Pakistan’s fiscal deficit surges ahead of crucial IMF talks

The federal government’s contractionary fiscal policy measures failed to hold a budget surplus, as a deficit of 1.54 trillion rupees was recorded. According to reports, the fiscal balance of the cash-strapped nation reverted from a surplus in the first quarter of the fiscal year (FY) 2024-25 into a deficit at the end of the first half of the current FY.

The budget deficit amounts to 1.2 percent of Pakistan’s Gross Domestic Product (GDP). Tax officials at the Federal Board of Revenue (FBR) recently failed to generate a respectable amount of revenue as collection levels fell short by 386 billion rupees in the first half of FY 2024-25. This failure on the part of the tax watchdog could partially explain the fiscal deficit Islamabad is grappling with.

As per reports, a 0.43 trillion rupee statistical discrepancy was noted in the one-trillion-rupee plus deficit.

For Islamabad, news of the fiscal deficit comes at a horrendous time as a mission from the International Monetary Fund (IMF) is expected to arrive at the end of February. IMF officials are expected to engage with Pakistan’s top leadership for review talks with respect to the disbursement of additional funds to Pakistan from the seven-billion-dollar Extended Fund Facility (EFF) program.

According to financial experts, one of the primary factors for the fiscal surplus in the first quarter of FY 2024-25 was the unnaturally large profit levels that the State Bank of Pakistan (SBP) was able to generate. These funds resulted in the deficit turning into a surplus when allocated to the budget.

The SBP was able to generate these abnormally large profits because of the high interest rate. The surge of policy rates to 22 percent undoubtedly slowed the economy down. However, the SBP emerged as a beneficiary of the high rates.

IMF Mission Chief Nathan Porter has been hosting conferences with FBR officials to finalise details regarding the upcoming review talks. According to reports, the talks between the IMF and concerned Pakistani authorities will be held in Islamabad at the end of February.

As per data from the Ministry of Finance, expenditures on debt financing and defence made up the lion’s share of Pakistan’s fiscal outflows. On the other end of the spectrum stood the Federal Public Sector Development Programme (FPSD), which received a measly 0.132 trillion rupees during the first half of FY 2024-25.

Entries into both sides of the fiscal account did not match, resulting in a statistical discrepancy in the value of 0.23 trillion rupees in the federal government’s budget. Analysts are speculating about possible outcomes of talks with the IMF regarding Pakistan’s ability to secure future disbursements if fiscal deficits persist.