No deal yet with IMF for revival of loan programme

Gap between revenue and expenditure projections of Fund and government persists
• Centre approves KP’s Rs115bn overdraft for current year

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have not yet been able to reach close to a staff-level agreement for revival of the Extended Fund Facility (EFF), leaving authorities in a tight spot to bridge the gap and get the updated federal budget for the fiscal year 2022-23 passed by the National Assembly.

The authorities in the finance ministry were expecting to conclude the staff-level agreement by Sunday (June 19) on the basis of revenue and expenditure measures that could deliver next year’s primary budget (the difference between revenues and expenditures, excluding interest payment) in Rs152 billion surplus.

However, the IMF staff still has reservations over Rs9.5 trillion expenditures projected by the authorities for the next fiscal year. The revenue measures in the budget, according to IMF estimates, are also insufficient to deliver slightly over Rs7tr target.

A top finance ministry official confirmed on Sunday night that they had not yet received the first draft of memorandum of economic and financial policies (MEFP) from the IMF as targeted earlier because certain matters remained unsettled. “We are working very closely with the IMF and will soon reach some conclusion,” the official said.

The government is targeting to secure the passage of the budget 2022-23 from the National Assembly on June 27-28, according to the finance ministry’s schedule of events. For this to happen, it has to reach an agreement with the IMF so that the agreed measures could be protected in the budget. In any case, the budget has to be passed by parliament by 28 to legally ensure its implementation with effect from July 1, as required under the Constitution.

While the two sides remained divided over personal income tax slabs and rates, the federal authorities received another setback after the provinces came up with their budgets which created another shortfall of almost one per cent of gross domestic product (GDP) — apparently meaning that the primary account would be in a massive deficit — rather than Rs152bn surplus.

The federal government had projected Rs800bn cash surplus from the four provinces in the budget for next fiscal year. However, so far only the Punjab government announced a budget with Rs125bn surplus, while Sindh presented a Rs35bn deficit budget. Khyber Pakhtunkhwa has neither committed a surplus nor projected a deficit in its budget. Balochistan has not yet announced its budget, but is highly unlikely to provide any sizeable surplus.

Based on Rs800bn provincial surplus, the Centre had projected an overall budget deficit for the next fiscal year at Rs3.8tr or 4.9pc of GDP because it had estimated its own federal budget deficit at Rs4.6tr or 5.9pc of GDP. This means that unless the federal government is able to convince the provinces to curtail their expenditures or increase revenues, the primary account would be in Rs650bn deficit.

This comes at a time when the KP government was already running on overdraft to meet its expenditures during the current fiscal year. The Economic Coordination Committee (ECC) of the cabinet has approved a supplementary grant — budget overrun — of Rs115bn for KP as late as last week i.e. after the presentation of the federal budget.

In a report last week, the finance ministry had reported to the ECC that the federal government had, under an IMF conditionality, prohibited borrowing from the State Bank of Pakistan by the federal and provincial governments. Prior to these IMF-sponsored reforms, the provinces were availing ways and means advances (overdraft facility) from the SBP.

In order to enable the provinces to continue availing such advances after the prohibition, the ECC had in June 2020 put in place a new lending policy for the provincial governments, besides enhancing their ways and means limits. Under that policy, the facility of ways and means advances is provided to the provincial governments by the Centre instead of the SBP.

In this regard, tri-partite agreements have been signed with all the four provinces. The agreement authorises the SBP to debit/credit federal and provincial government accounts as and when a province is in need of ways and means advance or has sufficient balance to clear the advance availed by that province. The existing limit of the ways and means advances of the four provinces is about Rs164.3bn — Rs77bn for Punjab, Rs39bn for Sindh, Rs31.3bn for KP and Rs17bn for Balochistan.

The provision of Rs15bn under the head of ways and means advances to the provinces was included in the outgoing budget as federal miscellaneous investment and other loan and advances, but KP has availed Rs115bn cumulatively during the year as of June 9, 2022.

In order to adjust the expenditure of Rs100bn made by the KP government in excess of the allocated limit as well as likely future requirements of the provinces during the outgoing year, supplementary grant of Rs130bn was required for which schedule of supplementary grants for Rs100bn will be issued forthwith. However, schedule of supplementary grants for the balance amount will be issued on a need basis as per ways and means advances availed by the provinces.

The finance ministry explained that this expenditure would have no impact on the overall fiscal deficit of the federal government as the payments are for a limited time period and as and when cash balance position of the provinces improves, as a result of divisible pool transfers, the SBP reverses the transaction together with mark-up and the same is booked as capital receipts/non-tax receipts of the federal government.