ISLAMABAD: Last week, the IMF team left Pakistan after holding a crucial round of talks with the government’s team about the upcoming budget for the fiscal year 2024-25. After discussing the salient features of the new budget, the IMF people have asked the government to get approval of the budget from the Parliament in June. Once this is done, the IMF and Pakistan’s economic team will resume talks for the new bailout program involving more or less a 6-8 billion dollar loan for a period of three years. In other words, the IMF has linked the approval of the new bailout package with the approval of Parliament for the budget envisaging tough conditions, including the elimination of subsidies, tax-base expansion, tight fiscal control, energy sector reforms, etc. Neither the IMF nor the government has shared with the media the key proposals of the IMF for the new budget.
Nonetheless, according to the media reports, the IMF-dictated budget is being seen as another bitter pill for the ruling coalition and the masses, as well as the new budget is expected to create more miseries for all segments of society, especially consumers, taxpayers, and non-filers.
Before leaving Pakistan last week, the IMF mission chief Nathan Porter issued a press statement after concluding initial talks with the government and said, “At the request of the Pakistani authorities, an International Monetary Fund (IMF) team, led by the IMF’s Mission Chief to Pakistan, visited Islamabad during May 13-23, 2024, to discuss Pakistan’s plans for a home-grown economic program that can be supported under the IMF’s Extended Fund Facility (EFF).
According to available information, the International Monetary Fund has informed Pakistani authorities that consideration of the next bailout package under the Extended Fund Facility depends on the approval of the upcoming budget by parliament. This development could initiate formal discussions and lead to the signing of a staff-level agreement for a new bailout package of $6 to $8 billion and additional climate change funding.
Analysts are of the viewpoint that the government would have to demonstrate its ability to increase tax revenue, achieve a primary surplus by reducing expenditures, and implement structural reforms to minimize losses of state-owned enterprises. Additionally, the government will need to raise electricity and gas tariffs in July and August 2024 to reach an agreement with the IMF. Therefore, the upcoming 2024-25 budget will be a crucial test for the current regime to demonstrate its ability to meet the IMF’s stringent conditions which can be annoying for the masses.
Meanwhile, the IMF team has gathered relevant data on all major economic indicators and has informed relevant authorities about the budget expectations for 2024-25. The IMF’s directives are clear: the government must create a roadmap to increase the tax-to-GDP ratio, which may fall to 9% of GDP for the current fiscal year.
Therefore, the FBR is facing challenges in meeting its revenue collection target of Rs 9.41 trillion, with predictions of a shortfall. The IMF may demand an increase in the collection to over Rs 12 trillion for the next budget, requiring an additional Rs 3 trillion in tax collection.
Consideration is being given to introducing a carbon levy to boost non-tax revenue in the upcoming budget. Expenditure rationalization, particularly for state-owned enterprises, pensions, and subsidies, is necessary to reduce current expenditures. Provincial nature projects will be abandoned in favor of federal development projects.
The IMF has recommended raising power and gas tariffs through baseline adjustments and quarterly tariff adjustments. Also, solar net metering is under scrutiny due to its impact on distribution companies’ grids, leading to an independent study. There are concerns about surplus electricity generation from solar panels during low consumption periods, exacerbating the fiscal challenges of the power sector. Officials hope the IMF will avoid front-loading the next bailout package to mitigate the inflationary pressures experienced in recent years.
FBR to revoke tax concessions
Furthermore, the government is set to revoke tax concessions that disproportionately benefit high-earning individuals over the middle-class workforce. The IMF has advised the government to treat salaried employees’ incomes similarly to those of non-salaried individuals as personal income. However, the Federal Board of Revenue (FBR) disagrees, arguing that the two types of income cannot be considered equally. If the IMF’s recommendation is implemented, the tax burden on the salaried class will increase significantly.
So far, the government has devised revenue measures totaling Rs500 billion for the 2024-25 budget. However, the final revenue measures will be agreed upon after receiving the IMF’s final projections for the revenue collection target. Unlike the traditional practice of working at the FBR headquarters, the Ministry of Finance handles all computations for tax recommendations.
