Aligning expenditure with resources
In May 2019 the technical teams of the government and the IMF reached an agreement on a $6 billion bailout package for Pakistan. According to PM’s Finance Adviser Abdul Hafeez Sheikh at the time, the government could not have bridged the financing gap of $12 billion on its own that he said was created by a weak economy. To get the bailout Pakistan had to agree to major conditions which Dr Shaikh saw as being in the country’s interest. These included aligning expenditure with resources, improving the functioning of loss-making state-owned enterprises, curtailing the subsidies available to the wealthy and tax the rich segments.
With Covid-19 emerging as a major threat, the IMF Executive Board approved a US$ 1.386 billion upfront disbursement to Pakistan to provide it breathing space, while putting on hold the existing $6 billion Extended Fund Facility (EFF). There are reports that the stalled IMF programme could only be revived if the government demonstrated its ability to present and pass the next budget for 2020-21 in alignment with the IMF’s envisaged macroeconomic framework.
The IMF has urged Pakistan to freeze government employees’ salaries. The Fund’s argument is unassailable: at a time when the world is facing an economic crunch, leading even the developed countries to reduce salaries, why can’t Pakistan do so when it faces greater financial problems? During the last one year and a half the common man had to pay heavily to sustain the economy. Why can’t those who are better off do their bit now?
The IMF wants a cut down of non-development expenditure. Against the IMF’s demand for the 0.4 perdent primary budget deficit, the government has proposed that the target should be 1.9 percent of GDP, or Rs875 billion. The budget deficit target, as suggested by the IMF, will be around 7 percent while the federal government sees the realistic deficit target at 8.4 percent of GDP, or Rs3.9 trillion.
There are serious differences between the government and the IMF. Dr Sheikh considers that the $6 billion bailout is of vital importance for Pakistan. The Finance Ministry is holding video conferences with the IMF staff in Washington for the restoration of the EFF. With the budget document almost ready, it still remains uncertain if it would reach Parliament in its original form.