Asrar Raouf describes the underlying tensions existing within the financial sphere
The condition of the economy is worrying and these Fiscal issues and IMF concerns are palpable in every segment dealing with economic matters both in public and private sectors. Despite serious economic concerns the country is deeply divided over issues such as long march and tosha khana without realising the gravity of the financial difficulty staring the nation in the face. Swamped by fiscal deficits and high levels of devastation caused by unprecedented floods Pakistan is now rated inching close to default and this risk is exacerbated by the unending political turmoil that may cause a serious breakdown of the entire state system. The indications of this dangerous portent is the weariness exhibited by the international donors particularly the IMF that are now quite reluctant to pursue parleys with Pakistani finance managers and are anxiously waiting for the outcome of the political tussle going on in the country.
Apart from political considerations looking at the matter from purely financial angle it could be seen that the IMF-Pakistan parleys now would resume after Pakistan fulfilled its pledge to adjust sales tax on petroleum products and took other measures required under a loan agreement revived earlier this year. Its difficulty should be viewed in the backdrop of the fact that the coalition government is desperate to win the confidence of people and is resisting increasing the fuel prices, a measure that goes directly against the reported understanding with the IMF. On the other hand, official sources insist that the talks between IMF and Pakistan were rescheduled after last month’s release of a World Bank report on flood damages in Pakistan. The damage assessment may play an important role in the talks with the IMF and Pakistan may well ask for some concessions in the conditionalities placed in the agreement signed with the IMF that have now become quite difficult to fulfill.
The financial situation is very tight as Pakistan is required to cough out $1 billion on maturity of five-year Sukuk bond on 5 December and though the finance minister has assured that the payment will be honoured but skepticism about it lingers keeping in view the difficult financial situation. The financial constraints and highly limited fiscal space has already made it extremely cumbersome for the country to raise foreign exchange from markets either through bonds or commercial borrowings and this prospect is quite freightening as the government needs between $32 billion to $34 billion this fiscal year to meet its foreign obligations and this is quite a tall order in the current financial climate. This is not the end of the matter as even after obtaining this hefty amount Pakistan would still require about $23 billion through the remaining fiscal year to remain afloat. In the past such figures were kept in dark but now more access is gained to such information and it has provided an opportunity to financial analysts to look at the vulnerability of the financial aspects of the country that now comes out to be much worse than generally projected.
Though Pakistan is still in the IMF programme that enables it to borrow from international donors but these donors, particularly the IMF, put pressure not only to bring down fiscal deficit by Rs.1,500 billion in the current fiscal year but also demand new taxes to increase liquidity and avoid fiscal deficit expansion. In this context, it is reported that the government requires at least Rs.800 billion and this huge amount could only be raised through taxation and resorting to this measure is an anathema for the coalition government that is already highly unpopular due to the regressive taxation it has instituted that were negatively exploited by the PTI. In addition, the IMF is asking Pakistan to fetch an additional 1 per cent of GDP keeping in view the shortfall on tax and non tax revenues as well as the hike in expenditure side. The debt servicing has ballooned up to unprecedented levels, putting more pressure on fiscal fronts.
The budget deficit is projected to touch Rs.4.750 trillion or close to 6 per cent of GDP against the envisaged target of Rs.3.79 trillion. The primary deficit is now assessed that it may touch a deficit of 2.8 per cent of GDP, equivalent to Rs.2.18 trillion against the sought target of surplus Rs.152 billion or 0.2 per cent of GDP. As an interim measure the dispensation has raised Rs.757 billion through treasury bills against the target of Rs.650 billion with the total bids for the auction amounted to Rs.1.247 trillion.
It appears increasingly difficult that the agreement Pakistan signed with the IMF may no more be tenable and both will be required to sit together and work out a revised macroeconomic and fiscal framework, whereby the budget deficit and primary deficit are projected to escalate massively against the envisaged targets. It has become inevitable that important structural adjustments are carried out in the agreement portfolio enabling Pakistan to satisfactorily meet the requirements assigned to it. It is very clear that it has now gone beyond the capacity of the coalition government to arrange for additional revenue keeping in view the situation confronted by the country. Moreover, it is also very difficult to justify the expenditure overruns as the circumstances of flood situation constrained the government to take emergency measures that were urgently required.
It was reported that Pakistani financial officialdom is in touch with the multilateral lenders including the IMF, the World Bank, the Asian Development Bank and they were all sympathetic towards Pakistan’s ground realities following floods and promised to support. It was mentioned that the IMF team and the government were examining the budget implications of floods as authorities had to immediately provide Rs.120 billion additional funds for flood relief through BISP support and national disaster management relief. It goes without saying that the floods had severely disturbed the macroeconomic framework and the IMF had asked the authorities to come up with all the specific expenditures that would be accommodated this year. In the interim, though, the IMF has raised the issue of managing $16 billion for reconstruction requirements in the aftermath of recent floods. The Pakistani side has explained that the reconstruction expenditures would be done in medium to long term basis and it would not be utilised in one year.
Based on these numbers, the IMF staff would give its response and negotiations on formal waivers would then proceed. It was reiterated by Pakistani financial managers that the government had taken a series of structural adjustments in a short period but weaknesses in the economy had developed over the years and that they accept that Pakistan would have to make further structural changes to stabilise the economy. Amidst plenty of difficulties, there is certainly a glimmer of hope as was witnessed by the action taken by the World Bank (WB) that is planning to provide Pakistan $1.3 billion for emergency, agriculture and housing relief in the wake of catastrophic floods this year. Separately, the World Bank has also agreed to provide the country with financial support for subsidising urea for flood-affected farmers. Earlier this month, the World Bank had announced that it will provide more than $3 billion to Pakistan for infrastructure development in the energy sector. TW