EDITORIAL: Prime Minister Shehbaz Sharif while speaking to a group of journalists in Peshawar stated that ongoing negotiations on the budget 2025-26 with the International Monetary Fund (IMF) under the ongoing 7 billion-dollar Extended Fund Facility (EFF) programme have been successful. He did not elaborate, thereby prompting several analysts to define success as the Fund agreeing to the government proposals on at least three major components of the budget where there was reported disagreement.
First, reducing the tax on the salaried people, which was raised in the current year’s budget, accounts for no feel-good factor in spite of the consumer price index plummeting to 0.3 percent in April, though there was an upward revision last month to 3.5 percent. The Fund’s first review documents stipulate that EFF tax target was surpassed to reach 10.7 percent of GDP instead of the budgeted 10.6 percent of GDP, which can be sourced to the decline in GDP to 2.6 as opposed to the projected 3.2 percent.
However, next fiscal year the Fund projects direct tax collections at 5 percent of GDP, against 3.8 percent this year, which would necessitate considerable widening of withholding taxes levied in the sales tax mode, an indirect tax whose incidence on the poor is greater than on the rich, which account for nearly 70 to 75 percent of all direct tax collections. This, in turn, may again be a challenge to the feel-good factor by the salaried people, especially as inflation is projected to rise between 5 to 7 percent next year.
Second, discussions between the Pakistani authorities and the Fund have reportedly centered on the need to end the traditional fiscal incentives to specific industries and to desist from procuring farm products, particularly wheat after announcing a support price. In this context, it is relevant to note that the Ministry of Industries is proposing fiscal and monetary incentives in order to fuel the wheels of industry, given that the large-scale manufacturing sector has been registering negative growth for the past three to four years.
Additionally, wheat prices have plummeted this year due to provincial governments being barred from procuring wheat as per EFF condition and it is feared that next year’s crop would not be able to meet domestic demand as farmers shift to growing more profitable crops. Subsidies therefore may be more than the budgeted target next year to forestall public discontent at higher wheat prices. Reports also indicate that the Fund has agreed not to insist on doubling the federal excise duty on fertilizers — from 5 to 10 percent but again this would imply that taxes would have to be generated from another source, which historically has implied widening the net of indirect taxes.
And finally, the Fund in its uploaded documents envisaged a decline in current expenditure as a percentage of GDP from 18.9 percent of GDP this year to 17.8 percent next year. Given the projected growth rate next fiscal year of 3.6 percent, one percent higher than this year, the Fund envisages current expenditure to decline from 14 percent of GDP this year to 12.7 percent next year — a decline that would nonetheless consist of a rise in total terms — from this year’s projection of 16.15 trillion rupees to 16.86 trillion rupees next year. This implies in actual terms the government has reduced current expenditure from what was budgeted for this year by one trillion rupees or an exact match to the shortfall in FBR revenue collection for the first eleven months. It is unclear whether the Fund’s projections will be reflected in the budget due next week.
Prime Minister Shehbaz Sharif, supported by the Fund and his economic team leaders, reiterated that economic stability has been achieved. This is supported by data relating to foreign exchange reserves held by the State Bank of Pakistan (11.5 billion dollars on 23 May though rollovers by friendly countries are of 16 billion dollars), the trade deficit remains sustainable even though it has risen to 21.3 billion dollars July-April 2025 against 19.6 billion dollars in the comparable period the year before (but remains lower than the average of previous years), and the rupee-dollar parity continues to fluctuate within a narrow range with the fund urging the SBP towards “a more flexible exchange rate should be an integral part of Pakistan’s policy framework facilitating a smooth adjustment of the economy in the face of external and domestic shocks.”
To conclude, the time for complacency is not at hand and as the Fund states the “gains are still fragile and policy and reform efforts need to be sustained to strengthen public finances, rebuild external buffers.
Copyright Business Recorder, 2025
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