Islamabad, Nov 15: IMF Highlights Pakistan’s Pressing Fiscal Constraints Amid Economic Challenges. The International Monetary Fund (IMF) says Pakistan’s finances are tight. The public debt-to-GDP ratio has increased dramatically in recent years, increasing by about 16 percentage points of GDP between FY17 and FY23, according to the Fund’s most recent Technical Assistance Report for Pakistan.
A number of factors contributed to this, including lower-than-expected GDP growth, rupee depreciation, the high cost of responding to pandemics and natural disasters, underperforming State-Owned Enterprises (SOEs), and general difficulties in achieving planned fiscal consolidation. Meanwhile, since FY17, the amount of budget money used for interest payments has risen, reaching 60% of tax revenue.
Converting a primary deficit of 1.3 percent of GDP for FY23 into a primary surplus of 0.4 percent of GDP for FY24 is a challenging undertaking for the authorities. This objective is based on the realization of new income from previous actions and considerable cost-cutting measures in all sectors of spending, with a focus on social and development expenditures.
According to the Fiscal Responsibility and Debt Limitation Act (FRDLA) of 2005, the goal is to reduce debt from its present level of 74 percent of GDP to less than 60 percent in the medium future. The actual budgetary results at the federal level have not been as good as anticipated in previous years. During FY17–23, the actual fiscal deficit was, on average, 25% more than the budgeted deficit.
Revenue budget predictions have continuously been overstated. The performance of non-tax revenue (versus anticipated amounts) has noticeably deteriorated in recent years, with a year-on-year reduction of 53 percent in FY19 and 43 percent in FY22.
Prior to FY20, spending offsets, specifically reductions in non-interest recurrent expenditure and development expenditure, were used to make up this revenue shortfall. Despite making significant cuts to development spending in recent years, the authorities have not been able to control spending.
At the same time, interest payments have increased significantly as a result of rising borrowing costs and a rise in governmental debt, which is mostly domestic and non-concessional in character. According to Amendment 18 (2011) of the Constitution, the four provinces have a direct claim on the “divisible pool” of federal taxes in addition to their own revenue sources.
According to the most recent National Finance Commission Award, this divisible pool is distributed “horizontally” among provinces according to variables like poverty, population density, and size, and “vertically” between provinces and the federal government in a ratio of 58:42. Approximately three-quarters of the overall money received by the provinces comes from the divisible pool.
They spend about one-third on development, mostly in the areas of health and education, and two-thirds on recurring expenses. A targeted, but non-binding, level of fiscal surplus is included in the Memorandum of Understanding that each Province has signed with the federal government in recent years.
Numerous reasons have contributed to the federal government’s recent low fiscal performance. These include significant fluctuations in commodity prices, the severe floods of 2022, which caused damages estimated at 5% of GDP, and tightening domestic and international funding conditions.
The current precarious financial situation has also been exacerbated by policy lapses. anticipated fiscal adjustments were delayed in FY23 due to unintended and untargeted subsidies as well as delays in implementing anticipated tax initiatives.
Simultaneously, the year-round import limitations immediately hindered the collection of sales tax and customs duties relating to imports, and they also contributed to the overall decrease in tax revenue by causing a fall in economic activity and the closure of many industrial facilities.
Amidst political unrest in FY22, a relief package offered substantial fuel and diesel subsidies, reduced power rates, and offered tax exemptions and tax amnesty. Alongside these actions were more food subsidies as well as raises in public salary and pensions.
As a result, the amount and makeup of spending have changed significantly from the authorized annual budget. Technical supplementary grants, which are essentially virements between grants, or supplementary and excess grants (henceforth referred to as “supplementary grants”), which are additional grants approved during the year that are not met by the surrender of existing grants (as defined by Article 84 of the Constitution), have been the two methods used to implement these in-year changes.
These supplemental awards totaled more than half of budget spending in FY23. Given the Executive’s unusual discretion in interpreting Article 84 of the Constitution to authorize these grants without the National Assembly’s previous consent, as will be covered later in this report, this indicates that a sizeable amount of spending does not undergo the prior scrutiny of the latter.
