Pakistan’s new government appears to be in a quandary over whether to go to the International Monetary Fund (IMF) or approach Saudi Arabia for bailout loans to support the country’s crumbling economy.
It has reached a point where bankruptcy seems the least bad option to face.
The budget deficit has reached Rs 2.26 trillion (US$18.4 billion), or 6.6% of the country’s gross domestic product (GDP). But this does not account for Rs 2 trillion ($16.4 billion) gas, commodity and power sector liabilities, which, if added together, will jack up the overall budgetary shortfall to Rs 4.26 trillion ($32.8 billion).
Circular debt – a financial resource shortfall within the Central Power Purchasing Agency (CPPA) – rose to Rs 1.1 trillion ($8.4 billion), bringing the power sector to the brink of bankruptcy.
Economic analysts claim the fiscal gap went beyond the $26 billion mark and that it cannot be bridged by the IMF alone. Pakistan’s allies like Saudi Arabia and China, they say, will need to come forward and offer soft loans to steer the country out of the economic morass.
Dr Farrukh Saleem, an economist, financial analyst and industrialist based in Islamabad, told Asia Times: “The overall fiscal gap, in my opinion, is around $26 billion. It does not need rocket science to determine the exact quantum of a deficit. We face an $18 billion shortfall in the current account and an additional $8 billion is required for the debt servicing by the end of June 2019.
“They will need to beg, borrow or steal to bridge the record gap of $26 billion as the IMF prescription alone would not do. The government will require $10 billion in soft loans from Saudi Arabia or China to keep going,” he said.
Saleem said the IMF was a quota-based institution which gave Pakistan $2 billion worth of Special Drawing Rights (SDR). Through their ordinary or normal access, he said, the IMF can entertain requests up to 435% of the allocated SDR, while in exceptional or extraordinary access, it could consider a proposal for over and above the 435% credit ceiling.
Pakistan, he pointed out, would need exceptional access from the IMF as it had $6 billion in outstanding loans and would not be able to get more than $3 billion under the IMF’s ordinary access mechanism.
The Pakistan Tehreek-e-Insaf (PTI) government is putting efforts on both these fronts. To prepare the ground for IMF negotiations and to reassure its commitment and seriousness to fiscal discipline, finance minister Asad Umer unveiled a mini-budget in parliament on Tuesday.
A day earlier, the Economic Coordination Committee (ECC) gave approval for 10% to 143% increase in gas prices that will fetch Rs.94 billion ($723 million) in government revenue.
The parliamentary session had been scheduled for Friday but was postponed due to the death of Kulsoom Nawaz – the wife of Pakistan Muslim League-Nawaz (PML-N) leader Nawaz Sharif, who had been sentenced to 10 years in jail.
The mini-budget proposed tax measures, a withdrawal of subsidies, removal of tax and duty exemptions and cutting down on development outlays to minimize the whopping deficit.
The finance minister claimed the tax measures would raise Rs 183 billion ($1.4 billion) in additional revenue as against media reports that the impact of tax and duty revision would be more than Rs 400 billion ($3.1 billion).
The measure suggested by the government in the mini-budget includes a collection of 0.6 % withholding tax on banking transactions, 100% increase in import duty on 1,800cc and above cars, consumption taxes on cigarettes, imported food and luxury items.
Income tax rates will be increased from 16% to 25% for the salaried class and from 25% to 30% for corporate taxpayers. With a view to curtailing the current account deficit, the finance minister proposed to increase customs and regulatory duties on some 6,000 imported goods.
“They are going to level the field for an IMF bailout, which requires fiscal discipline to curtail the budgetary deficit. The government needs Rs 700 billion ($5.4 billion) to Rs 800 billion (US$6.1 billion) to bring down the deficit to somewhere at 5.2% of the GDP,” Saleem said.
He added that Rs 250 billion ($1.9 billion) will come from an adjustment in gas and electricity prices. Similarly, he said, withdrawal of tax and duty exemptions would add Rs 250 billion ($1.9 billion) and another Rs 300 billion ($2.3 billion) will be secured by rescinding the development outlay.
The mini-budget is going to hit the common person hard and if the government decides to opt for IMF funding with all its strings, the going will get tougher for the poor segments of society.
“The IMF made agreements with Jordan and Argentina during the last three months which sparked unprecedented public resentment in both these countries. Pakistan needs a strong negotiating team that could finalize better terms with the IMF as any leniency on the conditionality would trigger a similar reaction in Pakistan,” Saleem said.