Budget preparations are underway in the federal capital with major stakeholders putting in their requests for next year’s allocations (current and development expenditure) while the private sector players are proactively engaging with the Federal Board of Revenue (FBR) through associations that best represent them — be they sector specific like all Pakistan Textile Mills Association or as member of a Chamber of Commerce — and, as is the norm, are seeking fiscal and monetary incentives — lower taxes, and a further reduction in the discount rate (11 percent as of 5 May 2025) to enable them to compete with regional countries.
The needs of some stakeholders, recipients of allocations, are rightly considered more paramount than that of others. But what is unconscionable is raising salaries by 20 to 25 percent in the current year at a time when the economy was extremely fragile, a state of fragility that continues to this day in spite of protestations to the contrary by members of the cabinet whose salaries/emoluments were also recently upgraded.
The fragility is reflected by: (i) rollovers of 16 billion dollars while the Governor State Bank of Pakistan (SBP) claimed that total foreign exchange reserves by the end of June this year would be only 14 billion dollars with net foreign inflows in the negative; (ii) Large scale manufacturing sector (LSM) remains in the negative territory implying that growth is not private sector led; (iii) agriculture growth may have to be downgraded if the Indus Water Treaty is not resuscitated; (iv) an unprecedented rise in remittances was attributed to the SBP buying dollars on the open market and crediting it to remittances, as per independent economists — a charge that SBP has not yet denied. The massive decline in remittances in the following month proves the veracity of this charge; and (v) trade deficit is on the rise again on the back of higher growth fuelled by higher exports heavily dependent on raw material imports.
Administration after administration has ignored the well-established truism that a fragile economy does not, nay cannot, attract foreign investment (for setting up units with private sector participation or purchase of a state owned entity). And typically, the capacity of an economy to attract foreign investment requires an investment grade rating by the three major international rating agencies.
Pakistan has never ever been rated in the investment category, even when the country’s economy was not as fragile as it is today. In the first nine months of the current year foreign direct investment was a low of 1.64 billion dollars against 1.44 billion dollars in the comparable period last year and privatization was budgeted at a low of 15 billion dollars last year while this year 30 billion rupees were budgeted (with zero realized so far).
Today Pakistan is on a rigid up-front International Monetary Fund (IMF) programme negotiating under conditions of little or no leverage due to what documents uploaded on the Fund website note is the recalcitrance by successive administrations to either abandon politically challenging reforms midway by suspending the programme or reverse them as and when the programme was completed.
The ongoing is the third IMF programme since 2019 and one lesson painfully learned by the authorities since then is that the IMF will not hesitate to suspend a programme in case of violation of the agreed conditions (as took place between October 2022 to May 2023) or postpone either the quarterly staff level agreement (SLA)/defer the Board meeting which is a prerequisite for approval of the tranche release, in the event of failure to implement prior conditions/structural adjustments, as was witnessed recently given that the first quarterly SLA was reached on 25 March 2025, but the Board meeting was not scheduled till 9 May.
Be that as it may, Finance Minister Muhammad Aurangzeb stated last Monday that the Fund review of the budget for next fiscal year is scheduled from 14 May to 23 May and dismissed the perception that higher operational costs due to our retaliatory strikes against India’s military adventurism may have compromised the budget calculations for the current year; and claimed that the existing fiscal space would absorb the costs.
One wonders what fiscal space he is referring to given that 833 billion-rupee shortfall from the budgeted amount during the first ten months of the year has been acknowledged by the FBR.
The Fund’s analysis of our key sectors and the three agreed time bound conditions to deal with the prevailing issues, conditions that do not take account of the unique situation in Pakistan, and are likely to initially hit the poor much more than the rich, are as follows: (i) disallow government interventions and purchases of agricultural commodities by State Owned Entities or provincial food departments that should be done solely for purposes of a narrowly defined national food security, and not as quasi-fiscal social policies.
This policy has reduced the price of wheat in the market at present however next year there is likely to be a wheat shortfall as farmers shift to more lucrative crops; (ii) the tax system is extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones; this support is targeted to be phased out in an attempt to end the elite capture of allocations and revenue measures.
The government has also pledged to impose an income tax on the rich farmers from 1 July 2025 effective 1 January 2025 (though it is unclear how the income of the farmer would be determined) and tax the traders, a pledge made repeatedly by administrations for the past decade or so, including in the current year, which does not provide a comfort level as to its implementation from next fiscal year.
And to add insult to injury reliance on indirect taxes, whose incidence is greater on the poor than on the rich has risen to the tune of 75 to 80 percent of all FBR collections; and (iii) the government’s intervention in price setting, including fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors.
And despite this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.
The World Bank claims that 1.9 million people were pushed below the poverty line last year, which remained static at 42.4 percent. The IMF rather sanctimoniously insists that the government raise the budgeted allocation for Benazir Income Support Programme (BISP), which was budgeted at a mere 3 percent (593 billion rupees of total expenditure 18,877 billion rupees) and use this mechanism to channel all subsidies (power sector subsidy as well as food subsidies).
The IMF rightly takes credit in an increase in the cash transfer under BISP - from 10,500 to 13,500 every quarter – effective January this year and stated in its documents that this “will bring benefit levels in real terms from its current generosity level (9.6 percent of the consumption basket of the bottom quintile to 12.4 percent) and absorption of additionally 500,000 households (registered but not enrolled) bring total enrolment to 9.8 million households by end 2025.”
The latter has been achieved however the consumption basket of the bottom quintile has not been achieved for the simple reason that inflation data is being manipulated, which again was tacitly acknowledged by the Fund as it stated that “important shortcomings remain in the source data available for sectors accounting for around a third of GDP and to deal with these weaknesses the Fund will extend a technical assistance on the Government Finance Statistics and a new PPI index.”
What is however heartening is that a road map is to be prepared to align electricity and gas subsidies with beneficiaries of BISP by June 2026 with tariff differential subsidy planned to end by 1 July 2027 – a subsidy that was budgeted for the current year at 509 billion rupees. However, given that the country has yet to implement structural reforms that challenge the pervasive elite capture, one would have to wait and see whether any of these reforms are implemented.
To conclude, there is an urgent need for the Fund staff to redesign the programme to iron out all short term flaws — heavy outlay on current expenditure, reliance on indirect taxes and providing fiscal and monetary incentives to the LSM that the IMF refers to as perpetually infant industries — with the objective of minimising the burden on the poor and vulnerable.
And the government must focus on its own budget design flaws and the budgeted current expenditure, one would hope, will be contained at 2024-25’s level of 17.2 trillion rupees if not reduced to 15 trillion rupees through voluntary sacrifice by the elite recipients of the budget. The fiscal space so generated must be diverted to BISP with the objective of raising its allocation from 3 percent to 6 percent.
Copyright Business Recorder, 2025
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