Federal government wants additional fiscal space of Rs 1.7 trillion from four provinces, especially Punjab and Sindh, sources say
ISLAMABAD:
The government on Tuesday delayed announcing the new budget until next week after it failed to resolve spending allocation issues in time and address some of the concerns of coalition partners.
The Finance Ministry this week sought consent from the International Monetary Fund (IMF) to make adjustments to major spending items, just four days before the tentative budget date of June 5, according to government sources.
Sources said the IMF was not very receptive to the government’s proposals but asked it to share the proposed spending adjustments along with the rationale.
The federal government is seeking an additional fiscal space of Rs 1.7 trillion from four provinces, mainly Punjab and Sindh, for the new fiscal year by adjusting National Finance Commission allocations and transferring some expenditure, according to people aware of these discussions.
Due to the reopening of issues related to allocations for the Public Sector Development Program (PSDP), subsidies to the power sector and treatment of social security expenditure under the Benazir Income Support Program (BISP), the government postponed the scheduled meeting of the National Economic Council (NEC).
The NEC, which was to approve the new fiscal year’s national development budget for the Center and four provinces, along with macroeconomic targets, would be chaired by Prime Minister Shehbaz Sharif and assist provincial chief ministers on Wednesday (today). The meeting is likely to take place on Thursday (tomorrow) or Friday.
Sources said the budget announcement was postponed to next week amid the government’s efforts to resolve outstanding issues with the IMF and the PPP, its main coalition partner since 2022, whose support is critical for Shehbaz Sharif to remain in office.
The budget could be presented on June 8 or 10, depending on how quickly these outstanding issues are resolved.
The Finance Ministry did not comment on the reasons for the budget postponement. Among the outstanding issues are the size of the next fiscal year’s development budget and the inclusion of schemes recommended by coalition partners.
The PPP and the government held regular meetings to resolve these issues, including resource distribution and expenditure allocation.
Planning Minister Ahsan Iqbal said on Monday that the government was allocating 87 billion rupees for plans recommended by its coalition partners, including provincial projects, what he called the “cost of the coalition government.” The PPP had sought larger allocations for the schemes it wanted to implement, mainly in Sindh through federal funding.
For the next fiscal year, the government has proposed a federal development budget of Rs 1,126 trillion, which the Planning Minister said was negative in real terms of Rs 15 billion.
Sources said the prime minister had asked the Finance Ministry to create fiscal space to increase the size of the PSDP by another Rs 200 billion.
They said the Finance Ministry approached the IMF with a request to allow it to make adjustments in the proposed allocations for power sector subsidies and BISP. For the next fiscal year, the total estimated cost of BISP disbursements and administrative expenses was Rs 838 billion.
Another Rs 830 billion has been proposed for subsidies to the power sector, including Rs 300 billion to offset the cost of inefficiencies, theft and low recoveries on electricity bills.
The government had the option to cut energy subsidies by 200 billion rupees, but this could affect the settlement of old debts or the subsidy amount for low-end consumers.
Sources said the government wanted some adjustments to be allowed to create fiscal space for additional development expenditure and some other critical spending requirements.
They added that it was proposed to the IMF that any spending reduction agreed under the BISP for the next fiscal year could be adjusted in lieu of social safety net spending by provinces.
The federal government also wanted the provinces to assume at least half of the responsibility for the BISP, but the provincial governments were not willing to shoulder the expense.
Another pending issue is what would be the federal divisible fund that would be divided between the Center and the four provinces.
The federal government wanted to exclude customs duties from the federal divisible fund on the grounds that there was no constitutional provision for them. However, some stakeholders were not in favor of excluding it from the NFC Award, which would be signed by President Asif Ali Zardari for the fiscal year 2026-27.
The five-year NFC award expired in 2015 and since then the president of Pakistan is expanding it each year until there is consensus among all parties on a new award.
Pakistan has also committed to the IMF that over a period of five years it would reduce the overall simple average tariffs from 20.2% in 2025 to 9.7% in 2030. With the condition, the government in the first year had reduced the tariffs to 16.56% and is now supposed to reduce it further to 13% from next month.
Sources said there were divergent views on the pace of trade liberalization and the Industry Ministry was not in favor of a steeper reduction.
There was a group of independent economists, trade experts and foreign consultants urging the government to further reduce tariffs by 3.56% to 13% starting next month, the sources added.
The government on Tuesday postponed the meeting of the Tariff Policy Board, which was to approve these cuts.
Under the plan agreed with the IMF, the government is committed to abolishing the 5% customs duty and abolishing the additional 2% customs duty that applies to the 16% tariff. It had committed to halve the rate of additional customs duty of 4% on the 20% slab and also to reduce the additional duty by 2% on the most imported slab.
Under the plan, there has to be a substantial reduction in regulatory duty rates by fiscal year 2026-27.
There have also been concerns about the impact of trade liberalization on Pakistan’s external sector. At the time of planning liberalization, the World Bank and the Ministry of Commerce had forecast a 14% increase in exports and only a 7% increase in imports.
However, contrary to these assumptions, exports plummeted by 6.2% and imports grew by more than 7% during the first 10 months of this fiscal year.
