IMF bailout: Provinces agree to spend Rs117b less than budget

Federation-provinces understanding to hinge on FBR meeting tax target of Rs2.475 trillion.

ISLAMABAD:

All four provincial governments on Tuesday agreed to save Rs117 billion out of their current year’s budgets, fulfilling an important precondition imposed by the International Monetary Fund (IMF) for approving the $5.3 billion bailout package.

The understanding was reached with the federal government when representatives of all provinces met with officials from the centre during a meeting of the Council of Common Interests (CCI).

The IMF had imposed the condition of seeking the CCI’s approval for provincial surpluses aimed at keeping the overall budget deficit at 6% of Gross Domestic Product (GDP) for the current fiscal year, ending on June 30.

Talking about the breakthrough, spokesman for the Finance Ministry Rana Assad Amin confirmed that the federal government and the four provinces agreed on generating Rs117 billion surpluses by June 2014.



However, officials added that the surplus will be linked with Federal Board of Revenue’s (FBR) ability to collect Rs2.475 trillion in taxes during the fiscal year 2013-14. Shortfall in taxes will have adverse implications on the understanding and the provinces will be allowed to reduce their respective savings by the same amount, they added. It is expected that from the total collection of Rs2.475 trillion, Rs1.502 trillion will be given to provinces as their share in federal taxes.

The understanding on generating provincial surpluses comes as the second major step towards meeting pre-conditions of the IMF bailout package.

As a first step, the State Bank of Pakistan has already stopped intervening in the exchange market, resulting in the depreciation of the rupee against the US dollar in the open market.

According to details, the provinces would save 35% or Rs117 billion of the additional anticipated income of Rs340 billion, according to the officials. Punjab will save the maximum amount of Rs60 billion, which is 8.5% of its total share of Rs708 billion under the National Finance Commission (NFC) Award for the current fiscal year.

Meanwhile, Sindh has agreed to save Rs30 billion from its income, which is 7.5% of its Rs400 billion share in the federal taxes, while Khyber-Pakhtunkhwa has agreed to save 6.8% or Rs17 billion out of its Rs251.5 billion share in federal taxes. Similarly, Balochistan will save Rs10 billion out of its total share of Rs142 billion, which comes to 7%.



Nevertheless, FBR’s ability to collect Rs2.475 trillion in taxes is now the biggest caveat in the understanding. Till July 22, the FBR had collected just Rs52 billion in taxes against Rs80 billion collected during the same period last year. This demonstrated a 35% decrease in collections over the comparative period.

To ensure the viability of the understanding, FBR will now need to grow at 27.6% growth rate to hit the Rs2.475 trillion goalposts over last year’s collection of Rs1.940 trillion. However, given the magnitude of the task ahead, FBR officials fear that lack of collections may lead to an increase in tax levy as the year progresses.

Pakistan and IMF have reached a staff level agreement for $5.3 billion in a bailout arrangement. However, Pakistan is seeking an estimated $7.3 billion to meet its anticipated budgetary shortfall in external inflows and outflows.

Finance Minister Ishaq Dar has said that he is hopeful that on September 4, when the IMF board meets to consider Pakistan’s request, the international financing institution will approve the request for $7.3 billion.

Published in The Express Tribune, July 24^th, 2013.