Miscalculated projections of federal budget deficit threaten IMF program once again

ISLAMABAD: Pakistan’s external financing plan has hit a major snag, with a nearly $4.5 billion shortfall, while its budget may exceed expectations by another Rs1 trillion due to the underestimation of debt expenditures.

According to a news story published in Express Tribune, these issues are raising concerns as the International Monetary Fund (IMF) prepares for its first review of Pakistan’s $3 billion IMF program, scheduled for November this year.

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Sources within the Ministry of Finance have attributed both problems to overly optimistic budgetary estimates. Failure to address these issues could potentially jeopardize Pakistan’s IMF program, again.

Against budget estimates exceeding $20 billion, there are growing concerns that at least $4.4 billion in foreign loans may not materialize. The government had allocated $4.5 billion in loans from foreign commercial banks and an additional $1.5 billion through Eurobond issuance. However, the Ministry of Finance has concluded that, given Pakistan’s low credit rating and the current global environment of higher interest rates, the nation is unlikely to secure nearly $3 billion in non-Chinese commercial loans.

In response to these challenges, the government is exploring alternative avenues for external financing, including increased disbursements from multilateral creditors and raising funds through privatization.

The government had budgeted $6.2 billion in inflows from multilateral and bilateral creditors for the fiscal year, but as of July, it had received only $293 million. Sources indicate that the World Bank may approve a $350 million loan under the second Resilient Institutions for Sustainable Economy (RISE-II) program in early October.

One contributing factor to the slow disbursements from multilateral creditors has been the interim governments in all federating units, which have slowed down development activities. If provinces can demonstrate improvements in ongoing projects, and if the central bank eases regulations, disbursements from multilateral and bilateral creditors could surpass $7 billion in this fiscal year, according to insiders.

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However, the Ministry of Finance faces the additional challenge of balancing the budget after a fresh assessment revealed that interest payments may exceed the budgeted figure of Rs7.3 trillion, potentially reaching well over Rs8 trillion. The government had initially estimated interest payments based on an 18 percent interest rate assumption. But, with an average interest cost of 22 percent now, the debt servicing estimate becomes understated by Rs 1 trillion for this fiscal year.

As a result, the projected federal budget deficit of Rs 7.5 trillion may soar to over Rs8.5 trillion, even if all other estimates remain unchanged, sources within the Ministry of Finance warn. These financial uncertainties present a significant hurdle as Pakistan prepares for its IMF review later this year.