The ‘International Monetary Fund-dictated’ budget 2022-23 has come into force after the parliament passed it without much ado and the president has signed the finance bill into law. The Rs9.579 trillion annual federal budget carried an unprecedented fiscal adjustment of more than Rs1.75tr or 2.2 per cent of GDP in a single year. It contained new taxation measures of almost Rs1.1tr or almost 1.4pc of GDP.

The single largest item on the non-tax revenue side stands out to be the Rs855bn — up from Rs750bn in the June 10 budget speech — petroleum development levy (PDL). This would be recovered, under a tight implementation schedule of the IMF, in a manner that it grows every month on each litre of every product of petroleum, to reach a maximum rate of Rs50. It has to be kept in mind that last year (2021-22), the total collection under PDL stood at Rs135bn against a target of Rs610bn as the then government reneged from its commitment to the IMF.

The result is a tight straight jacket from the IMF. Power base tariff should go up by almost Rs8 per unit (almost 50pc) to Rs24 per unit in three instalments between now and October. Finance Minister Miftah Ismail also has to produce before the IMF a memorandum of understanding from provinces for a cash surplus of Rs750bn. The four provinces have mostly presented their deficit budgets. Another IMF requirement is further policy tightening in its upcoming meeting.

The Federal Board of Revenue (FBR) would be required to collect about Rs7.47tr. The consolidated budget deficit would, with the help of the Rs750bn provincial surplus, then be limited to 4.9pc of GDP or Rs3.8tr. Interest payments alone would eat up more than Rs3.95tr or 40pc of the federal budget. But a more important benchmark to be delivered to the IMF would be the primary budget surplus (fiscal deficit excluding interest payments) of Rs153bn (0.2pc of GDP) during the year, against Rs1.6tr or 2.4pc of the primary deficit last fiscal year.

Therefore, the successful completion of IMF’s 7th and 8th reviews would then entail a price tag of almost $1.9bn in about two months. This is a sine qua non to unleash about $30bn worth of total external loans for budget support during the current year — almost a question of life and death for a nation that needs almost $40bn this year to service existing external debt and cover import bill with just over $10bn in hand at present.

With less than $8bn programme and project loans, about $20bn have to be arranged from ‘other loans’ for budget support. These include about $3bn from the IMF, about $3.8bn from Saudi Arabia including $3bn in safe deposit and $800 million in oil facility. Jeddah-based Islamic Development Bank would be chipping in with $1.2bn, China’s State Administration of Foreign Exchange (SAFE) Deposit is targeted at $4bn, almost $7.5bn from commercial banks and $2bn through Eurobond.

While all these projections are based in good faith there are a series of lurking risks on the horizon that could upset the budget and macroeconomic outlook in the medium terms. Finance Minister Miftah Ismail has identified some of them as political uncertainty, the Russia-Ukraine war, higher provincial deficits and significant losses and debts of state-owned enterprises (SOEs).

Unless the IMF terms and their implementation under a tight schedule are ensured possible slippages could occur in expenditures, because of higher subsidies, interest payments and revenue collection owing to import and demand contraction, posing substantial risks to economic growth and sustainability of fiscal and monetary projections.

The Ministry of Finance (MoF) has conceded before the parliament that the main reason behind the power sector losses includes the high cost of generation, attributable to costlier technologies and poorly designed contracts, resulting in exorbitant profits for private investors and front-loading of debt repayments during the first ten years of plant operations, above-average transmission and distribution losses and below-average recoveries of electricity bills. As a result, the power sector is the largest recipient of government subsidies at present.

Fuel imports — those of oil, gas and coal — constituted a large portion of Pakistan’s import bill and their prices affected the prices of various goods and services as they fed into the costs of production through multiple channels, including transportation costs and energy costs, etc.

“Volatility in prices of these fuels is a major reason behind the volatility in inflation rates which, in turn, contribute to volatility in interest rates and exchange rates,” according to the Ministry of Finance. Its adds that an increase in the cost of imported fuels — whether due to rising global prices or a falling rupee, or both — could affect the wider economy in the form of lower GDP and revenue growth besides higher current account deficit, inflation, interest rate, the interest cost, fiscal deficit and public debt.

The risks get more pronounced given the fact that there are little or no fiscal buffers or risk management framework for dealing with adverse shocks in the prices of imported fuels. Likewise, the “strict fiscal discipline” on the part of provinces and, resultantly, their cash surplus will be a crucial component in reducing the country’s overall consolidated fiscal deficit.

“In the absence of legally binding commitments from provinces, the risk remains high that the projected provincial budget surpluses may not materialise,” the MoF says and if the FBR fails to meet the revenue target the provinces would have a valid excuse not to give cash surpluses.

Losses and excessive debt of state-owned enterprises (SOEs) have necessitated costly government bailouts in the form of subsidies, grants, loans and guarantees. The fiscal cost of running the loss-making SOEs has been quite high and has worsened an already fragile financial position of the government. The conflict between Russia and Ukraine is also a risk factor to Pakistan’s positive economic outlook.

Domestic political uncertainty is another risk factor on the economic team’s radar as it could result in macroeconomic imbalances. Monetary tightening and fiscal consolidation measures to reduce the demand pressures would slow down economic growth this year. Pakistan’s fiscal stance is also vulnerable to commodity prices, especially those of oil, and fluctuations impact revenues on account of the petroleum development levy and the expenditure side through fuel subsidies.

Published in Dawn, The Business and Finance Weekly, July 4th, 2022