Analysis: Is mini-budget inevitable amid missed targets?

THE International Monetary Fund (IMF) is set to begin its review of Pakistan’s economic progress, focusing on the country’s performance in meeting targets for the July-September quarter under the $7 billion Extended Fund Facility (EFF).

The review, scheduled for this month, will assess Pakistan’s adherence to its commitments and set the tone for the programme’s continuation.

Independent economists have criticised the PML-N’s coalition government for failing to meet certain key benchmarks, including revenue targets, raising concerns that the IMF may propose some more — and potentially unpopular — measures for the current October-December quarter.

A notable feature of the upcoming EFF review is its incorporation of the National Fiscal Pact (NFP), which involves the provinces in a way not seen before. The NFP aims to establish targets for provinces to increase tax revenues to cover their expenses and boost spending on health and education. Provinces like Punjab and Sindh, which currently receive substantial allocations from the federal divisible pool, will face increased pressure to raise their own revenues.

Govt faces mounting pressure as IMF review looms

Finance ministry officials must be uneasy about the ambitious targets agreed upon with the IMF. Key benchmarks such as the Federal Board of Revenue’s (FBR) collection target, large-scale manufacturing and import volume have not been met.

The failure to transfer certain spending responsibilities to the provinces, a primary aim of the NFP, adds to the concerns. Questions remain as to whether the government will secure an IMF waiver or introduce a mini-budget — or additional revenue measures — to bridge these gaps.

Former finance minister Miftah Ismail has described the economic targets, particularly the FBR’s revenue goals, as unrealistic, attributing potential revenue declines to a drop in inflation, which has slowed to single digits. He questioned why the decline in inflation wasn’t anticipated during discussions with the IMF. Although he suggested the IMF might account for the inflation dip, he warned that the Fund would likely scrutinise the import slowdown.

A critical element of the IMF review will be the government’s failure to implement several NFP-related measures. Mr Ismail noted that the government had assured the IMF that costs for the Benazir Income Support Programme (BISP), fertiliser subsidies and provincial development projects under the Public Sector Development Programme (PSDP) would be shifted to the provinces.

None of these targets have been fulfilled, which the review will address in detail. The IMF has advocated for strict adherence to the 18th Amendment, seeing the NFP as a path to fiscal balance between federal and provincial governments since it is politically impossible to change the National Finance Commission (NFC) award.

During the transition phase, the provinces agreed to generate surpluses to aid the federal budget. While Sindh, Khyber Pakhtunkhwa and Balochistan exceeded their first-quarter surplus targets, Punjab ran a deficit of Rs160bn, likely to draw scrutiny during the review.

One primary NFP benchmark was the adoption of agriculture income tax (AIT) legislation by Oct 30, but none of the provinces have passed such laws.

The IMF has also called for higher taxes on traders, developers and the real estate sector, but the FBR, which agreed to raise Rs50bn from traders during the current fiscal year, has yet to successfully enforce tax collection from them. Former economic adviser Dr Ashfaq H. Khan anticipates that the IMF will demand further tax measures to cover the Rs190bn revenue shortfall from the first four months. He stressed that Pakistan’s authorities must negotiate effectively with the Fund to adjust tax targets in light of declining inflation, noting that this would depend on the support of major IMF shareholders.

The review would not be completed until more tax measures are enacted, Dr Khan stressed, questioning the tax authorities’ capacity to commit to such a grossly inflated target. While the finance ministry has reported a fiscal surplus for the first quarter — thanks to central bank earnings and the petroleum levy — the FBR is looking to adjust its revenue shortfall based on shifts in economic indicators.

Published in Dawn, November 3rd, 2024