According to FBR forecasts, autonomous revenue collection (based on GDP growth and inflation) will exceed Rs11.5 trillion in FY25. The federal government will consult with the IMF before finalizing revenue measures. In the previous budget, the government announced revenue measures totaling Rs415 billion. The FBR has suggested raising the annual tax exemption limit for the salaried class to Rs1.2 million in 2024-25. However, this proposal has been amended downward to Rs900000 from the existing exemption limit of Rs600000, due to increasing inflation.
The FBR has also discussed the mechanism of the pension tax with the IMF. The IMF aims to align the salary slab with the income of pensioners. However, the FBR’s activity is confined to the pensions of federal government employees, which are estimated to be worth around Rs700 billion. The FBR has objected to introducing a salary slab for pensioner income and has proposed an alternative mechanism for taxing wealthier pensioners.
In the private sector, large companies provide pensions to their employees. “There has been no final decision on this so far,” a tax official told media persons. He mentioned that the finance ministry is discussing pension-related tax changes with the IMF. However, the FBR has not calculated the actual revenue impact of taxing pensions.
The elimination of exemptions will also be addressed in prior consultation with the IMF. The FBR has provided all relevant data on possible revenue after these exemptions are withdrawn. The IMF has asked the FBR to collect taxes from traders and wholesalers, who are currently not contributing to tax collection. No agreement has been reached to increase regulatory tariffs on imports. The IMF typically does not suggest import duties, focusing instead on sales tax and income taxes, particularly withholding taxes. Currently, sales tax exemptions exceed Rs1.2 trillion. The government faces difficult decisions in revoking exemptions for food, international agreements, and pharmaceutical products. However, some items, such as insecticides and solar panels, may be subjected to sales tax.
Simultaneously, the government plans to raise existing withholding tax rates and introduce new ones, such as reviving the tax on cash withdrawals from banks, to maximize revenue. Furthermore, the finance ministry is considering imposing a tax on the import of exempted raw materials while increasing tax rates on existing ones.
SBP reports current account surplus
Pakistan’s current account posted a provisional surplus of $491 million in April 2024, up from a revised surplus of $434 million in March 2024, according to data released by the State Bank of Pakistan (SBP) in May. Overall, during the first ten months of the ongoing fiscal year, the current account balance recorded a deficit of $202 million, significantly lower than the $3.92 billion deficit in the same period of the previous year.
“This surplus exceeded our expectations as the SBP reported a much lower trade deficit than the Pakistan Bureau of Statistics (PBS)—72% of PBS’s figure compared to a 10MFY24 ratio of 90%,” stated brokerage house Topline Securities in a note. Low economic growth and high inflation have contributed to reducing Pakistan’s current account deficit, with increased exports also playing a role. High interest rates and certain import restrictions have further supported the policymakers’ goal of narrowing the current account deficit. In April 2024, Pakistan’s exports of goods and services totaled $3.28 billion, while imports amounted to $5.28 billion. Meanwhile, remittances in April reached $2.81 billion.
For the 10MFY24 period, the country’s total exports of goods and services exceeded $32.1 billion, while imports were $51.7 billion, according to SBP data. Worker remittances for the same period totaled $23.85 billion, marking a 4% increase compared to the previous year. The current account balance is a crucial indicator for cash-strapped Pakistan, which relies heavily on imports to sustain its economy. A widening deficit pressures the exchange rate and depletes official foreign exchange reserves.
Foreign Investment in Pakistan
The United Arab Emirates (UAE) has pledged a substantial investment of $10 billion in Pakistan, providing a critical financial boost to the struggling South Asian nation. This commitment was announced during Prime Minister Shehbaz Sharif’s meeting with UAE President Sheikh Mohamed bin Zayed Al Nahyan in Abu Dhabi, where the Prime Minister is currently on a day-long visit.
Pakistan’s economy has been facing severe financial difficulties, prompting the government to seek investments from allied nations. In addition to the UAE’s pledge, Saudi Arabia has committed to accelerating a $5 billion investment. Prime Minister Sharif emphasized during his visit that Pakistan is no longer reliant on “begging bowls” when seeking assistance from friendly countries.
