ISLAMABAD: The Senate Standing committee on Finance and Revenue, while observing increasing distortions in resources distribution under the 7th National Finance Commission (NFC) Award, asked Finance Minister Muhammad Aurangzeb to call a meeting of the Commission to review the resources’ distribution under the next award.

The committee which met with Saleem Mandviwalla in the chair was also informed by the finance secretary that there is no condition related to any change in the NFC Award from the International Monetary Fund (IMF).

Senator Syed Shibli Faraz raised the matter while saying that following the erstwhile FATA’s merger with Khyber Pakhtunkhwa, resources were not enhanced as per one of the criteria i.e. population, which resulted in the distortions.

Aurangzeb rules out ‘mini-budget’

The finance secretary said that the 7th NFC was in place, according to which 60 percent share goes to provinces and 40 percent to the federal government.

However, after this arrangement, fiscal and debt burden for the federal government increased.

He said that there is no condition in the IMF programme to revise the NFC Award. He said that Rs66 billion was allocated for the erstwhile FATA in the budget for the current fiscal year.

The finance minister said that it was decided to end tax exemptions under the head of sale tax and income tax for erstwhile FATA, however, on the Prime Minister intervention, the decision was withdrawn. Finance Minister assured the committee that any IMF conditions relating to fiscal policy, including the NFC Award, will be fully transparent.

The Finance Division secretary said the National Fiscal Pact among the Centre and the provinces would create a fiscal space by shifting the provincial nature development projects to federating units. The pact would focus on three major areas, including raising tax revenues through close coordination such as slapping Agriculture Income Tax (AIT) by the provinces and devolving expenditures.

Mandviwala recommended that work on a new NFC Award begin immediately, proposing that a new consultation process between the federation and the provinces should be initiated to review the distribution of resources under the next NFC Award.

Furthermore, the committee received a briefing on terms and conditions of IMF loan and commercial loans obtained. It was briefed on Pakistan’s ongoing discussions with the IMF regarding the new programme.

Aurangzeb confirmed that the new IMF agreement is extensive and comes with additional conditions. He also noted that talks with the IMF on climate financing have been progressing since October, with climate-related projects to be identified for funding.

About the terms and conditions of the current IMF programme, Secretary Finance informed that these include 4.5 years grace period, 10 years payment in 12 equal semi-annual instalments. The interest rate includes SDR rate+1 percent, said the secretary, adding that SDR is currently equivalent to 3.37. He further said that tan additional service charge of 50 basis points is applied on each amount drawn.

The committee was informed that the government has borrowed $ 7.4 billion from foreign commercial banks with general maturity tenor of 24 -36 months.

The committee was informed that $ 200 million for balance of payments and budgetary support was borrowed from Bank of China at interest rate of 3M term SOFR+3.15 margin in September 2024 with 24 months tenor. An additional $ 300 million was borrowed from the same bank at interest rate of 3M term SOFR +3.5 percent margin in June 2023 with tenor of 24 months.

The country borrowed $ 700 million from China Development Bank in February 2023 at interest rate of overnight SOFR +2 percent margin with 36 months tenor. Another $ 1 billion was borrowed from the same bank in June 2023, at interest rate of overnight SOFR +2 percent margin with 36 months tenor.

Another RMB7,2616 billion was borrowed in June 2024 at interest rate of 4.5 percent with 36 months tenor.

The country borrowed $ 500 million from Industrial and Commercial Bank of China in March 2023 at interest rate of overnight SOFR +2.95 percent margin with 24 months tenor. The country borrowed another $ 500 million from the same bank in March 2023 at interest rate of overnight SOFR +2.95 percent margin with 24 months tenor.

Another $ 300 million was borrowed from the same bank in April 2023 at interest rate of overnight SOFR +2.95 percent margin with 24 months tenor.

The country borrowed RMB 15,000 billion from syndicated loan facility (CDB, ICBC, BoC) in June 2022 at interest rate of 6M SHIBOR +1.50 percent with 36 months tenor.

The country borrowed $ 700 million from SCBL and WB PBG amortized loan facility in June 2017 at interest rate of overnight SOFR+2.25 percent (with a CAP of 4.47 percent due to IRS) with 120 months tenor. The country borrowed $ 36 million from ECO Trade and Development Bank in February 2019 at interest rate of 6M term SOFR + 0.42826 percent CAS +1.90 margin.

The minister rejected the notion that Pakistan was seeking expensive external commercial loans and emphasized that any loans taken in the future would only be necessary and on terms favourable to the country. The minister revealed that discussions with international commercial banks had been ongoing since April, but no decisions had been made to secure commercial loans at this stage.

The government would maintain transparency regarding future borrowing decisions, he added.

Aurangzeb informed the committee that a B rating upgrade from agencies would help Pakistan tap into international markets. He said it would be pointless to access these markets with the current CCC rating.

Aurangzeb also hinted at approaching the international capital market soon, with plans to issue Panda Bonds by the end of this fiscal year or early in the next. The committee also hinted further decline in policy rate, with inflation coming down.

On other matters, the Finance Minister dismissed any proposal to decrease the retirement age of government employees to 55, stating that this issue is not under consideration.

Copyright Business Recorder, 2024

KARACHI: In a positive turn on the economic front, borrowings by both the federal and provincial governments for budgetary support have shown a remarkable decrease, with a record payoff of over Rs 2 trillion in the first five months of the current fiscal year (FY25).

This sharp reduction signals a significant shift in the government’s fiscal strategy, bolstered by the transfer of the SBP’s healthy profits of Rs 3 trillion to the federal government, which has created a financial cushion for the government to retire outstanding borrowings from commercial banks.

Economists said that this development is a positive sign, suggesting improved fiscal discipline, and is likely to have a favorable impact on the country’s overall financial stability moving forward.

Budgetary support: Jul-Aug borrowing drops 58pc to Rs660.3bn YoY

According to the State Bank of Pakistan (SBP), the federal and provincial governments’ borrowing from scheduled banks for budgetary support experienced a significant decline with Rs 2.018 trillion retirement during July-November of FY25 as against borrowing of Rs 2.89 trillion in the same period of the previous fiscal year (FY24).

The detailed analysis reveals that the federal government has retired a significant amount of budgetary borrowing from scheduled banks, while made some fresh borrowing from the SBP.

The federal government repaid an amount of Rs 1.575 trillion to scheduled banks during July to Nov 2024, compared to Rs 3.4 trillion budgetary borrowing during the same period in FY24.

Additionally, the federal government borrowed Rs 31.6 billion from the SBP for budgetary support in the first five months of this fiscal year, compared to Rs 450 billion retirement to SBP in the corresponding period of FY24.

During the period under review, cumulatively provincial governments retired an amount of Rs 449 billion including Rs 351 billion to SBP and Rs 98 billion to scheduled banks.

The Balochistan government returned a loan of Rs 35 billion and Khyber Pakhtunkhwa Rs 110 billion to the State Bank. The Sindh government repaid Rs 106 billion and the Punjab government Rs 99 billion to the SBP during July to Nov of FY25.

The statistics also show that banks are aggressively increasing their lending to the private sector in order to achieve an Advance to Deposit Ratio (ADR) of 50 percent, thus avoiding additional taxes imposed by the federal government.

As a result, credit to the private sector surged to Rs 1.148 trillion in the first five months of this fiscal year, a significant contrast to a retirement of Rs 33.2 billion during the same period last year

Meanwhile, on Tuesday, the State Bank issued two auction calendars for the sale of short-term and long-term government papers to borrow Rs 7.6 trillion for the federal government during the next three months (Dec 2024 to Feb 2025). An amount of Rs 3.8 trillion will be raised against the sale of 3-month, 6-month and 12-month Market Treasury Bills (MTBs).

In addition, an amount of Rs 3.8 trillion will be borrowed through sale of long-term Pakistan Investment Bonds (PIBs) during the next three months.

Copyright Business Recorder, 2024

ISLAMABAD: The government received no amount of the budgeted $9 billion time deposits during the first four months (July-October) of 2024-25 compared to $3 billion materialized during the same period of last fiscal year.

The Economic Affairs Division (EAD) data shows that the government has budgeted time deposits of $9 billion including $5 billion Saudi Arabia time deposit and $4 billion SAFE China deposit for the current fiscal year, however, no money was received during the first four months (July-October) under this head.

Sources said that government had budgeted $3 billion time deposit for the last fiscal year 2023-24 including $2 billion from Saudi Arabia and one billion from UAE. The $3 billion time deposit from KSA and UAE was materialized in the first month of last fiscal year, however, during the first four months of current fiscal year no amount was materialized under this head.

Jul-Oct: $1.723bn borrowed from multiple sources

The data further shows that the government budgeted $3.779 billion from the foreign commercial banks for the fiscal year 2024-25. The country received $200 million under this head and that was in September. The country did not borrow from commercial banks in July, August and October, as per EAD data.

The government has budgeted $19.393 billion from multiple financing sources for the fiscal year 2024-25 including $19.216 billion loans and $176.29 million grants. However, this does not include any amount from International Monetary Fund (IMF).

The Fund report “2024 Article IV Consultation and request for an Extended Arrangement under the Extended Fund Facility” noted that the Pakistani authorities have stated that they have secured adequate financing from international partners to support its economic reform program and durably increase external buffers.

The current projections suggest that, after incorporating pre-existing financial commitments, rollovers and the envisaged IMF program, residual financing needs during the program period will amount to $5 billion.

1QFY25: With IMF in Islamabad, Punjab revises budget figures, now posts Rs40bn surplus

“To close this gap for the first 12 months of the arrangement, we have secured financing commitments from bilateral and multilateral partners, including China, Saudi Arabia, the Asian Development Bank and the Islamic Development Bank.

Further renewed commitments were received from bilateral partners to continue rolling over short-term claims (including loans, swaps and deposits) for the duration of the program, and will seek to lengthen the maturity of these claims as they roll over, which would reduce the burden of, and risks around, high gross financing needs“, the authorities added.

Copyright Business Recorder, 2024

EDITORIAL: Finance Minister Muhammad Aurangzeb during his press briefing on Sunday appreciated the efforts towards implementation of post-Staff Level Agreement on the nine-month-long Stand-By Arrangement, giving credit to the caretakers, and pledged that this time around the government will not back off from implementing reforms in the energy sector, state-owned entities, privatisation and collection of all budgeted taxes – policies that he claimed were homegrown. Two obvious but disturbing observations are necessary.

First and foremost the ongoing reforms reflect standard normal International Monetary Fund (IMF) conditions that Pakistan has been pledging to lenders in most of the previous (twenty-three) programmes, which were not implementable due to political considerations (reducing current expenditure rise from one year to the next that encapsulates sustained elite capture with an inexplicable 21 percent rise in the 2024-25 budget), privatisation that year after year has been deferred due to lack of the necessary investment climate domestically and internationally (the fiasco with the recent bidding of Pakistan International Airlines is a case in point) as well as refusal to undertake empirical studies of past privatisations to decide on the modus operandi of future privatisations (K-Electric continues to rely on tariff equalization subsidy to the tune of 171 billion rupees in the current year payable at the national taxpayers expense) and the heavy reliance on indirect taxes (to the tune of 75 to 80 percent of all collections sourced to indirect taxes whose incidence on the poor is greater than on the rich), which is the root cause of the extremely concerning 41 percent poverty levels that this country is experiencing.

This is not to understate the impact of IMF design flaws that administration after administration has been implementing, including the incumbent one, particularly with respect to raising tariffs to achieve full-cost recovery rather than dealing with inefficiencies in the sector, and changing the members of the Board of Directors by appointing their loyalists that has made little difference in performance. In other words, there is no element of homegrown reforms now or during the SBA with improvement in foreign exchange reserves down to debt rather than higher desired earnings, contraction of trade deficit due to import restrictions and, as per the IMF staff-level agreement report, “the shortening of the period for repatriation of export proceeds as appropriate given the still fragile external conditions,” and lower inflation, understated by 3 to 4 percent, but with the private sector unable to procure credit (registered at negative 240 billion rupees 1 July to 11 October) and therefore unable to raise output or increase wages, disposable income contracted still further this year with no feel-good factor by the public.

Secondly, the thrust of the Finance Minister was in line with the perception that reforms, identified more than two decades ago, were not implemented due to administrative failures. While discipline is an important input in the performance of several key sectors, yet it is secondary to education and relevant experience both domestically as well as internationally (for the one without the other is unlikely to pay dividends as the country has learnt to its cost).

In short, the issue is not only one of failure to implement reform but the flaws in the design of the reforms that have not been papered over even in the ongoing twenty-fourth IMF programme.

Private sector experience is not always beneficial in key government positions, mainly because there are major differences in their respective areas of concern and therefore their response to proposals raised by private entities as opposed to multilaterals and bilateral donors.

Muhammad Aurangzeb proceeded to state that in marked contrast to his approach to reforms, he would request public support in dealing with the serious climate challenge facing the country.

While Pakistan’s overwhelming contribution to climate challenge comes from neighbouring countries rather than from within, yet there is a need to legislate and assiduously implement these laws for dealing more effectively with this challenge.

However, the context of the press briefing was the end of the five-day IMF mission’s visit to Pakistan with the press release uploaded on its website this Friday past emphasising “the need to continue prudent fiscal and monetary policies” that explains Aurangzeb’s statement that administrative measures will be taken to implement the reforms, read all agreed conditions, and the Fund statement that “Pakistan should take steps to decrease state intervention in the economy”, which is at odds with the 21 percent budgeted rise in current expenditure.

Copyright Business Recorder, 2024

ISLAMABAD: Ministry of Finance approved Rs1.1 trillion development budget under the Public Sector Development Programme (PSDP) against the requested development budget of Rs2.9 trillion.

This was revealed in a Senate Functional Committee on Underdeveloped Areas meeting chaired by Senator Agha Shahzaib Durrani.

The Ministry of Planning and the Ministry of Finance briefed members on the development projects approved for the current fiscal year.

Officials revealed that while the Ministry of Planning requested a development budget of PKR 2.9 trillion, the Ministry of Finance approved PKR 1.1 trillion under the PSDP.

During the session, Senator Durrani questioned the lack of monitoring mechanisms for the disbursed funds.

He stressed that monitoring the implementation of PSDP projects is the responsibility of the Planning Ministry and highlighted that a lack of oversight contributes to corruption. “Who is responsible for ensuring performance? The Finance Ministry releases funds based on recommendations from Planning, but there’s no system to track outcomes,” he added.

Additional Secretary of the Planning Ministry admitted that monitoring over 1,000 projects is unfeasible with current resources. The committee was informed that there are 1,071 ongoing projects valued at PKR 13.7 trillion, including both new and ongoing initiatives, of which, PKR 3.9 trillion has already been utilised.

Expressing dissatisfaction with the briefing, the committee demanded a detailed report on the progress of PSDP projects and associated institutions in an upcoming session.

The Ministry of Interior briefed the committee on international NGOs’ operations in Pakistan.

Officials stated that 112 international NGOs are currently registered, with memorandums of understanding (MoUs) signed with 85. Monitoring their activities; however, remains a contentious issue, as the Ministry of Interior and the Economic Affairs Division (EAD) shifted responsibility on one another.

Senators Muhammad Aslam Abro, Falak Naz, Saifullah Abro, Hamid Khan, and specially invited Senator Ashraf Jatoi, alongside officials from the Planning and Interior ministries, attended the meeting.

Copyright Business Recorder, 2024

ISLAMABAD: Amid warning of increase in social risks on account of meeting the conditionality of new multilateral financing, Moody’s Investors Services (Moody’s) said interest costs in Pakistan will account for close to 40 percent of total spending in 2025, up from around a quarter in 2021.

Moody’s in a report “2025 Outlook – Stable as economic risks recede, geopolitical and trade risks persist”, stated that Pakistan recently agreed a new $7 billion International Monetary Fund (IMF) programme to alleviate liquidity pressures.

However, financing from concessional lenders often cannot fully replace sovereigns’ maturing debt. Meeting the conditionality of new multilateral financing can also prove difficult and increase social risks.

Moody’s upgrades Pakistan’s ratings to Caa2, outlook now positive

The rating agency stated that government debt affordability in Pakistan will remain weaker than before the pandemic. Pakistan in Asia-Pacific (APAC) is most vulnerable to food security crises. Government debt affordability in emerging and frontier markets will remain weaker than before the pandemic, particularly in Pakistan (Caa2 positive), Nigeria (Caa1 positive) and Egypt.

A number of sovereigns will face eurobond redemptions in excess of 10 percent of their usable international reserves in 2025, including Bahrain (B2 stable) and Tunisia. Local currency financing needs will also be sizeable for many sovereigns, with gross domestic financing needs of more than 10 percent of GDP in Pakistan and Zambia (Caa2 stable), even after default. Local and foreign currency liquidity risks will therefore remain a key driver of defaults, the rating agency added.

In advanced economies, median debt affordability in 2025 will remain stronger than before the pandemic, although the gains will be eroded. One exception is Greece where improving debt affordability will continue on the back of deleveraging. By contrast, in the US and France, debt affordability will deteriorate significantly, it added.

Moody’s stated that geopolitical tensions are also driving up global military spending. Years of underinvestment and the growing threat from Russia have prompted more European governments to raise defence spending and meet the NATO target of a minimum of two per cent of GDP. Japan’s (A1 stable) Defense Capability Buildup Program will continue to consume an increasingly significant part of its budget in 2025, while India’s defense spending will also grow rapidly amid tensions with China and Pakistan.

While we assume that global food prices will remain much lower than in recent years, low-rated frontier markets like Mozambique (Caa2 stable) and Rwanda (B2 stable) in SSA, Nicaragua (B2 stable) and Honduras (B1 stable) in Latin America and Bangladesh and Pakistan in APAC are most vulnerable to food security crises.

Copyright Business Recorder, 2024

LAHORE: By the end of this year, the Punjab government will have a surplus of Rs680 billion. The IMF has acknowledged that the deficit report concerning Punjab is incorrect, and it will soon be updated on the IMF’s website.

This was stated by the Punjab Information Minister Azma Bokhari, while strongly denying reports about a deficit in the provincial government’s first fiscal quarter.

Releasing an official document to clarify the matter, Azma mentioned that the Punjab government has already recorded a surplus of Rs40 billion in the first quarter. The IMF has confirmed this, noting that Punjab is in a surplus of Rs40 billion for the first quarter and that the province has an investment of Rs200 billion, she added.

During a meeting, the IMF accepted that the deficit reports regarding Punjab were erroneous and that they would be corrected, she said. Azma Bokhari also condemned the false propaganda about the Punjab government being in a deficit. She highlighted that under Maryam Nawaz’s leadership, for the first time since 1952, the overdue wheat debt had been cleared.

Additionally, since Maryam Nawaz became Chief Minister, Punjab’s debt has seen a significant reduction, she added. She urged the media to avoid spreading fabricated news.

Copyright Business Recorder, 2024

ISLAMABAD: The Ministry of Finance has revised the fiscal operations’ figures for the first quarter (Q1) of the current fiscal year 2024-25, showing to achieve a cumulative provincial surplus of Rs360 billion against a target of Rs342 billion agreed with the International Monetary Fund (IMF), with a provincial surplus of Rs40 billion for Punjab province.

Following the correction, the government closed the first quarter of the current fiscal year (July-September 2024-25) with a budget surplus of Rs1,896.01 billion, an increase of Rs200 billion, compared to Rs1,696.01 billion uploaded earlier by the Finance Ministry. With the revision in figures, the budget surplus ratio to GDP has improved to 1.5 percent, up from the earlier 1.4 percent.

The ministry claimed that with concurrence of the Fund, the revised figures were updated at its website, showing a provincial surplus of Rs40 billion for Punjab.

Govt posts a rare budget surplus of Rs1.7tn in Q1FY25

The Ministry of Finance endorsed the views of government of the Punjab on achievement of a provincial surplus of Rs40 billion during Q1 for fiscal year 2024-25. The Government of the Punjab has remained one of the most important contributors to provincial surplus during recent years; for fiscal year 2024-25 it has budgeted a provincial surplus of Rs630 billion as agreed with the IMF, the Finance Ministry added.

The MoF shared the updated Q1 fiscal operations figures with the IMF on 14th November, 2024. With concurrence of the Fund, the revised figures were updated at its website, showing a provincial surplus of Rs40 billion for Punjab.

As per the revised figures agreed with the Fund; Government of Pakistan has managed to achieve a cumulative provincial surplus of Rs360 billion against a target of Rs342 billion agreed with the IMF for Q1 for 2024-25.

As per the earlier data, among provinces, only Punjab had recorded a budget deficit of Rs160.16 billion. Sindh saw a budget surplus of Rs131.09 billion, Khyber Pakhtunkhwa registered a budget surplus of Rs103.75 billion, and Balochistan created a provincial surplus of Rs85 billion.

Copyright Business Recorder, 2024

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) on Friday concluded the five-day talks with a prescription by the Fund to strictly adhere to meeting the conditionalities of the ongoing $7 billion Extended Fund Facility (EFF).

The visiting IMF team led by its mission chief Nathan Porter on Friday held final meetings with federal and provincial governments’ representatives and asked for meeting the benchmarks and conditionalities for the EFF.

Finance Minister Mohammad Aurangzeb also participated in the final round of talks; however, till the filing of this report neither the Fund nor the Finance Ministry released any details.

IMF team looks at fiscal performance

The IMF team, the sources said, stressed the need to implement tax targets and the National Fiscal Pact.

The talks covered a wide range of economic issues, including provincial budgets, tax reforms, and foreign financing arrangements, where the Fund was convinced by provincial budget surplus.

Sources revealed to Business Recorder that IMF stressed upon accelerating tax revenue collection to meet the tax target of Rs12,970 billion for the current financial year. The IMF team also urged for the collection of taxes on agricultural income starting January 2025.

Sources familiar with the discussions revealed that the government assured the Fund of securing external financing to support its fiscal policies. The government has made firm commitments regarding external financing arrangements, the sources confirmed.

The IMF mission also conducted detailed reviews of various sectors, including property prices across different cities.

On the final day of talks, federal finance minister and officials from the Federal Board of Revenue (FBR) participated in discussions with provincial representatives.

The IMF raised concerns about the timely passage of laws, particularly in Sindh, urging the provincial government to expedite legislation.

Further, Khyber Pakhtunkhwa has made progress in its preparatory work, sources noted.

