Pakistan’s new budget is meant to please the IMF – The Diplomat

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However, representatives of the funding body say that additional measures are needed to bring the budget in line with its objectives.

Pakistan's new budget is meant to please the IMF

Pakistani Finance Minister Miftah Ismail at a meeting with IMF Deputy Managing Director Antoinette Sayeh. April 23, 2022

Credits: Twitter/Pakistan Embassy in the United States

On June 10, the newly elected government of Pakistan presented PKR 9.52 trillion ($47 billion) budget for fiscal year 2022-23. The budget is aimed at tough fiscal consolidation and achieving 5 percent economic growthwhich is lower than growth by 5.97 percent in the outgoing year.

Finance Minister Miftah Ismail, who presented the budget, promised to eliminate fuel and energy subsidies to revive a stalled $6 billion International Monetary Fund (IMF) aid package. The revival of the IMF program is critical for Pakistan as the country faces a balance of payments problem. There are fears that Pakistan could face a default-like situation if the IMF aid package is not restored in the coming weeks.

Earlier, Ismail stated that the reforms that are being introduced in the new budget will please the IMF, bringing the country closer to finalizing the agreement with the lender at the staff level. However, it seems that the proposed budget did not satisfy the IMF.

In a statement following the presentation of the budget, the Bank’s Resident Representative in Pakistan said that additional steps would be required to bring the budget in line with the main objectives of the IMF program. “Our preliminary assessment is that additional measures will be required to strengthen the budget and bring it in line with the key objectives of the program,” Esther Perez Ruiz said Reuters.

The IMF is reportedly demanding further increases in tax rates and wants the country to collect more direct taxes and eliminate remaining fuel subsidies. According to the proposed budget, the government intends to raise 7 trillion rupees ($34.6 billion) in taxes through the Federal Board of Revenue (FBR). Pakistan raised the tax rate on banking companies from 39 percent to 42 percent, which is likely to generate 15–20 billion rupees ($74.2–98 million) in additional revenue. Tax on immovable property exceeding Rs 25 million (US$0.127 million) will now also be subject to tax. “Most of the wealth of wealthy people is concentrated in the real estate sector of Pakistan. It’s a double threat.” finance minister said in his budget speech, pointing out that “this leads to the accumulation of unproductive assets and higher housing prices for the poor and low-income segments of the population.”

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Of the total annual budget, about 40 percent is reserved for the payment of external and internal debt. This means that the country’s debt service is expected to rise to $23 billion in the 2022-23 budget Last week, the foreign exchange reserves of the Central Bank amounted to $9.2 billionwhich is enough to cover Pakistan’s 45-day import bill.

The proposed budget failed to restore confidence in the market. Pakistan’s currency on Tuesday for the first time in history exceeded 205 rupees against the US dollar. Analysts believe that stability will return to the Pakistani market once a staff level agreement is reached with the IMF. ‘Delay is not good for markets’ – former Treasury adviser Dr. Khakan Najib the Express Tribune told the Express Tribune, adding that “markets are uncomfortable with uncertainty about the IMF’s loan program.”

The current financial crisis has also affected Pakistan’s defense spending. Director-General of the Inter-Services Public Relations (ISPR), Maj. Gen. Babar Iftikhar, said on Tuesday that defense appropriations decreased if you take into account issues such as rising inflation and currency depreciation. According to him, budget allocations were reduced from 2.8% of GDP to 2.2%.

Pakistan’s economic woes are not expected to ease in the coming weeks. The country’s import bills continue to rise due to oil imports and other costs, while exports have failed to strike a balance. The lack of international support further exacerbated the situation. The budget shows that the new government is short of work as it rushes to bring stability to the markets.