Budget dilemma: high hopes, limited room to deliver

LAHORE: For the first time in years, every segment of society is anticipating some form of relief from the upcoming budget. Yet, the government does not have much to offer, constrained by limited resources and the conditions imposed by the International Monetary Fund (IMF).

Even if certain concessions are offered, they are unlikely to meet the expectations of the business community. For the working middle class, any income tax relief may amount to little more than a token gesture. Farmers, meanwhile, are likely to be dismayed by potential increases in sales tax on agricultural inputs. Targeted subsidies may bring some respite to selected low-income groups, but Pakistan’s registered poor represent only a fraction of the estimated 100 million people living below the poverty line. Those left out will fall deeper into hardship.

Within industry, the textile sector appears notably divided. Small and medium-sized enterprises (SMEs) that export high-value apparel will be deeply disappointed if they are denied duty-free import of yarn for their export products. In contrast, domestic yarn spinners would welcome such a move, as it would compel exporters to purchase local yarn -- which is generally more expensive than imported alternatives. However, this could dampen apparel exports in the current fiscal year.

Both segments of the textile sector benefit from subsidised power rates, so energy costs are not a primary concern. A hike in the minimum wage, however, would be met with greater resistance from spinners than from the value-added sector, where many exporters already pay their skilled labour above the minimum threshold. Documented businesses may reduce their unskilled workforce if the wage increase exceeds their expectations.

The automotive sector is also on edge amid rumours that duties on used car imports may be reduced. There is speculation that the age limit for imported used vehicles will be raised from three to five years. These cars often include features that are absent in local models -- or, when added, significantly inflate the price. Such a move would favour importers while posing a major challenge for domestic assemblers.

The government is also seeking to ease taxes and regulatory hurdles in the real estate sector, hoping to stimulate construction and generate employment for unskilled workers. However, it has yet to persuade the IMF of the merits of this approach, and any deviation from the Fund’s recommendations could jeopardise foreign assistance. Lending commitments from the World Bank, other donors, and friendly nations are contingent upon Pakistan’s continued engagement with the IMF.

It also remains unclear what the budget holds for high-potential export sectors such as pharmaceuticals, information technology and food processing -- all seen as emerging engines of economic growth. Diversifying away from low-value textile exports is essential, and these higher-value sectors could play a vital role in reshaping the country’s export landscape.