IMF sees tough fiscal path ahead
For next fiscal year, the IMF report shows the revenue-to-GDP ratio at 17%, which is projected to increase to 17.7% in the last year of PTI government. PHOTO: FILE
Pakistan will not have fiscal space to spur sluggish economic growth under an International Monetary Fund (IMF) programme as the global lender sees a tough fiscal path ahead to contain an unsustainable public debt burden that is projected to be around Rs44 trillion (minimum) by 2023.
The Fiscal Monitor report, released on Wednesday by the IMF from Washington, has projected a gradual increase in revenues and reduction in expenditures in three years to bring the public debt-to-gross domestic product (GDP) ratio down to 78.3% or Rs44.3 trillion.
The ratio currently stands at 87.2% or Rs36.3 trillion, which is not only unsustainable but is eating up one-third of the total budget in debt servicing.
The downward debt trajectory, if followed, will limit the government’s ability to spend on creating jobs and enhance economic growth during the remaining - almost three years - period of the Pakistan Tehreek-e-Insaf (PTI) administration that will complete its five-year term in July 2023.
Still, the debt pile that Prime Minister Imran Khan will leave behind at the end of his five-year term will be equal to 78.3% of the size of Pakistan’s economy, higher than the 72.5% gross public debt at the end of Pakistan Muslim League-Nawaz (PML-N) government, according to the report.
The PML-N had left behind public debt of Rs24.9 trillion, which as per IMF’s projection would be at Rs44.3 trillion (minimum) by 2023, even after following a tight fiscal path. If the government deviates from this path, the burden will be higher.
In February last year, PM Imran had vowed to bring the public debt down to Rs20 trillion. Even at 78% of GDP, the public debt will be higher than the limit set under an Act of parliament. Under the Fiscal Responsibility and Debt Limitation Act, Pakistan’s debt should not be more than 60% of GDP.
For fiscal year 2021-22, the IMF has projected debt-to-GDP ratio of 82.1%.
The figures given in the IMF report are different from the official fiscal path, which gives a hint that it will not be an easy task for the government to revive the stalled $6 billion IMF loan programme.
According to the report, Pakistan’s budget deficit - the gap between expenditures and revenues - will be 6.7% of GDP in the current fiscal year, about half a percentage point less than the target approved by parliament.
The global lender has estimated the budget deficit at 5.2% of GDP for the next fiscal year and 4% for fiscal year 2022-23, which will be the last year of the PTI government.
IMF figures are lower than the targets the government has set for itself for three years, indicating that the lender will want continuation of fiscal consolidation.
The IMF has also projected the primary balance for the next five years, which is calculated by excluding interest payments. It has once again shown primary surplus from the next fiscal year that can only be achieved by either cutting the development budget or defence spending.
In its projections, the IMF has shown primary deficit at 0.4% of GDP for the current fiscal year and a surplus of 0.7% for the next fiscal year and 1.6% for the year after.
Revenues have been calculated at 16.1% of GDP for the current fiscal year, slightly higher than the government’s budgetary target.
For the next fiscal year, the IMF report shows the revenue-to-GDP ratio at 17%, which is projected to increase to 17.7% in the last year of PTI government. The IMF has estimated that expenditures would remain at 22.8% of GDP in the current fiscal year, which would gradually edge down to 21.7% in the last year of PTI government and 20.9% in 2025. These ratios are slightly lower than the Ministry of Finance’s projections given in the medium-term budgetary framework.
Pakistan needs annual economic growth of around 7% to create jobs sufficient to absorb the youth bulge. Any economic growth below this adds to unemployment and poverty. However, a report of the Asian Development Bank (ADB) says Pakistan cannot grow more than 3.8% on a sustainable basis without first fixing the structural issues.
The IMF has projected a 1% growth for this fiscal year and only 2% for the next year.
The report stated that the budget deficit in the last fiscal year remained at 8% of GDP, which was lower than the initial post-Covid-19 estimates.
“Pakistan’s deficit is estimated to have tightened for its fiscal year that ended in June 2020 as Covid-19 impacted only the fourth quarter and the capacity to scale up spending was limited,” said the IMF.
Although the government had announced Rs1.2 trillion in the coronavirus relief package, finance ministry documents showed that the spending was less than Rs300 billion.
Published in The Express Tribune, October 15th, 2020.
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