Pakistan and IMF agree on revising budget numbers

The logo of the International Monetary Fund outside its headquarters in Washington DC.  - Reuters/File
The logo of the International Monetary Fund outside its headquarters in Washington DC. – Reuters/File
  • IMF asks Pakistan to rationalize expenditure on PSDP for FY 2024.
  • Asked Pakistan to develop a five-year strategy for regional investment.
  • The caretaker Prime Minister approved five major steps to widen the tax base.

ISLAMABAD: With the start of policy-level talks, Pakistan and the International Monetary Fund (IMF) agreed to revise the fiscal and external framework to secure staff-level agreement under the $3 billion Standby Arrangement (SBA), The News reported on Tuesday. ,

Policy level talks will end tomorrow (Wednesday). The lender has so far expressed concerns over the exchange rate in the context of a free market-based mechanism, meeting all required dollar inflows and rising electricity and gas tariffs.

The current account deficit is expected to narrow, so some import compression will be used to reduce the external financing gap.

The government will have to increase the gas tariff as per the calculations made by the regulator. Electricity tariffs will have to be increased in line with fuel price adjustments and quarterly tariff adjustments. The FBR’s envisaged tax collection target was proposed to remain unchanged at Rs 9.415 trillion. However, the IMF has sought a Plan B in case of revenue shortfall in the current financial year.

In a separate meeting, caretaker Prime Minister Anwar-ul-Haq Kakkar approved five key steps to reform the taxation system and broaden the tax base by bringing 1.5 million new taxpayers into the tax net.

The FBR has worked swiftly to identify transaction-based data of one million non-filers, of whom 0.5 million will be brought into the tax net.

With the digitalisation of the economy and the introduction of a simplified regime for retailers, which was already allowed by the Parliament on the eve of the last Budget, the government is planning to make up for any shortfall in achieving the desired tax collection target. Expecting to bring in billions of rupees. , Policy and operations will be separated to restructure the administration of FBR.

Five major steps will be taken in the current financial year, including digitization of withholding tax, digital invoicing of sales tax, expansion of tax base and launch of simplified retailers scheme, anti-smuggling action and digitization of under-invoicing. To achieve desired results.

Under the proposed amendments to the fiscal framework, the budgetary numbers will be revised in view of the increase in debt service bills on both domestic and external debt in principle and the size of the mark-up. Secondly, the subsidy amount can be reduced to rationalize expenditure. The Public Sector Development Program (PSDP) at the federal level will also be reduced for the current financial year to realign the expenditure side.

When contacted, a senior official said the IMF had not shown an increase in the external financing gap.

“Debt servicing is estimated to rise to Rs 8.3 trillion to Rs 8.6 trillion in the current fiscal year, compared to the initial budgetary estimate of Rs 7.3 trillion, so the bill will rise by between Rs 1,000 and 1,300 billion,” top official sources confirmed. While talking to The News on Monday.

Keeping in mind the rising debt service bill, the IMF asked Islamabad to rationalize expenditure on PSDP for the current financial year.

The government had allocated Rs 950 billion for the current financial year and the Planning Ministry was tasked with preciseing the proposed cuts in PSDP spending. It is expected that the PSDP for the current financial year may be reduced from Rs 950 billion to Rs 750 billion to Rs 800 billion.

Secondly, the government allocated Rs 1,064 billion for subsidies, of which the government utilized Rs 2.5 billion in the first three months of the current fiscal year. In the first week of October 2023, the government released a subsidy amount of Rs 70 billion for the power sector. However, the amount of subsidy allocated may be reduced from Rs 1,064 billion to Rs 850 billion.

The government envisages a non-tax revenue target of Rs 2.96 trillion for the current fiscal year, of which Rs 0.869 trillion will be generated from petroleum levy.

The government has so far received Rs 0.468 trillion as non-tax revenue in the first quarter of the current financial year. Petroleum levy collection in the first three months of the current financial year is Rs 0.222 trillion.

On the development framework, the IMF has called for the development of a new five-year strategy, identifying key projects and funding sources in all regions to guide regional investment plans.

With Pakistan’s extremely limited budgetary resources, it becomes even more important to select the right projects for funding. The PFM Act requires that all projects must be technically approved before receiving funds in the budget. This is a good practice and should be maintained. However, other selection criteria do not exist to guide the allocation of limited budget resources and would help ensure that projects are aligned with Pakistan’s policy goals, including climate commitments.

Pakistan’s tight financial environment creates serious challenges for investment program implementation. The funds allocated for ongoing projects in the PSDP are inadequate to meet project implementation plans and this leads to slow delivery of projects (both between and within the budget year).

More broadly, the PSDP is unworkable and should be reevaluated. The total cost of completing projects in the PSDP is Rs 10.7 trillion, which is 14 times more than the budget allocation of Rs 727 billion in 2022-23. Despite the intention to give priority to completing ongoing projects, new projects with a total cost of Rs 2.3 trillion were added by the government in the last budget.

Moreover, separate preparation and monitoring of the current budget and development budget by the Finance Division and the Planning Commission respectively may lead to inconsistent and sub-optimal decision making. The government may consider imposing a windfall tax on the high profits of banks.

Originally published in news

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