KARACHI: Pakistan’s government is expected to place more emphasis on fiscal discipline than populist spending in the upcoming budget as it is negotiating a new loan programme with the International Monetary Fund (IMF), according to the latest brokerage report.
The government of Prime Minister Shehbaz Sharif will unveil a budget for the fiscal year 2025 on June 7.Last week, the IMF said Pakistan had made a significant progress towards reaching a staff-level agreement for an extended fund facility (EFF). The IMF started talks with Pakistan on a fresh bailout after Islamabad completed a short-term $3 billion stand-by arrangement last month that helped prevent a sovereign debt default.
The two-week talks between Pakistan and the IMF wrapped up last Friday. Pakistan is expected to seek a bailout package from the IMF, amounting to $7-8 billion.“As the government prepares to announce Budget FY25 on June 7, 2024, it is strongly believed that the fiscal discipline will take precedence over populist spending,” said a report published on Saturday by Karachi-based brokerage house Arif Habib Limited (AHL).
“The upcoming budget, likely to be in line with IMF demands, may lack ‘significant’ relief measures for the public. It is expected that the upcoming budget will centre on initiatives aimed at broadening the tax base, thereby almost meeting revenue targets,” it said.
The Federal Board of Revenue (FBR) aims to broaden the tax base in the FY25 budget by targeting the untaxed sectors/industries and various approaches. The FBR’s target for revenue collection is expected to be Rs12.4 trillion.
The government is likely to project the fiscal deficit for the next fiscal year at Rs9.3 trillion.“We anticipate the fiscal deficit to arrive at Rs9.4 trillion. The increase in fiscal deficit is primarily due to an increase in current expenditure followed by an increase in development expenditure,” said the report.
The report states that attempts to curtail overall expenditure are also anticipated, especially considering that more than 80 percent of tax revenue is used to service markups.“Current expenditure in FY25 budget is anticipated to swell up to Rs16.7 trillion against FY24’s budgeted current expenditure of Rs13.3 trillion mainly due to higher markup payments,” it said.
Pakistan’s GDP growth is rebounding significantly, and the government may project the GDP growth for the upcoming fiscal year at 4 percent.Inflation is also anticipated to witness a significant decline, to stand at 12 percent. Furthermore, the current account deficit is expected to reach $4.2 billion in FY25.
“There is a concerted emphasis on ensuring social protection for vulnerable segments of society amidst these fiscal adjustments,” the report said.“This includes measures aimed at safeguarding the welfare of those most in need, all while adhering to the targets likely to be set forth by the IMF in the ongoing negotiation of a new programme.”
The report stated that Pakistan’s upcoming FY25 budget comes amid some encouraging economic developments and very stable economic conditions.Pakistan forecasts its economy will grow 2.38 percent this fiscal year from 0.2 percent in FY23.
Inflation is also moderating, anticipated to decline from 29 percent in FY23 to 24.2 percent in FY24.However, concerns remain regarding subdued consumption demand due to strict macroeconomic policies, sluggish private investment, and global economic uncertainties.
“It will be interesting to witness how the government navigates through the challenges of managing potential IMF conditions, grappling with colossal debt servicing, and ensuring the continued improvement of tax revenue collection,” said the report.
However, while the immediate focus may understandably lean towards short to medium-term solutions, there is a resounding call for a shift towards a more holistic, long-term approach, it noted.
In anticipation of the budgetary proposals, stakeholders are clamouring for measures that prioritise sustainable growth and development, according to the report.This includes substantial investments in human capital and technology, alongside structural reforms aimed at bolstering efficiency and overall economic performance.
The establishment of the Special Investment Facilitation Council (SIFC) underscores a commitment to fostering private sector engagement, while the privatisation of underperforming enterprises is seen as a step towards streamlining the state’s fiscal obligations.