The Pakistan government has started to quickly make changes to its economic policies and slash fuel subsidies, along with an increase in per unit prices of electricity, to meet the criteria of the International Monetary Fund (IMF) as it gears up to begin a second round of re-negotiations for reviving the Extended Funding Facility (EFF) programme.
In a latest, the government has pitched the budget deficit target of 4.8 per cent of the country’s total economic size to the IMF for the next fiscal year. The pitch is part of the proposed economic remedies and policy changes, demanded by the IMF and global lenders to Pakistan, which include further adjustment through a combination of expenditure cuts and additional revenue mobilisation.
The discussion between Pakistan and the IMF will pave the path and clarity for fiscal year 2022-23 budget, debate on which will start this week, with an aim to close the deal with the Fund by June.
While Pakistan is hoping to convince the international lenders on its proposed targets, the coalition government is faced with multiple challenges to revive the country’s credibility. This is with reference to the past false promises committed by previous government to win the confidence of the lenders and get concessions on financial assistance programme.
“During the inclusive Doha talks, the government had proposed the budget deficit target for the next fiscal year at Rs.3.77 trillion, or 4.8 per cent of gross domestic product (GDP),” said a source with information of the Doha talks between Pakistan and the IMF.
“The primary deficit target, excluding interest payments, had been proposed at 0.5 per cent of GDP for the next fiscal year.”
But the IMF refused to accept both GDP figures, insisting that the 4.8 per cent deficit projection was at the lower end, especially in reference to lack of concrete measures.
“IMF demanded Pakistan to meet its commitment and generate a primary budget surplus instead of proposing the primary deficit target.”
On the other hand, Pakistan maintained that IMF’s demand would force a budget made on assumptions of achieving the primary budget balance, which it stated would be unrealistic and would start the financial year of the country on a wrong footing.
“Under the 2019 EFF, the IMF’s key goal is the primary budget target, which in present circumstances can only be achieved through a combination of development expenditure cuts and enhancing revenue collection,” said the informed source.
“However, the gains made through higher revenue mobilisation and development spending cuts are lost by an increase in the key policy rate by central bank to 13.75 per cent.”
“Due to the government’s failure fulfilling the promises made with the IMF, there was a serous credibility crisis. Our success was that we brought the IMF back to the negotiating table and covered significant ground,” said Aisha Pasha, Minister of State for Finance and Revenue.
Pakistan’s second round of negotiations with the IMF will start from Wednesday as Finance Minister Miftah Ismail expressed hope that he would be able to clinch a deal with the Fund and finalise the staff level agreement in June.