In terms of provincial budgets, the latest revised figures by the Finance Ministry noted that Pakistan surpassed its surplus target. The provincial surplus for the first quarter of 2024-25 was reported at Rs360 billion, surpassing the target of Rs342 billion set under the IMF agreement. Punjab recorded a surplus of Rs40 billion during July-September, reversing previous data that indicated a deficit of Rs160 billion.

Copyright Business Recorder, 2024

ISLAMABAD: The International Monetary Fund (IMF) has recommended Pakistan to strengthen capacity at the Finance Division to lead and coordinate macro-fiscal forecasts to support budget preparation, as well as increasing forecast cycles and synchronizing them with the budget.

The Fund in its “technical assistance report-improving budget practices” noted that the current organisation of the Finance Division is relatively fragmented and presents an obstacle to achieving a more strategic approach to budgeting.

The Fund also recommended introducing a strategic phase to the budget process, in line with the Public Financial Management Act (PFMA) 2019 and the accompanying Budget Manual; include more guidance and binding ceilings in the Budget Call Circular; and undertaking actions to minimise dual (“recurrent/capital”) budgeting.

The Fund asked Pakistan to consider reorganising the Finance Division with a focus on its budget and budget management functions, to bring the structure into line with good international practice.

The IMF has further recommended for preparing a PFM Digitalization Master Plan, establish a high-level Steering Committee to oversee coordination and implementation of the Plan, strengthen Fiscal Data Governance (FDG) practices, consider next steps after SAP life support ends in 2025, and review the budget preparation and budget execution business processes in FABS.

1.4pc of GDP: Q1 ends with Rs1.696trn budget balance

Pakistan’s current budgetary process is largely bottom up and designed to gather information from divisions/ministries. Thus, no up-to-date fiscal projections or budget ceilings (in aggregate of broken down by sector) are included in the BCC that launches the budget process in January.

A top-down approach to budgeting is sometime called a “strategic phase” because it requires the finance ministry to define policy objectives for the budget, and its priorities for spending and revenue mobilisation.

There could be two options for adding a strategic phase to the budget process in Pakistan. First, the Budget Strategy Paper, currently released in April, could be brought forward to January, and issued with the Budget Call Circular. This approach makes it difficult to assemble the necessary data to update the economic and fiscal projections in time.

Second, the existing timetable for preparing and publishing the Budget Strategy Paper could be retained but a preliminary analysis of macro-economic developments and updated macro-fiscal projections and a calculation of available fiscal space and the IBCs could be included in the Circular.

The second option would represent a substantial improvement from existing practice because it would include the latest assessment (from the Economic Adviser’s Wing) of the state of the economy5 as well as the most recent data on fiscal trends and indicators which can be highly volatile even over short periods of time.

The internal processes for preparing macro-fiscal forecasts are not fully aligned with the budget cycle. Currently, macro-fiscal forecasts are produced only once during the fiscal year, usually in March, as part of the Budget Strategy Paper (BSP), which presents the Federal government’s medium term fiscal strategy. This timing restricts the potential of the medium-term fiscal framework (MTFF) to effectively guide fiscal policy.

‘Do more’: IMF says budget approval ‘not enough’

As the budget preparation process starts in January with the issuance of the Budget Call Circular, the latest macro-fiscal indicators are still based on the previous year’s BSP.

Despite possibly substantial economic and fiscal developments since the publication of the BSP, the macro-fiscal forecasts are not revised. This makes budget preparation challenging.

The projections in the BSP differ significantly from budget estimates. In fiscal year 2023, expenditure forecast in the BSP for fiscal year 2022- fiscal year 2024 (published in April 2021) were Rs1,162 billion (1.2 percent of GDP) less than approved in the annual budget statement. In FY24, projections in the BSP for fiscal year 2023-fiscal year 2025 (published in June 2022) were Rs4,988 billion (around five percent of GDP) less than the annual budget statement estimates.

To improve budget credibility, the role of macro-fiscal functions should be strengthened within the Finance Division. The Economic Adviser’s Wing does not assess the accuracy of the macro-fiscal forecasts. To improve the quality of the forecast, it is important to examine past forecast errors and analyse the reasons for these errors.

To improve the budget preparation process, it would be necessary to revise the Budget Call Circular. It is apparent that many other countries, at a similar level of development to Pakistan, and with a similar administrative background, include much more information in their call circulars, and operate a budget process that has a strategic focus as well as including bottom-up elements.

Some weaknesses of the Finance Division include the lack of specialised staff, fragmented management, weak budget contestation, excessive focus on operations rather than policy, lack of coordination of federal-provincial relations, and limited use of IT to support decision making. The report also identified some functions that were missing or substantially under resourced (e.g., tax policy, debt management) and presented some specific proposals for reorganising the various units that comprise the Finance Division.

Another weak area is the lack of effective coordination between the MFPU in the Economic Adviser’s Wing and the Budget Wing. The deputy auditor general supported the World Bank’s findings when he informed the mission that the Budget Wing had little capacity to scrutinise ministries’ budget proposals, most of which were accepted without challenge.

Meanwhile, Pakistan faces a tight fiscal situation, says the International Monetary Fund (IMF).

The Fund in its latest, “technical assistance report-improving budget practices” noted that the ratio of public debt-to-GDP has risen significantly in recent years, growing by around 16 percentage points of GDP between fiscal year 2017 and fiscal year 2023.

This is due to a combination of factors, including weaker-than expected GDP growth, a depreciation of the rupee, the high cost of responding to natural disasters and the pandemic, underperforming state-owned enterprises (SOEs), but also the general challenges in delivering on planned fiscal consolidation.

Concurrently, the proportion of budget revenue consumed by interest payments has doubled since fiscal year 2017 and now stands at 60 percent of tax revenue.

The authorities have the difficult task of converting a primary deficit of 1.3 percent of GDP for fiscal year 2023 into a primary surplus of 0.4 percent of GDP for fiscal year 2024. This goal is predicated on the materialisation of additional revenues from recent measures and significant restraint across all areas of expenditure, while prioritising social and development spending.

The objective in the medium term is to bring down debt below 60 percent of GDP, from 74 percent currently, in line with the Fiscal Responsibility and Debt Limitation Act (FRDLA) of 2005.

In recent years, actual fiscal outcomes at the Federal level have fared worse than the projections. The actual fiscal deficit exceeded the budgeted deficit by 25 percent on average over the period fiscal year 2017-23.

Budget estimates for revenue have consistently been overestimated. The performance of non-tax revenue (against budgeted amounts) has notably deteriorated in recent years, experiencing a year-on-year drop of 53 percent in fiscal year 2019 and 43 percent in fiscal year 2022.

Copyright Business Recorder, 2024

ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to initiate legal changes, required to limit the discretionary powers granted to the federal government over the use of supplementary grants while maintaining some flexibility in budget execution.

The Fund stated that Pakistan stands as an exception in terms of the National Assembly’s oversight regarding the practice of supplementary grants, which deviates from good international practice.

The Fund has also recommended for request the auditor general to undertake a special audit on the mechanism, efficiency and effectiveness of supplementary grants over the last 10 years.

Strategy aimed at re-appropriation, more allocation of funds notified

The Fund in its “technical assistance report-improving budget practices” urged the government to review the various stages of commitment controls to make them comprehensive and aligned with international good practices and redesign the budget execution process accordingly.

The IMF stated that fiscal transparency code18 advises that “any significant amendments to the total budgeted expenditure should necessitate a supplementary budget beforehand. The Code further defines advanced practice as requiring “a supplementary budget ahead of any substantial changes to the total budgeted expenditure or its composition”.

The report noted that there is a strong rationale for requiring prior approval by the legislature which extends beyond the need for transparency and accountability. It allows the legislature the opportunity to examine and assess proposed changes to the budget in a similar manner to its initial scrutiny of thep roposed annual budget. It provides a crucial check to ensure a disciplined budget preparation process and to mitigate policy slippages during its implementation.

Conversely, frequent reliance on methods that alter budget allocations without the legislature’s input can lead to suboptimal macro-fiscal forecasts, inadequate costing of public policies, ineffective budget preparation, and relaxed control over the implemented budget by the Ministry of Finance.

Due to these concerns, many countries have adopted the practice of seeking their National Assemblies’ prior approval for supplementary spending.

The Fund noted that notwithstanding the Supreme Court’s final and binding judgement supporting the ex-ante approval of supplementary grants, relevant laws and rules can be amended to ensure greater certainty and clarity on its interpretation and application.

In 2019, a Constitutional Amendment was proposed to the Senate, aiming to revise Article 84 to require prior resolution from the National Assembly before the approval of supplementary grants, except in cases of emergencies.

The bill failed to secure the necessary Constitutional majority for passage. There may be other mechanisms through which the Supreme Court judgement can be enshrined. This could include amending the PFMA (e.g., Article 10) and the General Financial Rules 2019 (Rules 96-196), and/or reinstating the principle of ex-ante approval of the GFR.

Copyright Business Recorder, 2024

ISLAMABAD: Minister of State for Revenue Ali Pervez Malik said Thursday that it would be premature to comment whether mini-budget was imminent or not.

He was responding to a query on possibility of mini-budget at an event organised by PRIME Institute, here on Thursday.

“I would be able to comment on the issue when the visiting IMF mission will give its opinion on the said matter. Till now all these reports about mini-budget are rumors”.

Talking to media on the conclusion of the event, he said that Prime Minister Shehbaz Sharif has directed to reduce the income tax burden on the salaried class.

The minister also pointed out that inflation has significantly come down, from over 35 percent to around seven percent. He said the federal government has imposed taxes worth Rs3,500 billion but added that tax evasion needs to be stopped. The minister was of the view that the FBR has to check tax evasion to plug in loopholes and generate additional revenue.

No new taxation measures or mini-budget under study: FBR

Malik said that the government took some unpopular decisions but now things are on the right path due to these policy decisions.

He also highlighted that the current account deficit had reached $18 billion which has now been controlled. He said that to take the country out of economic troubles, the government must enhance its revenue collection. He also claimed that the government is taking measures to ensure that the current International Monetary Fund (IMF) programme is the last. He also pointed out that to improve FBR’s enforcement, the government has approved a summary to increase its resources.

Copyright Business Recorder, 2024

ISLAMABAD: The government closed first quarter of current fiscal year 2024-25 with overall budget balance of Rs1.696 trillion equivalent to 1.4 percent of Gross Domestic Product (GDP).

This was revealed in the consolidated federal and provincial fiscal operations data released by the Finance Division with a statistical discrepancy of Rs317.239 billion during first quarter of 2024-25.

The data showed that the government closed first quarter of current fiscal year with a primary balance of Rs 3.002 trillion, equivalent to 2.4 percent of GDP. Budget balance was surplus Rs1.696 trillion (1.4 percent of the GDP) in the first quarter (July to September) of the current fiscal year 2024-25.

Financing of negative Rs. 1.696 trillion was met by external (net) borrowing of Rs. 156 billion and domestic (net) borrowing of Rs. 1,539 billion which included non-bank borrowing of Rs. 335 billion and bank borrowing of Rs 1,874 billion.

The country’s total revenue stood at Rs5.827 trillion (4.7 percent of the GDP) against the total expenditure of Rs4.131 trillion (3.3 percent of the GDP) during the 1st quarter of current fiscal year.

Total revenue of Rs5.827 trillion included Federal Board of Revenue (FBR)’s tax collection of Rs2.562 trillion and Rs3.051 trillion as non-tax collection during the first quarter of current fiscal year.

Federal non-tax revenue included mark-up (PSEs and others) Rs36.4 billion, dividend Rs25.3 billion, profit PTA and others Rs20.277 billion, surplus profit of State Bank of Pakistan Rs2.5 trillion, defence receipts Rs6.067 billion, passport fee Rs19.98 billion, discount retained on crude oil Rs6.285 billion, royalties on oil, gas Rs48.485 billion, windfall levy against crude oil Rs7.8 billion, petroleum levy on LPG Rs806 million, gas infrastructure development Cess Rs121 million, natural gas development surcharge Rs11.7 billion, petroleum levy Rs261.688 trillion, and others Rs52.5 billion.

The current expenditure was estimated at Rs3.537 trillion including total interest payment of Rs1.306 trillion. The breakup included domestic markup at Rs1.085 trillion and foreign at Rs220.490 billion.

In other expenditures, pension was allocated Rs222.834 billion, running of civil government Rs142.476 billion, subsidies Rs20.153 billion, and grants to others Rs239.209 billion. Development expenditure and net lending Rs276.723 billion. Total development expenditure (PSDP) Rs278.366 billion.

All four provincial governments recorded a budget surplus of Rs159.688 billion during the first quarter of the current fiscal year. The expenditures of the four provincial governments registered at Rs1.760 trillion against revenue of Rs1.92 trillion.

Provincial tax collection was Rs212.965 billion with collection of sales tax on services Rs122.195 billion, excise duty Rs2.771 billion, stamp duties Rs14.621 billion, motor vehicles tax Rs13.823 billion and others taxes Rs59.555 billion. Transfers from federal government under National Finance Commission (NFC) award during the first quarter of 2024-25 stood at Rs 1.565 trillion.

Copyright Business Recorder, 2024

ISLAMABAD: The ministries demanded Rs2.9 trillion development budget, whereas, the federal government has approved Rs1.100 trillion under the Public Sector Development Programme (PSDP) 2024-25.

The ministries made this demand during a meeting of the Prime Minister’s Committee for Planning and Execution of Foreign-Funded Development Projects chaired by Federal Minister for Planning Ahsan Iqbal, here on Thursday.

The minister directed the Economic Affairs Division (EAD) to come up with a realistic demand of budget in consultation with respective ministries/divisions which will be deliberated with Ministry of Finance to arrange required funds for development projects.

Parliamentary penal informed: ‘PSDP allocations being revised downward on IMF instruction’

The committee, discussed in detail, the planning and execution of foreign-funded projects and the need to refine policy guidelines in line with the Economic Coordination Committee (ECC)’s decisions.

During the briefing, it was highlighted that the challenges posed by scarce resources and huge demand for development projects need to be addressed during the financial year.

The PSDP currently stands at Rs1,100 billion, with an allocation of Rs220 billion in foreign funding as rupee cover.

The financial constraints have led to a 10 times increase in the throw-forward, alongside administrative and implementation challenges.

The minister highlighted that over the past years, the pie of development portfolio is squeezing contrary to increasing demand for development infrastructure.

Moreover, adjustment of fiscal targets the development budget is shrinking.

Ahsan fears Rs200bn-400bn cut in PSDP outlay

He stressed the importance of preparing plans that address the minimum essential requirements of ministries to ensure timely disbursement of funds.

He emphasised that all projects should demonstrate robust economic and financial rationale, given the current balance of payments challenges.

He also called for the establishment of a mechanism to reduce financial burdens and ensure practical implementation.

Iqbal added that all PSDP projects, including foreign-funded initiatives, need execution within the specified timelines and clear ownership to avoid cost and time overruns.

He stressed the importance of carefully managing economic and financial risks associated with foreign-funded projects, as exchange rate fluctuations can significantly impact loan repayments, increasing the burden on government finances.

Secretary Planning Awais Manzur Sumra, Secretary Economic Affairs Division (EAD), Member Infrastructure, Waqas Anwar and senior officials from the Ministry of Planning attended the meeting. Federal Minister for EAD Ahad Cheema participated via video link.

Copyright Business Recorder, 2024

LAHORE: The Federation of Pakistan Chambers of Commerce and Industry's top officials, Zakki Ejaz and SM Tanveer, urged the government to slash electricity rates by 9 percent and lower interest rates to single digits, citing industry shutdowns and job losses due to expensive power. They also rejected the proposed mini-budget, as Pakistan's trade deficit shrinks and exports surge.

Zakki Ejaz, Vice President and Regional Chairman of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), and SM Tanveer, Chief of United Business Group said the government has increased the FBR target. They believe that without businesses how governments can generate taxes.

S.M Tanveer said the Federal Board of Revenue (FBR) has started filing cases against business individuals. The interest rate has decreased from 22% to 17.5%. The stock exchange has risen by 47 points to 82 points.

The trade deficit has decreased from 27.47 billion to 24.09 billion. Exports have increased from $24.7 billion to $30.6 billion. Agricultural exports have risen from $4.7 billion to $7.1 billion. IT exports have increased from $2.6 billion to $3.2 billion.

Additionally, 18 Independent Power Producers (IPPs) have been served notices and are paying capacity charges of 2.1 trillion rupees. Illegally closed power plants are being paid 1.1 trillion rupees. Saving 1.1 trillion rupees will reduce the cost of electricity units by 10 rupees. It's essential to adopt a "take and pay" policy, where consumers pay for the electricity they use.

"Thanks to the efforts of the Special Investment Facilitation Council (SIFC), five IPPs have been closed. A decision should be made as soon as possible regarding the future of IPPs," Tanveer said.

Inflation has dropped to 6.1%, so why is the interest rate still at 17.5%?

S.M Tanveer demanded a significant decrease in interest rates in November.

The year 2025 is crucial for economic growth. Bank deposits have surged from 22 trillion to 30 trillion rupees, indicating a positive trend.

Reducing interest rates will inject more money into the market. We also urge a swift decision regarding the 18 Independent Power Producers (IPPs) currently under review. Tanveer said by taking these steps, 2025 can truly become a year of economic development and growth.

Copyright Business Recorder, 2024

ISLAMABAD: Despite taxation measures of Rs 1,800 billion in the budget (2024-25), the Federal Board of Revenue (FBR) has suffered a massive shortfall of over and above Rs 87 billion during the first quarter (July-September) 2024-25.

It Is learnt that the FBR has collected Rs 2,452 billion against the assigned target of Rs2,539 billion set for the first quarter of current fiscal year.

However, the FBR has achieved the monthly target of Rs 985 billion set for September 2024 by collecting net revenue of Rs 996 billion during the month.

Q1: Rs170bn revenue shortfall glares at FBR

The tax collection target for September 2024 has been met, but there is a huge shortfall of Rs 87 billion during the first quarter (July-September) 2024-25. The FBR has received 3.6 million income tax returns for tax year 2024 with 1.3 million nil-filers during this period. The FBR has received 3.6 million income tax returns for tax year 2024 against 1.9 million during same period of last fiscal year.

In tax year 2023, the FBR has received a total of 6.2 million returns. The FBR has received an amount of Rs 95,708 million as tax along with the returns during tax year 2024. The persons registered from July 2023 to date stood at 825,257 including 497,092 nil-filers. However, the persons registered from July 2024 to date are 340,473 including 237,237 nil-filers.

Sources said that government will promulgate an Ordinance containing enforcement measures against non-filers and nil-filers; etc, to meet tax collection target of Rs12,915 billion for 2024-25.

Recently, the prime minister had approved FBR’s transformation plan containing enforcement measures regarding abolishing non-filer category besides restructuring non-registered business entities.

The advance tax installment was also due in September 2024 being paid by the corporate sector and banks.

The FBR had suffered a huge shortfall of Rs 98 billion in tax collection during first two months of 2024-25, as net collection stood at Rs1,456 billion against assigned target of Rs1,554 billion during this period.

Copyright Business Recorder, 2024

ISLAMABAD: With conventional foreign financing lines largely dry off and expecting a massive shortfall in revenue, no a mini budget but a ‘maxi budget’ would be unavoidable for the government, besides facing tough quarterly review of the International Monetary Fund (IMF) under the new loan programme.

This was stated by Dr Hafeez Pasha, former finance minister, while speaking at “Paisa Bolta Hai” with Anjum Ibrahim.

Dr Pasha said that trade deficit and current account deficit improved during the first two months of current fiscal year. However, the improvement was not due to increase in exports or decrease in imports but due to massive increase of 40 per cent in remittances.

No new taxation measures or mini-budget under study: FBR

He said that due to stabilisation of rupee, hundi/ hawala was controlled and it produced good results in terms of increasing remittances.

However, Dr Pasha warned that second part of balance of payment; i.e., financial account is not in a good position. He said that net external inflow in financial account decreased by $3 billion during the first two months of current fiscal year compared to the same period of last fiscal and inflow remained around $200 million; resultantly, financial account weakened.

To a question, he said that in the past, the country received disbursement from multilateral bilateral sources and it met requirements, but now bilateral loans is nominal as China has also stopped lending new loans to Pakistan.

He further said commercials banks were the traditional sources for borrowing; however, interest rate has gone to double digits of up to 13 per cent. Despite the fact that Moody and Fitch upgraded Pakistan and globally interest rate came down, but Pakistan is getting expensive loans, which shows the country’s vulnerability.

Dr Pasha said the most dangerous is budgetary position due to shortfall in Federal Board of Revenue (FBR)’s revenue, of around Rs250 billion. Growth in revenue is 20 per cent during the first two months of the current fiscal year which should have been 40 per cent to reach the target.

Further, the money which was due to come from the State Bank of Pakistan (SBP) through profit remained half; i.e., short by Rs1,250 billion, said Dr Pasha, adding that the provincial governments which had committed to generate surplus of Rs1,250 billion is hardly to reach Rs700 billion.

Financial position domestically is very weak and quarterly review with the IMF would be very dangerous with respect to tough conditions, said former finance minister, adding that in next few days and weeks, government would require to produce a ‘maxi’ and not a mini budget.

He said the government has revenue target of Rs12.970 trillion compared to Rs9.3 trillion achieved last year. With a 20 per cent growth in revenue would hardly reach Rs11.300 trillion and likely to face massive shortfall of Rs1700 billion at a time when shortfall is also coming in other revenue sources.

In response to another question, Dr Pasha said GDP growth last year was on account of production of different crops, which witnessed around 16 per cent growth after floods. In the current year, cotton, as well as, wheat production target will be missed and the 3.5 per cent growth target would be hardly achieved, said Dr Pasha, adding that manufacturing output increased by around 2.5 per cent in July 2024 compared to the same period of last year but declined when compared to June 2024. The growth rate would further decline when the government imposes more taxes, he added.

He said inflation has come down, but there is still manipulation. Currently, inflation is in the range of 12.5–13 per cent and is understated by around four per cent as house rent, impact of energy prices and other things are understated.

He expected rise in inflation, after the implementation of the market determined exchange rate policy as agreed with the IMF as it would result in depreciation of rupee compared to dollar. The IMF has given the assessment in staff-level agreement in July that rupee would go to Rs320, said Dr Pasha, adding that rupee is currently being controlled skilfully by restricting imports through delaying opening of LCs and restricting imports of non-essential items.

He said that exporters are hit hard by massively increasing electricity and other energy prices, withdrawing subsidies, high interest, high taxes, and not giving the benefit of exchange rate to them and exports are expected to further hit negatively in the coming days.

