IMF sees early fiscal turnaround

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ISLAMABAD: Thanks to its tough programme conditions, the International Monetary Fund (IMF) has forecast early signs of a fiscal turnaround in Pakistan, including higher revenues, contained expenditures, and a lower fiscal deficit, albeit with increased indebtedness during the current financial year (FY25).

In its Fiscal Monitor 2024 released on Wednesday, the IMF estimated Pakistan’s fiscal deficit — the gap between total resources and expenditures — for the current financial year at six per cent of GDP, slightly higher (0.1pc) than the government’s target but lower than last year’s 6.7pc and 7.7pc over the previous two years. This is significantly lower than the World Bank’s estimate of a 7.6pc deficit for the current year.

The IMF advised a strong resistance to spending pressures for defence, infrastructure, or subsidies to enhance competitiveness and tackle the entrenched battle against taxation, aiming to build a buffer and scale down rising debt ratios. If this approach is followed, the Fund projected the fiscal deficit to decrease to 4.7pc of GDP next fiscal year, 3.6pc in FY27, 3pc in FY28, and 2.8pc in FY29.

Likewise, the IMF estimated Pakistan’s primary balance — the gap between revenues and expenditures excluding interest payments — for the current fiscal year at 2.1pc of GDP, up from 0.9pc last year. For next year, the Fund forecast a slight decline in the primary balance to 1.7pc of GDP, stabilising at 2pc over the following three years.

Advises promoting good governance, eliminating corruption, improving tax system

The IMF estimated that general government revenues would surge by 2.8 percentage points (almost Rs3.5 trillion) to 15.4pc of GDP this year, compared to 12.6pc last year, driven by significant taxation measures in the current budget prior to the $7bn bailout. However, it forecasts a decline in the tax-to-GDP ratio to 15pc next year, rising again to 15.5pc in FY27 and maintaining 15.8pc in FY28 and FY29.

General government expenditure is projected at 21.4pc of GDP for the current year, approximately 2.1pc higher than last year’s 19.3pc. The IMF anticipated government expenditure to decrease to 19.7pc of GDP next year and 19pc in FY27, followed by 18.8pc in FY28 and 18.6pc in FY29.

On the other hand, the IMF projected Pakistan’s debt-to-GDP ratio to rise by 2.2 percentage points to 71.4pc during the current fiscal year, up from 69.2pc last year, but expected a downward trend after this fiscal year. The debt-to-GDP ratio is forecast to fall to 69.8pc next year, 67.4pc in FY27, further down to 64pc in FY28, and 60.7pc by FY29 — still above the 60pc limit under the law that has been consistently breached by successive governments for over a decade and a half.

The IMF also warned that Pakistan’s pension spending is expected to rise by 0.1pc of GDP by 2030, despite recent reforms, and surge by 6.7pc of GDP by 2050. Health spending is anticipated to increase by 0.1pc of GDP by 2030 and 4.1pc by 2050, significantly lower than pension costs. The Fund noted the country’s average debt maturity is about 18.8 years.

The IMF highlighted that many aspects relevant to policymakers pertain to the fiscal policy trilemma, as global public debt remains elevated — projected to exceed $100tr in 2024 and rise further over the medium term. “In an environment of high deficits and high and rising debt, governments everywhere face a seemingly impossible choice involving three incompatible imperatives,” the IMF stated.

These include pressures to spend more in various areas such as defence, climate change, competitiveness, growth, education, health, and infrastructure; political resistance to taxation; and the objective of macroeconomic stability encompassing public debt sustainability, monetary stability, and financial stability. “The trilemma puts countries in a bind: if a country caves to spending pressures without raising taxes, deficits and debt will continue to rise, ultimately proving unsustainable and causing instability,” the IMF observed.

The Fund advised promoting good governance, eliminating vulnerabilities to corruption, improving the tax system, and prioritising education and health, estimating that global debt would increase nearly 20 percentage points of GDP higher three years ahead than the baseline projection, reaching 115pc of GDP. “Much larger fiscal adjustments than currently planned are required to stabilise (or reduce) debt with high probability,” it stated, alerting that now is “an opportune time for rebuilding fiscal buffers” in a growth-friendly manner.

Published in Dawn, October 24th, 2024

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