDP growth in the outgoing fiscal year. He said energy crisis also shaved off the growth rate by 1% to 1.5%.
However, according to Harald Finger, the IMF’s Mission Chief to Pakistan, lower growth in Large Scale Manufacturing and deceleration in private sector credit would result lower economic growth. For the next fiscal year, the government has targeted the economic growth at 5.5 while the budget deficit target for the new fiscal year is 4.3% of the GDP.
Published in The Express Tribune, May 24th, 2015.
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