The nominal increase in exports during the first two months of current fiscal year was mainly due to increase in rice exports, he added.

He said every year development budget is cut and this time around is likely be cut by around Rs700 billion. The cut in interest rate would result in decreasing debt services expenditure by up to Rs400 billion but due to massive shortfall in revenue, budget deficit is expected to reach 7.5- 8 per cent and the IMF would come very hard, he added. Replying to another question, Dr Pasha said the system is being run on ad-hoc basis and lack comprehensive and a well-thought-out plan.

The lifeline is to increase exports and revenue and reduce expenditure both civilian and military. Military expenditure including pensions and civil armed forces has reached around Rs2,700 billion which needs to be reduced. Further, the 20–25 per cent increase in salary for government officials/ officers was inappropriate.

Referring to the Punjab government’s decision of giving subsides of Rs45 billion on electricity, he termed it inappropriate on part of the provincial government. Pakistan has centralised system at level of the Nepra; therefore, it is inappropriate for a province to take a decision on price.

He said unemployment ratio has touched 11 per cent; i.e., eight million people are unemployed in the country; poverty rate has surged to 43 per cent while saving rate turned negative.

He said that the current finance minister is a person of integrity and a banker but does not appear to be very familiar and comfortable with the government’s financial issues including taxation and other policy issues due to lack of experience and background.

Copyright Business Recorder, 2024

ISLAMABAD: The incidence of tax on the salaried class in Pakistan is three times higher than in India. A comparison of tax structure of salaried class between Pakistan and India has been issued by the Pakistan Business Council (PBC).

The comparative chart (Pakistan-India) revealed that annual tax in Pakistan is Rs 30,000 as compared to Indian Rs (INR) 10,050 in cases where annual salary in Pakistan is Rs 1,200,000 against Indian annual salary of Rs 360,360.

The tax in Pakistan is Rs 120,000 on annual income of Rs 1,800,000 as compared to Indian tax in PKR 40,050 on annual salary in INR 540,541.

Fear comes alive: all salaried persons earning over Rs50k a month to bear higher taxation in FY25

In Pakistan, tax is Rs 230,000 on an annual salary of Rs 2,400,000. The Indian tax in Pak rupee comes to Rs 73,500 on annual income of INR 720,721.

The annual tax in Pakistan is Rs 380,000 on an annual income of Rs 3,000,000 as compared to Indian tax in Pak rupee 133,500 on annual salary in INR 900,901.

The tax on annual salary of Rs 3,600,000 in Pakistan comes to Rs 550,000 as compared to Indian tax in Pak rupee 207,000 on annual salary in INR 550,000.

In Pakistan, tax is Rs 945,000 on annual salary of Rs 4,800,000. The Indian tax in Pak rupee comes to Rs 427,200 on an annual income of INR 945,000.

The annual tax in Pakistan is Rs1,365,000 on an annual salary of Rs 6,000,000 as compared to Indian tax in Pak rupee 767,700 on annual salary in INR 1,365,000.

The tax in Pakistan is Rs 1,785,000 on annual salary of Rs 7,200,000 as compared to Indian tax in Pak rupee 1,127,700 on annual salary in INR 2,162,162.

The annual salary in Pakistan is Rs 8,400,000 on which tax has been calculated at Rs 2,205,000. In India, Indian tax in Pak rupee 1,487,700 would be paid on an annual salary of INR 2,522,523.

The tax on annual salary of Rs 9,600,000 in Pakistan comes to Rs 2,625,000 as compared to Indian tax in Pak rupee 1,847,700 on annual salary in INR 2,882,883.

The annual salary in Pakistan is Rs 10,800,000 on which tax has been calculated at Rs 3,349,500. In India, Indian tax in Pak rupee 2,207,700 would be paid on an annual salary of INR 3,243,243.

Copyright Business Recorder, 2024

KARACHI: Central bank will likely cut its key interest rate again on Monday in its first policy meeting following the signing of a staff level agreement with the International Monetary Fund and a new state budget, analysts said.

Pakistan and the IMF reached an agreement for the 37-month loan program this month. Tough measures such as raising tax on agricultural incomes and lifting electricity prices have prompted concern among poor and middle class Pakistanis grappling with rising inflation and the prospect of higher taxes.

In June, Pakistan’s central bank cut its key interest rate by 150 bps from an all time high of 22%, in a widely expected move, marking its first rate reduction in nearly four years in its effort to boost growth amid a sharp decline in retail inflation.

However, inflation has slowed down. Pakistan’s consumer price index (CPI) in May rose 11.8% from a year earlier, giving the central bank room to cut, analysts say.

Only one analyst out of 14 predicted that rates would be held at 20.5%; the rest forecast a central bank cut. Seven analysts said they expected a 100 basis-points cut, five a 150 bps cut, while one analyst anticipated a 200 bps cut.

“An inflationary spike following the budget has not materialised as feared,” said Mustafa Pasha, chief investment officer at Lakson Investments.

In June, the central bank warned of possible inflationary effects from the budget, saying limited progress in structural reforms to broaden the tax base meant increased revenue must come from hiking taxes.

The South Asian country set a challenging tax revenue target of 13 trillion rupees ($47 billion) for the ongoing fiscal year that started July 1, a near-40% jump from the previous year, and a sharp drop in its fiscal deficit to 5.9% of GDP from 7.4% for the previous year, to secure key funding from the IMF.

Pasha added that clarity on the IMF programme, stability in the currency markets, and stable foreign inflows trickling into domestic debt and equities, provide “ample comfort to the SBP in continuing to ease the policy rate in July and beyond”.

However, Muhammad Ali, senior investment analyst at AKD securities said that the State Bank of Pakistan is likely to hold rates because it still needs to gauge food inflation for the next several months.

“Food commodities (e.g. wheat) have significant upside potential,” he said, adding that cuts of 150-200 bps each are possible in September and December policy meetings.

KARACHI: Calling the government of Prime Minister Shehbaz Sharif as ‘worse manager’ of the economy, the country’s business owners have become more pessimistic about their future because of continued political turmoil and the new tax-heavy budget, according to a latest survey.

The values were negative for all three strands as Gallup Pakistan surveyed the owners of 454 small, medium and large businesses from over 30 districts in the second quarter of 2024 to compile its Gallup Business Confidence Index report.

In the index the score for current business situation, future business situation and direction of the country declined by four to 10 percent, the survey reports.

Business sentiment witnessing signs of improvement: Gallup Survey

A significant number of businesses thought the government’s new financial plan for FY25 was not business-friendly while about two in five businesses see inflation as their biggest problem.

Like first quarter, price hike was the most cited problem that almost two out of five businessmen, 37 percent, would like the government to address.

The inflation, which soared to 12.6 percent last month in June, remains backbreaking and continues to erode the purchasing power of consumers.

More than half, 54 percent, of Pakistan’s businesses think that the current Pakistan Muslim League-Nawaz government is worse than the previous government in managing the economy, according to the survey.

“Owing to continued political uncertainty and the recently announced heavy-on-taxation federal and provincial budgets have had a significant impact on business optimism in the country,” said Bilal Ijaz Gilani, Executive Director at Gallup Pakistan and chief architect of Gallup Pakistan Business Confidence Index.

The business community, which is already burdened with various regulatory measures and taxes through direct and indirect means, expressed serious reservations on the new budget while being surveyed, he said.

The number of businesses which want the government to solve their taxation issues has risen considerably from the first quarter because of the increased taxes the government imposed in the federal budget last month.

Six out of 10 businesses surveyed said they were faced with crippling load-shedding. This quarter 16 percent more businesses said the power outages had increased due to heavy load on power infrastructure in the country in summer. Overall, 39 percent businesses surveyed said no to load-shedding while 61 percent said yes.

Asked how well their businesses were doing, the owners and managers said the national and global challenges had made economic security a distant dream in Pakistan. Resultantly, the net current business situation score saw a fall of 16 percent in the second quarter of 2024.

The businesses appeared more pessimistic about the future as 57 percent expressed negative expectations while only 43 percent expect things to get better. The net future business confidence score has worsened by 36 percent since the last quarter and is now at -14 percent.

The pessimistic expectations for future business conditions were prevalent especially among those selling hardware and tools, electrical items and manufacturing products. The businesses selling home decor and accessories, gift items like toys and sports related, and cosmetics were among the most optimistic.

The net direction of the country score also moved southward to -64 percent, worsening by four percentage points from the previous quarter as overall trend for the past few quarters has been consistently negative.

“Only 18 percent of respondents claimed that the country is heading in the right direction,” the report said.

A majority, 54 percent, of businessmen said the current economic managers from the PML-N government were worse than their counterparts in the previous government in terms of economic management. Twenty-three percent respondents from manufacturing sector thought the current and previous governments were the same.

A sweeping majority of businessmen, 85 percent, do not consider the government’s new financial plan as a “good budget,” the survey said. Eleven percent of the manufacturers and 15 percent service providers said the budget was business-friendly.

Because of high inflation and poor business conditions nine percent more employers, especially manufacturers, had to decrease their workforce in the second quarter. Six out of 10 businesses or 60 percent said their sales were worse this year. More manufacturers (66 percent) reported worse sales as compared to service providers (58 percent).

“The government in Pakistan needs to listen and address the concerns of business communities across Pakistan,” Gilani said.

Copyright Business Recorder, 2024

KARACHI: Despite the government estimating a surplus profit from the State Bank of Pakistan (SBP) at a record Rs2.5 trillion (roughly $9 billion) during the ongoing fiscal year 2024-25, it lacked ‘fiscal space’ to afford giving taxation relief, said a former finance minister and business magnate, highlighting the burgeoning needs of the government that continues to ignore the expenditure aspect of its budget.

Islamabad budgeted a 157% increase in surplus profit from the SBP in FY25 after its revised estimates showed an amount of Rs972.2 billion in the previous year as record high interest rates and free-flowing borrowing spree enabled massive earnings for the country’s central bank.

The surplus profit comes after the central bank accounts for an amount equivalent to 20% of its overall distributable earnings to the general reserve account — until the sum of the capital and general reserves equal eight percent of SBP’s total monetary liabilities — and post transferring earnings to the special reserve accounts created for any of its specific, identified liability, contingency or expected diminution in the value of its assets, according to the SBP Act.

Monetary Policy Committee: SBP issues advance calendar for meetings in July-December 2024

The annual budget statement shows the amount under the non-tax revenue receipts – which is not part of the divisible pool – and highlights the escalating expenditure of a government that resorted to increase taxation on packaged milk, salaried earners, and other formal sectors.

“Imagine if the SBP’s profit were lower,” Dr Miftah Ismail, a two-time finance minister, told Business Recorder.

“The government would then have imposed even more taxes.”

Ismail pointed out that it was the expenditure side of things that Islamabad needed to look towards.

“Instead, the government should have looked at containing expenditure. The current expenditure, even excluding interest payments, is up 24%. The PSDP allocation is up even more.”

Business magnate Arif Habib, who had before the budget announcement stated that the government would have some room as the SBP was set to post a record profit, also said fiscal burden distribution has been “unfair”.

“This incremental profit (of the SBP) has gone towards reducing the budget deficit,” the chief executive of Arif Habib Group told Business Recorder.

“But the distribution of fiscal burden has been unfair. The petroleum development levy has increased. The salaried group has faced higher taxation. This is a tough environment.

“Some exemptions like the one extended to the ex-FATA/PATA industries – worth around Rs70 billion – are roughly the same amount of taxation on the salaried class.”

Ismail said extending exemptions to ex-FATA/PATA industrialists is a result of “political pressure”. “The public there will not benefit from this. It will just be the industrialists.”

The federal government’s budget, which envisions 40% higher tax revenue and a nearly 64% increase in non-tax revenue, had already been termed ambitious by Fitch Ratings last month.

Copyright Business Recorder, 2024

PESHAWAR: Business community have rejected additional taxation measures in budget 2024-25 and stated that it has not made it difficult to keep operational industry, business and trade but impossible after slapping further taxes.

Business community stressed that the system of Australian tax law should be replaced by the tax model of the United Arab Emirates (UAEs), they stressed.

Terming the Independent Power Producers (IPPs) as detrimental for the country’s economy, business and industry, the traders demanded all IPPs contract cancellation.

These remarks were made by traders leaders during their speeches at a ‘Tajir’ Convention on the theme of “Anti-people Budget and difficulties of traders community” organized jointly by Jamaat-e-Islami Pakistan and Pakistan Business Forum in Peshawar.

Hafiz Naeem-ur-Rehman, emir of Jamaat-e-Islami was chief guest at the event. Besides, Central president of the Pakistan Business Forum Muhammad Kashif Chaudhry, JI provincial amir Prof Muhammad Ibrahim, members of the SCCI Nadeem Rauf, Saddar Gul, Fazl-e-Wahid, Secretary Sohail Anjum, a large number of trader’s leaders and representative of business community attended the convention.

Fuad Ishaq, president of the Sarhad Chamber of Commerce and Industry said the government had paid Rs2200billion on head of capacity charges to IPPs in last year. In the fiscal year 2024-25, he said Rs2800billion would be paid to IPPs on head of capacity charges.

He added that contracts with 12 new IPPs were made, which need to be halted. He said SCCI has played a front foot role against IPPs contracts. The government had made payment of Rs60billon to those plants which didn’t remain operational even a single day, Ishaq revealed.

Fuad Ishaq condemned the imposition of withholding tax at a ratio of 2.5 percent on traders’. He asked the government to provide facilities and incentives to traders instead of snatching morsel from their mouths.

Despite surplus in electricity and gas production, the SCCI chief said equal rates are being charged from Khyber Pakhtunkhwa with major provinces, which is completely unjust with terrorism-affected business community and people of the province.

Copyright Business Recorder, 2024

Such is Pakistan’s salaried group protesting power that it took to the streets in Karachi at 5:30pm – after work hours – as a severe ongoing heatwave and office considerations meant it pushed back the time to later in the evening.

A member of the ‘Salaried Class Alliance’, a relatively newly-formed group that represents interests of the salaried people, said these people may be protesting but they are still considerate.

On Tuesday, the alliance, as it likes to call itself – probably in a bid to differentiate itself from associations and councils that are prevalent in every other sector – held a demonstration at the Karachi Press Club, protesting against the increase in taxation on the salaried group in the Budget 2024-25.

Their demo came in between two other protests – one of teachers and another of a few people protesting against electricity outages. But such is Pakistan’s situation that these protests are intwined, with interests overlapping each other.

Runaway inflation, high energy tariffs, loadshedding, and increase in taxes have all become part and parcel of life as Pakistan moved from one programme with the International Monetary Fund (IMF) to another.

Finance Minister Muhammad Aurangzeb has said that relief would be provided to the salaried group, but when it was ‘possible’. With the staff-level agreement for a three-year programme now reached, many believe any relief is still some time away.

There were no more than 50 protesters who raised slogans against the increase in taxes on salaried class, but it comes as a sequel of a press conference the alliance held last month in which it voiced its concerns for the first time on a public platform.

One of the members, Komal Ali, said many people associated with the alliance were unable make it to the protest because some roads leading up to Karachi Press Club while there were traffic jams in the city.

It was later revealed that traffic jams coincided with the Bohra community leader’s arrival at the Sindh Governor House amid heightened security.

Meanwhile, in a conversation with Business Recorder, Ali said that the group wants the government to listen to the salaried people’s plight and reduce taxes.

“The salaried group has been struggling the most amid high inflation and the government burdening them with taxes is highly unjust.

“We have been appealing to the government to listen. We don’t want to go on strike as others do. We request and expect the government to listen to our demands.”

India gives income tax relief to some to stimulate spending

Her reference comes as several sectors protested – in their own way – after the budget announcement with flour millers, cement and petroleum dealers, retailers registering their grievances against the government.

The salaried group, however, has been quieter, subtle, and patient. It is looking to opt for a legal route, instead.

Another group member Nasir Hussain said amid inflation and higher taxes, salaried persons are also unable to provide quality education to their children.

“Around 60-70% of our salaries go towards taxes and utilities,” he said. “How can one improve their lifestyles and provide quality education to their children. Government doesn’t give anything in return – road infrastructure, education, security or healthcare. We get nothing.”

Shadab Javed, perhaps the youngest of all, echoed the view of others.

“It’s not just me. Everyone around me who has some chance is thinking of relocating outside Pakistan. The government is making things difficult for the middle income group.”

Islamabad, over the years, has increased taxes on salary and their contribution shows a seven-times increase over 11 years. The increase over the last four years has been especially profound.

In the Finance Bill 2024, the government has increased tax liability for all income groups that earn more than Rs50,000. Islamabad says it wants to generate an additional Rs70 billion in taxes from this group.

While the government did not touch the income tax exemption threshold – which still stood at Rs50,000 – liability increased across all other levels of salaries. For example, a person earning Rs100,000 a month will now pay Rs2,500 a month, up from the earlier level of Rs1,250 – showing 100% increase.

It also imposed a 10% surcharge on those whose total income go beyond Rs10 million during a fiscal year, on top of the higher rate of taxes.

The provincial budgets for 2024-25 have all been presented last month in the respective Provincial Assemblies. However, they have not received much attention in the media because of the exclusive focus on the Federal budget and the imposition of additional taxation of the highest-ever magnitude.

There is need to realize that the four Provincial governments combined will account for almost 36% of the total public expenditure in 2024-25. The total proposed outlay is Rs 10,456 billion, equivalent to 8.5% of the projected GDP this year.

The projected growth rate of expenditure in 2024-25 by the four Provincial governments is estimated at almost 33%. This is significantly higher than the anticipated increase in Federal expenditure of 24.5%. The total level of public expenditure is expected to rise to 15.1% of the GDP from 14.6% of the GDP in 2023-24.

The size of the Provincial budgets for 2024-25 ranges from Rs 930 billion of the Balochistan government to Rs 4816 billion of the Punjab government. However, the targeted spending per capita is the highest in Balochistan and the lowest in Punjab. This reflects the horizontal sharing formula from the divisible pool of federal taxes in the 7th NFC Award.

The targeted growth rates in expenditure also vary significantly. The Balochistan government has increased the size of the budget in relation to the level last year by 49%. The smallest increase is in the budget of the Khyber-Pakhtunkhwa government of 21%.

There was, in fact, a breach of the standard practice of presentation of budgets this year. The normal process is for the Federal budget to be presented first followed by the four Provincial budgets. This is necessary because the Federal budget has estimates of the transfers to each Provincial government in the next financial year. These transfers account for almost 80% of Provincial revenues. As such, knowledge of the magnitude of Federal transfers is essential for finalization and presentation of a Provincial budget.

However, the government of Khyber-Pakhtunkhwa presented its budget for 2024-25 before the Federal budget. In retrospect, this has been to the disadvantage of the Provincial government. It assumed that the increase in Federal revenue transfers will be 13.8%. It is now apparent from the Federal budget that the NFC-based transfers to the Khyber-Pakhtunkhwa government are projected to increase much more by as much as 36.6%. Therefore, the Khyber-Pakhtunkhwa government will need to present a revised budget for 2024-25 if it wants to increase various expenditures in light of the availability of more revenues.

There is a need to highlight the budgeted increase in own-revenues to get a measure of the proposed level of fiscal effort by the four Provincial governments.

There is a big variation in the targeted increase in own-tax revenues. It is as high as 56% in the case of the Sindh government and as low as 12% by the Khyber-Pakhtunkhwa government. In fact, the Sindh government is the only government, which has explicitly presented a taxation proposal for generating more tax revenues. This is from the sales tax on services.

Overall, the combined target for own-tax revenues in 2024-25 is Rs 1202 billion. This will raise, if achieved, the provincial tax-to-GDP ratio to 1% from 0.8% currently. However, it will still represent only 9% of the total tax revenues in the country.

There has been a major development recently. An agreement has been reached with the IMF on the development of the agricultural income tax by the Provincial governments from January 2025 onwards. The expectation is that agricultural income will be accorded the same tax treatment as non-salary income, with the highest marginal tax rate of 45%.

There are serious issues of the motivation and capacity to collect this tax. If these are resolved then it could lead to a sizeable increase in Provincial tax revenues.

Turning to the projected growth in current expenditure, the Provincial governments have had to build in the impact of a similar big increase in salaries and pensions as announced by the Federal government. The only Provincial government which has not done this yet is of Khyber-Pakhtunkhwa. Overall, the combined current expenditure of the four Provincial governments is expected to reach Rs 7918 billion, with the growth rate of over 27%.

Provincial development expenditures are expected to show an unprecedented combined growth rate of 53% in 2024-25. In fact, the Sindh government has targeted for an increase of 81%. Consequently, the ADP of Sindh at Rs 959 billion is expected to be even larger now than that of Punjab at Rs 842 billion. Combined the Provincial development spending is targeted to reach Rs 2538 billion, higher than the size of the Federal PSDP by over 80%.

We come finally to the bottom line of the Provincial budgets of 2024-25. This is the likely level in 2024-25 targeted level of cash surpluses. The expectation in the Federal budget of 2023-24 was that the four Provincial governments would generate a combined surplus of Rs 600 billion. According to the revised estimates for 2023-24, the combined cash surplus is likely to be only Rs 197 billion, thereby implying a shortfall of over Rs 400 billion. This has raised the consolidated budget deficit by 0.4% of the GDP and largely eliminated the primary surplus.

The outcome is not likely to be different in 2024-25. The Federal budget is based on the expectation that the combined cash surplus of the Provincial governments will Rs 1217 billion. The reported cash surpluses in the four Provincial budgets for 2024-25 add up to Rs 755 billion, implying a shortfall already of Rs 462 billion.

The provincial government of Sindh has taken pride in declaring that it has produced a ‘balanced’ budget, implying thereby a zero cash surplus. The only Provincial government which has committed to a large cash surplus of Rs 630 billion is that of Punjab. Khyber-Pakhtunkhwa projects a cash surplus of Rs 100 billion, while the targeted level is Rs 25 billion by the Balochistan government.

The need to move towards provincial tax reforms, especially in the agricultural income tax and the sales tax on services, and the result thereby in larger cash surpluses, has led to the talk of a National Fiscal Pact between the Federal and Provincial Governments. This has already been highlighted by the Federal Finance Minister and is mentioned in the 12th of July press note by the IMF on staff level agreement on a new IMF Programme.

There is need for the dialogue for changes in the fiscal structure of the Federation of Pakistan to proceed within the framework constitutionally of a National Finance Commission. The 10th NFC should be activated and talks proceed on a new fiscal framework of the Federal and the Provincial governments.

