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IMF plans budget adjustment of Rs1.7tr





The International Monetary Fund (IMF) has forecast a sharp fiscal adjustment of over 1.7 trillion rupees over the next two fiscal years in order to contain highly unsustainable public debt at current levels – a path that may resolve structural economic problems but seems politically unpopular.

In its Global Fiscal Monitor report, the IMF gave an overview of what the Pakistani government Tehreek-e-Insaf (PTI) might have to do to control the gaping public debt.

The IMF released Washington’s report on Wednesday – a day after Prime Minister Imran Khan expressed his intention to review the IMF’s program.

Prime Minister Khan said on Tuesday: “We are going to talk to the IMF because we see disruption coming. Just when our economy is recovering and all indicators are positive, unfortunately, we will have to revisit the whole situation and our new Ehsaas program.

The IMF board last month reinstated Pakistan’s $ 6 billion loan program that had been suspended for more than a year.

The fund only revived the program after Pakistan agreed to massively increase electricity prices, impose new taxes and empower the State Bank of Pakistan (SBP). and the National Electric Power Regulatory Authority (Nepra) – conditions that again seem unacceptable to the government. .

The fiscal path shown in the fiscal monitor may be slightly different from that of the IMF staff report for the Pakistan program, which is expected to be released shortly.

In the monitor, the IMF forecast a sharp increase in income but a gradual reduction in spending over two years to bring the ratio of public debt to gross domestic product (GDP) to 77.7% or 43 trillion rupees by June 2023. The ratio is currently at 87.7%, which the IMF wants to reduce by 10 percentage points within two years.

This means that the public debt will be 5.2 trillion rupees less than it actually will be without the IMF reform program.

The 87.7% debt-to-GDP ratio is not only unsustainable, but absorbs over 40% of the total budget in debt service.

The downward debt trajectory, if followed, will limit the government’s ability to spend to create jobs and improve economic growth during its term of office which will remain slightly over two years. The government will complete its five-year term in July 2023.

Yet the pile of debt Prime Minister Khan will leave behind at the end of his five-year term will be 77.7% of the size of the Pakistani economy, more than the ratio of 72.5% at the end. of Pakistan Muslim League-Nawaz (PML -N) government mandate.

The PML-N had left behind a public debt of Rs 24.9 trillion, which the IMF projected to be Rs 43 trillion by 2023, even after following a tight fiscal path.

If the government deviates from this path, the burden will be higher by at least 5.2 trillion rupees.

Even at 78% of GDP, public debt will be above the limit set by law of Parliament. Under the Fiscal Responsibility and Debt Limitation Act, Pakistan’s debt is not expected to exceed 60% of GDP.

For the 2021-2022 fiscal year, the IMF has projected a debt-to-GDP ratio of 83.3 percent. Pakistan’s budget deficit – the gap between spending and revenue – will be 7.1 percent of GDP in the current fiscal year, according to the report.

The global lender has estimated the budget deficit at 5.5% of GDP for the next fiscal year, which means the government will have to introduce more than Rs 830 billion in budget adjustments.

For fiscal year 2022-23, the IMF only forecast a 3.9% budget deficit, which will be the last year of the PTI government.

The IMF has also projected the primary balance for the next two years, which is calculated excluding interest payments.

In its projections, the IMF showed a primary deficit of 1% of GDP for the current year, a surplus of 0.4% for the next year and 1.6% for the following year. Revenue has been calculated at 15.8% of GDP for the current fiscal year.

For the next fiscal year, the IMF report shows the revenue-to-GDP ratio at 17%. This means that the government will have to introduce a minimum of Rs 625 billion in new taxes.

Expenditure for the current fiscal year is estimated at 22.9% of GDP, which for the next fiscal year is projected at 22.5% – a consolidation of just 0.4%. In total, fiscal consolidation for next year is equal to 1.6% of GDP.

If the government follows this path, the debt-to-GDP ratio will be 83.3% by the end of the next fiscal year. For the 2022-2023 fiscal year, the IMF has projected revenue at 17.5 percent of GDP, requiring additional revenue efforts of around half a percentage point.

The IMF estimated that spending would remain at 21.4% of GDP in the government’s last year PTI.

The total fiscal adjustment for the government’s last year is projected at 1.6% of GDP, which will come largely from the expenditure side.

In this scenario, the IMF forecast Pakistan’s debt-to-GDP ratio to drop to 77.7 percent by June 2023.

Pakistan needs an annual economic growth of around 7% to create enough jobs to absorb the surge of young people. Any economic growth below this figure adds to unemployment and poverty.

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