Govt on fiscal tightrope as IMF talks set to begin today

ISLAMABAD: The International Monetary Fund (IMF) is expected to discuss the deteriorating fiscal position which has been heavily affected by debt servicing which consumed the net revenue receipts of the federal government in the first quarter of the current financial year, reported The News on Thursday.

The IMF mission is expected to arrive in Pakistan today and remain till November 16 for the review ahead of the second tranche under the $3 billion Stand By Agreement (SBA).

Despite choking the release of funds for development projects and curtailing subsidies to the lowest levels, the government has been thumping on restricting budget deficit within the desired limits and especially converting the primary deficit into surplus for the first quarter of the current fiscal year.

“The IMF might raise the sustainability of such a tight fiscal position at a time when the government released development spending of just Rs40 billion against the allocation of Rs950 billion and restricted subsidies at Rs2.5 billion against the budgetary allocation of over Rs1,002 billion,” sources told The News.

However, the finance ministry officials believe that a downward revision of the policy rates is on the cards, and they have been planning for financing a budget deficit on preferably longer periods instead of relying upon shorter periods of treasury bills and domestic bonds.

“The average time to maturity will be stretched as much possible in order to reduce the over debt servicing bill in the remaining period of the current fiscal year,” said the official. The official claimed that the debt servicing bill would be curtailed within the allocated limit of Rs7.3 to Rs7.5 trillion for the current fiscal year.

Debt servicing consumed Rs1.4 trillion in the first quarter of the current fiscal year with the policy rate at 22%. The State Bank of Pakistan (SBP) on Wednesday raised Rs1,148 billion against the target of Rs975 billion, Rs173 billion higher than the target.

The 12-month yield declined by 40 basis points. The 3-month yield stands at 21.94%, 6 months at 21.98%, and 12 months at 21.99%. So overall, the market is indicating a slight reduction in the policy rates.

But the question is how would the government materialise its increasing revenue and expenditure requirements in the remaining months of the current fiscal year.

When contacted, Dr Khaqan Najeeb, former adviser to the Ministry of Finance, said an IMF programme is managed through prior actions, structural benchmarks, indicative targets, and performance criteria.

“It is safe to presume that first-quarter targets agreed with the IMF on fiscal, energy, monetary, and external are likely to be largely met. The fiscal shows a lower deficit at 0.9% vs last year and a primary surplus of 0.4%. The figures for meeting spending on income support of Rs87.5 billion are also likely to have been met. The SBP is yet to publish details of net international reserves, net domestic assets and SBP’s stock of net foreign currency swaps. But we are being assured that numbers are looking comfortable. There is probably no new borrowing by the government from SBP and the amount of government guarantees is also within the agreed limits. Hopefully, energy benchmarks are also within agreed limits,” said Dr Najeeb.

Dr Najeeb said it is also the quality of adjustments by Pakistan in reaching the first quarter targets that would be reviewed by the IMF.

“This review will affect the determination of how FY24 numbers will be met. There will likely be a dialogue on the external side where debt flows and exports are slower than anticipated. There is likely to be a discussion by the IMF of risks to the FBR collection target of Rs9,400 billion, which now requires a high growth of 33% over last year, along with expediting refund allocations,” said the former advisor.

Increased spending requirements on debt servicing of more than Rs1,000 billion compared to the budgeted amount of Rs7,300 billion along with a likely shortfall of exaggerated Rs600 billion provincial surplus will come under scrutiny by the IMF. This will set the tone for the updated Memorandum of Economic and Financial Policies, he concluded.