‘Pakistan won’t renegotiate IMF programme despite ambitious targets’

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  • MoF places high interest rate, currency devaluation and shortfall in FBR revenue among reasons behind fiscal deficit
  • Says standoffs at Pak-India border significantly increased govt expenditures in FY19

ISLAMABAD: The Ministry of Finance clarified on Friday that Pakistan will not be renegotiating the Extended Fund Facility (EFF) of International Monetary Fund (IMF) despite the ambitious targets set under the programme.

As per a statement issued by the ministry, the scheduled visit of the IMF’s Middle East director was not part of the review mission.

“Next week, the MoF will welcome IMF Middle East and Central Asia Director Jihad Azour and apprise him on the results achieved so far. IMF’s technical levels talks are expected to be held at a later stage after completion of the first quarter of FY20,” the ministry said. “The finance ministry, in line with the IMF, is fully committed towards the ongoing reforms programme, which includes seven performance criteria, five indicative targets and 13 structural benchmarks. The progress in all of them is very encouraging.”

Justifying the alarming level of fiscal deficit, the ministry stated, “While the fiscal deficit overrun in FY19 was due to macro adjustments in the economy and the need to protect citizens from rising oil prices, it is believed that it will have a material impact on the budget outcomes for FY20.”

Through the statement, the ministry also dispelled the impression that the government would face a gap of up to Rs1 trillion in the fiscal framework for FY20.

The ministry maintained that the fiscal outcomes of FY19 were due to the concerns over slowdown in growth and there were three key factors, including monetary & exchange rate corrections, need for protection of citizens from rising oil prices and escalation on border with India, which contributed to the fiscal deficit rising to 8.9pc of GDP, against the target of 7.2pc.

According to the ministry, the SBP took a policy direction in FY19 to correct the trade deficit and shore up the forex reserves. “These measures helped reduce the current account deficit (CAD) to $13.5 billion in FY19, down from $19.9 billion in FY18.

“However, the rise in interest rates and a weaker rupee led to a significant jump in the government’s debt servicing costs. These contributed Rs104 billion to the overall slippage.”

On the other hand, the ministry said, devaluation of the currency eroded the profits of the State Bank of Pakistan in FY19, with a shortfall of Rs135 billion in non-tax revenue of the government.

It said the non-tax revenue shortfall was exacerbated by the litigation of the telecom operators on renewal of the 3G/4G licenses. “This matter is now partially resolved with telecom operators depositing Rs70 billion as first instalment in September 2019.”

The ministry said that the federal government also faced a shortfall of Rs85 billion from interest receipts from public sector enterprises (National Highway Authority, WAPDA etc.)

“FBR’s tax revenue shortfall of Rs321 billion in FY19 was the single biggest reason for the increase in the fiscal deficit. This was due to a fall in imports (which account for 45pc of total FBR tax collection in customs duty, GST and excise). However, other key factors also contributed. Most notably, the decision of the government to shield domestic consumers from rising oil prices resulted in over Rs100 billion shortfall in GST collection,” it added.

As the revenue shortfalls contributed significantly to the rise in deficit, the expenditure overruns were also necessitated by the need to expand social safety nets and higher investment spending (PSDP), the ministry said, adding that if the government had decided to curtail these expenditures further, it would have led to further slowdown in GDP growth and caused a hard landing for the economy already undergoing major monetary and exchange rate adjustments.

As per the ministry, the attack on Pakistan by Indian forces and the standoff at the border has also resulted in a significant escalation in the FY19 expenditures, all of which were necessary to ensure the safety of citizens.

As per the official statement, the payments from telecom operators and privatization of the two RLNG plants are likely to materialize in the current fiscal year and will help the government to reduce the fiscal deficit in FY20 to 7.3pc of GDP.

“The results of the first two months are encouraging with FBR revenues posting an increase of 28pc.”

 

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