ISLAMABAD: With fiscal deficit estimated at around 9 per cent of gross domestic product (GDP) next year, the government is struggling to put the IMF programme back on track as the Fund expects a tight freeze on all non-debt servicing expenditures through the next federal budget.

Sources told Dawn that the IMF had sought to contain primary deficit to -0.4pc of GDP while authorities were still fighting for its target to be set at -1.2pc of GDP. How the two sides bridge the gap would become clear after the economic team concludes its presentation series to the prime minister.

The sources said that hectic engagements were currently in full swing among various arms of the federal government and the International Monetary Fund (IMF) to revive through the budget $6 billion Extended Fund Facility (EFF) that has been subject to formal completion of second quarterly review since February this year.

The Fund had disbursed about $1.44bn to Pakistan under the EFF by December last year, followed by another $1.4bn disbursement under Rapid Financing Instrument (RFI) for emergency support to help the country fight the impact of Covid-19.

Next year’s fiscal deficit being targeted at 9pc of GDP

The authorities expect to convince the IMF team for a primary deficit target somewhere between 0.4pc and 1.2pc — maybe 0.6-0.7pc, an official said. He said the fiscal deficit for the next financial year was being targeted at 9pc of GDP with a 0.5pc variation for possible Covid-19-related needs compared to about 9.5pc deficit expected during the current financial year. The original budget deficit target for the current year was 7.2pc of GDP.

As part of the dialogue, the IMF expects Pakistan to freeze, if not reduce, the expenditure for salaries and pensions, running of the civil government, security, subsidies and development. The argument is that the country was seeking debt relaxation from developed countries which had in fact cut their own salary bills by 1-2pc and expected the beneficiary nations to reciprocate by belt tightening.

The authorities are reported to have shown to the IMF’s resident mission in Islamabad the protesting government employees outside the federal government secretariat in recent months. Such protests could expand, they have argued, and taken the stand that the salaries had actually been slashed over the past two years when seen in the context of double digit inflation and higher income tax compared to single digit hikes on part of the salaries.

On top of that, the salaries to top level civil and military bureaucracy had been kept frozen in the current year’s budget and those of elected representatives actually reduced. The finance ministry has calculated the impact of 1pc increase in salaries at about Rs10bn and even a 7-8pc hike could have a significant additional burden of Rs70-80bn. Almost half of this expenditure works out on account of grade 17 to 22 officers.

The pension bill was also emerging as the major fiscal challenge. The estimate for next year’s salary bill was estimated at about Rs485bn compared to about Rs470bn for pensions. The subsidy on fertiliser estimated at Rs37bn this year is also under tight scrutiny and criticism. Also, the centre would urge the provinces to share 50pc cost of the special federal projects in the provinces.

Similar arguments for freeze have also been advanced by the IMF for continuously rising security expenditure. While the normal annual defence expenditure has a very limited elasticity, according to Pakistani authorities, parts of security-related development plans could be hit.

Likewise, the government was considering the IMF proposals to restrict energy sector subsidies — mostly in the power sector — to targeted distribution through Benazir Income Support Programme on the basis of its elaborate surveys and data instead of through tariff. As such, the size of subsidies is being curtailed to less than Rs185bn for the next year against about Rs291bn this year. A final shape would crystallise over the next couple of days.

The sources said the government had also completed a detailed exercise of expenditure cutting in more than 114 key heads of the federal government and have found no more than Rs30-35bn saving as these areas have been subject to the austerity drive since the days of former finance minister Ishaq Dar.

A proposal has also come under consideration to abolish the transport monetisation scheme introduced during Dr Shaikh’s last stint as finance minister which has been subject to misuse by top bureaucrats who not only enjoy more than Rs100,000 per month of transport allowance and at the same time use official cars or those secured from subordinate offices. However, Dr Shaikh is reported to have been warned by top bureaucrats that an end to transportation monetisation would mean procurement of new vehicles at public expense.

However, some major savings are expected on account of proposals put forth by Dr Ishrat Husain, the prime minister’s adviser on austerity and institutional reforms. These sources said Dr Husain and Dr Shaikh have convinced the prime minister to abolish all those posts which have been vacant for a year and more in the federal government and its allied agencies and departments.

The government is also under pressure to abolish about nine federal ministries the subjects of which have been devolved to the provinces and their skeleton units could be put under the ministry of inter-provincial coordination.

The authorities expect to line up formal talks with the IMF mission for revival of EFF programme in the early days of next financial year and after the completion of budget approval process this month. While disbursing the $1.4bn emergency funds to Pakistan early April, the IMF had said that RFI was the appropriate instrument to support Pakistan at this juncture as the severity of the shock and the uncertainty about the outlook make it difficult to recalibrate the existing EFF to ensure that it remains on track to meet its objectives.

Pakistan had made renewed commitment to reforms in the existing EFF — in particular those related to fiscal consolidation strategy, energy sector, governance, and remaining AML/CFT deficiencies considered crucial to entrench resilience, boost growth potential, and deliver broad-based benefits for all Pakistanis.

Published in Dawn, June 5th, 2020