Copyright Business Recorder, 2024

Sale of state-owned entities (SOEs) and not resuscitating the non-operational Pakistan Steel Mills is the mantra of the recently appointed economic team leader Muhammad Aurangzeb with overt backing from Prime Minister Shehbaz Sharif and other powerful stakeholders.

This is not a new policy decision. Sale of SOEs was pledged in discussions with the International Monetary Fund (IMF) by all three national political parties - from 2008 onwards - and the schedule for sale/reorganisation before sale of specific entities stipulated.

However, organised resistance by the staff supported by the then prevailing political opposition invariably led to, at best, deferral and, at worst, indefinite deferral of the privatisation plan.

Today, however, an additional negative element to this policy is the lack of environment conducive to investment inflows due to the ongoing economic impasse.

A buoyancy of the stock market is cited as proof that a favourable environment exists however this is simply not a valid assumption given the poor rating by all three international rating agencies, which may improve as and when the “successor” to the recently completed nine-month long Stand By Arrangement (SBA) is approved by the IMF.

In addition, low portfolio investment (July-May 2024 of 1170.7 million dollars in spite of a high discount rate during this period) bodes ill for Pakistan being considered attractive to foreign investors.

The government’s overarching objective with respect to privatisation appears to be to eliminate nearly a trillion rupees annual budgeted support to prop up loss-making entities with the three white elephants notably Pakistan Steel, Pakistan International and Pakistan Railways major contributors.

Two critical factors must not be ignored: (i) most of the SoEs operate within a monopoly setting and care must be taken to ensure that a private sector owner does not operate the unit as a monopoly by reducing supply to raise windfall profits to the detriment of the interests of the consumers/clients; and (ii) a detailed empirical study is critical before proceeding with any sale. Several cabinet members recently announced that a couple of electricity distribution companies would be privatised – the salutary objective being to enhance efficiency. Clearly, this decision appears to have been taken without first carefully assessing all pros and cons of a sale.

The example of 2005 K-Electric privatisation is available and one can draw some obvious lessons, notably that K-Electric still requires subsidies under the tariff equalization policy (174 billion rupees budgeted this year) which makes a mockery of the stated objective of the sale.

Thus, either the government opts to abandon the tariff equalization policy or else revisits its decision to privatise two of the distribution companies.

The current thinking in the corridors of power is to privatise units through proactively seeking foreign direct investment (FDI) from friendly countries with all lacunas in the sale to be promptly dealt with by the Special Investment Facilitation Council (SIFC) staffed with representations from the highest civilian (federal and provincial) and military establishment down to the ranks for a specific project proposal. While SIFC was established on 17 June 2023 and over 20 to 25 billion dollars of non-binding Memoranda of Understanding (MoU) have already been signed yet to date binding contracts are still awaited.

In this context, it is relevant to note that MoUs of a similar amount were pledged during previous administrations but were never transformed into binding contracts. The SIFC can draw important conclusions from these past failed attempts.

The consensus in the corridors of power today appears to be that there were some serious personality issues in previous administrations; however, it must be acknowledged that investment decisions are not based on religious or cultural or long-standing ties between the leadership of two countries but on the state of the economy and the risk - political and economic - associated with their investment.

The IMF has repeatedly urged the government to ensure transparency of decisions taken at the SIFC forum. This maybe good advice as SIFC needs to carefully review each proposed contract before signing off on the dotted line to (i) ensure that obligations do not have long-term negative consequences for the general public, an example is the contracts signed with Independent Power Producer’s under the umbrella of the China Pakistan Economic Corridor (CPEC) agreeing to capacity payments and 100 percent repatriation of profit; and (ii) extending special fiscal incentives that would render our tax structure even more anomalous that would work against local investors.

Pakistan’s Plan A, so stated the incumbent Finance Minister, is to seek another IMF programme, the twenty-fifth since independence, reflecting our too frequent cyclical balance of payments’ issues that account for our failure to remit profits to foreign companies today while our economy’s inherent economic travails continue to persist with the power and tax sectors continuing to suffer from major performance issues.

The way forward is therefore to initiate structural reforms as a prelude to achieving a stable economy, and begin with the two most appallingly poor performing sectors - power and tax sectors.

As aforementioned, the tariff equalization policy requires an urgent revisit and the tax structure needs to be transformed into one that is fair, equitable and non-anomalous.

Sadly, the budget 2024-25 has made zero inroads in implementing the needed structural reforms and instead worsened the situation by persisting in policies of the past that led to the current impasse.

To conclude, the way forward requires more in-depth empirical study while undertaking urgent reforms in the two most appallingly run sectors notably the power and the tax sector.

Copyright Business Recorder, 2024

PESHAWAR: The provincial government of Khyber Pakhtunkhwa will earn revenue amounting to Rs.89.8 billion in the current fiscal year 2024-25 from oil and gas as compared to Rs.42.8 billion in the financial year 2023-24, said White Paper on the annual provincial budget.

The receipts will be paid by the federal government in heads of Royalty on Oil and Gas, Gas Development Surcharge, Excise Duty on Natural Gas and Windfall Levy. In head of Royalty on Crude oil and Natural Gas, the province will receive an estimated amount to Rs.26.2 billion as compared to Rs.25.1 billion of the last financial year while in head of natural gas it will earn Rs.11.4 billion, Rs.2.7 billion in head of Gas Development Surcharge, Rs.2.7 billion in head of Excise Duty on Natural Gas and Rs.46.8 billion in head of Windfall Levy.

According to 7th National Finance Commission (NFC) Award, the share of Khyber Pakhtunkhwa, in the net proceeds of total royalties on crude oil in a year, is the proportion of crude oil produced in the province out of the total national production of crude oil in that year.

KP to streamline development of its ‘oil, gas districts’

Royalty on Oil and Gas is payable by the exploration and production companies to the government at the rate of 12.50% of the wellhead value, 2% of which is retained by the federal government and the rest is paid to the provincial government. It is pay able monthly within a period not exceeding 45 days of the end of the month of production in question, which if delayed beyond he stipulated period would attract fine at the rate of the London Inter-Bank Offered Rate (LIBOR) plus two percent as may be determined as per Rule 38 (3) of the Pakistan Onshore Petroleum (Exploration & Production) Rules, 2013. The wellhead value is determined by the government of Pakistan, after every six months.

Gas Development Surcharge is the margin available to the government caused by the difference in the sale price for consumers as determined by OGRA and prescribed price for gas companies on the basis of their fixed return, as defined in the Natural Gas Development Surcharge), Ordinance, 1967.

The prescribed price of Sui Northern Gas Pipeline Ltd (SNGPL) and Sui Southern Gas Company Limited (SSGPL) is based on wellhead price of gas, excise duty at wellhead, operation and maintenance cost, depreciation and returns of gas company (17.5% SNGPL and 17% SSGCL) on assets.

Royalty and Gas Development Surcharge are inversely proportional to each other. In case, the wellhead value is more, there will be more royalty but less Gas Development Surcharge and vice versa.

As per the 7th NFC Award, ’each of the provinces shall be paid in each financial year as a share in the net proceeds to be worked out based the average rate per MMBTU of the respective province. The average rate per MMBTU shall be derived by notionally clubbing both the royalty on Natural Gas and Development Surcharge on Gas.

Royalty on Natural Gas shall be distributed in accordance with Clause (1) of Article 161 of the Constitution whereas the Development Surcharge on Natural Gas would be distributed by making adjustment based on this average rate“.

The Excise Duty on Gas is collected by the Federal Board of Revenue (FBR), and the proceeds so collected are reported to the Finance Division on monthly basis for onward transfer to provinces. Excise Duty on Gas is currently being given at the rate of Rs.10 per MMBTU.

Presently ten companies are working in Khyber Pakhtunkhwa that shows promising prospects for oil and gas exploration in the province.

KP is the first province to have established a Provincial Oil and Gas Company (KPOGDCL) in 2013, under the administrative control of the Energy and Power Department for carrying out fast-track exploration and production of oil and gas.

Copyright Business Recorder, 2024

ISLAMABAD: Finance Ministry has cautioned that fiscal risks may lead to potential threats or uncertainty in fiscal forecasts presented in Medium Term Budget Strategy Papers (MTBS) from fiscal year 2024-25 to fiscal year 2026-27.

Finance Ministry on Friday released MTBSP and its statement of fiscal risks noted that any increase in the interest rate on external and domestic debt can lead to a rise in federal expenditures and subsequently, federal fiscal deficit and total debt of the government.

The report highlighted that Pakistan’s economic trajectory requires a blend of short-term and long-term measures to navigate through challenges such as high inflation, current account deficit, low foreign exchange reserves, and substantial debt burden.

Recurrent budget: MoF unveils strategy for release of funds

A primary objective of the Medium-Term Fiscal Framework is to facilitate policy formulation based on reliable projections of revenues and expenditures after reflecting upon various sources of revenue and heads of expenditure while considering historical trends as well as emerging challenges, said that report.

The combination of the first three scenarios – higher interest rate, lower non-tax revenue and higher subsidies –demonstrates the most significant impact on fiscal variables across the board. A combination of reduced revenues, increased expenditure on subsidies, and potential financing needs due to higher interest rates leads to substantial fiscal deficit and higher debt stock. It underscores the interconnectedness of fiscal policy and the need for comprehensive approaches to address fiscal challenges.

The combined effect of lower GDP growth and more than expected depreciation of rupee can lead to a higher fiscal deficit and an increased debt burden, exacerbating fiscal vulnerabilities. Moreover, depreciation could undermine investors’ confidence, leading to capital outflows and further currency depreciation, creating a vicious cycle of financial instability.

Financing requirements of SOEs render fiscal accounts at risk as entities like GENCOs, WAPDA, DISCOs etc face significant exposure as well as despite being an almost negligible contributor to global warming, the costs of climate change to Pakistan are substantial and continuously increasing as the country faces severe economic challenges.

Mitigation measures include; (i) stable macroeconomic policies prevent excessive exchange rate fluctuations and attract long-term investments, contributing to overall economic resilience and minimizing fiscal risk: (ii) accumulating foreign exchange reserves provides financial cushion against exchange rate volatility. During periods of economic stability and favorable trade balance, the government can build foreign currency reserves and manage these reserves through investments in safe and liquid assets: (iii) developing policies that support export-driven sectors increases foreign currency earnings and improves the trade balance. A stronger export sector enhances foreign exchange inflows, reducing pressure on currency and helping to stabilize it: (iv) creating a conducive environment for FDI boosts foreign currency inflows and supports economic growth.

Ensuring political and economic stability, improving ease of doing business, offering tax incentives, and protecting investors’ rights are key strategies for attracting FDI and by supporting sectors that are less vulnerable to climate impacts and promoting new industries that contribute to a greener economy, the fiscal base becomes more robust and less susceptible to climate-related disruptions etc.

It said that the government key priorities are strengthening macroeconomic sustainability and laying the conditions for balanced growth.

The paper envisages to increase the GDP growth from 3.6 percent in the current fiscal year to 5.5 percent in fiscal year 2026-27, inflation to decrease from 12 percent to 7 per during the period, current account deficit -$3.707 billion to -$5.055 billion, export to be increased from $32.341 billion to $37.051 billion in 2026-27, imports from $57.283 billion to $67.078 billion and remittances from $30.2 billion to $32.9 billion and FBR revenue from Rs 12970- billion to Rs18047 billion in 2026-27 and fiscal deficit from 6.9 percent of the GDO to 4.9 percent of the GDP in fiscal year 2026-27.

Copyright Business Recorder, 2024

ISLAMABAD: Federal Minister for Industry and Production, National Food Security and Research Rana Tanveer Hussain, on Friday, said the government has decided to introduce a track and trace system in the local cotton and ginning industry aimed at avoiding tax evasion.

Talking to a delegation of the Pakistan Cotton Ginners Association, who called on the minister, he said the cotton industry has a pivotal role in the rural economy and the potential to provide employment opportunities for a large portion of the skilled and semi-skilled workforce in the country.

The meeting discussed matters relating to additional taxation measures on seed cotton and cotton seed cake in the current budget, said a ministry statement.

Weekly Cotton Review: Market witnesses satisfactory business volume

The minister said a track and trace system will be implemented on locally produced cotton bales in order to avoid tax evasion to protect local farming communities as well as the industrial sector of the country.

Hussain said the Cotton Control Act will be implemented in real terms in collaboration with the provincial governments and assured the delegation that their proposals regarding sales tax on seed cotton and cotton seed cake will be considered.

The minister also assured the delegation that the matter of new taxation measures will be taken up with the Finance Division and the Federal Board of Revenue (FBR) for consideration to address the issues faced by the local ginning industry.

Speaking on the occasion, the representatives of the Cotton Ginners Association apprised the minister about the additional taxation on cotton products and said that heavy taxes were affecting the production of the cotton ginning industry. They urged the need for rationalisation of taxation on these commodities for the benefit of the local industrial sector as well as promoting cotton crop output in the country.

Copyright Business Recorder, 2024

The IMF and Pakistani authorities have reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) Arrangement of about dollar 7 billion. The agreement, inked on July 12, is destined to be approved by the IMF Executive Board.

Many people hail the agreement as a remarkable achievement while some question it: at what cost and of what benefit is it to the people of Pakistan? While the loan beneficiaries feel secured to survive yet another day on borrowed money, the loan is to be repaid by the future generations - a truth more close to reality.

It increasingly becomes clear that the IMF’s EFF of dollar 7 billion is nothing more than a loan like any other loan from the lender - based on interest and certain conditions. The difference is that the IMF loan and conditions influence the lives of the whole nation. From whatever angle you may look, a loan is an undesirable yet an inevitable option for Pakistan considering its unsustainable debt obligations and the state’s addiction of squandering the loan to cover up governance deficiencies and its unproductive spending.

Pakistan will soon face the crucial task of rescheduling its foreign debt payments amidst failing export earnings. With its current outstanding foreign debt estimated at US dollar 124.5 billion or 42 per cent of GDP, it will need to negotiate with numerous stakeholders, including multilateral institutions, banks and foreign financial organisations. Pakistan could potentially look to China for concessions, if not already done so, in light of their contribution to the debt through their Belt and Road Initiative.

According to data shared by State Bank of Pakistan, as of January 2024, Pakistan’s external debt servicing burden for the next 12 months equals almost dollar 29 billion. That is almost 45 percent of the country’s expected dollar income - hinging on income from exports and remittances. IMF’s new loan of dollar 7 billion is an add-on to this exposure, which will put an additional strain on country’s finances, leaving less room for essential public services and investments and relief to the people.

While on the subject, the observations of the international credit rating agencies cannot be ignored.

Moody’s in its latest report stated that the Programme would provide credible sources of financing from the IMF and catalyse funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs.

“However, the government’s ability to sustain reform implementation will be key to allowing Pakistan to continually unlock financing over the duration of the IMF programme, leading to a durable easing of government liquidity risks,” Moody’s report stated

The rating company warned that a resurgence of social tensions on the back of high cost of living - which may increase because of higher taxes and future adjustments to energy tariffs - could weigh on reform implementation.

The new IMF EFF comes with conditions of far-reaching reforms, such as measures to broaden the tax base and removing exemptions and making timely adjustments of energy tariffs to restore the energy sector viability, the financial services company said.

“Other measures include improving state-owned enterprises’ management and privatisation, phasing out agricultural support prices and associated subsidies, advancing anti-corruption, governance and transparency reforms, and gradually liberalising trade policy.”

Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain, it added.

Whereas, the international credit rating agency Fitch has warned that Pakistan’s ongoing political turmoil could derail the country’s economic recovery.

The latest Pakistan Country Risk Report highlights the precarious state of the economy, noting that urban protests have significantly hampered economic activities.

Fitch Ratings has termed Pakistan’s FY25 budget draft an ‘ambitious’ plan, projecting that the politically weak government will miss several set targets, including economic growth, tax collections, non-tax revenue, fiscal deficit, primary deficit, and expenditure in the year starting July 1, 2024.

Both Moody’s and Fitch underline political and social uncertainty and tension as a threat to the precarious state of economy and the implementation of difficult reforms.

These observations by the rating companies do not appear to have caught the eyes and ears of the state functionaries as at the implementation level there is a lack of clarity and direction to set things right.

IMF conditions are all about reforms and taxation. This puts under focus the conduct of the power sector and FBR (Federal Board of Revenue), among many other sectors and fault lines.

Power sector of the country is most worrying for the country’s fiscal sustainability and needs reforms the most, of which the resolution of Independent Power Producers’ (IPPs’) capacity payment issue is urgent. Federal Minister for Energy Awais Leghari this week asserted that the government was not in a position to act unilaterally against IPPs regarding power purchase agreements (PPAs), which are draining billions of rupees of taxpayers’ money. “The government has guaranteed the IPP contracts. We are moving towards privatising loss-making power companies and institutions,” the minister stated, responding to a barrage of messages on X from former caretaker minister Dr Gohar Ejaz, who blamed the incumbent government for the ongoing power crisis.

No doubt IPP capacity payment is a carry forward from the past, but it brings to surface the fact that the government of the day is at ground zero to address this complex issue. The solution has to be an out of the box solution but someone has to figure out how to go about it.

Taxation is all about the conduct of Federal Bureau of Revenue (FBR). During the visit of Prime Minister Shehbaz Sharif to the FBR House last week, the prime minister expressed serious displeasure that there are some ongoing hidden issues and the FBR has not apprised the prime minister about them and directed FBR to immediately bring all hidden issues before him and he would not take any punitive action against the tax authorities.

Referring to digitization, the prime minister said, “FBR chairman has given me a surprise and I was not expecting this from him that things are hidden from me”. This has not only surprised the prime minister but also the nation as, time and again, it had been stated that the key reforms being implemented at FBR are its digitization and automation aimed at achieving greater transparency and development of trust between FBR and taxpayers - leading to an enhanced tax base and tax recovery. Prima facie, here too we appear to be at ground zero. Hopefully, the said visit of the prime minister to FBR head-office would expedite the process of digitization and automation.

Likewise, there could be many other fault lines where truth needs to be exposed and issues brought forward leading to meaningful reforms and restructuring.

If the government of the day means business then a lot of meaningful hard work has to be put in and truth brought forward. Pending that, the IMF is here to stay.

Copyright Business Recorder, 2024

KARACHI: The federal government has planned to borrow Rs 3.97 trillion from the domestic banking sector during the first quarter of this fiscal year (FY25) to finance the fiscal deficit.

The State Bank of Pakistan (SBP) has issued calendars for the auction of Pakistan Investment Bonds (PIBs) and Government of Pakistan Market Treasury Bills (MTBs) for July-September of FY25. According to the auction calendar, major financing requirements will be made through sale of long-term government papers.

The federal government is intended to raise some Rs 2.36 trillion through sale of PIBs during the first quarter of this fiscal year. Some Rs 440 billion will be borrowed through sale of PIB (Fixed Rate), Rs 1.8 trillion through PIB (Floating Rate) Semi-Annual auction and Rs 120 against PIB (Floating Rate) Quarterly Auction.

Budgetary support: Govt borrowing rises 116pc

Some Rs 1.61 trillion will be borrowed through sale of short-term government security papers during July-Sep of FY25. Overall, some 6 auctions of T-Bills to be conducted to meet the financing target.

Analysts said the country’s revenue collection and foreign inflows are not sufficient to meet the budget expenditures that compel the federal government to borrow from Schedule banks to finance the fiscal deficit.

The federal government has borrowed a record Rs 8.4 trillion from the domestic banking system during the last fiscal year (FY24) for budgetary support to finance the fiscal deficit.

The SBP on Thursday reported that the federal government borrowing from scheduled banks for budgetary support rose significantly by 128 percent during FY24 mainly due to less than target revenue collection and to slow foreign inflows.

The federal government’s borrowing for budgetary support has increased by Rs 4.758 trillion during 1st July 2023 to 28th June 2024. Overall, the federal government raised Rs 8.475 trillion from the scheduled banks for budgetary support during the last fiscal year compared to Rs 3.717 trillion in the previous fiscal year (FY23).

However, the federal government instead of borrowing made a repayment of Rs 608 billion to the State Bank of Pakistan during FY24 as against a borrowing of Rs 196 billion in FY23.

Copyright Business Recorder, 2024

ISLAMABAD: The Ministry of Finance has issued a strategy for the release of funds for the recurrent budget of the financial year 2024-25, to be made through the pre-audit system by the Accounting Offices or through the Assignment Accounts procedure or any other procedure issued by the Finance Division.

Allocated funds for the recurrent budget to divisions/attached departments/subordinate and other offices, ie, autonomous bodies, authorities, commissions, etc, shall be released for FY 2024-25 by Finance Division under Demands for Grants and Appropriations at 20 percent for Quarter 1, 25 percent for Quarter 2 and Quarter 3 each and 30 percent for Quarter 4, as follows; (i) Employees Related Expenses (ERE) and Pension payments at 25 percent for each Quarter; (i) Non ERE Expenditure at 15 percent for Quarter 1, 25 percent for Quarter 2 and Quarter 3 each and 35 percent for Quarter 4; (iii) rent of office and residential buildings, commuted value of pension, encashment of LPR and PM Assistance Packages at 45 per cent during 1st half of CFY and 55 per cent in 2nd half of CFY; (iv) subsidies, grants and lending shall be released by Finance Division to PAOs on case to case basis; (v) cases relating to international and domestic contractual and obligatory payments beyond the above prescribed limits shall be considered on case to case basis by Finance Division; and (vi) PAO or Head of Department or Head of Subordinate Office shall not make any re-appropriation of allocated funds from ERE to any other head of account (Non-ERE) without prior concurrence of Finance Division.

MoF issues strategy for release of recurrent budget funds

The PAOs have been provided additional funds to meet the funding requirements of Ad hoc Relief Allowance 2024, announced in the budget for FY 2024-25, under a separate cost centre in each demand for grants. The Finance Division shall release 100 per cent of these funds in Quarter 3. PAOs are advised to re-appropriate these funds, in consultation with Expenditure Wing, Finance Division, only for the purpose of Ad hoc Relief Allowance 2024, to cost centers of divisions/attached departments/subordinate offices within respective demands for grants.

