ISLAMABAD - The International Monetary Fund (IMF) has projected that Pakistan would miss all economic targets during the ongoing fiscal year as the country is facing unprecedented health and economic shocks from the rapid propagation of the COVID-19 outbreak.

The IMF in its latest report on Pakistan’s economic situation has noted that the budget deficit would swell to Rs4 trillion in the current fiscal year (FY20) after coronavirus situation against the early projection of Rs3.2 trillion. The primary deficit is now expected to deteriorate to 2.9 percent of GDP in FY 2020 (from 0.8 percent expected earlier) due to a 1.8 percentage point decline in tax revenue relative to the pre-virus baseline, and the needed higher spending to support the health response, social safety nets for the very poor and unemployed.

One of the main reasons behind higher budget deficit is massive reduction in tax collection. The Fund has estimated that the government would miss the tax collection target of Rs5.55 trillion by Rs1.647 trillion during ongoing financial year. The Federal Board of Revenue (FBR) tax collection would record at Rs3.908 trillion after COVID-19 against the initial target of Rs5.55 trillion. The FBR would also miss the revised target of Rs4.8 trillion by Rs892 billion.

The government’s non-tax collection would also face shortfall during FY2020. The non-tax collection is projected at Rs1.287 trillion as compared to Rs1.319 trillion before COVID-19. The government had upward revised the target of non-tax collection to Rs1.6 trillion by expecting massive revenue generation from the privatization of public sector entities. However, the privatization programme is unlikely to be completed due to the prevailing lockdown. The massive shortfall in tax as well as non-tax collection would result in a massive budget deficit during FY20.

The IMF report also revealed that government’s spending on defence and Public Sector Development Programme (PSDP) during FY20. The government’s spending on defence is projected at Rs1197 billion after COVID-19 compared to earlier projection of Rs1260 billion during the FY20. Meanwhile, the combined spending of federal and provincial governments on development sector would be slashed to Rs483 billion during the current financial year.  Federal government’s spending on PSDP is estimated at Rs488 billion after Covid-19 situation as compared to Rs588 billion. Similarly, the provincial spending on development projects would also face the axe during the FY20.

IMF has also estimated that the economy could contract by 1.5 percent in FY2020 (the first full-year contraction since 1952), a downward revision of about 4 percentage points due to a decline in consumption, investment, international trade, remittances, and private capital flows.

According to IMF staff, the primary fiscal deficit is projected to widen by 2 percentage points of GDP (from 0.8 percent of GDP before crisis) owing to decline in tax revenues due to the closure of businesses and disruptions to trade (import-related taxes account for around 40 percent of the federal tax collection). Concurrently, the new external financing gap for Q4 FY2020 is estimated by IMF staff at US$2 billion, keeping SBP reserves at US$12 billion by end-June, despite the respite provided by falling oil import bill.

Finally, the COVID-19 shock is likely to reverse the decline in public debt in recent months that was achieved through the authorities’ resolute fiscal consolidation efforts