Pakistan’s proposed budget falls short of IMF’s requirements, Amplifying economic concerns
In a worrying development for Pakistan, the International Monetary Fund (IMF) has expressed the need for significant revisions to the country’s proposed budget before it can secure a critical bailout. This setback comes at a time when the Pakistani Government is grappling with a deepening economic crisis and the looming threat of default.
Last week, Islamabad unveiled a budget of Rs14.5tn ($51bn) for the upcoming financial year, aiming to break the months-long deadlock with the IMF and revive a stalled $7bn lending program. However, the IMF’s resident representative for Pakistan, Esther Perez Ruiz, issued a statement stating that the plan “misses an opportunity to broaden the tax base in a more progressive way.”
Disagreements between Pakistan and the IMF over subsidies and measures to expand the tax base have led to the withholding of two disbursements totaling $2.5bn since late last year. The IMF’s announcement has dealt a significant blow to Prime Minister Shehbaz Sharif’s government, which had pinned its hopes on the budget to win over the multilateral lender and secure the next $1.1bn tranche of the support package. Moreover, the budget was deemed crucial for restoring credibility with lenders in preparation for the national elections scheduled for October.
“The federal budget was not only based on unrealistic assumptions, it set out a fiscal path that was completely at odds with Pakistan’s economic situation as well as the path of fiscal consolidation agreed with the IMF,” remarked Sakib Sherani, head of research firm Macro Economic Insights in Islamabad.
Esther Perez Ruiz, expressed concerns about the budget’s “long list of new tax expenditures,” highlighting that they further erode the fairness of the tax system and leave less money available for welfare recipients. She also warned against the proposed tax amnesty, citing its potential to create a damaging precedent.
While Finance Minister, Ishaq Dar announced an amnesty in the budget speech, allowing expatriates to transfer up to $100,000 without disclosing the source of their income, critics argue that such measures weaken protections against money laundering.
Pakistan is currently facing a mounting financial and humanitarian crisis. Foreign reserves have plummeted to less than $4bn, sufficient for only about one month of imports. Inflation surged to 38 percent in May, and the central bank has raised interest rates to a staggering 21 percent, the highest in Asia.
In the absence of IMF support, Pakistan has turned to longstanding allies like China and Saudi Arabia for assistance. Officials are hopeful that Beijing will roll over $2.3bn worth of debt repayments due this month, which analysts believe would help Islamabad avoid immediate default.
However, Pakistan requires over $20bn to meet its foreign debt obligations in the coming financial year, leading economists to anticipate the need for a new IMF program. With the current package set to expire at the end of the month, Pakistan may have to seek another program, marking more than a dozen such programs since the 1980s.
The government’s efforts to turn the economy around have been further complicated by severe political turmoil. Prime Minister Sharif’s government is embroiled in a volatile standoff with opposition leader and former Prime Minister, Imran Khan, who remains widely popular. Last month, authorities arrested Khan and detained thousands of his supporters.
Pakistan’s economic predicament has also taken a toll on foreign companies, which have struggled to repatriate dollars from the country. Shell recently announced its decision to sell its majority stake in its local unit Shell Pakistan, while earlier this year, Virgin Atlantic announced it would cease operations in the country.
As Pakistan grapples with these challenging circumstances, urgent action is required to address the economic concerns and formulate a viable fiscal plan. Failure to do so may jeopardize the country’s financial stability and future prospects.