Revelations by the IMF

The recent IMF staff report on Request for Emergency Assistance by Pakistan contains some important revelations. Estimates for 2009-10 are presented, including those on the budgetary outcome. By now it is known that, as opposed to the target of 5.1 per cent of the GDP, Pakistan closed the year with a fiscal deficit of Rs929 billion, equivalent to 6.3 per cent of the GDP.

The IMF now indicates that the fiscal deficit was actually even higher at Rs1,203 billion, a whopping 8.2 per cent of the GDP, when augmented by the electricity sector debt which is being serviced by the government of Pakistan. This is the largest fiscal deficit in the last twenty years, even larger than the peak deficit earlier in 2007-08 of 7.6 per cent of the GDP, in the aftermath of the oil price shock.

The borrowing for the power sector had earlier been considered as part of the quasi-fiscal deficit. By explicitly highlighting it and including it in the augmented fiscal deficit, the Fund has signalled the fiscal un-sustainability of Pakistan. The circular debt problem in the power sector and efforts to resolve it are clearly beginning to have major macroeconomic consequences.

The consequence of the large fiscal deficit in 2009-10 is the very rapid build-up of Pakistan’s public debt. The outstanding debt stood at Rs8,607 billion on June 30, 2010, with an increase of Rs1,309 billion during the year. This one year increase is so large that it is equal to the total outstanding debt in the early '90s.

According to the IMF, if its loans are added to the public debt then the overall debt-to-GDP ratio of Pakistan now exceeds 63 per cent. It has increased by 2.8 percentage points in 2009-10. Targets in the Fiscal Responsibility and Debt Limitation Act passed by the National Assembly in 2005 are all in danger of being seriously violated.

The IMF budgetary estimates for 2010-11 also highlight the runaway growth in provincial expenditures following the 7th NFC Award. Both current and development expenditures of the four provincial governments combined are expected to increase by as much as 32 per cent each. There appears to be more space in the provincial budgets for diversion to flood relief, rehabilitation and reconstruction than in the federal budget, which actually envisages a fall in development spending, according to the IMF.

Despite the record deficit in 2009-10, the IMF projections for 2010-11 of the overall budgetary outcome are extremely optimistic. Tax revenues are expected to show an extraordinary growth of 25 per cent at a time when the economy has been hit severely by the floods and will show little growth. The pre-flood budget deficit target has been set at Rs685 billion or 4 per cent of the GDP. It remains to be seen what the outcome will be once the impact of the flood on revenues and expenditure is fully allowed for. Could the deficit in 2010-11 even exceed the record level of Rs1.2 trillion attained last year?

Published in The Express Tribune, October 2^nd, 2010.