The budget passed without any hiccups as expected reflecting a high degree of confluence of parliamentary opinion that included party (Pakistan Muslim League-Nawaz) loyalists, those not part of government but part of the system by dint of being allowed to occupy constitutional positions (Pakistan Peoples’ Party) and, of course, the beleaguered opposition focused on release of their party leadership from jail rather than the plight of their constituents that they purport to represent.
Parliamentarians have typically focused on two major aspects of the budget and sadly this principle, enshrined in their psyche, continued to prevail in the current year.
First, there was little if any debate on the expenditure side of the budget with no mention of the projected decline in current expenditure based on the expectation of a discount rate decline – a decision that clearly is no longer within the domain of the Finance Ministry, not because the State Bank of Pakistan (SBP) and its Governor who heads the Monetary Policy Committee is no longer susceptible to government pressure, but because the International Monetary Fund (IMF) is unlikely to extend approval for a rate decline until and unless supported by concomitant macroeconomic indicators. It is critical therefore to determine the likelihood of a discount rate cut.
Simply defined it is rate of return used to discount future cash flows back to their present value, indicative of the rate of inflation, and accounting for both the opportunity cost of capital and uncertainty of those future flows (uncertainty is likely to continue as domestic investment climate remains under stress and China reportedly decided to roll over 1.8 billion dollar loans but not the concessional loans, preferential buyer credit, and credit from Import-Export Bank of China).
It is patently evident that the government’s statistical machinery has been able to contain inflation but has ignored the complete lack of a feel good factor as far as the general public is concerned – a situation evident for three reasons.
First, the negative 1.47 large scale manufacturing sector growth in July-March 2025, against 0.92 percent last year with a very low 2022-23 base of negative 10.30 percent – a decline notwithstanding a cut in the discount rate from 21 percent in June 2024 to 11 percent in June 2025.
The IMF in its report dated 17 May 2025 unambiguously pointed to the need for the SBP to mitigate financial and reputational risks it faces which would require revised regulations concerning SBP’s collateral framework and counterpart eligibility policy in line with the recommendations of the 2023 safeguard assessment — a two-year delay in implementation that shows resistance by authorities which, in turn, raises concerns about their implementation in letter and spirit from 1 July 2025 onwards.
Second, private sector, accounting for 93 percent of the country’s total work force, has been unable to keep pace with sky-high inflation in years past (with sensitive price index peaking to over 40 percent) by a commensurate increase in salaries, a situation not faced by the 7 percent paid for at the taxpayers’ expense.
And finally, the tax structure remains highly skewed in favour of indirect tax collections (whose incidence on the poor is greater than on the rich) with withholding taxes levied in the sales tax mode dishonestly credited under direct taxes in the budget (based on the ability to pay principle), as has been the norm in the past, implying contracting purchasing power of each rupee earned of those who purchase the item or service on which the tax is levied. Those earning up to 600,000 rupees per fiscal year would be exempt from payment of income tax, though not quantified is how much extra they would pay to purchase items/services on which new/additional taxes have been imposed.
Be that as it may, our parliamentarians’ opposition to the Finance Bill 2025 mainly focused on the extra powers sought by the Federal Board of Revenue (FBR) staff to ensure enhanced enforcement measures – a focus that many link to their critical constituents (those who may or may not be sitting in parliament).
The objective of the enforcement measures, the FBR Chairman stated, was to generate the 389 billion rupees budgeted for next year under this head, an amount that he claimed was generated this year though that feat was attained without the Draconian measures.
Both the Finance Minister and the Chairman FBR claimed success in convincing the Fund staff that they would be able to generate 389 billion rupees in 2025-26 through enforcement, a convincing that was limited given the Fund’s addition of contingency measures targeted to generate additional 400 to 500 billion rupee taxes in case of failure.
Given FBR’s partiality towards imposing easy to collect withholding taxes, it is likely that the purchasing power of each rupee earned may be further eroded if a mini-budget is required during the year.
The other changes to the Finance Bill were specific to specific industries and critics argue that they reflect the demand of major constituents of each party and/or a party member including zero tariff applicable on 2201 tariff lines to be extended to an additional 916 lines, and reductions of customs on 2624 PTC codes on the grounds of creating a more business friendly import environment.
However, only detailed and cumbersome matching of the codes would reveal which items have benefitted. The revenue to be generated from auction of smuggled goods would be placed in a newly formed Customs Command Fund, with no mention of penalties on those government employees who are reportedly engaged in this nefarious activity.
The revenue from petroleum levy, an indirect tax, not under the purview of the FBR but placed under other taxes which are not shared with the provinces, is budgeted to generate a 1.46 trillion rupees – whose actual impact on inflation continues to be minimised.
In terms of expenditure the PPP Chairman expressed satisfaction at the budgeted allocation on the Benazir Income Support Programme (BISP), a much appreciated programme, which he claimed had been raised due to PPP intervention.
He is in good company as the IMF also claimed in its 17 May first review documents that it was its intervention that led to an increase in allocation in 2024-25 (January 2025 increase). Notwithstanding these claims the World Bank has calculated poverty levels in Pakistan at a high of 44.2 percent.
The 40 percent cut in the Public Sector Development Programme in the outgoing year was acknowledged, but with no projection made as to how much would have to be cut next year to meet the IMF targets.
To conclude the budget 2025-26 is, like its predecessors, unimpressive and the blame cannot be laid squarely on the domestic formulators as the IMF reviewed and approved it before it was presented to parliament though one can perhaps concede that had the IMF not been involved the elite capture would have been more pronounced.
Copyright Business Recorder, 2025