IMF deal prompts the Ministry of Finance to reduce the army budget by 20%

According to reports, the Ministry of Finance has slashed the armed forces development programme by Rs. 72 billion or one-fifth of the allocation made on the 10th of June. The decision has been finalized to meet a major condition of the International Monetary Fund (IMF), i.e., achieving a primary budget surplus in the new fiscal year.

One of the core conditions of the IMF for the revival of the bailout package is having a primary budget surplus of Rs. 153 billion or 0.2% of the national output. Finance Minister Miftah Ismail hopes to clinch the staff-level deal before the end of this week.

The original budget that the government tabled in the National Assembly on the 10th of June showed Rs. 363 billion allocations for the armed forces development programme. However, the budget provision has been reduced to Rs. 291 billion, according to the revised budget that the Ministry of Finance made public after its approval from the National Assembly.

This is not the first time the armed forces budget has been cut

The Ministry of Finance has cut the armed forces development programme by Rs. 72 billion or nearly 20%. The allocations are in addition to the regular defence budget. It is the second time in as many years that the armed forces development programme has been slashed due to fiscal constraints and limitations imposed by the IMF.

For the last fiscal year, the previous government had allocated Rs. 340 billion for this purpose but the actual spending has been shown at Rs. 270 billion, according to the budget books. Last year, a media outlet reported that the then government decided to reduce allocations for the military’s contingency obligations.

When contacted, an official of the Ministry of Finance said:

The armed forces development programme had to be reduced to bring down overall expenditures in a shape where the primary budget surplus target of the IMF could be achieved.

The government has set the primary budget surplus target at Rs. 153 billion or 0.2% of GDP on the back of Rs. 750 billion in provincial cash surpluses. However, the provincial budgets do not reflect the Rs. 750 billion savings and the IMF asked the government to secure the provincial endorsements through a memorandum of understanding (MoUs).

The Khyber-Pakhtunkhwa government has linked the signing of the MoU with the federal government’s ability to provide requisite funds to meet the needs of the erstwhile Federally Administered Tribal Areas (FATA). These areas have been merged with the K-P province.

K-P’s Finance Minister Taimur Saleem Jhagra met with Ismail to find an amicable way out. While speaking to a media outlet, he said:

Our objective is not to be obstructive to the signing of the MoU and the provincial cabinet has already given authority to the chief minister. However, it was important that the issues raised in a letter sent to the finance ministry are resolved and a positive step was taken on Tuesday during a meeting with the federal finance minister.

Although all four provinces seem committed to the signing of the MoUs, none has effectively shown provincial budget surpluses. The Punjab government that had earlier given a surplus budget on Monday announced over Rs. 100 billion electricity subsidies. This has eroded any surplus left besides exposing other provinces to similar demands from their poor people.

In an interview with a private TV channel, Ismail said:

The government on Tuesday gave a comprehensive reply to the IMF on the draft Memorandum for Economic and Financial Policies and a staff-level agreement can be reached within two to eight days.

According to sources, the IMF had shared the MEFP last Monday and then Ismail had promised to sign the deal within one week but he could not close the gaps. Ismail has also briefed the military leadership about the prospects of the IMF deals, telling it that the agreement could be reached by Thursday.

After a staff-level agreement, Pakistan will have to implement all the conditions agreed with the IMF before the executive board of the global lender approves the loan tranche and declares completion of the 7th and the 8th reviews of the bailout programme.

Adjustment in other expenditures

To satisfy the IMF, the government made adjustments in other expenditures with the total size of the budget now being Rs. 9.6 trillion – higher than proposed on the 10th of June. Here are the details of the adjustments:

• The stated defence budget has been further increased to Rs. 1.567 trillion – an increase of 14.1% or Rs. 194 billion over the last year’s original allocation.
• Compared with the 10th of June, the defence budget has been increased by another Rs. 41 billion.
• The cost of civilian and military pensions has been increased to Rs. 609 billion – up from Rs. 530 billion three weeks ago.

A major condition that remains outstanding is notifying the Rs. 3.51 per unit increase in electricity prices from the 1st of July. The government will also have to hand over the cabinet’s decision to further impose an Rs. 10 per litre levy on petrol from the 1st of August to the IMF.

Ismail said:

I secured the PM’s approvals on Tuesday for all necessary actions. The IMF has also set the condition that Pakistan should review its anti-corruption laws. The condition has been imposed after the recent amendments to the accountability law that unsettled the global lender. The IMF asked for a diagnosis of the corruption laws in consultation with international experts.

The Ministry of Finance has taken all necessary measures to satisfy IMF’s demands. Now time will tell how favourably IMF reacts to the proposed changes following implementation.

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