The PPP became secret in the tough conditions of the IMF

With the size of the new budget likely to jump 30% to a record Rs 18.9 trillion due to additional expenditure demands, the PML-N government on Wednesday took its main ally – the PPP – into confidence over the tough conditions raised by the International Monetary Fund (IMF).

The tax target for the Federal Board of Revenue (FBR) is almost 40% higher at Rs 13 trillion, and the target for non-tax revenue is expected to be a record Rs 4.8 trillion due to higher earnings from State Bank of Pakistan and the collection of Petroleum Levy.

Among the IMF’s demands for the new program is the signing of a National Fiscal Compact to devolve powers to the provinces and a further increase in electricity prices from July, according to sources familiar with a meeting held on Wednesday.

The PML-N government, for the first time, briefed the MPs about its negotiations with the IMF on the new bailout package and the budget for the financial year 2024-25.

The conditions also include approval of the new budget in line with IMF guidelines and prior parliamentary approval for additional grants.

National Assembly Speaker Sardar Ayaz Sadiq had asked the government to arrange briefing for the senior PPP leadership after the party complained of being kept in the dark about the IMF negotiations and the upcoming budget.

Finance Minister Muhammad Aurangzeb attended the meeting from China, while Finance Minister Ali Pervaiz Malik and Finance Minister Imdad Ullah Bosal gave the briefing.

The speaker arranged the briefing to develop consensus among the allies and another round will be held soon, said Senator Saleem Mandviwalla, who represented the PPP in the meeting.

It is the first time in many years that budget proposals are not shared with the standing committees of the National Assembly and the Senate prior to their presentation in Parliament. These committees have not yet been formed due to disagreements between the political parties.

Aurangzeb is expected to announce the budget on June 12.

The briefing to the PPP leadership came days after the finance ministry also gave a similar briefing to the military authorities. Prime Minister Shehbaz Sharif had also desired that Foreign Secretary Ishaq Dar accompany the finance ministry team during the briefing to the army. However, Dar skipped the meeting.

Ishaq Dar did not respond to a request for comment.

The PPP was informed that for the next rescue package, the IMF has set at least three conditions: approval of the new budget, an increase in electricity prices due to the annual increase in the basic tariff and a six-month adjustment in natural gas prices.

Treasury officials informed the PPP that the IMF believed there was a need to sign the National Fiscal Compact – a term equivalent to the National Finance Committee (NFC), possibly coined to avoid any political controversy related to the NFC.

The meeting was informed that the IMF believed that programs such as the Benazir Income Support Program (BISP) should eventually be provincialised.

Senator Sherry Rehman, who also attended the briefing, did not respond to a question about the PPP’s view on any new National Fiscal Compact.

Federal-provincial fiscal relations should be discussed in the Council of Common Interests (CCI) instead of negotiating with the IMF, said a participant in the meeting on condition of anonymity.

Finance ministry spokesman Qamar Abbasi did not respond to questions about whether the ministry had briefed the army a few days ago. The spokesman also did not respond to a question about the possible holding of a similar briefing for MPs belonging to PTI, the main opposition party.

What the budget will look like

The PPP has been told that next year’s budget may swell to a new record of Rs 18.9 trillion—an increase of Rs 4.4 trillion or 30% over this year’s original budget.

The size expanded further last week after the Defense Department and the Planning Department sought to increase their allocations to meet development and defense needs in the next fiscal year.

The massive increase in the size of the budget does not reflect the harsh economic realities, but the hands of the finance ministry are tied due to the IMF’s insistence on Rs 9.7 trillion allocations for interest payments.

Participants were informed that next year’s interest payments are estimated at Rs 9.7 trillion.

Interest costs of Rs 9.7 trillion are 33% higher than this year’s original budget.

Another major expenditure is the defense budget of about Rs 2.1 trillion and a special defense package. The grant amount for the next fiscal year has swelled to Rs 1.7 trillion, including about Rs 450 billion to meet defense procurement needs.

The Finance Ministry has now estimated the cost of the Public Sector Development Program (PSDP) at Rs 1.5 trillion, about Rs 280 billion more than the indicated budget approved by the Annual Plan Coordination Committee (APCC) last Friday.

PSDP of Rs 1.5 trillion will be 60% higher than this year’s original budget. Subsidies are expected to remain above Rs 1.3 trillion in the next financial year.

Resources

The government has informed its ally that the FBR’s tax target is likely to be Rs 13 trillion—an increase of Rs 3.6 trillion or 38% over this year’s initial target.

Responding to a question from a participant, the FBR chairman informed the meeting that it was difficult to achieve the target.

He further stated that its implementation will be subject to implementation of all IMF conditions, including imposition of 18% sales tax on items currently charged at a lower rate under the 8th schedule or zero rates under the 5th and 6th schedules.

The PPP was informed that the government was still trying to convince the IMF to withdraw its conditions for imposing an 18% sales tax on medicines, milk and basic food items. There is also disagreement over charging all income of employees and non-employees at a progressive rate, including income from stock trading and bank dividends.

Participants were informed that real estate income tax rates from annual tax return applicants will become progressive and linked to transaction values.

The hole

The Rs18.9 trillion budget line will be financed by taking about Rs9.8 trillion in loans from local and international creditors.

The federal budget deficit is projected to be around Rs 9.8 trillion or 7.9% of gross domestic product. The projected federal deficit is 30% higher than this year’s initial estimates.

The sources said the overall target for the deficit could be around 6.9% of GDP or Rs8.6 trillion.

The government expects the provinces to show a cash surplus of Rs 1.2 trillion. The primary budget surplus—after excluding interest payments—will be about 1% of GDP, or Rs1.2 trillion.