In order to keep prudent fiscal discipline and sanctity of the budgetary allocations, the guidelines and instructions given below shall be strictly followed by the Finance Division, all principal accounting officers, head of departments, head of sub-ordinate offices, autonomous bodies and all accounting offices: Grants-in-Aid; (i) recurrent funds released to autonomous bodies, authorities, commissions etc. shall be subject to following conditions; (a) PAOs shall, under their jurisdiction, ensure approval of annual budget of the autonomous bodies/authorities/commissions/funds/boards etc. by the competent authority under respective Statutes, Rules and Regulations; (b) a certificate to the effect of such approval shall be communicated to Budget Wing and Expenditure Wing, Finance Division by 31st August,2024. Autonomous Bodies/authorities /commissions/funds/boards etc. shall provide detailed budget information, ie, on detailed object-wise classification, along with their own receipts; (ii) PAQs shall not approach the Finance Division for meeting any expenses of autonomous bodies/authorities/commissions/funds and boards, etc, which are provided grant–in-aid, by ensuring proper distribution and adequate allocation of funds to such autonomous bodies/authorities/ commissions/funds/boards etc out of the total funds placed at their disposal for CFY; (iii)allocation and disbursement of funds to the public and private authorities/institutions/bodies/associations/foundations and others are required to be regulated and linked to outputs, outcomes and performance of the entities; (iv) grants–in-aid shall be considered non non-recurring in nature and funds shall be disbursed only to meet any justified shortfall for a limited period of time.

Grants and subsidies; (i) in case of subsidies, PAOs shall prepare quarterly funds requirement/ cash plan within their allocated budget for CFY and communicate it to concerned wings of Finance Division before the start of each quarter; (ii) concerned wings in Finance Division shall review the quarterly funds requirement/cash plan and subsidies and convey their views and comments to PAOs within two weeks; (iii) PAOs shall submit revised cash plan to concerned wings. In consultation with budget wing, the concerned wing shall seek approval of the finance secretary; (iv) for release of funds in accordance with the approved cash plan, PAOs shall approach the concerned wing for concurrence of Budget Wing and entry in SAP System. In case of any deviation from approved cash plan or fiscal constraints, Budget Wing shall seek approval of the finance secretary before release of funds; (v) sanction of expenditure for subsidies by the PAOs shall be granted with prior concurrence of Expenditure Wing and copies will be sent to Budget Wing, AGPR and all concerned; (vi) PAOs shall approach Expenditure Wing, Finance Division, for release of funds under grants. Expenditure Wing, in consultation with Budget Wing, shall seek approval of Finance Secretary. Afterwards, Budget Wing will release the funds for entry in SAP system; (vii) sanction of expenditure for grants by PAOS shall be made with prior concurrence of Expenditure Wing, Finance Division; and (viii) grants and subsidies reflected in the Finance Division’s Demand shall be processed by the concerned wings of Finance Division in consultation with Budget Wing.

Lending: (i) disbursement of budgetary funds on account of loans and advances and investments to Provincial Governments, Public Sector Entities and others shall be subject to the condition that all due repayments to federal government have been made as per schedules/maturities. If all due repayments have not been made, at source deductions shall be ensured by Provincial Finance and

Corporate Finance Wings; and (ii) with the approval of Finance Secretary, sanction letter shall be issued to AGPR with a copy to Budget Wing for release of funds in SAP system.

Foreign Exchange Payments: (i) adequate budgetary allocations on account of Foreign Exchange Component (Rupee Cover) shall be ensured by all PAOS and conveyed to the Economic Affairs Division and Finance Division; and (ii) funds for foreign exchange payments shall require prior approval of the External Finance Wing of Finance Division.

Commitment Control: (i) The Finance Division has issued Commitment Control Guidelines on March 04, 2022. Annual and multi-annual commitments for procurement of goods, services and civil works by all PAOS and accounting offices shall be recorded through the SAP System.

Austerity Measures: austerity measures issued by the by the competent authority, from time to time, shall be fully adhered to by all concerned, ie, PAOs, heads of attached departments, heads of subordinate offices and autonomous bodies and all accounting offices.

General guidelines and instructions; (i) all payments shall be made through pre-audit system by the Accounting Offices or through Assignment Accounts Procedure or any other procedure issued by the Finance Division; (ii) no direct payment through SBP shall be made by any office, except with the prior approval of the Finance Secretary as per Rules 3(9) and (10) of the Cash Management and Treasury Single Account Rules, 2024; (iii) approved direct payments shall be booked and recorded by the concerned Accounting Office immediately after receipt of intimation from SBP; (iv) special purpose funds or any other fund established, managed or controlled by the ministries, divisions, departments and organizations of the federal shall be regulated in accordance with Section 32 of the PFM Act, 2019. Cash Management and Treasury Single Account Rules, 2024; (v) quarter-wise fund releases will be uploaded on the AGPR server by the Finance Division within above stated release limits. No payment shall be made over and above the limits by any accounting office except with the prior approval of the Finance Division; and (vi) strategy for the release of funds with regard to PSDP, interest Payment, repayments of domestic and foreign loans and supplementary grants for CFY shall be issued by Finance Division separately.

The Finance Division has also made it clear that notwithstanding anything contained in this strategy, all releases of the recurrent budget shall be subject to the availability of fiscal space.

Copyright Business Recorder, 2024

KARACHI: Institute of Cost and Management Accountants (ICMA) has detailed the critical highlights and implications of Pakistan’s federal budget for 2024-25 on various sectors of the national economy.

Exports Sector:

The Export Finance Scheme (EFS) under EXIM Bank sees a significant boost, with its allocation rising from Rs.3.8 billion to Rs.13.8 billion to encourage export growth. However, exporters face new challenges with the shift from a 1% turnover-based Final Tax Regime (FTR) to a 29% tax on taxable profit, potentially hampering export competitiveness.

Moreover, the removal of zero-rating on local supplies under EFS could negatively affect exporters, as the new provision requiring withholding agents to collect 1% advance income tax from exporters upon realization of export proceeds.

Retailers/Wholesalers Sector:

Filing status now influences advance tax collection rates on sales to retailers, set at 0.5% for filers and 2.5% for non-filers. The Finance Act extends advance tax scope to all retailers. The expansion of the FBR Tajir Dost Scheme aims to register more retailers and wholesalers. Additionally, GST on TIER-Retailers of branded textiles and leather products rises from 15% to 18%, impacting the affluent class.

Salaried/Non-Salaried Sector:

The minimum wage increases from Rs.32,000 to Rs.37,000 per month. Income tax adjustments include a new tax structure where no tax is applicable for incomes up to Rs.600,000. Various slabs are detailed for higher income ranges, with rates increasing up to 35% for incomes above Rs.4,100,000. Non-salaried individuals face different tax rates, with the highest bracket at 45% for incomes above Rs.5,600,000. A 10% surcharge applies to individuals with taxable incomes exceeding Rs.10 million, and a 25% tax rebate for full-time teachers and researchers is restored.

Agriculture & Food Sector:

An allocation of Rs.5 billion is made for the Kissan Scheme. Sales tax adjustments include a 10% tax on local poultry and cattle feed supplies and an 18% GST on branded milk and corporate dairy farms. Federal excise duty is levied at Rs.15 per kg on white crystalline sugar, and customs duty concessions on fresh and dry fruit imports are withdrawn.

Textile Sector:

The removal of zero-rating on local supplies to registered exporters under EFS necessitates claiming refunds, complicating the process. The increase in tax rate from 1% (Final Tax) to 29% on profits, plus 2% advance tax on export proceeds, threatens to reduce export competitiveness. Additionally, a 2% customs duty is imposed on previously duty-free raw materials like raw cotton and fibers.

Automotive Sector:

The tax structure for motor vehicles is revised, ensuring fair contributions from luxury vehicle owners. Reduced sales tax rates on manufactured hybrid electric vehicles are extended until June 2026. The first registration tax rates for motor vehicles vary significantly between filers and non-filers, with rates increasing with vehicle size.

Import concessions for hybrid vehicles are withdrawn and additional customs duties on localized auto parts aim to boost local manufacturing.

Banking Sector:

Banking companies face restrictions on deducting “bad debts” classified as sub-standard or doubtful but can deduct those classified as “loss” related to non-performing assets. Super tax applies to banking companies for the tax year 2023 and onwards.

Energy Sector:

Incentives for manufacturing solar panels and allied equipment are introduced. Exemptions for importing equipment for energy projects, particularly for Gwadar Port and its Free Zone Area, are extended. Petroleum Development Levy rates are set at Rs.70 per liter for high-speed diesel, motor gasoline, and superior kerosene oil, and Rs.50 per liter for light diesel oil and E-10 gasoline. LPG produced in Pakistan now has a levy of Rs.30,000 per metric ton.

Financial Market/Stock Exchange:

The government removes slab-wise benefits on Capital Gains Tax (CGT) for holding securities over a year, maintaining a 15% top CGT rate for tax filers and increasing it from 30% to 45% for non-filers. Dividend income from mutual funds and REITs investing in debt securities is taxed at 25%. An increased advance tax rate on profit from debt for non-filers rises from 30% to 35%.

Health Sector:

A total of Rs.27 billion is allocated for healthcare. A health insurance scheme for journalists and media professionals is introduced. Sales tax on medicaments, including herbal medicines, increases to 18%, while exemptions remain for specific medical items and supplies to charitable hospitals. Customs duties on materials for dialysis equipment and specific neonatal treatments are waived, but duties on other medical supplies rise to 20%.

Real Estate Sector:

Profit taxes are set at 10% for construction and sale of buildings, 15% for development and sale of plots, and 12% for combined activities. Federal excise duty on immovable property varies based on the buyer’s tax status, with higher rates for non-filers. The CVT rate for Islamabad ranges from Rs.500,000 to Rs.1.5 million depending on the property size.

Information Technology:

The IT sector receives its highest-ever budgetary allocation of Rs.79 billion. Proposals include establishing a National Digital Commission and Pakistan Digital Authority, with significant allocations for IT parks in Karachi and Islamabad. However, GST on IT hardware rises from 5% to 10%.

Cement Sector:

Federal excise duty on cement increases from Rs.3 to Rs.4 per kg. These extensive changes in the federal budget 2024-25 reflect the government’s efforts to address economic challenges across multiple sectors, balancing revenue generation with incentives for growth and development.

Copyright Business Recorder, 2024

KARACHI: The Federation of Pakistan Chamber of Commerce and Industry (FPCCI) has urged the federal government to immediately review the power agreements with IPPs to save the country’s sinking industry as electricity tariff is unbearable due to capacity charges of IPPs.

Addressing a press conference at Federation House on Monday, acting President FPCCI Saquib Fayyaz Magoon along with S M Tanveer Patron-in-Chief UBG and other industrialists, said that presently, energy prices or tariff is the one the major and biggest problem in the country and directly hurting the industrialization in the country. “We have made it clear to the government that the industry cannot run until the energy prices not reduced”, he added.

He said that FPCCI in its budget proposals urged the government for reduction in the power tariff to make the domestic industry competitive in the world market; however, instead of reduction in electricity prices, the government has imposed fixed charges of Rs.1250, which has increased the cost of production.

BMP for revisiting power purchase contracts with a view to reducing energy cost

He informed that as against the capacity of 45,000 MW, only 22,000 MW comes in the main transmission line, but the consumers have also to pay the cost of unutilised electricity. “We have to pay 56 percent of the price in capacity charges due to unjustified contracts with IPPs”, he mentioned.

FPCCI on behalf of the entire business community’s demanded that the government should review the agreements awarded to IPPs, otherwise the industry will not be able to compete and survive.

On the occasion S M Tanveer said that currently, the government is paying Rs 2 trillion on account of capacity charges. “The government must decide that it want to save 40 people’s or 240 million Pakistani masses”, he questioned.

Industry is unable to keep the factory operational at this power tariff and started shutting down operations, he said. “Some 25 percent of industry has already shutdown due to high tariff and hundreds are in line to close the operation”, he added.

Tanveer warned that this crisis will lead to increase the unemployment in the country and mass decline in the country’s exports. This will also resulted in lower tax revenue, he added.

Revision of power tariff is a matter of urgency and the government must take immediate action to addresses this issue, otherwise once industry closes, can’t be revived. Business community is committed to support the country and the government to achieve a long-term growth and bring the $100 billion by end or 2030, but this needs to addresses the issues like power tariff to reduce the cost of production so our industry can compete in the international market, Tanveer said.

He urged the government to revise the contracts of IPPs and conduct Forensic audit of IPPs by international firm in next two weeks to save the country’s industry. “If the IPPs do not agree for revision and audit, their names should be included in the ECL”, FPCCI demanded.

He said that due to this situation new investment in the industry sector is come to standstill.

Copyright Business Recorder, 2024

ISLAMABAD: Cement dealers in Pakistan begin their countrywide strike for an indefinite period against higher withholding tax on cement in the federal budget 2024-25.

The government has increased the withholding tax to 2.5 percent for non-filers under Section 236H of the Finance Act 2024 which has made the cement business unsustainable given the current market conditions besides the new turnover taxes imposed on dealers and retailers.

All Pakistan Cement Dealers Chairman Sajid Chaudhry highlighted concerns that taxes and PoS measures have badly disrupted their business. He criticized the requirement for Point of Sale machines, arguing that such demands are impractical for many dealers and retailers, who lack the necessary resources and education.

Cement dealers announce strike against WHT

The association urged the government to intervene, suggesting a presumptive tax regime as a solution. They warned that failure to address these issues could force many businesses to shut down, worsen unemployment, and hurt the economy.

The federal government in budget 2024-25 has also imposed a higher FED on cement to Rs4 per kg compared to Rs2 in the previous fiscal year.

Meanwhile, the exports of cement witnessed an increase of 40.46 percent during the first eleven months of the financial year 2023-24, as against the exports of the corresponding months of last year.

The cement exports from the country were recorded at US $236.797 million during July-May (2023-24) against US $168.583 million during July-May (2022-23), according to the Pakistan Bureau of Statistics (PBS).

Khyber Pakhtunkhwa (KPK) budget was announced on 25 May, two and a half weeks before the federal budget was announced on 12 June, the Punjab budget was announced a day later on 13 June, Sindh on 14 June, and Balochistan on 21 June – dates that may reflect prevailing political considerations however all provincial budgets, like the federal budget, deviate but little from their previous budgets.

The similarity of the 2024-25 budget’s revenue and expenditure thrust with the previous ten budgets tabled by Pakistan Peoples’ Party’s (PPP) Sindh government and the Pakistan Tehreek-e-Insaf (PTI) administration in Khyber Pakhtunkhwa (KPK) may be rationalised on the grounds that the two parties have been in power in these two provinces since 2013.

Balochistan operates within its own unique political dynamics however with the country more critically assessing the performance of first time chief minister Maryam Nawaz Sharif widely believed to be the political heir of PML-N supremo, the same yardstick is, perhaps unfairly, not being applied.

Be that as it may, the one common feature of all four provincial budgets is the continuation of heavy reliance on federal transfers with little attempt to actually raise own revenue.

The transfers, based on the Finance Bill and amended in case of any subsequent change in taxes levied or withdrawn, or an unforeseen shortfall, will be distributed as per the 2010 National Finance Commission award.

Federal transfers as per the provincial budgets show Punjab’s budget formulators in the worst possible light with 79 percent reliance on federal transfers, trailed by KPK’s 77 percent, Balochistan’s 76 percent and Sindh’s refreshing 62 percent.

Sindh government clearly is in the lead in relying less on federal transfers and the reason is attributable to increasing revenue from sales tax on services, budgeted to rise from 230 billion rupees in the revised estimates of last year (lower by 5 billion rupees only than was budgeted) to 350 billion rupees in the current year – a 52 percent rise.

Punjab sadly envisages a rise from 224.8 million rupees in the revised estimates of last year - a higher shortfall from the budgeted 235 million rupees relative to Sindh - to 294 million rupees in 2024-25, a rise of an impressive 30.7 percent but total collections budgeted are lower than in Sindh.

KPK envisages a 7 billion rupees rise in sales tax collections on services in 2024-25 compared to the revised estimates of 2023-24.

Balochistan with its ongoing insurgency is limited in raising its own revenues.

The four provincial governments did not deem it politically expedient to levy a tax on the income of the rich and political extremely influential landlords that is at par with the rate paid by the salaried class.

Farm tax, designated a provincial subject in the constitution, is much drooled over by the Federal Board of Revenue (FBR) each year on the grounds that the rich famers enjoy a yield well above the national average, that allows them to rake in hefty profits each year, as well as enjoy subsidies on many inputs.

The landlords are heavily represented in the country’s national assembly, which enables them to ensure that the constitution is not amended to make farm income a federal subject but also in provincial assemblies, which accounts for a derailment of attempts to raise revenue from their income.

KPK envisages tax from agriculture income at a low of 114 million rupees in 2024-25, the same as realized and budgeted in the outgoing year. Sindh government envisages 6 billion rupees next fiscal year – up from the 2 billion rupees in the revised estimates of last year (budgeted at 3.630 billion rupees).

Punjab has budgeted an appallingly low 3.5 billion rupees for this year, identical to the amount last year. And Balochistan budgeted 1086.7 million rupees for next year against 776.2 million realised in 2023-24 and budgeted at 1035 million rupees last year.

In terms of expenditure, the KPK budget envisages a 10 percent increase in salaries and pensions – projected to cost an additional 35 billion rupees.

The federal budget raised salaries from between 20 and 25 percent (depending on the pay scale), a largess to be delivered at the taxpayer’s expense which, reports indicate, have prompted the KPK government to reconsider its original proposal.

Raising it to the level on offer by the federal government would mean an additional 76 billion rupees. Punjab apishly followed the federal government lead in announcing a 20 to 25 percent raise and a 15 percent hike in pensions.

Sindh went a step further and raised salaries by 30 percent and 15 percent pensions, while Balochistan raised salaries by 22 to 25 percent.

The only leverage available to federal and provincial governments, the former a perennial borrower domestically and from abroad, and the latter heavily reliant on federal transfers, is to reduce expenditures.

In this context, the KPK government took the most appropriate decision in limiting the raise of salaries to 10 percent, though ideally a salary freeze across the board would have been the most economically prudent decision to take.

Sadly, the status quo parties have always considered 7 percent of the country’s total labour force (paid at the taxpayers’ expense) to be key players in ensuring the implementation of their directives and therefore their political continuity which explains their insistence on raising public sector employees’ salaries at well above the rate of inflation even when, as is the case today, the economy is suffering from unsustainable budget deficits and heavier than ever reliance on borrowing.

The rest of the budgeted outlay by all provinces had one point of deviation, reflecting their party’s priorities. KPK budgeted an amount of 28 billion rupees for the much appreciated sehat card, though some needed changes were made, including limiting its use to the Benazir Income Support Programme beneficiaries and small surgeries only available in public hospitals.

Punjab’s signature outlay is to be on mobile hospitals and one would assume that this was accounted for in the health budget which was raised from 8074 million rupees in the revised estimates of last year to 8827 million rupees in the current year – a 9 percent increase though lower than KPK’s outlay on the extremely popular sehat card. Free laptops and free scooters for girls echo free gifting of items purchased at the taxpayers’ expense by her Uncle when he was chief minister.

Sindh government allocated 25 billion rupees over five years for free rooftop solar home systems to 2.6 million grid households.

While it is not known by how much demand will decline as a result, yet the salutary intent of this policy is to provide cheap electricity to the poor. Ignored is that it will also imply lower demand from the national grid that in turn would raise consumer tariffs as well as the tariff equalization subsidies payable by the centre.

To conclude, like the federal budget, the provinces too did not undertake any out of the box policies in terms of expenditure or revenue generation, and therefore it has been more of the very same.

Copyright Business Recorder, 2024

The IMF Staff-Level Agreement (SLA) for $7 billion programme is done. However, that does not ensure revival of the economic growth which is necessary for the young population.

The government expects 3.5 percent GDP growth in FY25, but it would be a surprise if the toll surpassed 3 percent.

FY25 started at a weak momentum in the manufacturing and services sector which is positive for growth numbers in a way as it is likely to jump from a very low base.

For example, Large Scale Manufacturing (LSM) was down by 10 percent in FY23 and remained flat in FY24; and a slight bounce back will bring it back to green. Similar is the story of wholesale and retail trade in services.

However, the outlook on agriculture is ominous. FY25 is starting on a high base (last year’s growth was 6.25 percent which is substantially higher than the previous five years average growth of 3 percent.

The farm economics does not look good this year. One, the low (or absence of) wheat support price has adversely impacted the returns on investment for farmers. Second, the harsh summers may have a dent on the cotton crop in Sindh, and the risk of erratic monsoon may impact the output in Punjab negatively.

Then the rice bonanza of last year (due to absence of India in the exporting market) is going to be over. The higher taxation on exports is not going to augur well for rice and other agriculture exports.

All these factors are reflected in the farm economy where the rates of land lease rates (theka) are down by 20-25 percent in certain parts of Punjab. Then, the new elephant in the room will be agriculture income treated as taxable beginning 1st Jan 2025. This could have a toll on the growth.

The overall agriculture output and income would be challenged and that shall have an impact on the demand of various goods and services in the rural economy.

The situation of the urban economic dynamics is not good either. Here, the higher taxation on salaried and non-salaried income will squeeze the disposable income. Then, the ending sales tax exemption on various products being consumed by urban middle class will further erode the purchasing power.

This can dampen the economic growth and employment generation. Already, sales in a few sectors are multiyear low – such as cars sales in FY24 is at 15 years low while 2-wheelers’ sales are at 9 years low, Cement domestic sales and petrol consumption is at 7 years low. The story is similar in many other sectors.

There might be some bounce back in auto sales, but this would remain significantly low from its peak in FY22.

The cement and steel sales are likely to remain bleak as new taxation measures can keep the real estate sector depressed. Exporters are postponing expansion. However, volumes of textile exports are likely to remain high in the next few months.

The business and consumer sentiments after the budget are not encouraging. There is no feel-good factor – be it rich industrialists exporters, SMEs, professionals and public at large. Local investment shall be hard to come by.

FDI is low anyways and all existing investors want smooth repatriation of dividends and profits. Those who had investment plans will delay them to the back burner. A few companies impacted by higher taxes have hiring freeze and are cutting expenses.

The IMF SLA is comforting news and priced in. The economy does not run on the IMF programme alone. The Fund’s presence is necessary to remain afloat, but it means continuation of contractionary policies. Higher taxation, possible currency adjustments and energy prices revision would have inflation implications to be visible from October onwards.

SBP (central bank) may cut the rate by 2-3 percent by then and may take a pause if inflation resurges. The interest rate decline is perhaps going to be much more gradual than anticipated earlier.

