IMF may resume aid program for Pakistan as budget fulfils competing objectives

June 13, 2022 (MLN): Pakistan’s budget for FY23 promised to deliver on two competing objectives set out by the International Monetary Fund (IMF), which should allow the fund to resume its aid program, Bloomberg reported today.

The two objectives set out by IMF as conditions for releasing the remaining balance from its existing loan program were fiscal consolidation and support for the poor.

“This should allow the IMF to resume its aid program, which is likely to conclude in the coming months”, Bloomberg said in a report.

The government has set a tax revenue collection target of 7.0 trillion rupees for fiscal 2023 which is 20% higher than the revised target for fiscal 2022. Moreover, the government has attempted to divert the tax burden from poor to rich segments such as taxes on farm equipment and essential food items have been removed, the limit for income tax exemption has been raised, as have taxes on luxury cars and expensive real estate purchases.

The government agreed to the IMF’s difficult targets as the country desperately needs aid to fill its external financing gap, which is estimated to be at least $18.3 billion in fiscal 2023. The country will likely receive the $3 billion aid in the near future, which should stabilize external balances.

However, it’s not expected to be easy for the country to persuade the IMF to further extend the program as it will probably be difficult for the government to deliver on its optimistic budget targets.

To recall, the government set its fiscal deficit target at 4.9% of GDP and a surplus target of 0.2% on the primary balance for fiscal year 2023. The primary surplus was one of the IMF’s pre-conditions for its loan.

The budget took several steps to support the disadvantaged, including an expansion of the cash transfer program and increasing scholarships for poor students.

A higher interest burden for servicing the debt will keep the fiscal deficit elevated in fiscal 2023.

As per the report, even if the government achieves a primary surplus of 0.2% of GDP, the fiscal deficit is still likely to overshoot the target. In addition, the primary balance target is considered to be highly optimistic.

The government’s tax revenue projections are based on a 5% growth for the next fiscal year. This is optimistic. The economy is expected to grow by 4.2%, which suggests the government is likely to miss its tax revenue collection target. History also suggests that tax collection targets have been missed by 10%, on average, since fiscal 2016, the report noted.

Moreover, as the next general election (due August 2023) draws near, it is highly likely that the government will announce further welfare programs, in addition to what was already announced in the budget.

Earlier today, economists at Citigroup Inc said that Pakistan’s plan to contain its deficit by cutting expenditure may not be enough to get the International Monetary Fund (IMF)’s nod for the resumption of its loan program.

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