IMF budgetary framework

ARTICLE: The IMF has developed a budgetary framework from 2020-21 to 2024-25 for Pakistan as part of the report for enabling access to Pakistan to the Global Rapid Financing Facility made available after the onset of Covid-19.

The objectives of this article are, first, to see the outcome anticipated by the IMF of the fiscal operations in 2019-20. Second, there is need to identify the key contours of the proposed fiscal policy by the IMF for 2020-21, especially if it retains the focus on stabilization in the form of large deficit reduction or recognizes the exceptionally difficult conditions created by the pandemic and the need thereof to use fiscal policy as a key instrument to revive economic activity and tackle the problems of rising unemployment and poverty in the country.

The IMF budgetary numbers which were prepared and released in April clearly highlight that the budgetary position in 2019-20 of the Federal and the Provincial Governments has been badly affected by the negative economic impact of the pandemic. Revenues have fallen sharply and expenditures have increased due to the relief package.

The budgetary process was proceeding well up to the month of February 2020. Revenues had increased by 17 percent and expenditures had largely been kept within budgetary limits as proposed in the budget of 2019-20. The consolidated fiscal deficit for the first three quarters was low at 3.6 percent of the GDP and there was the prospect of a less than 1% of the GDP deviation from the budget deficit target for the year of 7.3 percent of the GDP.

Unfortunately, the budgetary position has worsened sharply since March 2020. FBR revenues have plummeted by more than 15 percent since then. The relief package has added an estimated Rs 500 billion to grants, subsidies and other heads. Consequently, the consolidated deficit is projected by the IMF at 9.3 percent of the GDP. Perhaps for the first time, the four Provincial Governments will have a significant cash deficit of over Rs 200 billion by June. The federal deficit will approach 8.8 percent off the GDP. Therefore, the size of the deficit is likely to approach Rs 4,000 billion, the highest ever.

One particular area of concern is the access to external borrowing for financing almost 47 percent of the now anticipated deficit. The IMF expects that in 2019-20 the net disbursement of external loans will be $11.2 billion. But up till the end of April only the net inflow has been only $5.2 billion, including $1.4 billion from the IMF Rapid Financing Facility. As such, there is likely to be a big shortfall by the end of the year. This reflects the change in the level of capital flows globally after COVID-19. Most bilateral donors have turned inwards and are focusing on the use of the funds for reviving their own domestic economies. External financing of the Federal Budget could become increasingly scarce.

There is need to understand the economic environment in Pakistan that IMF has projected in developing the proposed budgetary framework for 2020-21. The GDP growth rate has been already been estimated at negative 0.4 percent by the PBS in 2019-20. This implies that due to the impact of COVID-19, the GDP growth rate in the last quarter of the year could be as low as negative 9 percent. The IMF expects the economy to rebound sharply to a positive growth rate of 2 percent in 2020-21.This borders on a high level of optimism. A more likely scenario is either a near zero GDP growth rate or even a marginally negative growth rate in 2020-21.

This optimism of the IMF has fundamentally impacted on its budgetary estimates for 2020-21. The most discussed target usually is the tax revenues of FBR. Believe it or not, IMF expects an increase of almost Rs 1,200 billion, implying a growth rate of over 30 percent. This is a repeat of the unattainable targeting of last year. How will FBR revenues be raised by 30 percent, when there is little or no buoyancy in the economy? Achievement of the target will require taxation proposals of Rs 800 billion combined in the federal and provincial budgets. This is to be achieved when industrial production has fallen in March by 23 percent and imports are down by 21 percent while exports have plummeted by over 47 percent.

However, the problem does not end here. Also, strict economy is expected in expenditure of both Federal and Provincial Governments in 2020-21.Federal non-debt servicing expenditure is projected to actually fall by 3 percent in 2020-21. In real terms, given the projection of the rate of inflation of 8 percent, this implies a real cut of 11 percent. Much of the real reduction is proposed in subsidies and grants of almost 26 percent. Clearly, the IMF expects the on-going various initiatives, including cash transfers to the poor, to be severely curtailed at a time when the number of poor has risen by 20 million to 100 million following the loss of employment and incomes due the havoc wreaked by the pandemic. What has happened to the 'human face' of the IMF portrayed currently at the global level so effectively by the Managing Director?

Simultaneously, the provincial governments are in for a very difficult time if the IMF estimates for these Governments in 2020-21 are accepted. Provincial governments combined are required to increase their tax revenues by 41 percent and cut their expenditure in real terms also by 2 percent. This is expected at a time when Provinces have to expand and allocate more funds especially to the health sector.

However, there is a piece of good news. The IMF expects Pakistan to receive $9.7 billion of net external assistance in 2020-21 as opposed to a big shortfall this year. Perhaps the Fund will play a leading role in helping Pakistan obtain sustainable debt relief and larger inflows from both multilateral and bilateral donors at time when capital flows to developing countries are likely to be smaller.

Overall, the five-year budgetary framework developed by the IMF is infeasible in its first year, 2020-21. The design of the framework is focused on bringing down the deficit by 2 percent of the GDP with an unachievable revenue growth target and a severe cut back in expenditure.

As opposed to this, the Finance Advisor has indicated that the Federal Budget of 2020-21 will be a 'Corona Budget' and a 'Budget with no now taxes'. This is very much the type of fiscal policy that needs to be adopted at this time. Presumably, he has received assurance from the IMF that there will be considerable scope for relaxation in the budgetary targets for 2020-21 contained in its recent report.

(The writer is Professor Emeritus at BNU and former Federal Minister)