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The fiscal numbers for the first quarter are too good to be true. The consolidated fiscal surplus stood at Rs1.7 trillion (1.4% of GDP), and the primary surplus stood at a whopping Rs3.0 trillion (2.4% of GDP).

Some are comparing this to FY04 when the full-year deficit was below 2 percent of GDP. That is not the right comparison to make as 1QFY25 numbers are skewed due to a one-time high SBP profit transfer of Rs2.5 trillion, which was received in the first quarter. The SBP profit for the last full year is high due to last year’s high open market operations (OMO) injection at peak interest rates. The rest of the year will yield no profits, and the fiscal figures will be normalized.

Having said that, fiscal consolidation is underway. The government showed a primary surplus for the first time since FY04 last year (FY24), and this year (FY25) is expected to show an even higher surplus. That will help stabilize cement. However, in this quest, tax rates in the formal sector are exorbitantly high and development spending is abysmally low—both of which are detrimental to the potential for economic growth.

The total fiscal revenues stood at Rs5,827 billion in 1QFY25—up by 117 percent YoY. The tax revenues stood at Rs2,776 billion—up by 25 percent. FBR fetched Rs2,563 billion, which is Rs91 billion shy of the target despite massive increases in rates for certain sectors. The biggest growth is in the direct taxes, which are up by 32 percent to Rs1,230 billion, while sales taxes are up by 24 percent to Rs905 billion. The customs and excise duties experienced a moderate increase of 10 percent and 18 percent, respectively, due to the ongoing normalization of import growth. Until that time, direct taxes will continue to bear the brunt.

Provincial taxes are up by 21 percent to Rs213 billion. The non-tax revenues have increased by 5.5 times to Rs3,051 billion, primarily due to SBP profits of Rs2,500 billion. SBP profits are now transferred once a year, after the audit. Last year, the SBP profits came in the second quarter, unlike this year. Hence the abnormal growth. This year’s SBP profits are excessively high due to an OMO injection exceeding Rs10 trillion during the year’s peak interest rates, which partially offsets the interest expense from last year.

On the expense side, the total expenditure grew by 13 percent in the 1QFY25 to Rs4,131 billion. The growth in current expenditure stood at 11 percent, reaching Rs 3,537 billion. Austerity is visible at the federal level, where the current expenditure is up by a mere 5 percent to Rs2,373 billion—mainly due to a decline in the markup expense—down by 5 percent to Rs1,306 billion. Within it, the domestic debt servicing toll is down by 13 percent to Rs1,086 billion—thanks to falling interest rates.

The defense expenditure, on the other hand, is up by 20 percent to Rs410 billion, recording the highest growth in the federal domain. However, provinces are spending more lavishly—up by 28 percent to Rs1,164 billion.

That sums up the current situation. The second quarter is expected to be challenging due to numerous coupon payments and the high maturity of T-bills in December. Plus, there would be no surprise in non-tax revenues. Additionally, FBR revenues increased in the 1QFY25 due to improved sentiment this year and strict control over refunds. Still short of the target. The pressure of taxes will only mount in the second quarter.

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