Money Matters

Budget 2024-25: balancing growth and stability

Finance Minister Muhammad Aurangzeb has announced Pakistan’s federal budget for 2024-25, targeting a modest 3.6 per cent growth for the coming fiscal year. This budget aims to satisfy the IMF and balance Pakistan's burgeoning books with higher taxation, as the country is in talks with the IMF for a larger, long-term programme to achieve permanent macroeconomic stability.

Budget 2024-25: balancing growth and stability

Finance Minister Muhammad Aurangzeb has announced Pakistan’s federal budget for 2024-25, targeting a modest 3.6 per cent growth for the coming fiscal year. This budget aims to satisfy the IMF and balance Pakistan's burgeoning books with higher taxation, as the country is in talks with the IMF for a larger, long-term programme to achieve permanent macroeconomic stability.

The government targets an increase in revenue/GDP to 14.3 per cent in FY2025, up from 11.5 per cent in fiscal 2024. Despite these objectives, global credit agency Moody’s highlighted that “Pakistan’s very weak debt affordability drives high debt sustainability risks. A significant share of its budget allocated towards debt payments will constrain the government’s capacity to service its debt while meeting essential social spending and infrastructure needs.” A phased reduction in non-essential expenditures and increased focus on efficient debt management practices could be considered to mitigate these risks.

The country is preparing for a challenging fiscal year in light of the budget. The new budget aims to assist in achieving economic security and growth. The government is ready to address budget shortfalls, generate more revenue, and boost important sectors like agriculture and the digital economy by setting high goals and making strategic allocations. The budget aims to meet the prerequisites for an additional IMF programme, setting a high tax revenue goal and aiming to lower the fiscal deficit from 7.4 per cent to 5.9 per cent. Streamlining tax collection processes and broadening the tax base could further aid in achieving these fiscal targets.

Another important consideration is the government's focus on unlocking financing from the IMF and other bilateral and multilateral partners to meet its external financing needs. The risks vary across budget lines, with the revenue increase driven by a 38 per cent increase in tax revenue, which the government aims to achieve through a combination of new taxes and stronger nominal growth. Introducing tax incentives for emerging industries and implementing stringent anti-evasion measures could enhance revenue generation efforts.

The budget's focus on revenue generation is critical. Despite the projected low growth and slowing inflation, strict implementation and innovative strategies are necessary to collect Rs12,970 billion in taxes. The government faces financial pressure as current spending is expected to reach Rs17,203 billion, with rising interest payments consuming more than half of the budget -- 51.78 per cent.

Nevertheless, the budget includes significant investments in welfare programmes, such as a 27 per cent increase in funding for the Benazir Income Support Program (BISP). Improved allocations for social protection and income inclusion aim to help those who may face the main brunt of structural adjustments. Measures like raising the minimum price of cigarettes to increase tax revenue and providing BISP with an unprecedented budget demonstrate the government’s effort to balance fiscal responsibility with social welfare. Additionally, prioritizing expenditure reviews and audits can help redirect funds to more impactful areas.

The budget's emphasis on the digital economy stands out. The government recognizes the potential impact of digital exports, investing in digitizing and reforming the Federal Board of Revenue (FBR) and developing IT infrastructure, including an IT park in Karachi and a Technology Park Development Project in Islamabad. These projects aim to increase tax compliance and address system flaws, making the projected $2 billion in digital exports achievable.

Developing the digital economy involves enhancing Pakistan's job market by providing high-end tech training to the country’s many young, skilled technology workers, which could boost digital exports and position Pakistan as a competitive player in the global digital market. Ensuring robust internet infrastructure and cybersecurity measures will further support digital economy growth.

In addition to the digital sector, agriculture remains a crucial part of Pakistan's economy, with potential exports valued at $20 billion. By adopting bioeconomic practices, Pakistan can significantly enhance this potential. Improving output, sustainability, and market value through a comprehensive bioeconomic model involves optimizing biological resources, promoting eco-friendly farming methods, and ensuring that agricultural products benefit both the economy and the environment.

Aligning farming methods with Sustainable Development Goals (SDGs) and climate action frameworks can make Pakistan a leader in sustainable agriculture, attracting more foreign markets and investment. Establishing farmer support programs and agricultural innovation hubs could also drive this sector forward.

The integration of the digital economy and agriculture supports a balanced and comprehensive economic strategy. Innovative and sustainable practices in both sectors contribute to Pakistan's economic growth while supporting global environmental goals. The digital economy, with its potential for high-value exports and job opportunities, complements agriculture's potential for large-scale exports and rural development. Together, they create a resilient economic system capable of handling global market fluctuations and climate change challenges. Encouraging public-private partnerships and international collaborations can further strengthen these sectors.

However, the primary challenge lies in ensuring the effective implementation of these measures and their potential benefits for the general public. Facilitating quality education and IT job training for youth from underserved areas can empower them and foster digital economy growth. Similarly, providing small-scale farmers access to bioeconomic practices and sustainable farming methods can increase crop yields and incomes, reducing poverty and promoting inclusive growth. Establishing monitoring and evaluation frameworks will ensure these initiatives are on track and achieving desired outcomes.

As the government embarks on this significant fiscal journey, it is crucial to adopt fact-based solutions that address both economic and human needs. By boosting trade in digital and agricultural goods, Pakistan can achieve a stable and growing economy. However, it is essential to ensure that these sectors are accessible to a broader population. Effective taxation of both sectors can generate the necessary capital for sustained growth while promoting stability and long-term success. Enhanced transparency and stakeholder engagement can support these efforts.

Overall, the budget includes substantial investments in export promotion and digital skill development, addressing current needs. This includes IT parks and skills development initiatives. Another focus is on digital government, which may require additional steps for better federal-provincial coordination. The creation of the National Digital Commission and National Digital Authority are steps in the right direction. Initiatives such as e-procurement, e-emigration, and complaint redressal mechanisms are positive for the sector and Pakistan.

However, some aspects could have been better addressed. More explicit details of the digital infrastructure budget are necessary for a complete analysis. The allocated Rs20 billion may not suffice for inclusive digital transformation across Pakistan. Explicit fiscal arrangements for startups, micro-enterprises, and freelancers were missing from the budget speech. A more focused approach towards attracting investment in the ICT sector through SIFC, CPEC, or other means would have been beneficial. Encouraging venture capital investments and establishing technology incubators can support the growth of startups.

With minimal industrial expansion and limited job opportunities, the economy struggles to accommodate new entrants into the labour market. The government's initiatives, as outlined in the budget, appear inadequate in addressing these pressing concerns. This underscores the need for a more robust policy emphasis on promoting entrepreneurship and facilitating job creation. Establishing entrepreneurship programmes and easing regulatory burdens on new businesses can help stimulate job creation.

Budget 2024–25 presents challenges for the public but paves the way for national economic growth and stability. By leveraging the strengths of the digital economy, agriculture, and targeted social security measures, the government can address immediate budget challenges and set the stage for long-term prosperity, ensuring that economic growth benefits everyone in society.

The writers are researchers associated with the Sustainable Development Policy Institute (SDPI), Islamabad.