The government of Pakistan has postponed the announcement of the new federal budget to next week after failing to resolve issues related to expenditure allocations and concerns raised by coalition partners. The finance ministry had sought consent from the International Monetary Fund (IMF) to make adjustments in major expenditure heads just four days before the tentative budget date of June 5, according to government sources.
IMF Response and Fiscal Space
The sources revealed that the IMF was not receptive to the government's proposals and instead requested a detailed sharing of proposed adjustments along with the rationale. The federal government is seeking an additional fiscal space of Rs1.7 trillion from four provinces, primarily Punjab and Sindh, for the new fiscal year through adjustments in the National Finance Commission (NFC) award and transferring some expenditures.
Postponement of NEC Meeting
Due to unresolved issues related to allocations for the Public Sector Development Programme (PSDP), power sector subsidies, and the treatment of social safety spending under the Benazir Income Support Programme (BISP), the government has postponed the scheduled meeting of the National Economic Council (NEC). The NEC, which was to be chaired by Prime Minister Shehbaz Sharif and attended by provincial chief ministers, was originally scheduled for Wednesday. The meeting is now likely to be held on Thursday or Friday.
Budget Announcement Date
The budget announcement has been moved to next week, with potential dates of June 8 or 10, depending on how quickly outstanding issues are resolved. The finance ministry did not comment on the reasons for the postponement.
Coalition Partner Demands
Among the outstanding issues are the size of the next fiscal year's development budget and the inclusion of schemes recommended by coalition partners, particularly the Pakistan Peoples Party (PPP), which has been a key ally since 2022. Planning Minister Ahsan Iqbal stated that the government was allocating Rs87 billion for schemes recommended by coalition partners, including provincial-nature projects, which he termed the "cost of the coalition government." The PPP has sought higher allocations for schemes it wants to execute, mostly in Sindh through federal funding.
PSDP and Fiscal Adjustments
For the next fiscal year, the government has proposed a federal development budget of Rs1.126 trillion, which the planning minister said was negative in real terms by Rs15 billion. The prime minister has asked the finance ministry to create fiscal space to increase the PSDP size by another Rs200 billion. The finance ministry approached the IMF to allow adjustments in proposed allocations for power sector subsidies and the BISP.
BISP and Power Subsidies
The total estimated cost of BISP disbursements and administrative expenses for the next fiscal year is Rs838 billion. Another Rs830 billion has been proposed for power sector subsidies, including Rs300 billion for settling costs of inefficiencies, theft, and low recoveries. The government has the option to cut power subsidies by Rs200 billion, but this could impact the settlement of old debts or subsidy amounts for low-end consumers.
Provincial Role in Social Safety
The government proposed that any reduction in agreed BISP spending be adjusted through provincial social safety net spending. It also wanted provinces to take on at least half of the BISP responsibility, but provincial governments were unwilling to shoulder the expenditure.
NFC Award and Tariff Issues
Another outstanding issue is the definition of the federal divisible pool. The federal government wants to exclude customs duties from the pool, arguing there is no constitutional provision for it. However, some stakeholders oppose this exclusion from the NFC award, which President Asif Ali Zardari would sign for fiscal year 2026-27. The NFC five-year award expired in 2015 and is extended annually.
Trade Liberalization Commitments
Pakistan has committed to the IMF to reduce overall simple average tariffs from 20.2% in 2025 to 9.7% in 2030. In the first year, tariffs were cut to 16.56%, and the government is now supposed to further reduce them to 13% from next month. However, there are divergent views on the pace of trade liberalization, with the industry ministry opposing steeper reductions. The government postponed the Tariff Policy Board meeting scheduled to approve these cuts.
Impact on External Sector
Concerns have been raised about the impact of trade liberalization on Pakistan's external sector. The World Bank and commerce ministry had predicted a 14% increase in exports and only 7% surge in imports. However, exports plunged 6.2% and imports grew over 7% during the first 10 months of this fiscal year.
