The government is likely to set the next fiscal year’s budget deficit target at around Rs1.44 trillion, owing to the implementation of political populist policies ahead of the next general elections, media sources have reported. This may also be due to higher expected expenditures for the upcoming fiscal year in comparison to relatively low revenues.
The International Monetary Fund (IMF) projects that the budget deficit may reach Rs1.5 trillion this year, however, the finance ministry does not seem to be in agreement with the IMF’s projection.
The government expects to keep fiscal space owing to the scheduled elections while IMF stresses that Pakistan stays steady on the path to fiscal consolidation. Although the IMF programme had concluded, the government may wish to maintain healthy relations with the IMF in expectation that it may need to borrow from the international fund in the future.
Maintaining the foreign exchange reserves at the current level may require monetary injection from the World Bank and the Asian Development Bank (ADB) owing to declining external sector.
All this necessitates that the targeted fiscal deficit be set at around 4 pc of GDP or Rs 1.44 trillion, which is higher than 3.5 pc of GDP or Rs 1.27 trillion it had projected previously in the medium term economic framework.
The finance ministry is planning to set next fiscal year’s budget deficit target at around 4% of the GDP or Rs1.44 trillion, sources have been reported to have said. This translates to about Rs180 billion more being set than what the finance ministry had earlier projected, they added.
The budget deficit needs to be financed by borrowing from domestic and international sources. The ruling government will need to add a minimum of Rs1.5 trillion more through borrowing in its last year in power.
The finance ministry will be presenting the Budget Strategy Paper 2017-18 for approval of the federal cabinet end of the current month.
The growing fiscal deficit has been a direct result of populist measures that the PML-N government resorted to after the announcement of the last budget. The textile package was announced without having allocations in the budget. Due to the reversal of taxation policies during the ongoing fiscal year, a decline in tax revenues of Rs 168b was noticed which rendered the Rs3.621 trillion annual target unachievable.
Following the conclusion of the Article-IV discussions with the IMF earlier this month, Finance Minister Ishaq Dar had projected that the budget deficit would reach 4.1% of the GDP or Rs1.376 trillion.
Sources have been reported to have said that during the Article-IV consultations, the IMF insisted that the budget deficit would escalate to Rs1.511trillion translating into 4.5pc of the GDP. Dar, however, disagreed with the IMF projections. Tokhir Mirzoev, the Country Representative of the IMF in Islamabad stressed that the country should continue to follow the path of fiscal consolidation.
Mirzoev further said that the appropriate budget deficit target for next fiscal year would have to be based on the projection of the likely outcome of the fiscal year 2016-17, which is still under consideration. The finance ministry officials, however, stated that the past three years’ data showed that IMF’s forecasts about the budget deficit were off the mark and the deficit results were in line with the finance ministry’s assessments.
