IMF projects record budget deficit

Puts deficit at Rs8.2tr, higher than target, leading to extra Rs1.3tr borrowing

Shahbaz Rana October 12, 2023
design: mohsin alam


The International Monetary Fund (IMF) on Wednesday projected Pakistan’s budget deficit at 7.6% of the size of its economy, or a record Rs8.2 trillion, which was far higher than the official target and would keep the government dependent on lenders to remain afloat.

In its global Fiscal Monitor Outlook, the lender also made some adjustments in revenue and expenditure forecasts for the current fiscal year compared to the ones given in the staff-level report for a $3 billion Standby Arrangement in July.

The overall budget deficit – the gap between government’s expenditures and revenues – is estimated at 7.6% of gross domestic product for this fiscal year, according to the Fiscal Monitor released during the second day of the annual World Bank-IMF meetings taking place in Morocco.

The government had set the overall budget deficit target at 6.5% of GDP, or Rs6.9 trillion, for FY24. The 7.6% deficit means that Pakistan will need to borrow Rs1.3 trillion more than what it had planned in June this year.

The government is already struggling to borrow from international creditors despite entering into a $3 billion deal with the IMF. This has shifted the financing burden to domestic banks, which are now freely exploiting the situation.

The World Bank reported that cumulatively nearly 75% of banks’ lending was being made to the government, leaving only one-fourth of the available money for private sector.

Last week, the World Bank had also given the budget deficit forecast equal to 7.7% of GDP.

The understated debt servicing cost of Rs7.3 trillion for FY24 could be one of the key factors behind missing the budget deficit target.

Additional Secretary Finance Amjad Mehmood told the Senate Standing Committee on Finance this month that a 1% increase in interest rate would add Rs600 billion to the debt servicing cost. By this standard, even the 7.6% budget deficit projected by the IMF appears to be on the lower side.

Pakistan has been constantly running record high budget deficits due to its inability to contain expenditures and increase revenues to a decent threshold.

The Fiscal Monitor put Pakistan’s total revenues at 12.5% of GDP, or Rs13.3 trillion, a ratio that was slightly better than July forecast. Compared to that, the total expenditures are projected at 20.1% of GDP, or Rs21.3 trillion.

The IMF has projected excess expenses of over Rs300 billion compared to the three-month old report.

However, it has not changed the primary budget surplus forecast of 0.4% of GDP, or Rs421 billion. But last week, the World Bank said that Pakistan would not be able to produce a surplus, rather it would show a deficit of 0.4% of GDP.

Under the short-term $3 billion IMF deal, Pakistan is bound to achieve a primary budget surplus of 0.4% of GDP.

“Today, we have much more information than what the IMF had in July at the time of programme approval,” said Adnan Ghumman, a World Bank economist, while responding to a question about the contrast between the IMF target and the World Bank projection.

The IMF said that Pakistan’s gross public debt would remain at 72.2% of GDP by the end of current fiscal year, which was 1.3% of GDP, or Rs1.4 trillion, higher than the previous forecast.

Under the Fiscal Responsibility and Debt Limitation (FRDL) Act, Pakistan is required to keep its debt below 60% of GDP, which every government has failed to implement despite tinkering with definitions of debt and the FRDL law.

The Fiscal Monitor report stated that there was an upward trend in global debt. For all countries, it is becoming hard to balance public finances, according to the report.

It added that the difficulties originate in the ever-growing demand for public spending, associated with high expectations about what the state can and should do, elevated debts, high-for-long interest rates and political red lines on taxes.

Debts are generally elevated around the world, and borrowing costs are rising. Global debt has risen persistently over the last 75 years. The mountain range got its tallest and steepest peak, in 2020, the year of the pandemic, at 258% of GDP, according to the IMF.

It said that in the following two years, a strong rebound in economic activity, accompanied by an unexpected inflation surge, pushed debt lower by 20 percentage points of GDP.

Published in The Express Tribune, October 12th, 2023.

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