Since 2019 the three International Monetary Fund (IMF) programmes for Pakistan focused more on primary as opposed to fiscal balance calculated as a percentage of total income.
The logic: unburdened by net interest payments on past borrowings, Pakistan will learn to manage (reduce) budgeted spending against its revenue for long term debt sustainability, macroeconomic stability and rebuilding investor confidence.
This objective does not preclude the fact that net interest payments on past loans would still have to be budgeted and so the primary balance focus is merely an accounting exercise nor does it preclude the need to incur higher domestic/external borrowing to service past debts and to meet the budgeted expenditure priorities that account for over 92 percent of the budget when announced (and more than 95 percent of the budget at the end of a fiscal year as Public Sector Development Programme is mercilessly slashed top achieve a more sustainable budget deficit).
In 2022-23, Pakistan experienced a negative 0.9 percent primary balance as a percentage of Gross Domestic Product (both including and excluding grants).
The year was marked by the suspension of the then ongoing IMF programme subsequent to the then Finance Minister Ishaq Dar violating two conditions agreed in the eighth review as he continued to support; (i) intervention in the foreign exchange market to artificially keep the rupee/dollar parity low, and (ii) subsidised electricity for the industrial sector through an unbudgeted allocation of over a 100 billion rupees at a time when over 30 million Pakistanis were sleeping under the open air due to the devastating 2022 floods. For the following year in 2023-24 the IMF extended a nine-month programme loan and set the primary surplus target at 0.4 percent, but by the end of the year estimated it at 0.9 percent (excluding and including grants).
From 2024-25 the Fund in its 17 May 2025 first review documents projected a primary surplus at 2.1 percent (excluding grants) and 2 percent, including grants and set the target excluding and including grants at 1.7 percent for the current year and 2 percent for the next three fiscal years (2026-2029).
For comparative purposes it is noteworthy that the average primary balance in 2023 across the 38 Organisation for Economic Cooperation and Development countries (OECD), inclusive of the 28 European Union nations, was negative 2.4 percent of GDP with only 10 of the 36 OECD countries recording a primary surplus of which the largest was Norway (13.9 percent). In 2024 the OECD collectively did not register a surplus (though the rate again varied in individual countries).
As per an OECD publication: “the mean annual primary balance across EU Member States is 0.2 percent of GDP for debt-to-GDP ratios between 30 and 60 percent, and 2.4 percent of GDP for debt ratios above 90 percent of GDP. The much higher median for the high-debt group reflects the impact on the mean of a negative outlier, namely a one-off primary deficit of around 10 percent of GDP recorded by Greece in 2009.
The median primary balance (not influenced by outliers) is 3.3 percent of GDP for the highest debt group, compared with 0.1 percent of GDP for the lowest debt group. Looking ahead, given higher government debt ratios and lower potential growth after the crisis, the primary surpluses necessary to stabilise and reduce debt ratios would need to be higher than in the past.
Overall, the past experiences of EU Member States suggest that governments should be expected to rise to the challenge of moving to and sustaining high primary surpluses over an extended period, in particular, if the right incentives for fiscal discipline and a strengthened EU budgetary surveillance framework are put in place.”
The largest EU economy (notably, Germany) is currently experiencing deindustrialization as a consequence of the decision to ban the import of cheap Russian gas with the recent added complication of supply disruptions of semiconductors for use in the auto industry – a disruption subsequent to the Dutch decision to take over Nexperia headquarters in Holland, a Chinese company, without taking account of the fact that the company’s production base was located in China. The retaliatory measure by the Chinese was to stop exports of semiconductors to the European Union.
Germany’s debt to GDP ratio stands at 63.89 percent, followed by the second-largest EU economy, France, reeling from a debt to GDP ratio of 113 percent, Italy at 135 percent and Spain at 101.2 percent.
Two recent EU decisions are likely to increase the bloc’s indebtedness further: i) a pledge to massively increase defence spending by 150 billion euros (with 65 percent of the equipment to be from suppliers within the EU, Norway, or Ukraine) while the UK, US and Turkey would be excluded from the contracts unless they sign a security and defence partnership agreement with the EU; and (ii) the decision to use 140 billion-euro Russian sovereign funds parked in Belgium and frozen since the start of Russia-Ukraine hostilities for loans to Ukraine (that would enable Ukraine to pay for US arms purchases).
The Belgians have opposed the move pointing out that even during the World War, sovereign funds were immobilized (as opposed to frozen) and therefore there must be distribution of risk (defined as setting up a fund of the same amount to allow for repayment to Russia – an exercise that defeat the purpose of the appropriation of funds). Belgium, however, was complicit in using the interest on the sovereign funds as collateral for loans to Ukraine.
Additionally, the exercise would imply no other country would park their sovereign funds in Europe again — a move that would add greater impetus to the de-dollarisation (as well as of the Euro) in the global economy.
Many may well query why Pakistan is being subjected to a primary balance condition with relatively better statistics than those prevalent in the OECD countries: debt to GDP ratio of 71 percent (though higher than the 60 percent allowed under the 2005 Fiscal Responsibility and Debt Limitation Act), and a primary surplus.
The answer is: EU nations as well as all OECD countries have much easier access to credit (from within the EU and/or from multilaterals). And the three international rating agencies’ assessment of the OECD member countries is investment grade while Pakistan neither has access to easy credit (the friendly countries have made annual roll-overs contingent on staying on an active Fund programme) and nor have we ever been rated as investment grade.
In the current year’s budget, total allocation for mark-up payments is a high of 53 percent of total current expenditure which in turn accounts for 93 percent of total outlay though the amount earmarked for Public Sector Development Programme is mercilessly slashed at the end of each fiscal year to meet the Fund target of fiscal balance and in the first quarter the actual disbursement was way less than disbursement — 40.44 million rupees against authorisation of 156,064 million rupees.
And total debt to be incurred in the current year is budgeted at 6,309 billion rupees domestic borrowing and foreign borrowing at nearly USD 20 billion and with expenditure not reduced from last year the onus of improvement in the budget deficit rests with reducing the discount rate from 11 percent – a reduction that is unlikely as inflation begins to creep upwards in the aftermath of the floods.
To complicate matters further data collected by government-controlled institutions has been a subject of criticism by domestic economists, a view endorsed by the IMF in its 10 October 2024 documents titled “Pakistan: 2024 Article IV Consultation and Request for an Extended Arrangement under the EFF Press Release; Staff Report, and Statement by the Executive Director of Pakistan” where it was noted “important shortcomings” in the source data for sectors accounting for around a third of Gross Domestic Products, including issues with the granularity and reliability of the Government Finance Statistics which may account for the Fund’s focus on primary deficit.
To conclude, the focus on primary surplus must be changed to one of budget deficit with more of a focus on a reduction in current expenditure as opposed to on raising revenue from an economy that remains fragile.
Copyright Business Recorder, 2025
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