Structural flaws in IMF programme may hinder reduction in budget deficit

Economists say high deficit targets for first two quarters may make it difficult for government to achieve the goal.

ISLAMABAD:

Structural flaws in the recently-signed programme with the International Monetary Fund (IMF) may work against one of the key objectives of ‘stabilising economy through belt-tightening’, as quarterly budget ceilings set by the IMF are contrary to historical budget deficit trends.

The quarterly budget deficit ceilings allow the government to spend more in the first two quarters of the fiscal year, while imposing restrictions of less spending in the third and fourth quarters, showed the IMF documents.

Historically, the budget deficit in terms of the total size of the economy remained low in the first two quarters of the fiscal year, but widened in the third and fourth quarters.

The government’s ways and means boundaries are also set in a manner that allow comparatively less spending in the first two quarters and more during the last two quarters of the fiscal year. According to the ‘ways and means limit’, government agencies can spend up to 20% during each of the first two quarters and 30% each in the third and fourth quarters.

For the current fiscal year, the IMF imposed a binding condition of keeping the gap between the national income and spending at Rs1.463 trillion or 5.8% of the gross domestic product (GDP). To achieve this target, the Washington-based lender had allowed the government to attain a budget deficit of 1.7% in the first quarter, 1.8 % in the second, 1.3% in the third and just 1% in the fourth quarter, according to the IMF documents.

According to independent economists, lean budget deficit targets in the first two quarters will allow the government to adopt an expansionary fiscal policy – cutting interest rates and expand money supply to encourage growth and combat inflation – which may make it difficult to reverse the trends in the next two quarters. They argued that it will be difficult to reverse historical trends, and eventually the government will miss the deficit targets for last two quarters.

Historical trends

During the last five years, the budget deficit in the first quarter remained around 1% of the GDP that gradually widened during the course of the fiscal year and in the fourth quarter the deficit remained over 2% of the GDP – double than the IMF permissible limit.

The preliminary results of fiscal 2014’s first quarter (July-September) were also in line with historical trends. According to an official from the Ministry of Finance, the budget deficit in the first quarter remained at Rs293 billion or 1.1% of the GDP – far below the IMF ceiling of 1.7%. One of the major reasons behind lower budget deficit was the placement of Rs67 billion in the Universal Services Fund under the control of the Finance Ministry. This gave 0.3% benefit to the government in the first quarter.

According to the official in the first quarter, the government’s revenues stood at Rs471 billion against total expenditure of Rs845 billion, showing a gap of Rs374 billion or 1.4% of the GDP. However, provinces saved Rs81 billion that brought down the overall budget deficit to 1.1%.

In the last fiscal year 2012-13, the budget deficit in the first quarter was 1.2% of the GDP while it was 3.6% or Rs787 billion in the fourth quarter. The fourth quarter of the fiscal year 2012 closed at 2.3% of the GDP. Similarly in fiscal year 2011, the budget deficit was 2.1% of the GDP.

The fiscal ceilings were indicative, but the final goal of attaining a budget deficit of 5.8% was more important, said Dr Nadeemul Haque, former deputy chairman of the Planning Commission. Haque, who had also served in the IMF, said that the international lending agency could adjust these fiscal ceilings as per requirement.

The fiscal year 2009-10 was the first year under the last IMF programme. Even in that year when the government showed restraints in spending, the deficit remained at 2.1% of the GDP, according to documents of the finance ministry.

Ministry of Finance spokesperson Rana Assad Amin did say the quarterly ceilings were not in line with historical trends, but he affirmed that the austerity measures will reverse them. Amin said the 5.8% budget deficit target was “sacrosanct” for the government to achieve.

Published in The Express Tribune, October 6^th, 2013.

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