Pakistan may request International Monetary Fund to review some of the fiscal targets due to slippages in tax revenues and current expenditures and slowing down economic activity, official sources said. The Ministry of Finance is preparing detailed fiscal and monetary data for a comprehensive review with the Fund.
The IMF mission is expected here shortly to complete the review and prepare a report for its Board of Directors, which is expected to meet by end-March 2009 in Washington. Successful completion of the economic review would also enable release of the next IMF tranche under $7.6 billion facility.
Government officials are in a fix due to slowdown in the economic activity, energy shortages and tighter monetary situation at home, and not very conducive external environment, which in turn is putting more pressures on exports from Pakistan. Industrial sector growth is negative so far, and if the current situation persists, it would remain so for the next two quarters of the FY09 as well. Overall GDP growth estimates of 3.4 percent for FY09 assume 1.5 percent growth in the manufacturing sector.
Dr Salman Shah, former Finance Minister, suggested that Pakistan should renegotiate the macroeconomic targets with the IMF. Talking in Aaj TV programme 'Islamabad Tonight', he said the fiscal deficit target of 4.2 percent should be maintained, but emphasised reduction in interest rates to revive the industrial sector. He also questioned capacity of the government. He said that the IMF programme was agreed when international fuel oil prices were close to $150 per barrel. This situation has changed now.
These sluggish trends have slowed down the tax revenue collection by the Federal Board of Revenue (FBR), which is all set to face a major revenue shortfall. The government is hoping to collect higher amount of petroleum development levy (PDL) due to a sharp reduction in the international fuel oil prices. However, the high collection of PDL may be neutralised due to an upsurge in defence and security expenditures. The situation on both eastern and western frontiers is extremely volatile, and cost of troop mobilisation is enormous.
There is no quantitative tax revenue collection criterion agreed with the IMF. So, there would be no need to request for a waiver. Under the IMF programme, the Overall Fiscal Deficit (OFD) is the major quantitative target.
Budget deficit target number becomes the most sacrosanct on fiscal side under any IMF programme. Some officials believe that it would be harder to achieve fiscal deficit target and the government may have to seek a waiver. There are no quick fixes available to correct the situation.
Development budget has already been scaled down substantially. However, current expenditures increased more than 25 percent during first half of the fiscal year, largely due to defence and security-related expenditures. The government would continue to rely on PDL collection to offset tax revenue shortfall. Similarly, some fine-tuning in tax administration may help ensure better compliance. However, still some upward revision of the fiscal deficit would have to take place to ease pressures on the development budget. Large cuts in development spending are slowing down economic activity further.
Tight monetary situation is another challenge. The headline inflation, measured by Consumer Price Index (CPI) is showing stubbornness. Despite frequent adjustments in the policy rate by the central bank, the rate of inflation remains at 23.85 percent (July-January FY09). Overall exports from Pakistan grew by about 8 percent during July-January FY09, but January 09 over January 08 there is a decline of over 7 percent. However, data for the month of February and March may provide some concrete evidence, regarding trends of inflation, growth and fiscal accounts.
Shahid Javed Burki, a former Senior Vice President of the World Bank, said that the present crisis-like situation is one of the worst of Pakistan history. He said no quick fixes were available, and the government should focus on putting in place long-term measures to improve the macroeconomic conditions.
Yousaf Nazar, a senior economist, said that the bold initiatives and imagination is missing from the economic management of the country. He emphasised the need for improving governance. He said the government should focus to find some home-grown solutions of the prevailing economic conditions.
The government is keen to make some fine adjustments in the overall macroeconomic framework. These would be discussed with the visiting IMF team, which is expected to visit Pakistan in the second half of February 2009.
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