IMF tells Pakistan to cut spending to absorb Rs500bn flood impact

ISLAMABAD:

The International Monetary Fund is ready to allow roughly Rs500 billion adjustments within the budgets to offset the impact of floods but without compromising on the overarching goal of maintaining fiscal discipline.

But Pakistani authorities are insisting upon getting relaxation by the same amount against the primary budget surplus annual target, according to the federal and the provincial authorities engaged in these negotiations.

Punjab, which is the worst-affected province, also conditionally remains committed to deliver the Rs740 billion cash surplus, provided the Federal Board of Revenue meets its Rs14.1 trillion target. The provincial government is still looking for fiscal space to meet the expenditure on the rehabilitation of the people affected by the floods.

The Pakistani authorities had formally sought relief in the targets of primary budget surplus and the cash surplus from the IMF to meet the emergent expenditure on the rehabilitation of the flood-affected people, the sources added.

The government sources said that the IMF has not yet agreed to lower these targets but is willing to make within budget adjustments.

The IMF's stance is not boding well with the federal and the provincial authorities that are facing the challenge of meeting these expenditures without any external help. If budget adjustment is accepted, it will bind the hands of the federal government that is already facing fiscal challenges.

There have also been instances where the IMF relaxed targets in some other countries to meet the unforeseen expenses. But it is, thus far, not willing to allow the additional space.

The sources said that it emerged during these discussions that there is a minimum Rs500 billion impact of the floods on the revenues and expenditures.

They said that the IMF was ready to allow these adjustments and offset the impact on the primary balance by cutting the Public Sector Development Programme (PSDP) and using the budget contingency pool.

The sources said that the FBR's target might be downward revised by Rs170 billion to Rs13.96 trillion. The IMF was also ready to reduce non-tax revenue of the federal government and Punjab's Agriculture Income Tax target, they added. The impact of non-tax revenue mainly in the captive levy and the provincial revenue is Rs140 billion, said the sources.

The sources said that the IMF has also assessed that the provincial expenses may also overshoot by about Rs150 billion because of floods related cost.

As an alternative, the IMF has proposed that the federal government should cut the PSDP by Rs300 billion and another Rs150 billion to be taken out of the contingency pool meant for such emergencies. This will have zero impact on the overall primary surplus target.

The sources said that the Pakistani authorities were of the view that Pakistan should be provided additional fiscal space instead of allowing within the budget adjustments. The IMF was reluctant to provide additional space at this stage, they added.

There is a strong view that the IMF should allow additional space and cut the primary budget surplus target by about Rs500 billion or 0.4% of the GDP.

For this fiscal year, the IMF has set the primary budget surplus target at Rs3.1 trillion or 2.4% of the GDP and the cash surplus target for the four provinces at Rs1.464 trillion or 1.1% of the GDP. But the primary balance is linked with the provinces' ability to generate cash surplus and the FBR's ability to meet the target of Rs14.13 trillion.

There were apprehensions that the government of Punjab, which suffered major losses, may not be able to meet its cash surplus target.

However, the information minister of Punjab, Miss Azma Bukhari, said that the provincial government remained committed to implement its part of the promise provided the FBR achieved its target.

"Punjab is committed to the estimated provincial share of Rs740 billion, (which is) contingent upon FBR meeting its target of Rs14.1 trillion", said Azma Bukhari while responding to a question by The Express Tribune.

To another question, Miss Azma said that Punjab did not inform the IMF that it won't deliver the Rs740 billion cash surplus target.

Under the IMF programme, Punjab's Rs740 billion cash surplus is very critical for the federal government's ability to meet the condition of showing primary budget surplus. Azma said that Punjab expects that the FBR would achieve its target of Rs14.1 trillion and make up its shortfall so far.

There is hardly any possibility that the FBR would achieve its annual target, like the previous fiscal year. Even if there is an agreement on downward revising the FBR's target by Rs167 billion, the new target of Rs13.96 trillion will not be achieved.

The FBR has already missed its first quarter target by a wide margin of Rs198 billion despite assuming drastic legal powers.

The FBR's failure costs the provincial government a lot, which are then forced to cut their planned expenditures. In the last fiscal year, the government had to increase the petroleum levy rates to offset the impact of missing the FBR target on the overall primary budget surplus target.

In the last fiscal year, the Punjab government had to take a hit of nearly Rs500 billion due to the FBR.

The IMF-FBR meeting on this fiscal year's revenue collection remained below the expectations of the government after the FBR could not satisfy the IMF that it had a credible plan to achieve the annual Rs14.13 trillion target.

To a question, Punjab's information minister said that so far the flood damage assessment survey is ongoing and Punjab will have better visibility on post-flood related expenditure once this survey is completed.

There is a possibility that the provincial government of Punjab may have to make adjustments in its current and development budgets to create space for spending on the rehabilitation of people while remaining within the overall IMF umbrella targets.

The sources said that the macroeconomic targets, mainly inflation, economic growth rate and current account deficits were still open for decisions by the IMF.

The government was pitching a 3.5% to 3.9% economic growth target post-flood situation while the IMF's assessment was that the GDP growth may not increase by more than 3% in this fiscal year. The inflation target is also open for discussions.

The Finance Ministry pitched a $500 million current account deficit projection post-flood but it may also not be agreed by the IMF due to higher than anticipated imports of goods and shrinking exports.