Federal government wants additional fiscal space of Rs 1.7 billion in 4 provinces, especially Punjab and Sindh, sources say
ISLAMABAD:
The government on Tuesday postponed the announcement of the new budget until next week after being unable to resolve spending allocation issues and address some of the concerns of coalition partners in time.
The Finance Ministry this week sought approval from the International Monetary Fund (IMF) to make adjustments to key spending items, just four days before the provisional budget date of June 5, according to government sources.
The sources said the IMF was not very receptive to the government’s proposals, but asked it to share the proposed spending adjustments along with their justifications.
The federal government is seeking additional fiscal space of Rs 1.7 trillion from four provinces, mainly Punjab and Sindh, for the new financial year through adjustments in the allocation of the National Finance Commission and transfer of some expenditures, according to people aware of these discussions.
Due to the reopening of issues related to Public Sector Development Program (PSDP) allocations, power sector subsidies and processing 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 to approve the national development budget for the new financial year for the Center and four provinces, along with macroeconomic targets, was to be chaired by Prime Minister Shehbaz Sharif and in the presence of provincial chief ministers on Wednesday (today). The meeting is now expected to be held on Thursday (tomorrow) or Friday.
The sources said the budget announcement was postponed until next week as part of the government’s efforts to resolve outstanding issues with the IMF and the PPP, its main coalition partner since 2022, whose support is essential for Shehbaz Sharif to remain in power.
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. Outstanding issues include the size of the next fiscal year’s development budget and the inclusion of projects recommended by coalition partners.
The PPP and the government met regularly to resolve these issues, including the distribution of resources and the allocation of expenditure.
Planning Minister Ahsan Iqbal said on Monday that the government was allocating 87 billion rupees for projects recommended by its coalition partners, including for provincial nature projects, which he called the “coalition government cost”. The PPP had sought higher allocations for the projects it wanted to execute, mainly in Sindh through federal funding.
For the next financial year, the government has proposed a federal development budget of Rs 1,126 billion, which the planning minister said is negative in real terms by Rs 15 billion.
The sources said the Prime Minister had asked the Finance Ministry to create fiscal space to increase the size of the PSDP by another Rs200 billion.
They said the Finance Ministry had contacted the IMF to request permission to make adjustments in the proposed allocations for power sector subsidies and the BISP. For the next financial year, the total estimated cost of BISP disbursements and administrative expenditure was Rs838 billion.
An additional 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 power bill collections.
The government had the option to reduce electricity subsidies by Rs 200 billion, but this could impact either the settlement of old debts or the amount of subsidies for low-end consumers.
The sources said the government wanted certain adjustments to be allowed to create fiscal space for additional development expenditure and certain other essential expenditures.
They added that it was proposed to the IMF that any reduction from the agreed spending under the BISP for the next financial year could be adjusted in place of social protection spending 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 shoulder the expense.
Another outstanding question is what would constitute the divisible federal pool that would be shared between the Center and the four provinces.
The federal government wanted to exclude customs duties from the divisible federal pool on the grounds that there was no constitutional provision to this effect. However, some stakeholders were not in favor of its exclusion from the NFC award, which President Asif Ali Zardari would sign for the 2026-2027 financial year.
The five-year NFC price expired in 2015 and since then the President of Pakistan has extended it every year until there is consensus among all parties on a new price.
Pakistan has also committed to the IMF to reduce over a five-year period the overall simple average of customs duties from 20.2% in 2025 to 9.7% in 2030. On this condition, the government had reduced customs duties to 16.56% in the first year and is now expected to further reduce these duties to 13% from next month.
The sources said there are divergent views on the pace of trade liberalization and the industry ministry is not in favor of a deeper reduction.
A group of independent economists, trade experts and foreign consultants have urged the government to further reduce the customs duty from 3.56 percent to 13 percent starting next month, the sources added.
The government on Tuesday postponed the meeting of the Tariff Policy Council, which was supposed to approve these reductions.
According to the plan agreed with the IMF, the government commits to abolishing the 5% customs duties and removing the additional 2% customs duties imposed over the 16% customs duties. It had pledged to halve the 4% additional customs duty rate on the 20% slab and also reduce the 2% additional duty on the highest import slab.
As per the plan, there is to be a substantial reduction in regulatory duty rates for the financial year 2026-27.
Concerns have also been raised over the impact of trade liberalization on Pakistan’s external sector. When planning liberalization, the World Bank and the Ministry of Commerce predicted a 14% increase in exports and only a 7% increase in imports.
However, contrary to these assumptions, exports plunged by 6.2% and imports increased by over 7% in the first 10 months of this fiscal year.
