IMF warns Pakistan's budget deficit may hit record high due to coronavirus crisis

The IMF has warned Pakistan that the cash-strapped country's budget deficit is expected to rise to a record 9.2 per cent of the size of national economy or Rs 4 trillion (USD 23.7 billion) in the current fiscal year due to the impact of the coronavirus pandemic.

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The International Monetary Fund in its Middle East and Central Asia Regional Economic Outlook (REO) Update released on Wednesday urged the Pakistan government to ramp up spending on the health sector that remained the lowest in the region.

Fiscal expansion is expected in all countries as the fight against the virus and its economic effects is scaled up, the Express Tribune newspaper reported, citing the report.

It said that Pakistan's budget deficit that in pre-COVID-19 situation had been projected at 7.3 per cent of gross domestic product (GDP), may increase to 9.2 per cent. In absolute terms, the deficit will be equal to Rs 4 trillion, higher by Rs 800 billion than previous estimates, it added.

Inflation is projected to remain at 11.1 per cent this year and 8 per cent next year.

The deficit is expected to rise because of revenue shocks as the government has not yet announced any major increase in budgetary expenditure, according to finance ministry sources.

For fiscal year 2020-21, the IMF has projected 6.5 per cent budget deficit, higher by 1 per cent compared with the pre-COVID-19 analysis of the IMF staff.

The budget deficit is expected to be the highest in Pakistan’s history after the Pakistan Tehreek-e-Insaf (PTI) government booked the highest deficit in 28 years in its first year in power.

The government exceeded its budget deficit target by 82 per cent, which stood at Rs 3.444 trillion in previous fiscal year 2018-19. The target was just Rs 1.9 trillion or 5.6 per cent of GDP.

The IMF has already said that Pakistan’s economy will fall into recession in this fiscal year and growth is expected to contract by 1.5 per cent before it recovers to 2 per cent in the next fiscal year. It said temporary economic slowdown as part of stabilisation policies adopted by Pakistan under the USD 6-billion loan programme also contributed to the post-pandemic economic situation.

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The IMF said oil importers in the Middle East, North Africa and Pakistan region were expected to see an increase, on average, to 8.5 per cent of GDP because of the impact of lower growth on tax revenues in most countries and scaled-up spending.

The global lender said it would not be compensated by savings in subsidy accruing from lower international commodity prices and an increase in tax revenue in some countries including in Pakistan.

The challenges posed by the coronavirus would be particularly daunting for countries with weaker health care infrastructure like Afghanistan, Mauritania, Pakistan and Sudan, said the IMF.

Health expenditures in Pakistan are the lowest in the Middle East and Central Asia region, standing at round 2.2 per cent of GDP. These also include private expenditures.

The IMF said many countries including Pakistan had increased transfers and subsidies for targeted households while using existing social protection programmes and are giving cash to unemployed and self-employed workers.

Assistance to affected firms in the tourism or exporting sectors and to small- and medium-sized enterprises has been granted through guaranteed and subsidised lending, and through tax exemptions.

But “given weak health care capabilities in some countries (Afghanistan, Mauritania, Pakistan, Sudan) and reliance on private expenditure on health care in some others, scaling up health expenditure (including for migrants and refugees) is needed urgently”, said the IMF.

Pakistan has already witnessed USD 2.5-billion outflow of hot foreign money out of investment of USD 3.4 billion in government securities by foreign investors.

In order to offset the impact of low inflows, the IMF said it was providing financial support to Jordan, the Kyrgyz Republic, Pakistan and Tunisia. The IMF board is expected to approve USD 1.4 billion in emergency relief for Pakistan on Thursday.

The IMF is also providing debt relief from international creditors to Somalia and 24 other nations. Pakistan is not among these countries, but Pakistan is not among those countries.

Prime Minister Imran Khan earlier this week appealed for a "global initiative on debt relief" to help developing countries like Pakistan to overcome disastrous impacts of the novel coronavirus pandemic.

In a televised speech on Sunday, Khan noted that the deadly virus posed unprecedented health and economic challenges and the global recession is a certainty, which could be worse than the "Great Depression".

"A global pandemic cannot be contained without strong, coordinated and well-crafted global response," he said, urging the international community, particularly the United Nations Security Council and the international financial institutions, to respond positively to the dilemma confronting the developing counties in the wake of the COVID-19 outbreak.

Pakistan has recorded more than 6,500 COVID-19 cases and over 110 people have died due to the disease.

The country has approached multilateral donors for additional funds to fight the pandemic and its economic implications. The World Bank has approved USD 1 billion and the Asian Development Bank USD 1.5 billion for Pakistan to keep its economy afloat.