KARACHI: The government's projection of central bank profits of Rs1.113 trillion for the next fiscal year is reasonable and attainable, analysts said on Saturday, given growing income from lending to the state as a result of higher interest rates.
Prime Minister Shehbaz Sharif’s coalition government announced its budget for the fiscal year 2023–2024 on Friday, facing an external debt repayment crisis and political clamour before the upcoming elections in October or November.
The government of Pakistan has the difficult task of striking a fine balance between populist policies and keeping its commitments to revive the International Monetary Fund bailout programme. The cash-strapped government is aiming for an increase in the overall revenue target on the back of stronger Federal Board of Revenue (FBR) tax collections and non-tax income in accordance with the criteria outlined in the recent IMF negotiations.
These objectives are part of the government’s drive to formalise the economy, broaden the tax base, and streamline tax collection in an effort to reduce budget deficits. Despite the government’s efforts to raise money, analysts claim that given the current economic situation, there is a substantial amount of over-optimism and it is highly improbable that the expected revenue estimates will be realised.
The government has set an ambitious gross revenue target of Rs12.2 trillion, up 38 percent from the revised estimates for FY2023, amid an economic slowdown brought on by import restrictions. According to government forecasts, the FBR will collect taxes worth Rs9.2 trillion, a 28 percent increase from FY2023. For FY2024, the government has set a target for non-tax revenue collection of Rs2.9 trillion. In a post-budget press conference, Pakistan’s Finance Minister Ishaq Dar claimed that a target for non-tax revenue of Rs2,963 billion is achievable.
The SBP profit, which is expected to be Rs1,113 billion, and the Petroleum Development Levy (PDL), which is expected to be Rs869 billion, make up the non-tax revenue. “I think these forecasts are extremely accurate,” he remarked. “Yes it (the SBP profits target) is realistic, considering the amount of rise in interest rates,” said Fahad Rauf, the head of research at Ismail Iqbal Securities. “The SBP earns interest on the government securities it holds against borrowing to govt. It also earns on money lent to banks through OMO (open market operations),” Rauf added.
The SBP raised the policy rate by 725 basis points so far this fiscal year to combat record-high inflation. The policy rate is now at 21 percent. As of May 12, 2023, the government had borrowed more than Rs3 trillion to finance the budget deficit. But as working capital and loans for fixed investments shrank, the private sector’s credit also fell significantly.
“The SBP profit contribution (in non-tax revenues) seems to be achievable on the back of higher income by the central bank on OMOs and PIBs (Pakistan Investment Bonds) held by the central bank. However the SBP Act had some restrictions related to the timings of transferring profits to the government,” said Topline Securities in a report.
Transfer of SBP profits to the government in FY2022 decreased year-on-year due to a change in the transfer mechanism, according to the SBP Governor’s Annual Report for 2021-2022. Prior to the amendment in the SBP Act, which became effective in the third quarter of FY2022, SBP’s profits were transferred to the government at the end of each quarter.
However, following the amendment the SBP profits are to be transferred after the finalisation of annual financial statements at the end of each fiscal year, it said. This implies that full-year profits of the SBP for a given fiscal year will be transferred to the government in the next fiscal year, it added. The central bank’s consolidated profit clocked in at Rs761 billion in FY2021, while it had earned Rs1.163 trillion in the previous year, it said in its Annual Performance Review for FY2021. The decline in profit is primarily attributed to lower income from lending to the government, maturing of PIBs, and a decrease in the average interest rate during FY2021.