The budget 2025-26 makes one implicit and three explicit assumptions that enable its architects to present a set of expenditure and revenue targets in support of Finance Minister Muhammad Aurangzeb’s claim that it would fundamentally change the DNA of the economy through the creation of a competitive economy on the back of a rise in productivity that, in turn, would increase exports. The question is if these assumptions are realistic.
The implicit assumption is a further reduction in the discount rate after the meeting of the Monetary Policy Committee scheduled today (16 June 2025) to justify the 739 billion rupees budgeted reduction under the head of mark-up next fiscal year. This reduction is notwithstanding the government’s intent gleaned from the budget documents to: (i) increase non-bank borrowing from the budgeted 2.662 trillion rupees in 2024-25 to 2.874 trillion rupees next year though the budget acknowledges a reduction of 23.658 billion rupees on account of National Savings Schemes – from 164,994 million rupees in 2024-25 to a projection of 141,288 million rupees next year; and (ii) bank borrowing (T-bills, Pakistan Investment Bonds, sukuk) or debt equity budgeted to generate 3.435 trillion rupees in 2025-26 against 5.142 trillion rupees budgeted for 2024-25 – a claim that is not in synch with the details provided for capital receipts budgeted to rise to 2663.9 billion rupees in 2025-26 against only 326 billion rupees in the current year with floating debt budgeted to rise to 1.409 trillion rupees in 2025-26 against 1.121 trillion rupees in the current year.
In this context, it is relevant to note that the Finance Minister on several private television channels post the budget speech expressed a pledge to raise debt equity (which remains stymied due to the country’s low rating by the three international agencies) and the issuance of a Panda bond at however low the total, or so he stated. Needless to add, any reduction in the discount rate would require International Monetary Fund (IMF) concurrence given that its appraisal in the first review documents uploaded on its website on 17 May 2025 stated that “monetary policy should remain appropriately tight and data dependent,” which would make any further reduction during the year a challenge. In addition, the Fund’s staff level agreement on the ongoing programme in October 2024 referred to the Fund providing technical assistance to support Pakistan’s efforts to overcome “shortcomings in the source data available”, which would imply that the GDP projection of 4.2 percent next year may not be achieved.
An explicit assumption was the rupee-dollar parity at 290. This rate assumes external receipts of 19.99 billion dollars with 16 billion-dollar rollovers by the three friendly countries. Repayments are budgeted at 18.869 billion dollars, with repayment of short-term credit projected at 689 billion rupees. It stands to reason that debt equity, if procured, would generate a higher repayment of short term credit. Last fiscal year’s revised estimates revealed that net external resource inflows were 2583.8 billion rupees against 106.5 billion rupees projected in the current year. This is in spite of external receipts next fiscal year are comparable to the outgoing year – 5.777 trillion rupees in 2025-26, with revised estimates giving a total of 5.833 trillion rupees.
The IMF first review report urged the government to “monitor the recent Real Effective Exchange Rate (REER) appreciation to avoid eroding competitiveness,” while the SBP website notes the REER at negative 2.10 with the base year inexplicably given as 2010 – a year that many analysts argue reflects tacit assistance in reaching a desired parity with REER positive till January this year.
In addition, it is relevant to note that SBP committed to the Fund in the Memorandum of Economic and Finance Policies, to maintain a flexible exchange rate by allowing banks to act freely without restrictions, including removal of import payment restrictions (though this pledge is unlikely to be kept in the event of the reemergence of an unsustainable trade imbalance) and “limiting foreign exchange sales to banks to at most balancing foreign exchange purchases within each quarter and consult with the Fund if gross sales exceed 200 million dollars in any rolling 30-day period.” In addition, the government has pledged that given that “limited reserve buffers are a key constraint to external stability the SBP will continue its efforts to build stronger foreign exchange buffers ….and FX sales will be limited to episodes of disorderly market conditions and not used to prevent a trend depreciation of the rupee driven by fundamentals.” In other words, the IMF is likely to forestall any move to intervene in the foreign exchange market.
The second explicit assumption is the generation of provincial surplus of 1464 billion rupees in 2025-26 against 1009 billion rupees in the revised estimates of the current year which, as per the budget documents, fell short of the federal budgeted 1217 billion rupees – a shortfall of 17 percent. One would be well advised to wait for provincial budgets prior to taking the revised estimates as attainable.
And the final explicit assumption is privatisation proceeds of 87 billion rupees which at the rate of 290 rupees to the dollar is a mere 3 billion dollars which does not gel with the pledged objective of not only privatising PIA but also Roosevelt Hotel and distribution companies. This mirrors the approach taken by the IMF in the first review documents wherein it notes the ironing out of all impediments to PIA sale after the fiasco last year and yet it projects privatisation proceeds at zero till 2030.
Federal Board of Revenue (FBR) collections are budgeted at 14.13 trillion rupees next year against 11.9 trillion rupees in the revised estimates of 2024-25, a shortfall of one trillion and 70 billion rupees which the Chairman FBR maintains will narrow by the end of the current month.
The Finance Minister praised the 390 billion rupees generated from enforcement measures in the outgoing year and a similar amount budgeted to be generated from this source in 2025-26 (accepted by the IMF he informed the country gleefully) with the warning that if FBR fails (the finger pointed at failure to legislate the necessary laws and/or delays associated with challenges in courts) additional taxes of the amount will have to be imposed; it is however relevant to note that these enforcement measures were targeted not at direct but indirect taxes (much was made of revenue collected as excise duty on sugar and tobacco), which are not only passed on to the consumers but whose incidence is greater on the poor than on the rich.
Non-tax revenue will be mainly sourced to petroleum levy (apart from SBP profits budgeted at 2.4 trillion rupees next year which are being challenged by economists) with a budgeted rise from 1.162 trillion rupees in the revised estimates to 1.468 trillion rupees next year though this amount too presupposes lower international price of oil which has risen by 5 percent a few hours after Israeli attack on Iran.
Tax revenue is dependent on the accuracy of the growth rate estimated at 2.7 percent for the outgoing year as it is almost entirely attributed to the rise in services sector (difficult to quantify with many operating in the informal sector) with large scale manufacturing sector registering negative growth and major crop growth downgraded from the target.
If the 2.7 percent is downgraded later, a ploy that was used in 2013 by the then finance minister who inexplicably downgraded the growth rate from two years previous, then the projected 4.2 percent for 2025-26 would be more realistic though the gains would be considerably more limited as the bar would be low.
Copyright Business Recorder, 2025
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