Pakistan has informed the International Monetary Fund (IMF) that it anticipates a reduction in the current fiscal year’s budget deficit to approximately $2 billion or less, compared to the previous estimate of $6.5 billion by June 2024. This revised deficit estimate reflects an expected slowdown in revenue collection during the remaining months of the current fiscal year. The decrease in foreign exchange inflows and challenges in meeting the required levels of dollar inflow from overseas sources have left Pakistani authorities with few options but to absorb the losses in the current budget.
The need for non-resident financial assistance, approximately $28 billion, is now pressing. This includes servicing foreign loans, estimated at around PKR 23.5 billion, and a projected loss of $4.5 billion in current accounts. The government had secured a $3 billion Stand-By Arrangement program with the IMF, with expectations of improvements after July 2023. However, recent months have seen a significant drop in foreign loans and grants, which has put added pressure on Pakistan’s external accounts.
Now, Pakistani authorities are expecting an increase in dollar inflows from multilateral and bilateral creditors after the first review by the IMF program. According to Dr. Hafeez A. Pasha, an independent economic expert, Pakistan’s external financing gap stands between $6 billion to $7 billion. Assistance from the IMF’s program would help Islamabad reduce this gap.
Officials from key government sources had mentioned, “The current accounts’ loss for the first quarter was $0.974 billion; therefore, it is expected that it will be limited to around $4.5 billion instead of the previous estimate of $6.5 billion.” These estimates have been shared with the IMF’s review mission, which is currently in Pakistan for discussions on the Stand-By Arrangement program.
The government initially aimed for total revenues of PKR 30.843 billion and an estimated collection of $64.7 billion at that time. This estimate was based on an expected 2 million tons of rice and the availability of 5 million extra bales of cotton. However, the Finance Ministry’s top officials are now engaged in back-and-forth discussions over the estimates of the overall balance of trade.
It is important to note that if there is a reduction in revenue collection, the deficit may also decrease to $58 billion from the initial estimate of $64.7 billion, reflecting a potential reduction of $6.7 billion. Another looming concern is that remittances sent by Pakistanis from abroad may also fall below the targeted level. These remittances, currently at $30 billion annually, fall short of the $32.889 billion estimated for the fiscal year.
The government anticipates that the Gross Domestic Product (GDP) growth rate will remain at approximately 3.5%, mainly because the agriculture sector and significant industries have demonstrated improved performance. The inflation rate, based on the Consumer Price Index (CPI), is expected to stay around an average of 21%, in line with consumer price expectations.
A reduction in imports and an improved exchange rate, coupled with a better trade balance and enhanced pace, could potentially lead to a monthly reduction in inflation. However, this could be subject to variations based on several factors.
Pakistan’s fiscal outlook presents a challenging scenario as it aims to narrow its deficit while facing external financial pressures and reduced inflows. The government is looking to the IMF’s assistance to help alleviate the external financing gap, but uncertainties in global financial markets and potential changes in economic conditions may further influence the situation. The ongoing discussions with the IMF review mission will play a crucial role in determining the extent of assistance and adjustments needed to stabilize Pakistan’s economic outlook.
