FeaturedNationalVOLUME 19 ISSUE # 32

Anchoring stability

The new fiscal budget for Pakistan seeks not only to secure IMF funds but also to fortify the economic stability achieved over the past year. Through rigorous fiscal consolidation, the budget aims to deepen this stability. However, the sustainability of the economic recovery heavily relies on foreign inflows from multilateral and bilateral partners to boost international reserves.
The latest fiscal blueprint unveils an array of ambitious targets, aligning with IMF stipulations to fortify Pakistan’s appeal for an extensive and prolonged bailout, thus solidifying the economic stability gained over the past year. Primarily, the budget aspires to augment the government’s tax revenues by over 40%, escalating to Rs12.97 trillion from the forecasted Rs9.25 trillion of the concluding year, through substantial tax reforms.
Historically, the average annual tax collection surge has hovered around 20%, anticipated to hit 30% this year. The additional tax initiatives, amounting to Rs2.2 trillion or 1.8% of GDP, aim to expand the consumption tax domain, markedly increase the existing personal tax load on both salaried and non-salaried individuals, abolish tax exemptions across various economic sectors, incorporate previously untaxed incomes, tighten measures against non-filers, and elevate the petroleum levy by Rs20 per litre to Rs80. The remaining Rs1.5 trillion increase in tax revenues is projected to stem from a nominal economic expansion driven by a targeted inflation rate of 12% and a 3.6% GDP growth.
These tax augmentations and the proposed petroleum levy increment are poised to elevate the tax-to-GDP ratio for the ensuing year to an estimated 11.5% from the current year’s 9.6%. Another pivotal objective of the budget is to generate a primary surplus of 1% of GDP, thereby constraining the fiscal deficit to 6.8% for debt sustainability. The deficit could be further reduced to 5.9% if provinces generate a surplus of Rs1.2 trillion as outlined in the budget.
While the fiscal measures are commendable, targeting erstwhile untouchables such as real estate investors, stock investors, exporters, and the retail supply chain, they lack radical policy shifts and represent incremental steps toward economic documentation.
Perhaps the political landscape is not favorable for the government to enforce the radical measures required for significant economic enhancement. Nonetheless, despite the ambitious tax and deficit goals, achieving them remains within the realm of possibility. Skepticism persists regarding the authorities’ capability to fully implement the new measures and ensure heightened compliance. Despite the elevated tax collection target to bridge the fiscal gap, the budget scarcely attempts to curtail expenditure.
Although the finance minister mentioned ‘right-sizing’ the government in his budget speech, no concrete policy steps were announced in this direction. Instead, the total current expenditure is projected to swell by 21% to Rs17.2 trillion, with power and other subsidies increasing to Rs1.4 trillion and defense expenditure rising by 14% to Rs2.1 trillion. Similarly, the consolidated development expenditure of the central and provincial governments has surged by over 58% to nearly Rs3.8 trillion, as the government aims to stimulate moderate economic growth through substantial infrastructure spending, given the lack of appetite for new private sector investment.
Beyond securing IMF funds, the primary aim of the new budget is to reinforce the stability achieved in the past year. While the fiscal consolidation envisaged in the budget is likely to enhance stability, a sustainable economic recovery hinges on foreign inflows from multilateral and bilateral partners. These inflows are essential to bolster international reserves to cover three months of imports.
Despite the authorities’ optimism that the new IMF agreement will unlock these flows and improve the country’s credit ratings, facilitating access to commercial loans, there is scant evidence of a significant increase in foreign inflows from these sources in the near term. The IMF deal may unlock multilateral funds, but it falls short of assuring bilateral or commercial creditors or foreign investors. Regrettably, the new budget does little to address this shortfall.
The budget proposals clearly reflect the government’s commitment to adhere to the IMF’s directives, which have been rebranded as ‘Home Grown’ solutions since, according to the finance minister, there is no ‘Plan B’ aside from seeking an IMF program. The economic challenges facing the nation and the reasons for the current predicament are well understood, as is the solution.
The persistent issue has been the reluctance of successive governments to dismantle the elite control over the economy and to boldly enforce the rule of law. The economic situation has now deteriorated to such an extent that procrastination is no longer an option, and decisive action is imperative.
The budget strategy for FY2024-25 is anchored in principles of prudent fiscal and debt management, offering a roadmap for economic revival and stability. It outlines strategic directions for revenue generation and spending priorities, laying the groundwork for addressing fiscal deficits and reducing inflationary pressures in the short to medium term.
A particularly stringent measure is the increase in the maximum tax bracket for the income of non-salaried taxpayers, such as proprietorships and Associations of Persons. The budget’s focus remains on consolidation, and rightly so. Although there is a notorious tendency to veer off course at the final stage, it is crucial to stay the course and avoid any missteps that could derail the entire process.
It is hoped that the stern stance of the lender of last resort, combined with the fatigue of our longstanding allies over our perpetual dependence on borrowing to sustain an unsustainable lifestyle, will serve as a wake-up call, prompting us to mend our ways without further delay. The complacency that has enveloped our economic dilemma for so long must be replaced with a strong sense of urgency and concern.
The budget strategy for FY2024-25 is firmly rooted in principles of sound fiscal and debt management, paving a pathway for economic revival and stability. It is essential to maintain this course and avoid any missteps that could derail progress. The pressing economic situation calls for immediate and decisive action to dismantle elite control and enforce the rule of law. The hope is that the stringent stance of international lenders and the weariness of our long-standing allies will prompt necessary reforms, replacing complacency with urgency and concern.