The International Monetary Fund (IMF) has projected a steep fiscal adjustment of over Rs1.7 trillion in the next two fiscal years aimed at containing a highly unsustainable public debt at current levels - a path that can address structural economic issues but seems politically unpopular.
In its Global Fiscal Monitor report, the IMF has given a glimpse of what the Pakistan Tehreek-e-Insaf (PTI) government may have to do to control the yawning public debt.
The IMF on Wednesday released the report from Washington - a day after Prime Minister Imran Khan expressed his intention to again review the IMF programme.
PM Khan said on Tuesday, “We are going to speak to the IMF because we see disruptions ahead. Just when our economy was recovering and all the indicators were positive, unfortunately, we will have to review the whole situation and our new Ehsaas programme.”
The IMF executive board last month restored Pakistan’s $6 billion loan programme that had remained suspended for over one year.
The fund revived the programme only after Pakistan agreed to massively increase electricity prices, impose new taxes and give autonomy to the State Bank of Pakistan (SBP) and National Electric Power Regulatory Authority (Nepra) - the conditions that now seem again unacceptable to the government.
The fiscal path given in the fiscal monitor may be slightly different from the IMF staff report for Pakistan’s programme, which is expected to be released soon.
In the monitor, the IMF has projected a sharp increase in revenues but a gradual reduction in expenditures in two years to bring the public debt-to-gross domestic product (GDP) ratio down to 77.7% or Rs43 trillion by June 2023. The ratio currently stands at 87.7%, which the IMF wants to cut by 10 percentage points within two years.
This means that the public debt will be Rs5.2 trillion less than what it actually will be without the IMF reform programme.
The 87.7% of debt-to-GDP ratio is not only unsustainable but is eating up over 40% 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 its remaining tenure of slightly over two years. The government will complete its five-year term in July 2023.
Still, the debt pile that PM Khan will leave behind at the end of his five-year term will be equal to 77.7% of the size of Pakistan’s economy, higher than the 72.5% ratio at the end of Pakistan Muslim League-Nawaz (PML-N) government’s tenure.
The PML-N had left behind public debt of Rs24.9 trillion, which as per IMF’s projection would be at Rs43 trillion by 2023, even after following a tight fiscal path.
If the government deviates from this path, the burden will be higher by at least Rs5.2 trillion.
Even at 78% of GDP, the public debt will be higher than the limit set under the 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-toGDP ratio of 83.3%. According to the report, Pakistan’s budget deficit - the gap between expenditures and revenues - will be 7.1% of GDP in the current fiscal year.
The global lender has estimated the budget deficit at 5.5% of GDP for the next fiscal year, which means that the government will have to introduce over Rs830 billion worth of fiscal adjustments.
For fiscal year 2022-23, the IMF has projected only 3.9% budget deficit, which will be the last year of the PTI government.
The IMF has also projected primary balance for the next two years, which is calculated by excluding interest payments.
In its projections, the IMF has shown the primary deficit at 1% of GDP for the current fiscal year, a surplus of 0.4% for the next fiscal year and 1.6% for the year after. Revenues have been calculated at 15.8% of GDP for the current fiscal year.
For the next fiscal year, the IMF report shows the revenue-toGDP ratio at 17%. This means the government will have to introduce a minimum Rs625 billion worth of new taxes.
Expenditures for the current fiscal year are estimated at 22.9% of GDP, which for the next fiscal year are projected at 22.5% - a consolidation of only 0.4%. In total, the fiscal consolidation for the next year is equal to 1.6% of GDP.
If the government follows this path, the debt-to-GDP ratio will be 83.3% by the end of next fiscal year. For fiscal year 2022-23, the IMF has projected revenues at 17.5% of GDP, requiring further revenue efforts of about half a percentage point.
The IMF has estimated that expenditures will remain at 21.4% of GDP in the last year of the PTI government.
Total fiscal adjustment for the last year of the government is projected at 1.6% of GDP, which will largely come from the expenditure side.
In this scenario, the IMF has projected that Pakistan’s debt-to-GDP ratio will come down to 77.7% by June 2023.
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.