In order to meet fiscal targets, the government would have to cut the PSDP (public sector development plan). It’s already down by Rs50 billion for accommodating protected electricity consumers for three months. More cuts may follow. This will limit the growth coming from public investment.

And if there is any revival of the growth spurt, SBP would have to proactively manage it through currency adjustments, as in the absence of foreign investment and market debt, SBP has to keep a balanced current account.

The IMF agreement may provide a temporary lifeline, but it cannot mask the deeper issues plaguing the economy.

With agriculture facing a downturn, urban consumers squeezed by higher taxes, and critical sectors such as manufacturing and services showing only fragile signs of recovery, the forecast is grim.

Sustainable growth requires more than fiscal adjustments and external loans; it demands comprehensive reforms, robust public investment, and policies that stimulate both domestic and foreign investment.

Without these, the economy risks stagnation, leaving the youthful population and future generations to bear the brunt of these economic missteps. The road ahead is perilous, and it is time for the government to adopt a long-term vision beyond the immediate relief of an IMF programme.

Copyright Business Recorder, 2024

The Pakistan budget 2024-25 appears to have largely satisfied the IMF (International Monetary Fund), prompting it to move on with the 25th IMF programme, to once again bail the country out for its fiscal and economic sustainability. But, this is not where IMF stops.

The budget satisfied the IMF to the extent of its conditionalities on enhancement of taxation and tax base and curtailment of subsidies, the brunt of which is felt by the people at large and the industry in particular.

What follows now is IMF tightening the noose on the government on the many shortcomings in its state governance and structural changes needed at many ends - the brunt of which will be experienced by the incumbent government with political and socioeconomic consequences. However, most of these conditions could turn out to be in greater public interest and somewhat in bringing around better state governance.

The IMF has placed a significant condition to abolish the Pakistan Sovereign Wealth Fund (PSWF) as a prerequisite for qualifying for a new bailout package, aiming to ensure transparency and accountability in the financial affairs of the country’s seven profitable state-owned firms. The Fund is adamant on it, setting September 30th as a deadline to repeal the Pakistan Sovereign Wealth Fund Act 2023, which governs the operations of the PSWF.

The Pakistan Sovereign Wealth Fund (PSWF) is a state-owned investment fund established by the Government of Pakistan to manage and invest the country’s surplus funds for the benefit of future generations. The International Monetary Fund (IMF) may have some concerns about the PSWF due to transparency, accountability, or governance issues. The IMF may want to abolish or reform the PSWF to improve transparency, ensure proper governance, and enhance accountability to prevent misuse of funds or corruption.

Pakistani authorities are reported to have sought more time to provide a final response, but it appears the government may have no choice but to agree to the IMF’s demand to inject transparency and accountability into the affairs of the seven companies.

The previous government had enacted the Pakistan Sovereign Wealth Fund Act to transfer the shares of seven profitable entities and then sell them overseas to raise money. The law states that the assets and profits of the Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited, Mari Petroleum, National Bank of Pakistan, Pakistan Development Fund, Government Holdings (Private) Limited, and Neelum-Jhelum Hydropower Company will be shifted to the Sovereign Wealth Fund.

Imposition of equitable tax rate on agriculture income was suspiciously excluded from the budget - to the disappointment and chagrin of many taxpayers who believe that they are not being fairly treated on taxation. This discrimination did not go unnoticed by the IMF who has brought this onto its ‘must do’ list.

The IMF wants the imposition of a standard individual income tax rate of up to 45% on agriculture income – something that may end the disparity in income tax regime without the need to amend the Constitution. The condition is part of the structural benchmarks the IMF has defined for the next bailout programme. October 2024 is the deadline set by the IMF to amend the existing provincial laws to bring them at par with the federal income tax law. The IMF has also asked for rescinding any income tax exemption for the livestock sector by October this year.

Under the Constitution, the federal government cannot impose taxes on agricultural income. The provinces are authorised to collect taxes from the agriculture sector that contributes 24 percent to the economy but does not contribute even 0.1% of the total taxes collected from across the country.

The IMF has not touched the constitutional arrangement, but instead has asked the provinces to simply adopt the income tax rates of non-salaried business individuals that are as high as 45 percent of net income.

The World Bank in its report has estimated that Pakistan can raise farm income tax equal to 1 percent of the Gross Domestic Product. This is equal to Rs1.22 trillion considering today’s projected size of the economy.

The sources told a newspaper that provincial governments have, by and large, given consent to the IMF’s demand, although they view that 45 % tax compared to the existing 15 percent maximum rate is too high. In case of the corporate farming, the rate of corporate income tax rate is understood to be applicable.

Many of the federal ministries are superfluous in terms of duplication of work and having no role after the 18th amendment, when many federal subjects were transferred to provinces. Such ministries should have long time back restructured or declared redundant. Here again, IMF takes the lead to set things right.

Five federal ministries have been identified as the initial focus of a comprehensive right-sizing initiative launched by the federal government under the directives of the IMF. These ministries have been given a deadline of July 12, 2024, to submit their responses, highlighting the urgency of the matter.

The Prime Minister has constituted a Committee on right-sizing of the federal government, tasked with the job of proposing a new architecture for federal functions.

The five key ministries are: Ministry of Information Technology and Telecommunication, Ministry of Kashmir Affairs & Gilgit-Baltistan, Ministry of States and Frontier Regions (SAFRON), Ministry of Industries and Production (MoI&P) and Ministry of National Health Services Regulations & Coordination.

More of such IMF conditions, primarily related to state governance gaps and deficiencies, would be brought on the table for implementation with defined timelines, as negotiations with IMF proceeds.

Years of mis-governance in state affairs on account of lack of competence and political and vested interests interventions has rendered the state machinery ineffective to do the basics to bring around a change for the better in state affairs. The “basics” such as transparency in Pakistan Sovereign Wealth Fund, imposition of agriculture tax at the right rate and rationalization of federal ministries that the IMF has been vigorously advocating constitute the basic requirements and public demands of the day, which any responsible government would have done on its own initiative and in good time.

For internal security we move when China points at our gaps and deficiencies in our system; for fiscal and economic sustainability we need the IMF and World Bank to guide us, on diplomacy we oscillate between the demands of the US and China. All these are doable and well under our own reach to manage and manage well. The nation no doubt has tremendous competence and knowledge embedded in its genes, which has time and again proved its worth. It only needs to be polished and showcased once again.

Copyright Business Recorder, 2024

ISLAMABAD: The Finance Ministry on Friday issued strategy for release of recurrent budget funds for 2024-25 fiscal year with 20 percent for quarter 1, 25 percent for quarter 2 & quarter 3 each and 30 percent for quarter 4.

The Finance Ministry said that in pursuance of the provisions of the Public Finance Management Act, 2019 and Financial Management, funds release strategy for the recurrent budget for fiscal year 2024-25 is being issued for implementation with immediate effect and until further orders.

Allocated funds for the recurrent budget to Divisions/Attached Departments/ Subordinate and other offices i.e. Autonomous Bodies, Authorities, Commissions etc. shall be released for fiscal year 2024-25 by Finance Division under Demands for Grants and Appropriations at 20 percent for Quarter 1, 25 percent for Quarter 2 & Quarter 3 each, and 30 percent for quarter 4.

Federal government employees: Ad hoc relief in pay, pension notified

Employees Related Expenses (ERE) and Pension payments at 25 percent for each quarter, non-employees related expenditure al 15 percent for Quarter 1, 25 percent for Quarter 2 & quarter 3 each and 35 percent for Quarter 4.

Rent of Office and Residential Buildings, commuted value of pension, encashment of LPR and PM Assistance packages at 45 percent during 1st half of Current fiscal year and 55 percent in 2nd half of the ongoing fiscal year.

Subsidies, grants and lending shall be released by Finance Division to Principal Accounting Officer (PAOs) on case to case basis.

The cases relating to international and domestic contractual and obligatory payments beyond the above prescribed limits shall be considered on case to case basis by Finance Division.

The PAO or Head of Department or Head of Sub-ordinate Office shall not make any re-appropriation of allocated funds from ERE to any other head of account (Non-ERE) without prior concurrence of Finance Division:

The PAOs have been provided additional funds to meet the funding requirements of Adhoc Relief Allowance 2024, announced in the budget for fiscal year 2024-25, under a separate cost centre in each demand for grants and Finance Division shall release 1OO percent of these funds in Quarter 3.

PAOs are advised to re-appropriate these funds, in consultation with Expenditure Wing, Finance Division, only for the purpose of Adhoc Relief Allowance 2024, to cost centres of Divisions/Attached Departments/ Subordinate Offices within respective Demands for Grants.

Copyright Business Recorder, 2024

ISLAMABAD: The Finance Division has issued a strategy for release of funds for development budget for financial year 2024-25 with 15 percent for Quarter 1, 20 percent for Quarter 2, 25 percent for quarter 3 and 40 percent for Quarter 4.

According to Finance Division funds for development budget shall be authorized by Planning, Development and Special Initiatives (PD&SI) Division out of the PSDP allocation for current fiscal year for approved projects at 15 percent for Quarter 1, 20 percent for Quarter 2, 25 percent for quarter 3, and 40 percent for Quarter 4.

While executing development projects PD&SI Division and the principle accounting officers (PAOs) concerned shall ensure implementation of the provisions of the Public Finance Management Act, 2019 and planning division shall devise quarterly sector wise, project wise and Division-wise strategy for release of funds for Public Sector Development program within the approved appropriations.

Govt slashes PSDP by Rs204bn

Any proposal for change to the limits prescribed shall be considered by the Budget Wing, Finance Division on case to case basis and shall require prior approval of the Finance Secretary.

The PAOs shall ensure availability of sufficient funds for Employees Related Expenses (ERE) for each project. PAOs, heads of attached department, heads of sub-ordinate office or project director shall not make any re-appropriation of funds from ERE to Non-ERE heads of account except with the prior concurrence of PD&SI Division.

Adequate budgetary allocations on account of Foreign Exchange component (Rupee Cover) shall be ensured by all relevant PAOs and conveyed to Economic Affairs Division and Finance Division and funds for foreign exchange payments shall require prior approval of External Wing of Finance Division.

All payments shall be made through the pre-audit system by all the Accounting Offices or through Assignment Account procedure or any other procedure issued by the Finance Division. Separate Assignment Account shall be opened for each project. No direct payment through the State Bank of Pakistan (SBP) shall be made by any office, except with the prior approval of Finance Secretary as per Rules of the Cash Management & Treasury Single Account Rules, 2024.

The instructions with regard to Supplementary Grants, Technical Supplementary Grants and Re-appropriations shall be issued by the Budget Wing, Finance Division, separately. There shall be no requirement of ways and means clearance from Budget Wing of Finance Division for the release of development budget and no payment shall be made over and above the limits by any accounting office except with the prior written approval of the Finance Division.

The Development Wing of Finance Division shall coordinate and oversee the matters relating to release of funds for development budget and other ancillary matters. The PAOs may approach PD&SI Division for any issues related to authorization as well as distribution of funds between the approved projects/schemes.

Copyright Business Recorder, 2024

ISLAMABAD: Federal Board of Revenue (FBR) Chairman Amjed Zubair Tiwana Friday said new revenue measures taken in the budget (2024-25) would not be withdrawn and enforcement would be the top priority for 2024-25 to meet the assigned revenue collection target of the new fiscal year.

Briefing the National Assembly Standing Committee on Finance, on Friday, on FBR’s performance (2023-24), the FBR chairman said that the tax collection target for 2024-25 could only be achieved when FBR has ample resources with increased enforcement on untaxed sectors.

The enforcement drive would be intensified during 2024-25 to tax those sectors which are out of the tax net or under-paying taxes. There is a trust deficit between the government and the International Monetary Fund (IMF) on the issue of enforcement.

“They say that if the FBR has been unable to do enforcement during the last 70 years, then how the tax machinery be able to do the same now,” he said.

FBR, PRAs at loggerheads over harmonization of tax collection

He said the government does not want to impose sales tax on milk, but we have to due to the IMF. He regretted that the burden of tax had been increased on the salaried class in the budget.

The FBR chairman admitted before the committee that the withholding taxes are imposed to compensate FBR’s weak enforcement. In Pakistan, there are more withholding taxes as compared to the rest of the world. However, the number of withholding taxes has been reduced from 58 to 31.

Responding to a query on real estate sector, he said that the economic slowdown has not only been witnessed in real estate sector, but almost all sectors. He referred to the automobile sector and tobacco industry where economic slowdown has affected their production and sales.

The FBR chairman said the biggest initiative in reforms is to shift FBR Tax Policy Wings from FBR. This reform initiative would be achieved by the deadline of March 31, 2025. The transfer of policy wings from the FBR has been agreed by all stakeholders.

In future, the audit of exporters would only be done after prior approval of the concerned FBR Member. Over 7,000 notices were issued to exporters engaged in domestic sales as well.

During the briefing, the FBR chairman informed that out of Rs4,583 billion direct taxes collection during 2023-24, withholding tax collection stood at Rs2,680 billion, reflecting an increase of 58.47 per cent. Major head of withholding taxes included salary, dividends, interest and exports etc which contributed Rs1,538 billion during 2023-24.

The committee members including Chairman of the Committee Syed Naveed Qamar expressed serious concern over heavy reliance on withholding taxes and stated that if all withholding taxes have been collected in indirect mode, then what is the revenue collected from the FBR’s own effort? The inflation, autonomous growth and additional taxation measures have helped the FBR to achieve the target in 2023-24, but how much revenue FBR has collected from its own efforts, they raised question.

Naveed Qamar said that everyone in Pakistan is operating as a withholding agent as reflected by withholding tax collection during 2023-24.

The FBR chairman responded that the share of withholding taxes has been decreased from 70 per cent to 58 per cent in 2023-24. Direct taxes contribution is around 50 per cent which was traditionally less than 40 per cent. The import taxes now stand at 34 per cent which was more than 50 per cent of total taxes in 2021.

The FBR has collected advance tax of Rs1,462 billion from banks and companies under Section 147 of the Income Tax Ordinance, 2001, through its own efforts, he maintained.

The FBR chairman said that the FBR has achieved target of Rs9,252 billion during 2023-24 and collected Rs9,311 billion, reflecting an achievement of 100 per cent target. Tax-wise breakup revealed that direct taxes witnessed growth of 36.5 per cent; sales tax (19.5 per cent); Federal Excise Duty (FED) growth 56.1 per cent and customs duty witnessed the growth of 30 per cent during 2023-24.

The FBR data (2023-24) further revealed that the income tax target has been achieved by 121.8 per cent; sales tax (85.9 per cent); FED (96.2 per cent) and customs duty target has been achieved by 100.6 per cent.

Copyright Business Recorder, 2024

EDITORIAL: Once again the tax-to-GDP ratio for the last fiscal clocked in at nine percent and, typically, once again there hasn’t been a squeak out of the government about the real reason it’s stuck in such a low band even though this is the fifth-highest populated country in the whole world.

It’s because this government, just like every other administration before it, bowed to political pressure and left the biggest fish – agriculture, wholesale, retail, real estate – un- or under-taxed and now there’s no hope at all of this fiscal year’s outcome to be any better than the last one’s.

The new banker-finance minister promised to finally tax these holy cows, just like every other finance minister before him, but didn’t – or couldn’t? – do it when the budget was rolled out. His promise made a lot of sense. We were on the cusp of another critical EFF (Extended Fund Facility) with the IMF (International Monetary Fund), and taxing untaxed Big Money would have created the fiscal space needed to meet the harsh “upfront conditions”.

But when push came to shove, the cruel tax burden fell not on these bloated mafias but on the common, hard-working people who’re already footing the debt bill because they’re forced to pay taxes even when their real incomes have not kept up with historic inflation and unemployment.

It’s rightly said that the most dangerous lies are the ones we tell ourselves. And over the years our leaders seem to have come to really believe that protecting the rich, connected and powerful from the tax net while squeezing more and more out of ordinary, law-abiding citizens is the right way to run the country.

Even now, with the economy on the brink of ruin, the specially protected sectors are allowed to use pressure tactics, outright blackmail, or more often their contacts in government to avoid paying their fair share.

Agriculture, for example, still makes for less than one percent of provincial revenue figures. In such circumstances, you’d expect a committed government in the centre to calculate the agri tax at the same tax rates as ordinary people pay and then deduct said amount from annual NFC transfers.

But since the central government is also littered with the same kind of feudal lords and industrial barons, it’s no surprise that no such smart idea ever sees the light of day. And we go round and round in the same circle.

The big problem is that now the well is running dry. Most common Pakistanis have seen their real incomes drop badly because of the economic downturn of the last few years, especially unprecedented inflation and unemployment.

And since they’re earning much less in real terms yet must pay far more taxes – just so the government can meet the Fund’s conditions and avoid default – it’s only a matter of time before we reach some sort of critical threshold.

For a while, though, it really did seem that this time would be different. This government took office after a very controversial election, but promised that it understood the gravity of the situation and was willing to do whatever it took to sort out the economy.

And it really seemed that the new finance minister really meant business when he talked taxes; that he’d bring the no-nonsense, clinical calculus of the banking world to the finance ministry and set the budget right.

Alas, it was not to be. It’s not just that we’re unable to expand our tax net and raise tax revenue. It’s that the state is not interested in it.

Copyright Business Recorder, 2024

“Accordingly CVT was abolished through the Finance Act 2010 as charge and levy of CVT became a provincial subject. Different provinces have started levy and collection of CVT on immoveable property through their respective Legislation”—FBR’s Circular 3 of 2012 explaining provisions relation to Capital Value Tax (CVT)

The Ministry of Law and Justice has informed the Federal Board of Revenue that the tax authorities are not legally empowered to collect the Federal Excise Duty (FED) on all allotment and transfer of commercial and residential plots/buildings within the jurisdiction of federal Capital—‘Allotment/ transfer of plots with Capital: Tax Authorities are not competent to collect FED: Law Ministry’, The Business Recorder, November 27, 2010

“Entry 50 was the subject matter of discussion in a number of appeals before a Division Bench of which one of us (Shahid Karim, J.) was a member and it was held that tax on capital value of immovable property was beyond the legislative competence of the Parliament and was within the power of the Provincial Assemblies to legislate upon”—Commissioner of Inland Revenue v Muhammad Osman Gul [ICA No.35908 of 2023] [(2024) 129 TAX 364 (H.C. Lah.)]

“The Eighteenth Amendment brought a change to and amended Entry 50 in the Fourth Schedule (Federal Legislative List) of the Constitution of the Islamic Republic of Pakistan. As a consequence thereof, the Federation and all Cantonment Boards lack competence, power, and jurisdiction to levy, charge, impose and recover any or all tax(es) on any immovable property, including, but not limited to, tax on the annual rental value of immovable property”—M/S MILLENNIUM MALL MANAGEMENT CO v PAKISTAN & others [(2024) 129 TAX 505 (H.C. Kar.)]

In the Finance Bill 2024 the Federal Board of Revenue (FBR) proposed federal excise duty [FED] on transfer of immoveable property and National Assembly, acting as a rubber stamp, passed it in utter violation of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. It proves beyond any doubt that while FBR is incompetent as far as tax legislation is concerned, our elected members are least concerned to abide by the supreme law of the land under which they have taken their oaths and vowed to uphold it supremacy. They have proved to be the worst violators of the Constitution.

The cases cited above and many others quoted and relied upon therein or reported elsewhere have explained in great detail and in unequivocal terms that after the Constitution (Eighteenth Amendment) Act, 2010 [“18th Amendment”], the federation has no power whatsoever to levy any tax on capital value of immovable property, except in Islamabad Capital Territory (ICT). FBR, in utter violation of Articles 77, 142, 189 and 201 of the Constitution, in the second consecutive budget has encroached upon the legislative powers of the provinces envisaged in Article 142(c) read with Entries 49 and 50, Part I, Federal legislative List (FLL), Fourth Schedule to the Constitution.

It is shocking that the elected (sic) members sitting in the National Assembly and Senate have once again failed to take cognizance of the perpetual violations of the Constitution on the part of FBR.

The amendment made in the Federal Excise Act, 2005 [FED Act 2005 as amended up to 30 June 2024] through the Finance Act, 2024 with effect from July 1, 2024 to the effect of imposing FED on transfer of immoveable property reads as under:

“after Table-II, the new Table shall be added, namely:– “Table-III”

In the budget 2022-23, through the Finance Act, 2022 with retrospective effect, that is from tax year 2022 onwards, section 7E of the Income Tax Ordinance, 2001 [“the Ordinance”], inserted. It was challenged in all the five High Courts of the country.

A detailed discussion on constitutionality of section 7E of the Ordinance vis-à-vis the conflicting judgements of High Courts is available in ‘Section 7E: Constitutional validity’, Business Recorder, April 19, 2024. Imposition of FED on transfer of immoveable property by the Finance Act, 2024, has raised some fundamental issues relating to its validity under the Constitution“ as well as real import of amendments made in Entry 49 & 50, Part I of FLL of the Fourth Schedule by the 18th Amendment.

The judgement of single judge of Lahore High Court, though disapproved erroneously by a Division Bench in intra-court appeal [Commissioner of Inland Revenue v Muhammad Osman Gul [ICA No.35908 of 2023] [(2024) 129 TAX 364 (H.C. Lah.)] brilliantly traces the history of taxes on immovable property and makes the following noteworthy observations:

“In Pakistan, estate tax was charged under Estate Duty Act 1950, which was repealed in 1979, without any debate or deliberation. It was within competence of Federation under Entry 46 “Estate Duty on property” along with Entry 45 “Duties in respect of succession to property”. Both the entries, imposing tax on immoveable property, are repealed by 18th Amendment along with the amendment in Entry 50, where after the phrase “taxes on immoveable property” is excluding “taxes” on immovable property and not the immovable property itself from capital assets, value of which is to be taxed under Entry 50. Omission of Entries 46 & 45 along with amendment in Entry 50, collectively shows that all taxes, burden of which is on the immoveable property are excluded from competence of the Federation”.

The issue of interpretation of Entry 50, Part I of FLL of the Fourth Schedule by the 18th Amendment in the wake of conflicting judgements of five High Courts [three in favour of taxpayers and two in favour of the federation], is presently sub judice in the Supreme Court of Pakistan to authentically settle the issue whether in pith and substance section 7E of the Ordinance is a tax on income or not.

A three-member bench of the Supreme Court seized the matter and heard it for three days on day-to-day basis which was not as per the Supreme Court (Practice & Procedure) Act, 2023. Later, on pointing out that since the matter involved interpretation of the Constitution, it could not be heard by less than a five-member bench under section 4 of the Supreme Court (Practice & Procedure) Act, 2023, constituted a larger bench to hear the matter, which was fixed but adjourned on April 25, 2024, and any fresh hearing date is yet not announced.

