Federal government wants additional fiscal space of Rs1.7t from 4 provinces, especially Punjab and Sindh, sources say
ISLAMABAD:
The government on Tuesday delayed the publication of the new budget until next week after it failed to resolve in time the problems with expenditure distributions and address some of the concerns of the coalition partners.
The Finance Ministry this week sought the consent of the International Monetary Fund (IMF) to make adjustments in major spending items, just four days before the June 5 preliminary budget date, according to government sources.
The sources said the IMF was not very receptive to the government’s proposal, but asked it to share the proposed adjustments to spending along with the rationale.
The federal government is looking for additional fiscal space of Rs1.7 trillion from four provinces, mainly from Punjab and Sindh, for the new fiscal year through adjustments in the National Finance Commission award and the transfer of some spending, according to people familiar with the discussions.
Due to the reopening of issues related to Public Sector Development Program (PSDP) allocations, subsidies to the power sector and the treatment of social security expenditure under the Benazir Income Support Program (BISP), the government has postponed the scheduled meeting of the National Economic Council (NEC).
The NEC, which was slated to approve the new fiscal year national development budget for the Center and four provinces, along with macroeconomic targets, was to be chaired by Prime Minister Shehbaz Sharif and attended by provincial chief ministers on Wednesday (today). The meeting will now probably be held on Thursday (tomorrow) or Friday.
The sources said the budget announcement has now been moved 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 crucial for Shehbaz Sharif to remain in office.
The budget could be tabled on June 8 or 10, depending on how quickly these outstanding issues are resolved.
The Ministry of Finance has not commented 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 the distribution of resources and expenditure allocations.
Planning Minister Ahsan Iqbal said on Monday that the government allocated Rs 87 billion. to the schemes recommended by its coalition partners, including to projects of a provincial nature, what he called “the cost of the coalition government”. The PPP had sought higher allocations for the schemes it wanted to carry out, mostly in Sindh through federal funding.
For the next financial year, the government has proposed Rs1.126 trillion federal development budget, which the planning minister said was negative in real terms by Rs15 billion.
The sources said the prime minister had asked the finance ministry to create fiscal space to increase the PSDP size 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 Rs838 billion.
Another Rs 830 billion has been proposed for subsidies to the power sector, including Rs 300 billion to offset the cost of inefficiency, theft and low recovery of electricity bills.
The government had the option of cutting the electricity subsidies by Rs200 billion, but this could affect either the settlement of the old debt or the subsidy amount for the low end consumers.
The sources said the government wanted some adjustments to be allowed to create fiscal space for additional development expenditure and some other critical expenditure requirements.
They added that it was suggested to the IMF that any reduction in the agreed expenditure under BISP for the next financial year can be adjusted in lieu of social safety net expenditure by the provinces.
The federal government also wanted the provinces to shoulder at least half of the responsibility for the BISP, but the provincial governments were unwilling to bear the cost.
Another outstanding question is what would constitute the federal divisible pool that would be shared between the Center and the four provinces.
The federal government wanted to exclude tariffs from the federal divisible pool on the grounds that there was no constitutional provision for it. However, some stakeholders were not in favor of excluding it from the NFC award, which President Asif Ali Zardari would sign for the 2026-27 financial year.
The five-year NFC award expired in 2015, and as Pakistan’s president extends it every 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 will reduce overall simple average tariffs from 20.2% in 2025 to 9.7% in 2030. Under the condition, in the first year the government had cut the tariff to 16.56% and now it is supposed to further reduce these tariffs from next month to 13%.
The 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 who urged the government to further cut tariffs by 3.56% to 13% from next month, the sources added.
On Tuesday, the government postponed the meeting of the Tariff Policy Council, which was supposed to approve these cuts.
Under the plan agreed with the IMF, the government is committed to abolishing the 5% tariff slab and abolishing the 2% additional duty imposed on the 16% tariff slab. It had committed to halve the additional duty rate of 4% over the 20% slab and also reduce the additional duty by 2% over the highest import slab.
According to the plan, there must be a significant reduction in the statutory duty rates for the financial year 2026-27.
There have also been concerns about the impact of trade liberalization on Pakistan’s external sector. At the time of planning the liberalization, the World Bank and the Ministry of Commerce had predicted 14% increase in exports and only 7% increase in imports.
Contrary to these assumptions, however, exports fell by 6.2% and imports grew by over 7% during the first 10 months of this financial year.
