The information on fiscal operations in the first quarter of 2025-26 has been released recently by the Federal Ministry of Finance.
The first impression on looking at the numbers is positive. A budget surplus has been generated by the federal and provincial governments of Rs 2,119 billion. This is not only a large positive magnitude, but it exceeds the surplus in the first quarter of 2024-25 by 11.7 percent.
However, it turns out that the surpluses in the first quarters of 2024-25 and 2025-26 are due to a lumpy transfer of annual profits by the SBP (State Bank of Pakistan) of Rs 2,500 billion in 2024-25 and Rs 2,428 billion in 2025-26 during these quarters.
Conversion of the lumpy transfer during a financial year to an equal quarterly amount implies that there was a consolidated budget surplus of Rs 298 billion in the first quarter of 2025-26, compared to a marginal surplus of only Rs 21 billion in the first quarter of 2024-25.
Therefore, there is need to recognize the improved state of public finances in the first quarter of 2025-26. Factors which have contributed to this improvement are analysed below:
The first question relates to the performance of tax revenues. FBR (Federal Board of Revenue) revenues have shown a relatively low growth rate of 12.6 percent. This is not only lower than the projected nominal GDP growth rate of 13 percent, but also below the targeted growth rate of 18.6 percent in the federal budget of 2025-26. Therefore, there is already a shortfall of Rs 153 billion.
Within federal taxes, the disappointing performance has been that of income tax, with a growth rate of 10.9 percent, while the target growth rate for the year is 19.1 percent. Sales tax revenues have also shown a modest growth rate of 12.5 percent and customs duty of 11.9 percent. The only tax with a high growth rate is excise duty of 25.8 percent. The good news is that provincial tax revenues have shown buoyancy, with a high growth rate of almost 27 percent.
Turning to the trends in public expenditure, there are some unusual developments in the first quarter of 2025-26. Current expenditures of both the federal and the four provincial governments combined have shown much faster growth than development expenditure and net lending to SOEs. The former’s growth rate is 14.4 percent, while the latter’s is only 6.9 percent.
The high growth rate of 14.4 percent is due to, more or less, the same growth in federal and provincial current expenditures of above 14 percent. The fastest growth rate in federal spending is in grants and subsidies of 69.5 percent. Fortunately, the cost of debt servicing has gone up by only 5.4 percent in the presence of constant interest rates. Similarly, the outlay on defence services has shown a modest increase of 9.3 percent, whereas the budgeted magnitude for the year is expected to show a growth rate of 16.8 percent.
There has been relatively fast growth in provincial current expenditure of almost 15 percent in the first quarter. The government of Punjab has reported an increase of almost 17 percent. This may be attributed to emergency expenditures related to flood relief operations. The government of Baluchistan has shown a very big increase in current expenditure of 34 percent, for reasons which are not clear. The conclusion is that the provincial governments will have to exercise greater economy in current expenditure if the consolidated budgetary targets are to be met in 2025-26.
The level of development spending plus lending to PSEs has apparently shown little growth in the first quarter of 7 percent and remained at a low level of only Rs 295 billion. However, this appears to be the outcome of an unusual development, described below.
The federal government has spent only Rs 41 billion on development projects in the first quarter, which is only 3 percent of the annual target of development expenditure of Rs 1,287 billion. This low level of spending is one of the factors that has contributed to the overall budgetary surplus.
The provincial governments have, however, maintained the emphasis on development spending, with an outlay of Rs 400 billion in the first quarter. This represents a growth rate of almost 57 percent above last year’s first quarter level, partly due to the cost of restoring infrastructure after the floods. It is hoped that the process of project selection and implementation will increasingly shift to managing the process of climate change.
The real surprise in the budgetary magnitudes for the first quarter is in net lending to PSEs by the federal government. It turns out that there has been actually a repayment of loans by the state enterprises. This is of a significant magnitude of Rs 146 billion and has contributed significantly to the generation of a budget surplus.
Overall, the first quarter of 2025-26 has seen an overall budgetary surplus of the federal and provincial governments combined. This is the case even if the SBP profits are seen as being spread over the four quarters of 2025-26.
However, there are some areas of concern. First, the revenue performance by FBR has implied a significant shortfall already of Rs 153 billion. This will continue to be the key area of focus in forthcoming IMF (International Monetary Fund) reviews.
Second, there is need for exercising more control over current expenditure by both the federal and the provincial governments. More funds need to be diverted to development spending, if Pakistan is to achieve a sustainable increase in the GDP growth rate in coming years through expansion of the infrastructure.
The targets for the remaining three quarters of 2025-26 remain very ambitious. The consolidated budget deficit will need to be brought down to 3.9 percent of the GDP from 5.4 percent of the GDP in 2024-25. A large primary surplus of 2 percent of the GDP is to be generated as per the target agreed with the IMF. A high quality of public financial management will continue to be required for achievement of these targets.
Copyright Business Recorder, 2025
The writer is Professor Emeritus at BNU and former Federal Minister