It was believed that Federal Finance Minister, Ishaq Dar would present the Budget for the next financial year (FY24) keeping in view two prime objectives: 1) restoring relations with the International Monetary Fund (IMF) and 2) avoiding pitfalls of an election year budget.
The general consensus is that the federal budget is unimaginative, lacks concrete substance and uses the old tried mundane methods which really haven’t ever been successful.
The incumbent government has followed the decades-old practice of milking the already milked cow. It has proposed to continue super tax at income above PKR150 million. However, new slabs have been introduced with the peak slab being all companies/ individuals having income exceeding PKR500 million being taxed an additional 10%.
Measures for increasing documentation and widening the tax net are missing, and the easy solution of taxing the already taxed, particularly corporates has been adopted. At 39% for Corporates (29% tax + 10% super tax) and 49% for banks (39% tax + 10% super tax), Pakistan has one of the highest taxes in the world and the highest in the region – quite a disincentive for foreign entities to invest and set up shops in the country.
For FY24, the GoP projects GDP growth at 3.5% which will likely be contingent on how soon Pakistan re-enters the IMF fold. Further delays and Pakistan’s precarious Foreign Exchange Reserves situation, administrative controls will be the order of the day resulting in a continued slowdown, having domino effects on GDP growth and tax collections.
The cumulative interest payments for FY24 are projected at PKR7.3 trillion, exceeding net federal receipts at PKR6.9 trillion. This in itself is the biggest problem for the country right now. Unfortunately, the budget lacks any concrete steps to stem the bleeding at the Center, which will continue to result in a precarious situation in the years ahead.
In the Budget for FY24 the GoP has attempted to appease the IMF while also, understandably, keeping an eye on election-year considerations despite the Finance Minister claiming in his speech that this is not the case.
The Minister was correct to the extent that populist measures appear to be limited to the agriculture and SME sectors as well as to public sector employees (sharp 30-35% increase in salaries and a 17.5% increase in pensions). That said, the envisaged increase in taxation is not equitable – the brunt appears to fall on the corporate sector, while agriculture and the retail sector have continued to be protected.
The planned 28% increase in tax revenue faces risks in a slowing economy; particularly as the government has not attempted to widen the tax net (punitive taxation on non-filers does not appear to be enough). As a result, supplementary mini-budgets may be needed as the year progresses, possibly under a caretaker government ahead of elections.
Even if the FY24 Budget passes the IMF‘s scrutiny, it will leave the government with two outstanding issues before it can secure the staff-level agreement this month, credibly securing commitments to plug the remaining funding gap and ensuring the proper functioning of the foreign exchange market.
While the window is small and the margin for error razor-thin, both the prime minister and the finance minister have encouragingly reiterated their commitment to completing the 9th review and getting the staff-level agreement over the line.
A huge expansionary budget of PKR14.4 trillion – with business as usual approach – continuation of excessive taxation and unrealistic targets- has been presented by the Finance Minister.
Interestingly, a review of the budget does not give any indication that it relates to the country on the verge of default and must do belt-tightening to cut the fiscal deficit to less than 4% per International Monetary Fund requirements.
No effort seems to have been made to cut expenditures. Instead, the total expenditure for FY24 is pitched 50% higher than FY23 with a hefty increase in salaries (30 to 35%) and pension (17.5%), while substantially higher development expenditure is planned at PKR1.14 trillion. Subsidies are pitched at around PKR1 trillion.
Such an expansionary budget even at a time when the country is at the brink reflects the fundamental problem ingrained in the mindset of the politicians. Continuous expansion of the state, on the assumption that it has unlimited resources and they can continue distribution of the largesse endlessly to obtain political milage.
It is on this basis that Pakistan has built virtually the entire power sector in the public sector, built power generation either on imported fuels or complicated very large complicated hydro projects which do not generate power in winter and a huge number of wasteful SOEs.
To meet such huge expenditure requirements, a highly ambitious target of tax revenue PKR9.2 trillion and an unrealistic target of PKR2.96 trillion for non-tax revenue has been made.
It appears that while high revenue target is fixed in line with IMF requirements, a large increase in expenditure is pitched to achieve political objectives in view of elections. The government has tried to please both: the IMF as well as the public its potential candidates — it is like “having the cake & eating it too”.
But the obvious problem with this budget is that these numbers are unlikely to satisfy IMF unless Pakistan gets out of the way support from countries that control the Fund.
Clearly, Pakistan needs to finalise a new IMF programme together with restructuring/reprofiling of its external debt in the first quarter of FY 24 to preclude likely sovereign default.
For this, the lenders and IMF will require major structural reforms, including steps to cut unproductive expenditure and curtail unsustainable recurring fiscal deficits. This will require major privatisation/closure of loss-making SOEs and the sale of other assets to generate cash and reduce ongoing losses. Such reforms are considered essential to make the economy productive and to enhance its capacity to pay its external debt and liabilities.