IMF Focused on Helping Pakistan Turn Primary Deficit into Surplus

• The IMF is not concerned about the increase in the budget deficit due to debt servicing.
• The Pakistan and IMF teams are currently holding talks at the technical level.
• The Fund delegation is in Pakistan until November 16 to hold talks.

ISLAMABAD: The International Monetary Fund (IMF) mission is focusing on Pakistan’s fiscal framework for the current fiscal year 2023-24 to turn the primary deficit into surplus under the $3 billion stand-by arrangement (SBA). The news on Monday.

The IMF is not worried about the overall widening fiscal deficit due to the escalating debt servicing of Rs 1 trillion for the current financial year. The government has planned to keep a cap on the debt service account at Rs 7.3 trillion, but the IMF has predicted it could reach Rs 8.3 trillion by the end of June 2024.

The primary surplus means that the deficit will be calculated excluding debt servicing in the form of capital and the requirement of surcharges on domestic and foreign loans.

The IMF review mission is currently in Pakistan to complete the first review under the $3 billion loan program and the potential release of the second tranche of $700 million by the end of December 2023. The tranche will be completed if both sides are able to reach a staff-level agreement at the end of the talks.

Pakistan and IMF teams are currently holding technical-level talks, while policy-level talks will be held next week from November 13 to 16.

By postponing core expenditure on subsidies and development spending, the government managed to keep the overall fiscal deficit within the planned limits of 0.9% of GDP for the current financial year. The primary surplus has been achieved for the first quarter by adopting a deferral of certain capital expenditures.

The government has issued subsidies of just Rs 2.5 billion in the first quarter out of the Rs 1,064 billion allocated for the current financial year. For the Public Sector Development Program (PSDP), the government has used only Rs 41.9 billion out of Rs 950 billion.

The postponement shows that the government, with the decision, was able to narrow the overall deficit and was able to meet the primary surplus targets to please the IMF.

“You should commend the government for turning the primary deficit into a surplus,” said a government official speaking to The news under the condition of anonymity.

When reminded that it was achieved by cutting subsidies and stifling development spending, the official said: “What other option does this caretaker government have? The only option was to undertake better expenditure management under the IMF’s program to align the primary deficit to a surplus.”

Under the SBA, Pakistan has targeted an overall fiscal deficit of 6.5% of GDP, equivalent to Rs6.9 trillion for the current financial year. The federal government’s budget deficit was estimated at 7% of GDP or Rs 7.5 trillion, but the provinces had to generate a revenue surplus of Rs 600 billion, after which the country’s overall fiscal deficit had to be reduced to 6.5% of GDP.

“Fiscal management is the key to the deficit”

Former economic adviser to the Ministry of Finance Dr Khaqan Najeeb said that managing Pakistan’s fiscal deficit was crucial as the government needs to print new currency to complete its borrowing needs in order to cover the deficit.

This increases the money supply in the economy and creates inflationary pressures, he said, adding that deficit financing also increases the government’s dependence on external resources.

The economist said the government’s borrowing plan is crowding out the private sector and harming growth, adding that the excessive deficit must increase the financial burden on future generations. He suggested that Pakistan should restructure its debt, implement spending reforms and introduce broad-based fiscal measures to control large fiscal deficits.

Dr Khaqan explained that the primary deficit is the amount the federal government needs to borrow to cover all expenses except loan and interest payments. In the first quarter of 2024, controlled subsidy and growth spending contributed to a lower fiscal deficit and primary surplus.

The need for a serious overhaul of Pakistan’s budget is underscored by the fact that the federal government’s net revenue receipts, after transfers to provincial governments alone exceeded debt service by Rs26 billion to cover all other expenses in the first quarter of FY2024; concluded. .