Monetary Policy Committee (MPC) met under the chairmanship of Jameel Ahmed, Governor of State Bank of Pakistan (SBP) on 4 November and issued its Monetary Police Statement (MPS) the same day as is customary.
The 250 basis point reduction was commented on, as usual, by major private sector bank borrowers, mainly representatives of the large-scale manufacturing sector (LSM), on the appropriateness (or not) of the rate adjustment.
It is unclear what impact, if any, this latest rate reduction will have on private sector credit, a major LSM input, given that credit to the private sector continues to be in the negative category as per the Finance Division’s October 2024 Update and Outlook which reported negative 240.9 billion rupees as credit to the private sector 1 July to 11 October 2024 (when the discount rate was reduced from 20.5 percent on 11 June to 19.7 percent on 29 July to 17.5 percent on 4 September and 15 percent on 4 November) against negative 247.8 billion rupees in the comparable period the year before (with a discount rate of 22 percent).
Again as is usual, by far the largest borrower, notably the government, did not express an opinion though the October Update noted that “markup expenditure declined by 6.3 percent owing to the gradual decline in the policy rate. Consequently, the fiscal deficit reduced to 0.7 percent of GDP as against 0.8 percent of GDP last year.
Additionally, the primary balance recorded a surplus of 0.05 percent of GDP.” The impact of each percentage change in the discount rate on the country’s indebtedness is estimated at 100 billion rupees and, in total terms, the 6.3 percent reduction in mark-up may have been calculated in one of two possible ways: (i) against total domestic mark-up budgeted at 8,736,398 million the decline would be 550,393 million rupees; or (ii) if foreign mark-up was included in the projection then the total reduction would be 615,825 million rupees. Either way, it’s a sizeable reduction in current expenditure that would generate fiscal space, if, and only if, other budgeted expenditure was not allowed to rise.
The October Update further noted that “total expenditures grew by 3.1 percent to 1,635.5 billion rupees during Jul-August 2025 against 1,585.7 billion rupees last year.” This statement again does not reveal the complete picture as it does not indicate whether this growth is measured against 14.485 trillion rupees budgeted last year or against 15.160 trillion rupees in the revised estimates of last year — 14.232 for current expenditure in the revised estimates (against the budgeted 13.344 trillion rupees).
The government needs to focus on four elements of its budgeted expenditure and revenue components if it is to move towards sustainability: (i) current expenditure for 2024-25 is budgeted at 91 percent of the total against 94 percent in the revised estimates last year and 92 percent in the budget last year.
This high percentage allocation is counter-productive as it supports the elite capture of our outlay. In addition, past precedents indicate that our budgets err on the side of underestimating the current expenditure – a practice that needs to end; (ii) in contrast the budgeted federal development outlay, a prime contributor to growth in this country, is over-estimated each year.
It was budgeted at 652,950 million rupees in 2023-24 though actual outlay in the revised estimates was 459,000 million rupees or nearly 30 percent lower disbursement than was budgeted. If this trend, established decades ago, continues and there is a 30 percent reduction in disbursements for development this year, then the federal outlay for this item would be lower by 311,932.8 million rupees – and the likelihood of this is high as the revenue shortfall may, as in the past, lead the incumbent economic team leader to reduce the outlay on development; (iii) the revised estimates indicate an increase in current expenditure from what was budgeted of 948,476 million rupees and this was mainly on account of a rise in mark-up of 780,826 million rupees.
This rise cannot be attributed to a rise in the policy rate as it was 22 percent from July 2023 till April 2024 or, in other words, the total borrowing increased rather than the cost of borrowing – a heavy reliance that must stop; and (iv) the budgeted tax target is 12.97 trillion rupees, a rise of 40 percent from the revised estimates of last year and 38 percent from the budgeted estimates of the year before.
This indicates a shortfall of 163 billion rupees however the Federal Board of Revenue July-October 2024 collected 3.44 trillion rupees against the target of 3.636 trillion rupees or a shortfall of 196 billion rupees so far. To use this data to project the shortfall for the entire year is not advisable as the government has pledged to the IMF to increase identified indirect taxes (on multiple items) to meet any shortfall – taxes that would hit the poor much harder than the rich which in turn would dampen consumption further (there has already been 10 to 12 percent decline in consumption of electricity due to rising tariffs) with negative repercussions on growth and consequently on tax collections.
Given the unrealistic target, it was presumptuous of the 4 November MPS to parrot the Fund and emphasize “the importance of continued fiscal consolidation to support macroeconomic stability and reiterated the need for fiscal reforms, focusing on broadening the tax base and curtailing PSE’s losses.”
To conclude, there is a need to look deeply into the economic lacunas within the budget to determine a policy strategy that takes account of the Fund concerns but goes beyond its advice for reforms: taxes on existing payers must be replaced by widening the tax net preferably in the short term through a constitutional amendment that would tax the income of the rich landlords at the same rate as the salaried (a possibility given the ease at which the incumbent government passed the twenty-sixth constitutional amendment), slash current expenditure that would require a sacrifice from all the elite recipients while ensuring that the budgeted amount for development outlay is met and finally the tariff upgrade to meet full cost recovery must instead focus on the advisability of the massive tariff equalization subsidy extended by the government.
Copyright Business Recorder, 2024
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