Emerging challenges to the economy

The budget 2024-25 formulated to qualify for the 25th IMF programme has been passed by the parliament.

Now the IMF bailout programme is very much in sight. In the market, however, the budget fallout is very much in evidence. A traumatized salaried class is wondering how to make its ends meet.

Many of the so-called taxpaying loyalists are tempted to manoeuvre a part of their income in cash while many potential taxpayers sitting on the fence are contemplating to stay a little longer out of the net and exporters are pleading to save exports.

The Federal Minister for Finance and Revenue, Muhammad Aurangzeb, has expressed his optimism that Pakistan would secure a “larger and longer” bailout agreement in its negotiations with the International Monetary Fund (IMF) in July, following the approval of the $67.76 billion federal budget.

The minister stated that the structural benchmarks of the programme had been the same for the last three or four years, adding that the country had not implemented those benchmarks. “Now we have told them to trust us and we will get this done,” according to him.

This appears a tall promise as many of the key structural reforms are not off the ground, notably, in the energy and petroleum sectors and state-owned enterprises (SOEs)

The Minister has expressed optimism about achieving the Federal Board of Revenue’s (FBR’s) tax target of 9300 billion rupees and mentioned that taxes are being paid at a rate of less than 10% of GDP over the past three years.

The finance minister has outlined plans for reforms in the energy and petroleum sectors, highlighting that improvements in these areas would lead to sustainable economic stability and stressed the importance of curbing tax evasion and preventing corruption through FBR digitization, which he believes will increase transparency and efficiency in tax collection.

The Minister of State for Finance Ali Pervez Malik has added to the Finance Minister’s statement in a way by stating that after the conclusion of an agreement with the International Monetary Fund (IMF) this month or next month, a comprehensive reforms agenda would be placed before the nation to increase the tax-to-GDP ratio to 14 percent as well as increase in export and investment rate.

Additionally, he said that increasing exports to GDP ratio to 15 percent is another target of the government through addressing the challenges of productivity and competitiveness as well as to increase the dismally low investment-to-GDP ratio to 30 percent from the existing 13 percent.

Whereas, Prime Minister Shehbaz Sharif is reported to have stated that the 25th IMF programme would be the last IMF programme for Pakistan.

The optimism of the state functionaries, however, does not reflect the market sentiments.

The total amount of money circulating in Pakistan reached an all-time high in the first half of 2024, indicating the nation’s heavy reliance on cash and impeding government efforts to document the informal economy.

Citing SBP data, Topline Securities reported this week that during the last six months, from January to June 21, the amount of currency in circulation (CIC) increased 11.2 per cent to Rs9.4 trillion. “Of this, 7.4 percent increase is in the month of June 2024 alone, until 21st,” it said. This increase in CIC is mostly consistent with the 4-8 percent June pattern that has typically been observed, it noted. Post budget 2024-25 the money circulating is likely to increase.

The export industry is in a state of panic.

A Karachi-based textile unit has announced closure. It has spoken vocally about the plight of the export industry signaling, a larger collapse in the country’s export industry.

The handout issued stated: “The government has levied the exports sectors with a huge taxation up to “42 percent” but shunned a mechanism to make refunds.

The governments replaced three different supporting programs including MB, DTRE and EOU with the EFS, which eventually saw an axe, leaving the exports sectors insecure, completely fearing that a huge refunds backlog will dwindle the exporters’ finances“.

Furthermore, it stated: “A super tax at 10 percent is applied on profit in Normal Tax Regime, meaning the tax rate reaches 29 percent with an addition of 10 percent to a total 39 percent tax.”

The textile industry has had its hey days for years with preferential treatment by the government. But now with high electricity tariffs and lending rates together with a taxation level never experienced by the industry before the industry has lost its steam.

Neither structural reforms nor the privatisation of loss-making state-owned enterprises (SOEs) are off the ground. It may be added that SOEs in Pakistan span eight sectors: Financial, Oil & Gas, Power, Infrastructure Transport & ICT, Manufacturing Mining & Engineering, Industrial Estate Development, Trading & Marketing, and Miscellaneous.

It is important to note that FBR has been discussing steps to digitalize its system since long.

There have also surfaced inter-ministerial disputes. The Commerce Ministry last Wednesday is reported to have displayed its anger against the Finance Ministry for not making its export growth-related recommendations part of the federal budget 2024-25 despite the fact that those had successfully sailed through Tariff Policy Board (TPB), an inter-ministerial body, which takes decisions on revision of tariffs on goods.

The 25th IMF programme is by no means an end in itself, but it heralds the beginning of greater economic and fiscal challenges for Pakistan.

Copyright Business Recorder, 2024