Despite a relatively stable foreign exchange reserve position of $14.5 billion as of May 17, Pakistan still requires further financial support. While the completion of a short-term $3 billion program last month helped avert a sovereign default, the government is advocating for a new, longer-term program to address ongoing fiscal challenges.
Although Pakistan’s economy has shown signs of stabilization, with inflation decreasing to around 17% in April from a record high of 38% last May, the country continues to face significant fiscal deficits. Import control mechanisms have managed the external account deficit but have resulted in stagnant growth, projected to be around 2% this year compared to negative growth last year.
Signs of Economic Stability are More Evident: Economic Update & Outlook
As we approach the end of the outgoing fiscal year, signs of economic stability are becoming more evident. GDP growth is on the recovery path, while inflation continues its steady decline. Fiscal consolidation efforts are apparent from the positive primary balance, and the resilience of the external sector is evident from the positive current account balance. Despite the challenging situation during the past ten months, the government completed the IMF Stand-By Arrangement (SBA) program. To sustain the economic recovery, the government has initiated formal discussions for a new three-year IMF program. This initiative is a vital component of the stabilization strategy, aimed at strengthening the external sector and boosting investment flows, thus, steering the economy toward its potential growth. The Finance Division has mentioned these positive developments in its latest monthly report, Economic Update & Outlook, May 2024, released on May 29.
Agriculture emerged as a main driver of economic growth in the current fiscal year, registering a growth of 6.25 percent. The agriculture sector’s recovery is mainly attributed to government initiatives through improved input supply and increased credit disbursement to farmers. Jul-Apr FY2024, the input situation remained encouraging as farm tractor production and sales increased by 54.8 and 56.6 percent, respectively.
Whereas a 33.8 percent surge was observed in agricultural credit disbursement during Jul-March FY2024. However, there was a mixed trend in fertilizer usage in April 2024, with Urea off-take decreasing by 19.7 percent and DAP off-take increasing by 82.5 percent. Large Scale Manufacturing (LSM) growth in 2024Q3, became positive and is expected to remain moderately positive on average throughout the second half of the current FY. It witnessed a minor decline of 0.1 percent during Jul-Mar FY 2024 against the contraction of 7.0 percent same period last year. During this period, 11 to 22 sectors witnessed positive growth.
The CPI inflation stood at 17.3 percent on a year-on-year basis in April 2024 as compared to 36.4 percent in April 2023. The major drivers include Housing, water, electricity, gas & fuel, Perishable food items, Furnishing & Household equipment maintenance, Clothing & Footwear, and Transport. On the fiscal front, during July – March FY24, the revenue growth outpaced the growth in expenditures. Within revenues, both tax and non-tax collection grew significantly by 29.3 percent and 90.7 percent, respectively. Moreover, measures to control non-mark-up spending helped in improving the primary surplus to Rs 1615.4 billion (1.5 percent of GDP) from Rs 503.8 billion (0.6 percent of GDP) last year. While, overall fiscal deficit remained at 3.7 percent of GDP, the same as recorded last year. On the external front, the current account for FY2024 (July-April) narrowed down significantly, recording a deficit of $0.2 billion compared to last year’s $3.9 billion, primarily due to an improved trade balance.
In April 2024, the current account surplus was recorded at $491 million, an increase from $434 million in March 2024. Year-on-year, exports in April 2024 increased by 23.4 percent to $2.6 billion, fueled by eased import restrictions that enhanced the supply chain for export industries. In the same period, imports also rose by 22.8 percent to $4.4 billion. The trade deficit for April 2024 was recorded at $1.8 billion. Furthermore, the FDI witnessed an increase of 39.1 percent and reached $358.8 million in April 2024, as against an inflow of $ 258.0 million last month. Remittances in April 2024 were encouraging, as they increased on a year-on-year basis by 27.9% to $ 2.8 billion. On the back of a persistent policy rate at 22 percent, during 1st July – 03rd May, FY2024 money supply (M2) shows growth of 7.1 percent (Rs 2,229.8 billion) as compared to a 7.0 percent growth (Rs 1,943.4 billion) in last year. Although the signs of a moderate economic recovery are evident. But to sustain this positive momentum, the policy efforts and reforms to raise productivity, and competitiveness are imperative.
