Budget deficit may be set at Rs1.44tr as govt looks at populist policies

With elections around the corner, Pakistan could deviate from path of fiscal consolidation

ISLAMABAD: The government may set next fiscal year’s budget deficit target at around Rs1.44 trillion, which may slightly deviate it from the path of fiscal consolidation, as it starts implementing politically populist policies ahead of the next general elections.

The other reason for setting higher-than targeted budget deficit - the amount by which expenditure exceeds income - for fiscal year 2017-18 is greater expenditures and relatively low revenues during the outgoing fiscal year. The International Monetary Fund (IMF) expects the budget deficit would exceed to a whopping Rs1.5 trillion this year - a projection that the finance ministry has not fully accepted yet.



The IMF and Pakistan still differ on the exact quantum of budget deficit during the outgoing fiscal year 2016-17, said sources in the Ministry of Finance. This has a direct bearing on the next fiscal year 2017-18 budget deficit target, they added.

The government wants more fiscal space to spend in the election year while the IMF is keen that the country remains on the fiscal consolidation path. Despite an end to the IMF programme, the government cannot afford to annoy the IMF as it needs a good health of economy certificate to borrow from abroad.

Pakistan’s weakening external sector requires dollar injections from the World Bank and the Asian Development Bank to sustain foreign exchange reserves at the current level.

Due to a higher than targeted budget deficit in the outgoing fiscal year, the finance ministry will have to set next year’s target far higher than Rs1.27 trillion or 3.5% of Gross Domestic Product (GDP) that it had earlier projected in the medium term economic framework.

The finance ministry is planning to set next fiscal year’s budget deficit target around 4% of the GDP or Rs1.44 trillion, said the sources. This will be around Rs180 billion more than what the finance ministry had earlier planned, they added.

The budget deficit is filled by borrowing from domestic and international sources. This means the PML-N government will add at least Rs1.5 trillion more to public debt in its last year in power.

The exact position will be clear by the end of this month when the finance ministry takes the Budget Strategy Paper 2017-18 for approval of the federal cabinet.

Deviation reason

The main reason for deviating from the fiscal path is a growing budget deficit in the outgoing fiscal year, which was a direct result of populist measures that the PML-N government took after announcing the last budget.

The government announced a textile package this year without having allocations in the budget. Due to reversal of taxation policies during the course of the fiscal year, tax revenues have so far fallen short of target by around Rs168 billion, making the Rs3.621 trillion annual target unrealistic.

IMF reasoning

For this fiscal year, the parliament had approved Rs1.276 trillion or 3.8% of the GDP budget deficit target. After conclusion of the Article-IV discussions with the IMF early this month, Finance Minister Ishaq Dar had disclosed that the budget deficit would touch 4.1% of the GDP or Rs1.376 trillion.



However, the sources said that during the Article-IV consultations the IMF insisted that the budget deficit would widen to Rs1.511 trillion or 4.5% of the GDP. The finance minister did not agree to the IMF projections.

“We do not comment on the specifics of ongoing discussions,” said Tokhir Mirzoev, the Country Representative of the IMF in Islamabad.

However, he urged that the fiscal consolidation should continue. “Further consolidation will be needed next year to address fiscal vulnerabilities and strengthen resilience of public finances,” said Mirzoev.

Yet, the Country Representative said that the appropriate budget deficit target for next fiscal year would depend on the projection of the likely outcome in fiscal year 2016-17, which is still being discussed.

However, the officials of the finance ministry were of the view that the past three years’ record showed that the IMF’s projections about the budget deficit were off mark and the final deficit results were closer to the finance ministry’s assessments.



Although the government missed past two years budget deficit targets, it remained on a fiscal consolidation path, said the officials. In fiscal year 2013-14, the budget deficit stood at 5.7% of the GDP, which came down to 5.4% in 2014-15. Again, in 2015-16, the deficit was 4.6% of the GDP, which was higher than the target but better than the previous year.

But the likelihood is that the government will have no option but to adopt populist measures to win over the voters, said the sources.

Published in The Express Tribune, April 18^th, 2017.

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