A holistic reading of Serial No 1 of the newly-inserted Table III to the Federal Excise Act, 2005 [FED Act 2005] shows that in pith and substance it is a duty to be paid on gross consideration at the time of “allotment or transfer of commercial property and first allotment or first transfer of open plots or residential property by any developer or builder in such mode and manner and subject to such conditions and restrictions as may be prescribed by the Board”.

The textual and plain reading of the law shows that any transferor of:- commercial property or first time allotment/transfer of open plot and any developer or the builder of:- residential property will charge and recover from the buyer or allottee, as the case may be, FED on the rate(s) applicable on the day of transfer or allotment.

There is absolutely no doubt that in respect of all the above events, FED is imposed on transfer of immoveable property, on buyer or allottee to be collected and paid in the government treasury by any transferor in respect of commercial property or first time allotment/transfer of open plot and by any developer or builder for residential property.

This imposition in pith and substance represents FED on transfer of immovable property and not any services rendered by the transferor or developer/builder. If it is capital value tax (CVT), then FBR has already conceded in Circular 3 of 2012 that power to levy it exclusively vests with provinces after the 18th Amendment, except in ICT. If for argument’s sake, it is conceded that FED is imposed on services then it is hit by Entry 49, Part I of FLL, Fourth Schedule to the Constitution that gives exclusive right for such taxation to the provinces after the 18th Amendment.

It is an established law that entries contained in the FFL, Fourth Schedule to the Constitution are mutually exclusive and for one taxable event two entries cannot be invoked—Pakistan International Freight Forwarding Association v Province of Sindh & Another (2016) 114 TAX 413 (H.C. Kar.) followed in Pakistan Mobile Communication Ltd & 2 Others v Federation of Pakistan & Others (2022) 125 TAX 401 (H.C. Kar.).

Entry 43, Part I of FFL, Fourth Schedule to the Constitution even in its widest possible scope/import cannot override Entry 49 as far as any imposition on services is concerned. Such a tax cannot even be imposed by the Parliament (Majlis-e-Shoora) under Entry 50 or 52, Part I of the FLL read with Article 77 and 142(a) of the Constitution after the 18th Amendment.

The legislative competence of provinces in view of ouster clause in Entry 49, Part I of FLL, Fourth Schedule to the Constitution is succinctly elaborated in Pakistan International Freight Forwarding Association v Province of Sindh & Another (2016) 114 TAX 413 (H.C. Kar.) followed in Pakistan Mobile Communication Ltd & 2 Others v Federation of Pakistan & Others (2022) 125 TAX 401 (H.C. Kar.).

Needless to say that the National Assembly by imposing FED in respect of transfer of immoveable property has once again violated the clear command of the supreme law of the land. All the institutions are bound to follow the Constitution and judgements of the Supreme Court and High Court in terms of its Articles 189 and 201. The National Assembly has violated both by imposing FED on transfer of immoveable property that falls outside its legislative competence.

Even if it is FED on services, exclusive legislative competence to tax it vests with the provinces in the wake of the 18th Amendment effective from April 19, 2010. This unconstitutional imposition of FED will certainly be challenged under Article 199 of the Constitution by the aggrieved persons.

Copyright Business Recorder, 2024

Benjamin Franklin’s famous quote, “In this world, nothing can be said to be certain except death and taxes,” resonates profoundly with the registered taxpayers of Pakistan, particularly the salaried class.

The salaried class in Pakistan, particularly those with annual incomes between 600,000 and 1.2 million rupees, is increasingly dissatisfied with the new tax policies introduced in the budget for the fiscal year 2024–25. Given the higher taxes they now have to pay, this group has been vocal about the need to adjust the exemption threshold.

While the government’s decision to raise the minimum wage from 32,000 to 37,000 rupees per month is commendable in light of inflation and rising living costs, it raises questions about equity. Individuals earning just 13,001 rupees above the new minimum wage are now required to pay a 5% tax on any income exceeding 50,000 rupees per month, which has highlighted the financial burden on the lower-middle class.

The Pakistani President recently emphasized the importance of a balanced approach to taxation that does not unduly burden the salaried class while ensuring adequate revenue generation for the state. His remarks align with a broader public sentiment, advocating for a reconsideration of existing tax laws to promote fairness and prevent undue impact on those approaching substantial tax obligations.

According to official figures, payroll taxes in Pakistan are high because the salaried class contributes a disproportionate share of the country’s income. This cohort, already strained by inflation and stagnant earnings, now faces increased taxes, compounding their challenges. Many Pakistanis struggle to meet basic living expenses, making the new tax laws particularly harsh for those already finding it difficult to pay their bills.

One of the more contentious aspects of the new tax policies is the inclusion of income tax in electricity bills. Consumers have widely criticized this practice for being unwarranted and unduly burdensome. The Federal Board of Revenue (FBR) should solely bear the responsibility of overseeing and ensuring the proper functioning of energy production and distribution companies involved in tax collection.

Adding income tax to power bills has escalated monthly expenses for many, exacerbating already precarious financial situations amid other rising costs. With current Pakistani electricity prices, these additional charges hit consumers especially hard, reducing their disposable income and making it harder to afford other necessities.

One cannot overlook the influence of the International Monetary Fund (IMF) on recent tax changes and related budgetary measures. Pakistan’s relations with the IMF have heavily influenced its taxation strategy as it strives to meet the stringent requirements of its IMF loans.

To stabilize the economy and reduce budget deficits, the government often enacts more taxes and stricter tax policies to broaden the tax base. While these measures aim to stabilise the economy, they frequently impose a significant societal cost, particularly affecting the most vulnerable segments of society.

There are both advantages and disadvantages to the IMF’s role in Pakistan’s economic policymaking. On one hand, the IMF’s financial support is crucial for maintaining macroeconomic stability and enabling the government to perform essential functions. On the other hand, austerity measures driven by IMF conditions often disproportionately impact low- and middle-income groups.

This broader trend of IMF-influenced economic policy includes recent tax revisions, such as the controversial inclusion of income tax in power bills and higher tax rates for the salaried class. Some argue that a progressive approach is necessary to ensure that individuals across different income levels contribute their fair share of taxes. They propose that the government should target the untaxed informal sector and wealthy individuals who frequently evade taxes in order to expand the tax base, thereby alleviating the burden on the salaried class.

In light of President Asif Ali Zardari’s recent statements and actions, it is critical to address these issues promptly. An efficient and equitable tax system is essential as the government navigates economic changes and its global financial commitments.

This necessitates ensuring that tax collectors do not misuse power bills as a revenue-collection tool, as well as reviewing the income tax structure and exemption levels. To prevent external interference, the FBR’s role must be well-defined and strictly adhered to.

The tax changes proposed in Pakistan’s budget for 2024–25 have sparked significant debate and concern. Factors such as increased taxes on the salaried class, the incorporation of income tax into electricity bills, and the impact of IMF conditions have created a complex and challenging economic environment. As the government seeks to balance tax collection with social equity, it must carefully consider the average Pakistani’s plight.

There’s need to address wasteful and unjustified government spending. To create a more equitable and sustainable fiscal policy, it is necessary to revise exemption levels, expand the tax base, and ensure transparent and fair revenue collection processes.

In South Asia, countries like India, Bangladesh, and Sri Lanka have implemented various approaches to taxing the salaried class, often coupling tax obligations with specific benefits to alleviate the financial burden. In India, the income tax structure is progressive, with multiple tax slabs designed to ensure that higher earners pay a larger proportion of their income in taxes.

To offset the impact, the Indian government provides numerous deductions and exemptions, such as those for housing loans, education expenses, and health insurance premiums, which significantly reduce the taxable income for salaried individuals. Similarly, Bangladesh has a tiered tax system where tax rates increase with higher income brackets. The government offers benefits such as tax rebates on government bond investments and life insurance premiums.

Sri Lanka, while having a simpler tax structure, offers relief through personal allowances and exemptions for certain types of income, such as pension contributions and savings account interest. These measures not only help to ease the tax burden on the salaried class but also encourage savings and investments, contributing to overall economic stability. By providing targeted benefits and maintaining a progressive tax system, these regional countries strive to balance revenue generation with the economic well-being of their salaried citizens.

The increase in income tax is a particularly contentious issue, with significant implications for socio-economic stability in Pakistan. Higher taxes on the salaried class not only strain household finances but also contribute to a broader sense of economic insecurity. This financial pressure can lead to socio-economic instability, as individuals and families find it increasingly difficult to meet their basic needs and maintain their standard of living.

The risk of brain drain is one of the most concerning potential outcomes of higher income taxes. As financial pressures mount, skilled professionals may seek better opportunities abroad, where they can achieve a higher quality of life and retain more of their earnings. This exodus of talent can have long-term negative effects on Pakistan’s economic growth and development, as the country loses valuable human capital that is essential for innovation and productivity.

To mitigate these risks, it is crucial for the government to adopt a more progressive tax policy that reduces the burden on the salaried class and ensures a fairer distribution of tax obligations. By targeting wealthy individuals and the informal sector, the government can expand the tax base without disproportionately impacting those who are already struggling. Addressing these issues is vital to maintaining socio-economic stability and preventing the loss of skilled professionals who are critical to Pakistan’s future.

Copyright Business Recorder, 2024

It seems the mainstream press is finally waking up to the social implications of the new tax regime. So far it’s happily provided uncontested coverage of the recent rate cut and the bubble in the stock market, never questioning nor even wondering about which way interest rates and the market will go once the IMF programme’s “upfront conditions” begin to bite.

This week, though, an editorial in Dawn – Ballooning bills, 6 July 2024 – warned that a “second cycle of nationwide protests and agitation against the ballooning price of electricity will start soon”. Long story short, tariff revision is just one of those many “upfront conditions”, which will inflate utility bills and push the already horribly taxed middle- and lower-income classes right over the edge. But there’s more.

The press ought to highlight also that high cost of energy will reignite cost-push inflation just when the state bank is turning dovish after years, cripple the similarly horribly taxed industrial sector, force job losses and drive yet more people into utter desperation. It must also remind everybody that this is happening in a country which has the world’s fifth-highest population and figures right at the top in global poverty and illiteracy indices. To make electricity, gas, water and eventually even food and water simply unaffordable for millions of people in this environment is the textbook recipe for creating a social nightmare.

But most of all, the press is still criminally silent about the fact that all this is being done deliberately. Everybody understands that the country will default without an active IMF programme, and it will come with very harsh “upfront conditions” that will tax the country to the bone. But the new finance minister, at least, seemed to realise that the desperate need for more fiscal space meant that the four sacred sectors – agriculture, real estate, wholesale and retail – would finally have to be taxed. But it turned out, at the time of the budget, that he didn’t.

Anybody who’s run headlines out of a newsroom for a few years will tell you how every new ‘parachute’ finance minister makes this same claim all the way to his first budget, but then bows to political pressure at the last minute. You just do not tax the feudal and industrial elite that rules this country, nor their friends in trade and property; not if you want to keep your job and the glitter, glamour and international connections that come with it. That’s why even though I have learned it is not wise to make predictions about policy, I still dared to call the banker-finance minister’s bluff in this space when he first said those words.

And he didn’t disappoint. All that experience in local and international banking and finance and his prescription is to tighten screws on existing taxpayers even more tightly than his predecessors! And not only do the biggest, most bloated and best-connected sectors stay protected from the tax net, government officials and parliamentarians get more salaries and more perks and privileges while the private sector, the urban middle class, and lower income groups are made to pay pound after pound of flesh to save the country.

Yet I’m surprised to see these pages still quoting experts and former very senior officials of top institutions calmly predicting a “downward trajectory” for interest rates, a stable rupee, and a “stabilising economy”. It seems nobody’s considering the very basic fact that when poor people see their bills rise by 40-50 percent, a lot of them simply cannot pay them, and the inevitable outcome is social unrest on a very large scale.

The caretaker government got a taste of this when people got their electricity bills for last August and poured onto the streets. That’s when the information minister made a clown of himself by saying that they called the IMF to revise the tariff, but it was night time in Washington so they didn’t take the call. Now the plan is to do the same to people, more and more, month after month. That’s sure to raise prices across the board and, just as the editorial warned, trigger nationwide protests.

The press must also warn that history will look back to his fiscal year, and hence the celebrated banker-minister’s first budget, as the time when painful structural reforms under a critical IMF programme could have saved the country. But its rulers, forever in denial, refused to create additional fiscal space, kept their friends and cronies protected, and deliberately piled more pressure on honest, hardworking Pakistanis than they could bear.

Copyright Business Recorder, 2024

ISLAMABAD: Federal Minister for Finance and Revenue Senator Muhammad Aurangzeb had a meeting with the Founder and Chairman Delivery Associates Sir Michael Barber at the Finance Division Monday, said a press release.

The meeting was also attended by Development Director British High Commission Jo Moir, Senior Governance Advisor Matt Clancy, Governance Advisor BHC Naveed Aziz, Senior Economic Advisor Louie Dane and officials from the Finance Division.

Sir Michael Barber appreciated the Federal Budget 2024-25 and the structural reforms in taxation implemented by the Government of Pakistan. Recognising the challenges involved, he discussed the priority areas of Pakistan’s home-grown economic plan.

Sir Michael reaffirmed the commitment to continuing support, building on previous collaborative efforts with Pakistan.

The finance minister thanked Sir Michael for his acknowledgment and appreciated the support of the UK government. He outlined key priority areas for the Government comprising of taxation reforms, energy sector reforms, and restructuring of State-Owned Enterprises (SOEs).

Emphasising the importance of structural reforms within the framework of the IMF program, the Federal Minister highlighted initiatives aimed at enhancing exports, attracting Foreign Direct Investment (FDI), and the privatisation efforts.

He underscored the government’s focus on export-led growth and the digitalization of the Federal Board of Revenue (FBR) to ensure transparency and expand the tax base.

The meeting concluded with a commitment to enhance collaboration between both parties, focusing on mutual strategic goals and sustainable economic development.

Copyright Business Recorder, 2024

The fiscal year, 2024-25, promises to be an eventful year. It will see early negotiations between the Government of Pakistan and the International Monetary Fund for a three-year Extended Facility.

Achievement of the quarterly performance criteria and structural benchmarks will determine the extent and nature of actions to remain in the Program.

There is a need to focus on the Annual Plan prepared every year by the Federal Ministry of Planning, Development and Special Initiatives. This is a properly researched document, which contains a detailed set of economic projections for 2024-25.

The other set of projections are those that were made by the IMF following the second and last review of the Stand-by Facility for Pakistan in May 2024. These projections do not reflect the potential impact in 2024-25 of any new IMF Programme.

This article focuses on the outlook in 2024-25 for economic growth, level of investment and the rate of inflation. A subsequent article will be on the balance of payments and the likely outcome of fiscal operations both by the Federal and provincial governments in 2024-25.

Focusing first on the rate of GDP growth, both the Annual Plan and the IMF projections expect the growth rate to rise from 2.4% in 2023-24 to 3.5%.

The primary source of growth in 2023-24 was the truly exceptional growth in major crops of 16.8%, which was enhanced by the low base due to the loss of output in the floods in 2022-23. Almost 60% of the increase in the GDP in 2023-24 is attributable to the major crop sector.

The expectation now in the Annual Plan is that the level of output of major crops will not be sustained in 2024-25 and there will be a drop in output of 4.5%.

The two sectors that are expected to fuel the process of growth in 2024-25 are large-scale manufacturing and wholesale and retail trade, with growth rates of 3.5% and 4.1%, respectively. However, the performance of the large-scale manufacturing sector will hinge especially on the textile sector, with a share of almost 30% in the overall sectoral value-added.

The export performance will determine the growth of the textile sector. There are two factors here, which could impact negatively on textile exports. The first is the change in taxation of exports brought in the Federal Budget of 2024-25. Now exports will no longer pay only 1% income tax on the value of exports but will be subject henceforth to much higher normal income taxation. This has increased the risk of underreporting of the value and quantum of exports. Further, continued escalation in utility tariffs will reduce the competitiveness of exports. Other industries which may show limited growth in 2024-25 include other agro-based industries and industries relying more on imported inputs.

The increase anticipated in the Annual Plan of a big jump in the growth rate of the largest sector, wholesale and retail trade, from 0.3% in 2023-24 to 4.1% in 2024-25 is also surprising. It is unlikely if the major crop sub-sector shrinks by 4.5% in 2024-25. Almost 25% of the trading activity is in the crops.

Overall, the growth rate of 3.5% in the GDP in 2024-25 looks somewhat ambitious. A perhaps more likely outcome is a growth rate of 3%.

Turning to the overall rate of fixed investment in the economy, the year 2023-24 witnessed the lowest level in the last fifty years. It is estimated at 11.4% of the GDP, with private investment at 8.7% of the GDP and public investment at 2.7% of the GDP. Four decades ago, the peak level of total fixed investment of 17% of the GDP was attained.

The big slump in private investment is attributable to a number of factors. First, interest rates have been at peak levels. The policy rate remained at 22% and was only brought down to 20.5% just before the end of 2023-24. Second, the rupee cost of projects has escalated substantially, especially after the large devaluation of the Rupee in 2022-23 and profitability has been reduced by the weak economy and the cost-push effects of big escalation in electricity and gas tariffs. Third, there has been the ‘crowding out’ effect of colossal borrowing by the Federal government from the banking system.

The overall level of investment in 2024-25 is expected to rise from 11.7% of the GDP to 12.7% of the GDP by the IMF. This will hinge on whether the SBP (State Bank of Pakistan) continues to bring down the policy rate in coming months in light of the lower rate of inflation. Also, the Federal and Provincial governments have generally targeted for an over 50% increase in development spending. If these two outcomes are achieved, then the 1%-point increase in the level of investment looks feasible.

The most discussed projection for 2024-25 is the rate of inflation. The year, 2024-25, closed with an average monthly rate of inflation in the Consumer Price Index of 23.9%. The last few months of 2023-24 witnessed a sharp decline in the rate of inflation, from 28.3% in January to only 12.6% in June.

The two projections for 2024-25 are close to the rate observed in June 2024. The IMF expects it to average 12.7%, while the Annual Plan anticipates the rate to go down even further to 12%.

There are a number of risk elements in the projection of the rate of inflation. First, there is the outlook for imported inflation. The decline in the rate of inflation in the second half of 2023-24 was attributable to the stability in the nominal value of the rupee. Entry into the IMF program may necessitate resort to a market-based exchange rate policy. Already, the IMF projections anticipate an over 15% devaluation of the rupee in 2024-25.

International prices have generally been stable or declined in recent months. However, crude oil prices have shown recently a rising tendency. There is need also to build in the impact of the budgeted increase in the petroleum levy.

Electricity and gas tariffs will probably show a big rising trend in 2024-25 in the presence of the IMF Program and the commitment to prevent any increase in the size of the circular debt. Further, high inflationary expectations are likely to persist.

The rate of inflation projection at 12 to 12.7% appears unduly optimistic. In light of the above stated reasons, the rate of inflation may be in the rage of 16% to 18% in 2024-25.

The likelihood is that in comparison to the Annual Plan and IMF projections for 2024-25, the GDP growth rate may be somewhat lower and the rate of inflation significantly higher this year. Hopefully, the level of investment will rise from its lowest level in fifty years and provide the basis for somewhat higher GDP growth in coming years.

Copyright Business Recorder, 2024

PESHAWAR: Chairman Pakistan Peoples Party, Bilawal Bhutto Zardari addressing a press conference said that he was briefed on the issues of the people.

He said that the PPP has always engaged in positive, issue-based politics and intends to continue do so in the future, as well. The PPP does not believe in the politics of foul language and desires to represent the people to resolve the plethora of problems they face.

There is a deficit of positive politics in the country and the politics of hatred and division has reached its peak. We have to combat such anti-political and anti-democratic tendencies in a democratic manner, as is the wish of the people.

Bilawal said that as the chairperson of his party, he would like to get reorganised the party nationwide, especially in Khyber Pakhtunkhwa. The PPP will combat all antagonistic forces with positive politics and it will be victorious. He further said that the increasing inflation, poverty and unemployment are of utmost concern and the situation is deteriorating by the day. If politicians are not seen combating these issues sincerely, they would then have to face the voters. The security situation Pakistan is faced with is critical.

The policemen, Army and martyrs of the country made the terrorists face a historic defeat, with the world as a witness. Unfortunately, despite these great sacrifices to achieve peace, decisions were taken as a state and as a government that led to a resurgence of terrorism, from KP to Balochistan.

Chairman PPP said that the government has decided to call an APC regarding the counteroffensive, which will be attended by a delegation of the PPP. The party will then share its input on the appropriate forums. The PPP’s aim will be to allow for the formation of consensus, as it had also hoped for the budget and the economic policy.

The PPP is standing with its people, police and Army, and the law enforcement agencies are rendering sacrifices in all four provinces. We have to put our House in order when it comes to the economic and security situation, and the PPP will play a positive role in this process, he said.

Responding to a question, Bilawal said that the decisions taken with consensus will be better apt for the current economic quagmire. It is correct that the current government is standing with the votes of the PPP and that is how the budget too was passed. This is why we had stressed on consultation with us prior to the budget. The PM and his team paid heed to the issues we raised, and assured us that our input would be taken into consideration prior to certain policies being devised.

Responding to another question regarding Afghanistan, he said that many were not able to achieve their targets in the country. Furthermore, a visit to Afghanistan will not resolve our problems.

Referring to his own tenure as the Foreign Minister, Chairman Bilawal said that not only did Pakistan host Afghanistan’s foreign minister but also the Chinese foreign minister. It marked the first tripartite interaction between Pakistan, China and Afghanistan. This is the diplomatic, engaging manner with which our issues should be tackled. It is in the interest of the people of both the countries that we address our mutual concerns. Afghanistan does not have a standing army or counter-terrorism experience, there are capacity issues.

However, our issues too carry weight and we should see to it that they are paid heed. If the two countries are to successfully resolve their issues, it will mark an era of economic prosperity for both the nations.

To another question, he said that no party other than the PPP has consistently demanded accountability for terrorism. When General Faiz and General Bajwa were incumbent, it was the PPP’s demand that brought them to the National Assembly. PPP was the party that raised questions in that meeting.

The PPP is awaiting the APC, where factual information will be presented, and that will be the appropriate forum to raise concerns. There have been mistakes in the past that cannot be denied. Our security situation is directly linked to the economic plight. We cannot criticise every decision of the government just for the sake of it.

