Islamabad June 13 2022: Pakistan’s budget promised to deliver on two competing objectives set out by the International Monetary Fund as conditions for releasing the remaining balance from its existing loan program — fiscal consolidation and support for the poor. This should allow the IMF to resume its aid program, which is likely to conclude in the coming months. That will help support dwindling foreign exchange reserves and a falling currency, and boost overall macroeconomic stability, at least over the near term.
Even so, the budget targets are likely to prove difficult to achieve. That will pose difficulties in persuading the IMF to further extend the aid program over the course of the fiscal year ending June 2023.
The government set its fiscal deficit target at 4.9% of GDP and a surplus target of 0.2% on primary balance for fiscal year 2023. Primary surplus was one of the IMF’s pre-conditions for its loan.
The budget took several steps to support the disadvantaged, including an expansion of the cash transfer program and increasing scholarships for poor students.
A higher interest burden for servicing debt will keep the fiscal deficit elevated in fiscal 2023. Our calculations suggest that even if the government achieves a primary surplus of 0.2% of GDP, the fiscal deficit is still likely to overshoot the target. In addition, we see the the primary balance target as highly optimistic.
Missed Budget Targets Will Likely Irk IMF
The government agreed to the IMF’s difficult targets as the country desperately needs aid to fill its external financing gap, which we estimate to be at least $18.3 billion in fiscal 2023. The country will likely receive the $3 billion aid in the near future, which should stabilize external balances.
However, it’s not expected to be easy for the country to persuade the IMF to further extend the program as it will probably be difficult for the government to deliver on its optimistic budget targets.
The government’s tax revenue projections are based on a 5% growth for the next fiscal year. This is optimistic in our view. We expect the economy to grow by 4.2%, which suggests the government is likely to miss its tax revenue collection target.
History suggests that tax collection targets have been missed by 10%, on average, since fiscal 2016
Moreover, as the next general election (due August 2023) draws near, it is highly likely that the government will announce further welfare programs, in addition to what was already announced in the budget
Budget Details
The government has set a tax revenue collection target of 7.0 trillion rupees for fiscal 2023 — 20% higher than the revised target for fiscal 2022.
The government has attempted to divert the tax burden from poor to rich segments — taxes on farm equipment and essential food items have been removed, the limit for income tax exemption has been raised, as have taxes on luxury cars and expensive real estate purchases.
