IMF forecasts steep development budget cut

GDP growth projected at 4.5%, development spending to be slashed by 25%

ISLAMABAD:

The International Monetary Fund has projected that Pakistan’s national development budget will be cut by 25%, or Rs377 billion, for fiscal year 2016 in order to achieve the overall budget deficit target of 4.3% of total size of national economy. The Washington-based lender also projected that, as a result of lower development spending, the government will miss its economic growth rate target of 5.5%.

The IMF is projecting that the government will only be able to spend Rs1,136 billion on development this fiscal year, as opposed to the Rs1,513 billion approved by the National Economic Council, the steepest cut in recent years.

The bulk of the cuts will be borne by the provincial development budgets, which will collectively lose Rs313 billion, or 38.5% of their budgeted Rs813 billion. The federal development budget, by comparison, will only lose 9%, or Rs64 billion, of its budgeted Rs700 billion, the IMF projects.

The steep cut in the development spending will not only adversely affect current year’s economic growth rate but also delay many critical infrastructure projects due to a lack of funding. Against the official target of 5.5% GDP growth, the IMF has projected that Pakistan’s economy will grow at a pace of 4.5% this year.



The development spending will be cut to achieve the IMF-dictated budget deficit target of 4.3% of GDP or Rs1,292 billion. Achieving that target hinges on two factors: the Federal Board of Revenue meeting its target to collect Rs3,104 billion in taxes, and the provincial governments being forced to run a collective Rs297 billion in surpluses.

The surpluses are only possible if the provinces restrict their spending, including on development projects, said a federal finance ministry official, which in turn is linked to the FBR meeting its revenue target.

The seventh National Finance Commission (NFC) award grants 57.5% of most taxes collected to the provinces. Last year, the FBR could not achieve its Rs2,810 billion target. As a result, the provinces got Rs182 billion less than the promised amounts. It also led the government missing its budget deficit target for fiscal 2015, prompting Islamabad to seek a waiver from the IMF for having violated one of the conditions of its $6.3 billion bailout programme.

From the beginning of the fiscal year, the FBR is struggling to achieve this fiscal year’s tax target and is behind by Rs64 billion in just the first three months.

For the current fiscal year, the federal government has promised to give Rs1,849 billion to the provinces as their share in federal taxes under the 7th NFC Award.

The Federal Finance Ministry has assured the IMF that the provincial finance secretaries agreed that they would ensure budget surpluses equivalent to Rs297 billion. The Finance Ministry also claimed that the provincial finance secretaries have agreed that provincial spending will be maintained at 6.5% of GDP or Rs1,961 billion.

However, constitutional experts say that the federal government does not have the authority to make commitments with international financial institutions on behalf of the provinces.

 

Published in The Express Tribune, October 8^th, 2015.