Reform agenda for the next budget

Reducing the fiscal deficit is not just a matter of economic policy; it is a necessity to ensure long-term financial stability

Reform agenda for the next budget


he federal government is expected to present its budget for the fiscal year 2024-25 on June 7. This will be the first budget of the Pakistan Muslim League-Nawaz government after coming into power in the wake of general elections held on February 8.

The significance of this budget cannot be overstated. Pakistan is currently grappling with formidable economic challenges. The country is struggling to meet its balance of payment needs and is negotiating a bailout package with the International Monetary Fund. The new package is essential for stabilising the economy, which is facing a historically low GDP growth of around 3 percent.

Additionally, the policy rate of 22 percent, coupled with stagflation, poses a challenging scenario both for consumers and businesses. Despite the government’s claim of achieving the lowest inflation rate in 23 months, it remains alarmingly high at 17.3 percent.

The upcoming budget is, therefore, critical. It must not only address perpetual economic woes of the masses, traders and the industry, but also show a pathway to sustainable recovery. The government’s focus will likely be on measures to control inflation, stimulate economic growth and provide relief to the common people, while balancing fiscal responsibility with necessary expenditure to support the economy.

Pakistan’s negotiations with the IMF are particularly important in this context. Securing a new long-term extended fund facility (EFF) programme will not only help stabilise the economy but also build investors’ confidence. To secure IMF’s support, the government needs to demonstrate a commitment to introducing economic reforms and prudent fiscal management.

A critical aspect could be the measures announced in the budget for revenue mobilisation. Effective steps in this direction will not only reduce reliance on global lenders like the IMF but also facilitate the initiation of essential infrastructure and social sector development projects. Such an approach could stimulate economic growth, create jobs and improve public services, thereby enhancing overall economic stability.

A daunting challenge ahead for the government is to reduce the fiscal deficit, which was 7.7 percent of the GDP for the fiscal year 2023-24 and is expected to further widen this year. The upcoming budget will reveal the government’s strategy to reduce the burgeoning budget deficit, whether through effective revenue generation measures or by cutting wasteful expenditure or reducing crucial development expenditure. Balancing these priorities will be critical in determining the country’s economic trajectory.

The federal as well as provincial governments must recognise that with rapidly growing population, delaying long-overdue structural reforms is not an option. Comprehensive tax reforms are essential to bring the tax-to-GDP ratio in line with the country’s economic profile. Otherwise the governments’ struggle to generate sufficient revenue to support essential public services and development projects will continue. Moreover, reducing the fiscal deficit is not just a matter of economic policy, but also a necessity to ensure long-term financial stability.

Achieving prudent and consistent revenue targets is contingent upon documenting the economy. The Small and Medium Enterprises Development Authority estimates that the informal sector constitutes around 40 percent of the economy. In 2022, the World Bank reported an informal economy of approximately $457 billion.

Implementing measures to formalise this substantial portion of the economy will not only enhance monitoring of economic activities but also significantly boost the tax-to-GDP ratio. Formalisation will lead to better compliance, increased transparency and ultimately, a more robust and equitable economic framework.

While documenting the economy, the federal government needs to simplify tax laws and address the concerns of businesses. The upcoming budget should in particular address issues related to capital gains tax and super tax. Introducing a growth-conducive tax system is essential to attract investors.

The federal government needs to simplify tax laws and address the concerns of businesses. The upcoming budget should address issues related to capital gains tax and super tax. A growth-conducive tax system is essential to attract investors.

The government must settle the issue of inter-corporate dividends, minimum tax requirements for listed companies and jurisdictional conflicts over sales tax on services. Additionally, issues like the minimum advance tax on turnover, determining market value of properties and the use of fake retailer profiles need to be resolved. This will create a business-friendly environment and foster economic growth.

Pakistan has experienced substantial investment inflows exceeding $60 billion through China-Pakistan Economic Corridor, marking the completion of its initial phase. However, Pakistan has yet to realise significant benefits from these investments. The anticipated revenue generation potential of the CPEC projects has not materialised.

On the one hand, Pakistan owes a considerable portion of its loans to China, posing a significant burden on its treasury, on the other, the imposition of capacity charges has exacerbated the hardships faced by the nation. Despite substantial investments in infrastructure, key projects, such as the Gawader Port remain non-operational, casting doubt on the efficacy of funds allocated. Furthermore, Pakistan’s efforts to establish economic zones to attract investments have fallen short of expectations outlined in the CPEC agreement.

Foreign investment in economic zones has been minimal. Even Chinese investors have refrained from making considerable investments. As a result, these have yet to achieve full operational capacity, leading to a shortfall in anticipated investments, hindering revenue generation efforts.

Consequently, Pakistan faces challenges in both revenue generation and debt-servicing. The forthcoming budget is important in addressing these critical challenges by presenting comprehensive strategies to make these zones operational, stimulating investment and fostering job creation.

Additionally, the budget should prioritise addressing the concerns of exporters and provide incentives to augment local manufacturing. Despite Pakistan’s strategic location amid a region with population exceeding three billion, its textile sector is struggling to expand its export share, due to non-competitive energy tariff in the region making it imperative for the government to thoroughly consider this matter and other obstacles through policy guidelines.

This may involve amending existing laws related to income tax, sales tax, federal excise duty and customs duties to facilitate a conducive environment for export growth. The Foreign Office should consider offering incentives to investors from neighbouring countries to encourage their participation in cross-border trade and investment activities.

Pakistan’s dependence on foreign remittances is undeniable. However, the country has yet to fully leverage its skilled human capital to enhance remittance inflows and bolster its foreign policy objectives. By prioritising export of skilled labour, Pakistan could achieve dual benefits, i.e., increased remittances and foreign investment.

A proactive approach entails empowering Pakistan’s foreign offices to engage with local private sectors and incentivise them to accommodate skilled Pakistani workers. This initiative holds the potential for substantial long-term gains, including generation of foreign exchange and attracting foreign investment. Moreover, it serves as a strategic driver for advancing Pakistan’s foreign policy objectives on the global stage.

Pakistan faces significant challenges posed by trade-based money laundering, largely stemming from a large informal economy. This phenomenon exacts a considerable toll on our economic stability for which, the forthcoming budget must delineate clear directives for the comprehensive registration of all businesses and digitisation of their operations.

Comprehensive reform measures in budget 2024 hold the promise of mitigating various illicit practices, including the proliferation of fictitious invoices, instances of under and over-invoicing, and misclassification of manufacturers. By formalising business activities and transitioning to digital platforms, Pakistan stands to fortify its financial integrity framework and foster a more transparent and conducive business environment.

Dr Ikramul Haq, an advocate of the Supreme Court, is adjunct faculty at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.

Reform agenda for the next budget