After all, this is perhaps one of the steepest fiscal adjustments Pakistan has ever agreed to make in its history.
Recovering from negative economic performance, the first time after 1952, the impact will be no less than three times as dangerous – additional tax burdens, lower spending to raise living standards, and self-pay for the same utilities but not imminent. let-up signs.
Prime Minister Imran Khan’s government has committed to increasing the Federal Revenue Council (FBR) tax collection by around Rs1.27 trillion (about 2.5 percent of GDP), including additional tax measures worth Rs750 billion in its upcoming budget.
This is on top of cutting around Rs280 billion in the development budget, including Rs150 billion in the federal Public Sector Development Program (PSDP) during the current fiscal year and nearly freezing development and defense spending as a percentage of GDP over the next five years. The third and perhaps most painful of all is the gradual rise in electricity costs to generate nearly Rs900 billion (close to 2pc of GDP) in less than a year. Gas price adjustments will be another addition.
The IMF now requires parliament to approve legislation under a deadline unlike its previous program which recognized the legislature cannot be given orders
Performing this challenging task carries its own risks as the national economy recovers from a 0.4 percent contraction, which includes job losses, cuts in wages and rising poverty. The World Bank estimates that the past year and a half has reversed the past 20 years’ achievements in poverty reduction, although there is no clear data to support this at this stage.
“Unfortunately, there are no easy solutions and hard choices have to be made in the power sector,” said Ernesto Rigo, head of the International Monetary Fund’s (IMF) mission to Pakistan, when asked if it was realistic to carry out such an operation when the economy and people were trying to survive in difficult economic times. “If not, it will remain a barrier to economic growth.”
But Prime Minister Khan and his new finance minister Hammad Azhar have already started talking about renegotiating with the IMF in light of the severe third wave of Covid-19 after securing $ 500 million in the first tranche under a revived program. Interestingly, monitoring and sequencing requirements have also been strengthened under the program being revived with five previous actions, 10 revised benchmarks or deadlines, and 11 completely new structural benchmarks.
Mr Rigo, however, believes that the program objectives and design are irreversible even though the ordering can always be reviewed under changing economic conditions. The IMF has issued its growth forecast at 1.5 percent for the year against the 3 percent anticipated by the State Bank of Pakistan (SBP), increasing to 4 percent of GDP next year and then remaining flat at 5 percent through 2026. Growth is expected to pick up gradually. , but only reach its medium-term potential of 5% by 2023-24, slower than envisioned in the first EFF review, due to the major shocks and the need for continued fiscal adjustments, which are expected to offset some of the impacts of a stronger private sector. sector growth in the economy as a whole.
However, the review will now be conducted every three months for close monitoring by IMF staff instead of a biennial review under the original program which remains suspended for one year. In addition, for the first time there is a requirement in the program that requires parliament to approve acts and laws under a deadline. In previous programs, IMF staff used to liaise with parliamentarians to exchange views and advocacy, but always recognized that parliaments cannot be dictated.
The IMF noted that the authorities have committed to 3.3 per cent of a measure of GDP revenue during the program period ending in September 2022 and based on agreed fiscal measures for next year’s budget, a virtual freeze note on defense and development spending in terms of percentage GDP not only next year but also for the next five years.
The IMF predicts the current account deficit will widen to 1.5 percent of GDP in 2020-2021 as a result of the recovery and will continue to widen gradually towards 3 percent in the medium term with stronger imports driven by rising domestic and export demand. However, market-determined exchange rates, together with adequate monetary policy, will help strengthen reserves for more than three and a half months of imports by 2024-25.
Substantial risks cloud prospects, amplified by Covid-19. These fall into the four major groups. First, the heightened uncertainty – particularly around the global recovery and thus the prospects for growth, trade and remittances – arose from the second wave of the pandemic and the emergence of new strains around the world. This could reverse the course of the current pandemic in Pakistan and require additional mitigation efforts, especially if domestic vaccination efforts stall.
Second, policy gaps remain a risk, reinforced by weak implementation capacity and influential vested interests. This mainly affects the fiscal sector and thus debt sustainability, including the risk of provinces not meeting their commitments to budget parameters.
Third, failure to meet program objectives, including those linked to authorities’ AML / CFT action plans with the Financial Action Task Force (FATF), could hinder external funding and investment, the IMF warned.
Fourth, geopolitical tensions could spike oil prices and adverse changes in investor sentiment could impact external financing. At the same time, increased growth and program objectives emerged from the political calendar. With Senate elections due in March, according to the IMF, there is a window to accelerate reforms to the general election scheduled for August 2023. The prime minister is already showing signs of changing his mind.
The Debt Sustainability Analysis confirms that public debt remains sustainable with strong policies, but also shows the risk of policy slips and contingent liabilities. Pakistan’s development and defense budget has decreased significantly over the past two years and will remain nearly flat at a reduced rate over the medium term to 2026 under fiscal consolidation as part of the IMF’s ongoing program.
Documents released by the IMF as part of its resurgence program with Pakistan two weeks ago show that Pakistan’s defense budget has fallen from 3 percent of GDP in 2017-18 to 2.9 percent last year and will further decline to 2.8 percent of GDP this year. this. . It will struggle at the same 2.8 percent of GDP through 2025-26.
Likewise, the country’s overall development program which reached 4.2 percent of GDP in 2017-18 fell to 2.7 percent of GDP last year and 2.6 percent of GDP this year. Development spending is expected to increase slightly to 2.7 percent in the next fiscal year and then range from around 2.8-2.9 percent in 2026, depending on the increase in revenue collection.
Published in Dawn, The Business and Finance Weekly, April 12, 2021