ISLAMABAD: Pakistan’s development spending will be further cut during the current and next fiscal years as part of a larger fiscal rearrangement to put the $6 billion Extended Fund Facility (EFF) back on track following about $1.4bn additional emergency funding by the International Monetary Fund (IMF) that provides the country a breathing space to fight the post-coronavirus situation.

The latest IMF record suggests that the country’s consolidated development expenditure for the current year would be down by 34 per cent to Rs953bn, compared to the pre-virus estimate of Rs1.437 trillion. The major reduction of more than 45pc would be in provincial annual development plans (ADPs) to Rs461bn against Rs844bn estimated before the Covid-19 outbreak.

The federal government’s Public Sector Development Programme will be down by 17pc to Rs488bn from the pre-coronavirus estimate of Rs588bn even though the government had originally allocated Rs701bn for the PSDP and the planning authorities were adamant on utilising the full allocation.

Move part of larger fiscal rearrangement to put $6bn IMF programme back on track

A senior government official explained that the development budget had already been scaled down because of the poor performance of the Federal Board of Revenue (FBR) against its revenue targets, but later development activities came to a halt because of the countrywide lockdown. The setback, he said, was on both sides — lower revenue collection and negligible construction activities.

Also, interest payments are estimated to come down by over 6pc to Rs2.7tr this year against the pre-virus estimate of Rs2.88tr. Of this, the major interest payment of about Rs2.38tr would be on domestic debt and Rs326bn on foreign debt.

In contrast, defence expenditure would slightly go up by 4pc to Rs1.2tr, compared to the budget estimate of Rs1.15tr. For next year, the defence budget has been estimated at Rs1.33tr, up by 15.5pc when compared to the current fiscal year.

IMF’s resident representative in Islamabad Teresa Daban Sanchez on Sunday said the IMF “staff and the authorities continue to work closely to bring second review to the IMF board as soon as possible”.

In an explainer earlier, the IMF said it was “premature at this time to set out a concrete timeline for the resumption of the EFF” as Covid-19 shock in Pakistan was still unfolding and the full magnitude of its impact, both in Pakistan and globally, still unknown. “Discussions for the EFF were paused in late-March 2020 to focus on a purchase under the Rapid Financing Instrument (RFI),” the IMF said, adding that the 39-month programme approved in July last year remained in effect and the two sides remained engaged.

The IMF has reiterated that “strong policies and reforms remain critical to increase resilience and boost Pakistan’s growth potential in order to deliver benefits for all Pakistanis, especially the most vulnerable”.

The IMF has also scaled down the FBR’s revenue target for the current year to Rs3.903tr, compared to the budgeted target of Rs5.55tr, down by Rs1.64tr or 30pc — the highest revenue shortfall in decades. The IMF was expecting the pre-coronavirus FBR collection at Rs4.8tr.

On the other hand, the IMF has increased the petroleum levy target for next year to a mammoth Rs489bn against an estimated Rs295bn this year. The non-tax revenue is also estimated to be Rs1.287tr this year, down from Rs1.32tr before Covid-19 and yet significantly higher than budget target of Rs894bn.

As such, the estimates for total revenue during the current year have now been brought down by 15pc to Rs5.98tr, compared to Rs7.034tr pre-virus understanding between the government and the IMF. Likewise, total revenue for the upcoming fiscal year has also been reduced to Rs7.4tr from Rs8.5tr.

The overall budget deficit for the current year has been estimated to increase to 9.3pc of GDP or Rs3.92tr against the pre-coronavirus estimate of Rs3.23tr or 7.3pc of GDP. As a consequence, the primary deficit (fiscal deficit, excluding interest payments) would also go up to 2.7pc against the early projection of 0.7pc of GDP. The size of the economy is also estimated to shrink to Rs42tr this year against the pre-virus estimate of Rs44tr.

Even for the next fiscal year beginning July 2020, the IMF has set the development expenditure target at Rs1.285tr against Rs1.653tr estimated before Covid-19. That would mean ADPs of the four provinces would be kept contained at Rs694bn and the federal PSDP at Rs586bn.

The IMF has now estimated that most of the fiscal indicators would come under stress and miss targets. For example, the revenue-to-GDP ratio would come down to 14.3pc against the previous estimate of 16pc, while the FBR revenue would stand at 9.3pc of GDP instead of 10.9pc.

The IMF said the Rapid Financing Instrument (RFI) provided emergency one-off financing to a country experiencing a large shock, like that from Covid-19. Pakistan requested a purchase equivalent to 50pc of its quota (about $1.4bn), which was approved by the IMF Executive Board on April 16.

The resources will provide critical support for medical supplies, the vulnerable population and food security. The RFI is not a replacement for the EFF, the Fund said.

Published in Dawn, April 20th, 2020