ISLAMABAD    -   Technical level talks between Pakistan and International Monetary Fund (IMF) are expected to be held in October or November after completion of first quarter (July to September) of current fiscal year to review the economic performance of the country. “Structural benchmarks during Q1 FY20 are so far very encouraging with strong indication that all the targets will be met,” the ministry of finance claimed on Friday.

“The Finance ministry is fully committed along with the IMF towards the ongoing reforms programme. The reforms program has 7 performance criteria, 5 indicative targets and 13 structural benchmarks and the progress on all of them is very encouraging”.

The Ministry of Finance has maintained that the FY19 Fiscal outcomes were due to concerns over slowdown in growth and there were three key factors including Monetary & Exchange rate corrections, need for protection of citizens from rising oil prices and expanding social safety nets and escalation on border with India which contributed to the fiscal deficit rising to 8.9% of GDP, against target of 7.2%.

The SBP has taken a policy direction in FY19 to correct the large trade deficit and shore up FX reserves. These measures have helped to reduce the Current Account deficit (CAD) to $13.5b in FY19, down from $19.9b in FY18. However, the rise in interest rates and a weaker rupee have led to a significant jump in the government’s debt servicing costs. These contributed Rs 104b to the overall slippage. On the other hand, the devaluation of the currency eroded profits of the SBP for FY19, with a shortfall of Rs 135b in non-tax revenue of the government.

Non-tax revenue shortfall was exacerbated by the litigation by the telecom operators on renewal of the 3G/4G licenses, and revenue of Rs 80b did not materialize in FY19. This matter is now partially resolved with telecom operators depositing Rs 70b as first instalment in September 2019. Federal government also faced a shortfall of Rs 85b from interest receipts from PSEs (NHA, WAPDA etc)

FBR tax revenues shortfall of Rs 321b in FY19 was the single biggest reason for the increase in the fiscal deficit and it was driven by a fall in imports (which account for 45% of total FBR tax collection in customs duty, GST and excise). However, other key factors also contributed. Most notably, the decision of the government to shield domestic consumers from rising oil prices resulted in over Rs 100bn shortfall in GST collection.

Against a revised target of 7.2% of GDP (published in April 2019), at the outset of the program - the fiscal year FY19 closed at 8.9% of GDP indicating a slippage of Rs 686b.

While revenue shortfalls contributed significantly to the rise in deficit, the expenditure overruns were also necessitated by the need to expand social safety nets and higher investment spending (PSDP). If the government had decided to curtail these expenditures further, it would have led to further slowdown in GDP growth and caused a hard landing for the economy already undergoing major monetary and exchange rate adjustments.

The attack on Pakistan by Indian forces and the standoff at the border has also resulted in significant escalation in the FY19 expenditures, all of which are necessary to ensure safety of citizens.

The Ministry of Finance has maintained that while targets under IMF program are ambitious, there is no need to renegotiate. Similarly, while the fiscal deficit overrun in FY19 was due to macro adjustments in the economy and the need to protect citizens from rising oil prices, it is believed that it will have a material impact on the Budget outcomes for FY20.

The payments from telecom operators and privatization of the two RLNG plants are likely to materialize in the current fiscal year and will help the government to reduce the fiscal deficit in FY20 to 7.3% of GDP. The results of the first two months are encouraging with FBR revenues posting increase of 28% y/y.

The reforms agenda pursed by the Government of Pakistan and supported by the IMF Extended Fund Facility (EFF) are target oriented but necessary to put the economy on a sustainable growth trajectory. The reforms program has 7 performance criteria, 5 indicative targets and 13 structural benchmarks.

The progress on nearly all the performance and structural benchmarks during Q1 FY20 is encouraging and targets will be met. Finance ministry is fully committed along with the IMF towards the ongoing reforms program.

Next week MoF will welcome Jihad Azour, Director of the IMF Middle East and Central Asia Department, and apprise him on the results achieved so far.

APP adds: Meanwhile, Finance Ministry Friday categorically refuted the claims made in certain media reports that the International Monetary Fund (IMF) was sending an SOS mission to Pakistan owing to the fiscal outcomes of FY 2018-19 and that programme might be renegotiated.