As far as the law and order situation is concerned, the KP government has a primary role to play. If the KP government and its ministers, for the past 15 years, have admitted to being financed by terror outlets, continue to voice support for them, and directly fund these organisations, then how can we expect to combat such elements? Hence, the APC is a welcome initiative so that all political parties can present their stance.

Responding to a question regarding the budget, Chairman PPP claimed that CM Sindh had resolved all of Sindh’s issues prior to the budget. The remaining issues concerned the rest of the three provinces. This was because it was included in the agreement that the PPP and PML-N would collectively collaborate on the PSDP prior to the budget. Our objection was on the post-facto agreement. It is hoped that in the future, there would be pre-facto cooperation instead.

Chairman PPP said that the PPP had planned on creating fiscal space to fund the projects it had proposed in its manifesto as well as the 10-point agenda. Till now, the ministries operating in the federation have not been devolved. When this takes place, it will aid the federal and provincial governments.

Moreover, he said that Sindh’s budget is pro-poor and includes public-private partnership based initiatives centring on solar energy to address the energy crisis and rising costs.

Chairman PPP said that the Pakistani government is no longer in denial of the plethora of issues we face as a country. We were told by governments in the past that all is well. There were instances in the past, such as the one taken by the President of Pakistan and the government of the time, to provide relief to and invite the hardened criminals including those responsible for the APS attack, which led to a mindset of denial.

He said that there has been a shift since but there needs to be further change as far as the economic policy is concerned, which centres around regressive taxation and indirect taxes, burdening the impoverished.

The Karachi Chamber of Commerce has presented an analysis on the budget, according to which, for every 1000 rupees earned, there is a 100 percent increase in the taxes. In contrast, for every 20 million rupees earned, there is only a 4 percent increase. As long as we burden the poor, instead of the elite, we will not be able to form a welfare state.

Chairman Bilawal said that the PPP does not desire ministries in the government, but wants for the problems of the people to be addressed. The only condition is to be given the respect, space and opportunity for its input to be included.

Copyright Business Recorder, 2024

ISLAMABAD: The government has begun rightsizing the federal government by seeking information from five ministries about their actual and revised budget for 2023-24 and budget for 2024-25 besides their segregated functions between federal and provincial based on federal legislative list latest by 12 July.

Sources said that ministries of Information Technology and Telecommunication, Kashmir Affairs and Gilgit-Baltistan, States and Frontier Regions (SAFRON), Industries and Production have been asked to treat the matter as urgent and the response may be ensured by 12th July 2024 for onward submission to the Prime Minister’s Office.

Prime Minister’s Office Institutional Reforms Cell in a letter to these ministries has been mandated to undertake a comprehensive exercise for right sizing of government to ensure productive and allocative efficiency. The Cell being part of Cabinet Division serves as a support unit in carrying out the assigned mandate of reforms and provides necessary secretarial support

Govt passes tax-laden budget ahead of talks on fresh IMF loan

The prime minister has constituted the Committee on Rightsizing of the federal government with the ToRs: propose architecture for functions of the federal government that can be undertaken in private mode, ascertain functions requiring public finances which can be performed in private mode and, analyse whether remaining functions have appropriated and economical architecture corresponding to them; determine functions which are entirely provincial with no international “obligation and without affecting common market principal; recommend concrete plan with clear way forward and methodology along with ascertainment to safeguard assets, human resources and other ancillary issues; any other issue relevant to the scope of work assigned to the committee.

The committee in its 30 meeting convened on 5th July 2024, chaired by Minister for Finance and Revenue has decided to seek input from the ministries – IT and Telecommunication, Kashmir Affairs and Gilgit-Baltistan, States and Frontier Regions (SAFRON), Industries and Production (MoI&P) and Ministry of National Health Services Regulations and Coordination – on immediate basis latest by 12th July 2024 for further processing of the case.

The committee has sought from the ministries details of the budget including revised estimates for fiscal year 2023-24 and budget estimates for 2024-25 as well as list of all the assets owned by the ministry along-with appropriate market value and functions of the Division as per rules and business besides segregate functions between provincial functions and federal functions bases on federal legislative list as well as what is the justification (if any) for the functions being performed by the Division, etc.

Copyright Business Recorder, 2024

QUETTA: Prime Minister Shehbaz Sharif on Monday said that under an agreement reached between the federal and Balochistan government, a total of 28,000 agricultural tube wells in the province would be shifted to solar system within three months.

Talking to media after the agreement signing ceremony, the prime minister said the federal government would provide 70 percent funds while 30 percent would be contributed by the provincial government for Rs 55 billion solarization project.

The prime minister met the provincial cabinet in which the federal ministers and Governor Balochistan Jafar Khan Mandokhel and Chief Minister Sarfraz Ahmed Bugti were present, PM Office Media Wing said in a press release.

FY2024-25: Balochistan govt presents Rs955.6bn provincial budget

Earlier, the prime minister witnessed an agreement signing ceremony between the federal and the provincial governments for shifting of electricity run tube wells to solar powered mechanism.

The prime minister tasked the chief minister to complete the solarization project within three months.

He opined that the completion of project would ensure prosperity of the farmers and bring a large area of cultivable land under farming, adding that with functioning of the solar powered tube wells, the farmers would get uninterrupted power supply throughout the day.

During his address to the provincial cabinet, he termed the agreement as “a deep structured change” firmly rooted in the government’s conceived reforms agenda, he said that a huge sum of Rs500 billion would be saved from going down the drain.

The prime minister said that the federal government would be absolve of paying Rs 80-90 billion burden which was provided as subsidy to the province due to non-payment of bills and still the farmers community was getting 2 to 6 hours power supply.

With the solarization process, the issue would be resolved forever, he expressed the hope.

The prime mister said that throughout the world, the utilization of solar capacity was tapped for generation of environment friendly power which was considered as the inexpensive source of power.

He said that the government was taking steps on priority basis for the provision of solar power and assured that the federal government would work closely with the provincial government for the uplift of the province.

The prime minister said that they had reserved 10 percent of additional quota for the students of province in a batch of 1,000 graduate students being sent to China on government scholarships to seek the latest training in the agriculture sector.

While 10 percent additional quota for the students of Balochistan was also allocated in the training programme to be imparted by Huawei to 300,000 students in IT sector, he added.

He further informed that the federal government had already set aside funds in the fiscal budget for Danish schools in the province, adding that they were keen to broaden Danish schools to the divisional level so that students in the entire province could be benefitted from the education facility.

The prime minister said that when the young people of Balochistan were equipped with the latest education, the country and province would move on path of progress.

The prime minister also appreciated ideas and efforts of the chief minister and said the today’s signing of agreement was part of the reforms agenda and collective efforts made by the federal and provincial governments for the progress and prosperity of the country.

The prime minister also apprised that a total of 1 million agricultural tube wells throughout the country would also be converted on solar power and would save a sum of $3.5 billion on import bills of fuel, thus saving precious and limited resources of the country.

The model for the upcoming project would be introduced soon which would be “a quantum jump,” he added.

He regretted that the injustices were done with the debt ridden country in the last many decades and if they had not taken drastic steps for the economic turnaround, the coming generations would not forgive them. The prime minister said that it was his first visit to the province after the formation of new government.

ISLAMABAD: The Tax-to-GDP ratio stood at 9 percent during 2023-24, according to the Federal Board of Revenue (FBR) report.

The FBR’s new report on revenue forecasting (2024-25) said the tax-GDP ratio remained in the range of 8.7 percent to 9.2 percent. Last year, the tax–GDP ratio was 8.5 percent however, during fiscal year 2023-24, it has started improving and stood at 9.0 percent.

The FBR report said that the traditional methodology has been adopted to forecast FBR revenues for FY2024-25. The autonomous growth has been applied on base year FY2023-24. An increase of Rs. 1,922 billion is forecasted for FY2024-25, thus arriving at expected revenue collection of Rs. 11,174 billion.

Aurangzeb vows to raise tax-to-GDP ratio to 13pc

The revenue forecasting for 2024-2025 is estimated at Rs.11.17 trillion without budgetary measures. Most of the FBR taxes are buoyant and are positively correlated with actual variations in macroeconomic indicators used in the forecasting model.

Hence, there is potential for achieving growth in tax revenues, provided that macroeconomic indicators perform well. With the improvement in local and global economic conditions, the tax revenues are expected to increase accordingly. Similarly, removing import restrictions further, the tax collection at import stage shall improve as well, FBR added.

The FBR revenue target for FY2024-25, without budgetary measures is projected at Rs. 11,174 billion. The projected target is 20.8% higher than the collection figure of over Rs. 9,252 billion for 2023-24.

Copyright Business Recorder, 2024

EDITORIAL: One of the most challenging and thankless jobs under the current economic conditions in Pakistan is that of the federal finance minister in view of the facts that economic growth barely covers the population growth, inflation is high, fiscal structure remains unsustainable, and the balance of payment conundrum continues to simmer with an unprecedented hardening of International Monetary Fund’s (IMF’s) stance.

It is, therefore, akin to be in the proverbial ‘hot seat’ that continues to heat up further because the person in the seat remains hamstrung by the influential elements and circumstances that compromise the needed efforts to tackle the mess in the economy.

Successive finance ministers have faced the wrath of media and public and agonizing pressures from the interest groups and powerful elements. The incumbent finance minister, too, faces an identical ordeal.

The budget passed by the coalition government is widely and vehemently assailed by all across the board, including the business community and the general public, especially the urban middle class; and rightly so in view of the inordinate burden the government has placed on existing taxpayers while at the same time it has cleverly and deviously insulated the officials of the ‘State’ from additional tax measures and showered hefty increases in allocations on the officialdom.

One must acknowledge that the finance minister and his team had little wiggle room to play and had to do away with the sales tax exemptions on a large list of items. The normalization of income tax for various sectors (including exporters) too had to happen.

Having said that, there are certain areas where the government could have been more thoughtful than they have in the budget.

Letting the higher burden fall disproportionately on middle income salaried and non-salaried individuals where the effective tax rate for highest slab ranges between 39-49 percent cannot be justified.

During the last two decades or so, technocrats of different hues and shades, elected on technocrat seats in the senate, have been installed as finance ministers. They have been found to be beholden to the party leader for this opportunity to upgrade their curriculum vitae and standing in the international world of finance.

The party head, however, has scant understanding of economics and finance. Although he does not fully appreciate the intertwined fiscal and monetary linkages, he is extremely sensitive about the interests of his party’s constituents whom he often rewards with relief through warranted or unwarranted reductions in prices of essential items.

Therefore, what is missing in almost all the finance ministers in the last more than two decades is the absence of a personality that has the stature to say ‘no’ to the power corridors and also who enjoys the confidence of his boss (Ishaq Dar being the notable exception who enjoyed full confidence of Nawaz Sharif).

We have had two finance ministers in the past, both under martial law administrations, who possessed this standing and stature: Muhammad Shoaib and Ghulam Ishaq Khan were the ministers of finance in the governments of Field Marshal Ayub Khan and General Ziaul Haq, respectively, who were known for resisting undue pressure and saying ‘no’ to their bosses on matters of significance to the economy, including the patronage of select groups.

To elucidate this point, it is worth recalling an incident that would demonstrate the kind of stature and confidence of his boss and the ‘powers that be’ that a finance minister needs to enjoy to be able to deliver on the corrective steps and reforms that are direly needed to pull the economy out of the morass.

During the Ziaul Haq era, all banks in the country operated in the public sector as they had been nationalised by the Zulfikar Ali Bhutto government on 1st January 1974, i.e., prior to Ziaul Haq’s martial law on 5th July 1977. During the 1980s, the Pakistan army decided to have a bank of its own by the name of ‘Services Bank’.

A CEO for the bank was hired, the State Bank of India building in Lahore was vacated and handed over to them for setting up their office, and cars that had been impounded by the customs for various irregularities were released to the proposed bank for their staff.

This newspaper broke the story that the army is setting up a bank. Both the then governor of State Bank of Pakistan A.G.N. Kazi (who under the law had to issue a licence to operate a bank) and the then Finance Minister, Ghulam Ishaq Khan, were completely unaware of any such move.

Once it came to their notice both these gentlemen opposed this move tooth and nail. Their argument was that banking is nationalised and unless the law is changed the setting up of this bank cannot be allowed. They dug in their heels and the decision to establish the bank had to be shelved.

Be that as it may, in days of tough economic conditions, a finance minister is required to stand up and oppose the Prime Minister and other powerful circles if their demands are against the wider economic interests of the country.

Apparently, Aurangzeb and his team found it hard to say ‘no’ to the MNAs from ruling PML(N) and its coalition partners on the PSDP (Public Sector Development Plan) allocations for schemes proposed by legislators, doing away with the category of non-filers being recognised when in fact they are tax dodgers, generous increases in the salaries of government employees whether retired or serving and, creating a chasm between the officials of the state and the rest of the people by according them exemptions from sacrifices that are being asked of the rest of the nation by imposing exorbitantly high taxes such as the surcharge on salaried and non-salaried tax liabilities and sales tax on packaged dairy products, including baby food and infant formulae.

All these measures are going to hit the people at large and not just the rich class.

The selective application of demand for sacrifice particularly when there is nothing tangible in the Finance Act on lowering the government expenditure except for general statements about closing departments on devolved subjects and reducing the number of ministries/divisions is bound to create despondency amongst the masses.

Copyright Business Recorder, 2024

Several prominent federal ministers publicly stated that the taxation measures approved by parliament on 28 June were prior conditions of the International Monetary Fund’s (IMF’s) “successor” loan to the nine-month-long Stand-By Arrangement (SBA) whose last tranche was released in May.

Two prevailing factors strengthen this perception. One, Finance Minister Aurangzeb has consistently stated that the successor IMF loan is Plan A, there is no Plan B, and he expects programme approval this month, which implies negotiations are at an advanced stage.

And, two, given that the tax measures submitted to parliament by the finance minister on 10 June were less politically challenging than the amendments approved by parliament two and a half weeks later (which do not reflect the recommendations of the Senate Standing Committee on Finance and Revenue as those discussions centred on reducing and not raising the burden on the public) the blame can more easily be placed on the IMF’s prior conditions.

The question is whether the administration is using the Fund as a convenient scapegoat, given that the Fund staff typically refrain from challenging the government’s stance publicly, or is it in fact the case?

Two elements have been prevalent in our interactions with the Fund staff since staff level agreement was reached on 12 May 2019 on the Extended Fund Facility.

Firstly, the Fund displayed considerable rigidity in either revisiting or phasing out harsh up-front conditions (inclusive of periodically raising electricity and gas tariff to achieve full cost recovery in spite of a large per unit tax component, petroleum levy considered the lowest of all hanging fruit, a market based exchange rate and a primary surplus that led to massive increase in borrowing) due to the country’s long history of abandoning a Fund programme when the balance of payments position strengthened in the aftermath of a Fund loan.

And secondly, its corollary is equally applicable: the economic team leaders appointed since late 1990s (including caretakers) either had similar qualifications and work experience as the Fund staff so they failed to bring a domestic perspective to the table or were appointed purely on the basis of nepotism.

And while all donor programmes required engagement with officials in different sectors, yet in Pakistan, ministries are staffed with generalists and not sector experts, which explains the poor state of the power and gas sectors.

Finance ministers have been typically appointed on technocrat seats in the assemblies and their only constituent is the party leader with little understanding of basic economics, though highly sensitive to a rise in the prices of essentials.

This led to major design flaws in the Fund programmes for Pakistan exacerbated in the budget for 2024-25: (i) a zero focus on current expenditure curtailment, which was budgeted to rise by 21 percent this year; (ii) inability to end elite capture of budgetary allocations and revenue generation sources — the budget 2024-25 enhanced elite capture by raising salaries of civilian and military personnel by 20 to 25 percent at the taxpayers’ expense (while the 93 percent of the total labour force employed by the private sector has not received a raise for a number of years due to the ongoing economic impasse), granting exemptions to the officials on sale of property and allocating discretionary funds to parliamentarians; (iii) a high discount rate that has shrivelled growth; and (iv) administrative measures that have steadily eroded the value of the rupee domestically and vis a vis other currencies which accounts for 41 percent poverty levels in Pakistan today.

The incumbent Finance Minister during his 30 June interaction with the media conceded that the tax burden on the salaried class had gone up in the final budget adding inadequately that he could only “empathise and sympathise” and pledged that “the first opportunity we get we will provide relief to them.”

The incremental income tax rate increase for those earning above 600,000 rupees per annum will be as follows: (i) 600,000 to 1.2 million rupees or monthly income of 50,000 rupees to 100,000 rupees per month would witness a doubling of their tax rate – from 2.5 to 5 percent; (ii) 1.2 million to 2.2 million rupees per annum or more than 50,000 rupees per month to 183,000 rupees per month - 12.5 percent to 15 percent of the amount exceeding 1.2 million rupees; and (iii) the highest rate of 35 percent for those earning more than 6 million rupees per annum has not changed.

A comparison with Sri Lanka is relevant as the two countries successfully averted the threat of default by procuring an IMF loan — unlike Sri Lanka which suspended foreign loan repayments on 12 April 2022 Pakistan managed to get rollovers extended from friendly countries (a condition for the then ongoing IMF loan tranche release). Tax rates in Sri Lanka today start at 6 percent and go up to 30 percent, while in Bangladesh the highest rate is 25 percent and in India the highest rate is 25 percent.

A comparison however requires consideration of the prevailing inflation: In India Consumer Price Index last fiscal year was below 6 percent, in Sri Lanka it dropped from a high of 51.7 percent in January 2023 to 1.70 percent in June 2024.

In Pakistan, it registered at 23.41 percent July-June 2024 with a SPI of 27.52 percent. If the Fund insisted on the income tax upgrade on those with a salary of less than 200,000 rupees per month, then one is forced to conclude that it was a poor decision and the government team should have raised the issue of an inflation differential.

The budget 2024-25 continues heavier than ever reliance on consumption and import taxes.

A World Bank 2022 study titled “From Swimming in Sand to High and Sustainable Growth” argues that “distortions in the form of differences in direct tax rates tend to make it more profitable to invest in real estate relative to manufacturing or tradable services.

And because the size of the tradable sector tends to be associated with growth, this reduces growth potential. Within tradables, high import duties make it more profitable for firms to sell domestically rather than exporting. For example, in Pakistan, a 10 percent import duty on a given product increases profits of selling domestically relative to exporting by 40 percent on average.

Firms that decide to embark upon export-oriented manufacturing despite these adverse incentives face a further distortion: if they want to innovate, they miss out on export subsidies. It is 80 percent more likely for a potential exporter that decides to export a traditional product (e.g., apparel) to be eligible for an export subsidy, than for one that decides to innovate andexport a new product.

This is because export subsidy schemes target mostly well established, unsophisticated export products and can provide up to a 30 to 35 percent boost in profits. In agriculture, for example, subsidies and support prices for specific crops coupled with additional subsidies on key inputs (e.g., water) induce farmers to allocate land to sugarcane rather than diversifying into other crops that would fetch better prices internationally, or that embed less water. Talent is also misallocated because of distortions.“

There have been no structural changes in the budget, merely passing the buck onto the hapless electricity/gas and petrol consumers, salaried class and on a target for primary surplus which if past precedence is anything to go by may well lead to higher borrowings with a higher component of debt servicing raising the deficit to more than the budgeted unsustainable 6.9 percent with inflationary implications.

To conclude, the budget follows the pattern of previous budgets – raising current expenditure by 21 percent with major influential recipients refusing to voluntarily sacrifice their raised allocations while sources of revenue imply not only higher taxes on existing taxpayers but also enforcement targets that have never been realized in the past (and Pakistan is not an exception in this regard).

One would assume that failure to achieve revenue targets from the revenue projections (particularly through enforcement and digitization) would imply a detailed contingency plan agreed with the IMF where specific items would have to be taxed as targets are unmet.

Copyright Business Recorder, 2024

ISLAMABAD: Pakistan will keep seeking financial assistance packages from the International Monetary Fund (IMF) if it does not significantly boost its tax revenue, Finance Minister Muhammad Aurangzeb said.

Aurangzeb’s comments come days after Pakistan’s president signed the federal budget for the current fiscal year, which has been criticised by the opposition, trade bodies and even the government’s allies for its ambitious tax targets.

The tax-heavy budget aims to raise Rs13 trillion ($46.6 billion) by July 2025, a roughly 40 percent increase from the current financial year. Financial experts say the budget is aimed at satisfying the IMF, which has repeatedly asked Islamabad to bring tax reforms to ensure growth in its fragile economy.

Prior actions for IMF programme largely complete, says Aurangzeb

Speaking to a British newspaper, Financial Times, Aurangzeb said he was “relatively confident” of reaching a staff-level agreement with the IMF this month for a loan his government has estimated to be between $6 and $8bn.

“But it will not be our last fund program if we don’t bring our tax revenues up.”

Pakistan hopes the IMF bailout package will stabilise its economy, one of the worst-performing ones in Asia that has been troubled by double-digit inflation, slow growth and low foreign reserves.

Pakistan’s economic indicators have recorded an improvement over the past few months, with inflation dropping down to 12.6 percent in June from the record-breaking 38 percent in May 2023. Pakistan’s stock market has registered high growth in recent weeks while the central bank’s foreign reserves have risen to over $9 billion.

“The direction of travel is positive, and investors are showing confidence in the stock market,” Aurangzeb said.

However, he acknowledged Pakistan’s tax collection authority, the Federal Bureau of Revenue (FBR), was viewed negatively by the masses.

“People don’t want to deal with the tax authority because of corruption, because of harassment, because of people asking for speed money, facilitation money,” Aurangzeb noted. “That’s not sustainable.”

The finance minister lamented how Pakistan’s economy was reliant on imports, stating that Islamabad had to borrow to pay off existing or accumulating debt.

“We need to create the capacity to repay loans,” Aurangzeb said. “As long as this economy stays import-based, what happens is the moment it heats up? We run out of dollars (and) we have to go back to the lender of last resort on our knees.”

Since April, Prime Minister Shehbaz Sharif has visited Saudi Arabia, UAE and China to attract foreign investment in Pakistan’s key sectors. His government has repeatedly assured Pakistan’s allies it seeks not loans but “mutually beneficial” partnerships.

“It’s about time we get real,” Aurangzeb said, pointing to Gulf investors’ demands for equity and board seats.

“The ball is in our court to provide bankable and investable projects.”