Outlook for 2024-25

The last week’s article on outlook for 2024-25 by this writer in Business Recorder had focused on the projections for the year of the GDP growth rate, level of investment and the rate of inflation.

This article projects the likely outcome of the external balance of payments and the fiscal operations by the Federal and Provincial governments this year.

The outlook is derived by looking at two sets of projections. The first such projections are in the Annual Plan for 2024-25 by the Planning Commission. These are based on research and analysis by economists in the Commission.

The second set of projections for 2024-25 is by the staff of the IMF on the 10th of May, following the conclusion of the nine-month IMF Stand-by Facility with Pakistan. They are not reflective of any new IMF Programme with Pakistan in 2024-25.

We take up first the external balance of payments projections for 2024-25. These are of critical importance. Fortunately, both the Planning Commission and the IMF have made what appear to be an optimistic set of projections.

These projections for 2024-25 envisage a widening of the current account deficit from the extraordinarily low level of less than dollar 1 billion to between dollar 3.5 to dollar 4.5 billion.

However, this larger deficit will be financed by a big jump in the positive balance in financial account of the balance of payments from dollar 4 billion to over dollar 10 billion.

The rise in exports of goods in 2024-25 is projected at up to 7 percentage, while imports of goods are expected to grow by 10 percentage.

Consequently, the trade balance in goods will worsen by almost dollar 3 billion. Home remittances are expected to show a significant growth of close to 6 percentage.

The major improvement in the balance in the financial account of the balance of payments is due to, first, a big jump in the inflow of foreign investment. It is expected to jump up by almost dollar 3 billion, according to the Annual Plan. Further, the projections anticipate a rise in the disbursement of loans of dollar 3.5 to dollar 4 billion.

Consequently, the IMF projection is that Pakistan’s foreign exchange reserves will rise from just over dollar 9 billion at the end of 2023-24 to a healthy dollar 13.4 billion by the end of 2024-25.

The Planning Commission makes no projection of the level of foreign exchange reserves.

The fundamental question that arises, especially from the IMF projections, is that if the balance of payments position will strengthen in 2024-25 and reserves will rise to a safe level, then why does Pakistan need to enter into a new IMF Programme?

Clearly, the IMF projections are very much on the optimistic side. The reality is very different. The magnitude of the financing problem for Pakistan can be judged from the estimated quantum of external financing required in 2024-25.

The total estimate of external financing in 2024-25 by the IMF is dollar 24 billion. This includes amortization payments on external public debt of dollar 15 billion, current account deficit of dollar 4.5 billion and a build-up of reserves of dollar 4.5 billion.

Roll-overs are likely to reach dollar 8 billion. Consequently, the net financing requirement in 2024-25 will be dollar 16 billion.

The probability of a total dollar 16 billion inflow is very low with the current perceptions of the low credit rating of Pakistan. During 2023-24, there has been no flotation of Euro/Sukuk bonds and any new borrowing from international commercial banks, even though the combined targeting for accessing these sources was dollar 6 billion.

Further, the inflow from multilaterals has declined by 30 percentage last year. There is no doubt that at this stage, Pakistan will need the umbrella of an IMF Programme starting in early 2024-25. The IMF projections for 2024-25 will only then become realizable.

Turning to the projections of the public finances in 2024-25, it appears that these are characterized also by a high level of risk, like the balance of payments projections for 2024-25.

The first relatively uncertain magnitude is the target level of FBR revenues in 2024-25 of Rs 12,970 billion. This will require an extraordinarily high growth rate of over 40 percentage, in relation to the level achieved in 2023-24.

Direct taxes are expected to show an increase in revenues of over 48 percentage and indirect taxes of 35 percentage. These high growth rates have never been achieved before. They will imply an unprecedented increase in the tax-to-GDP ratio from 8.7 percentage of the GDP in 2023-24 to almost 10.5 percentage of the GDP in 2024-25.

The Federal budget has, no doubt, introduced the heaviest and diverse set of taxation proposals.

However, for the FBR target to be met, these proposals will have to yield as much as Rs 2,230 billion of revenues this year. Given the relatively low growth in the various tax bases, this quantum of additional revenues looks unlikely.

There is a similar problem with the projected level of Federal non-tax revenues. They are expected to show an even higher growth rate of 64 percentage. This is based on a quantum jump in the receipt of profits from the SBP to Rs 2,500 billion, with a growth rate of 157 percentage. The basic question is whether the SBP has agreed to transfer this level of profits to the Federal Ministry of Finance in 2024-25?

To top it all, there is the expectation that the four Provincial governments will achieve a cash surplus of Rs 1,217 billion, almost 158 percentage above the likely level in 2023-24.

In the four budgets for 2024-25 of the Provincial governments, the total combined surplus committed to is under Rs 700 billion. Therefore, there is already a shortfall of over Rs 500 billion.

The Federal Ministry of Finance appears to have engaged in some wishful thinking in its budgetary projections for 2024-25. Consequently, the budget deficit is to be brought down from close to 8 percentage of the GDP in 2023-24 to below 6 percentage of the GDP in 2024-25.

Further, a large primary surplus of 2 percentage of the GDP is to be generated. This is in sharp contrast to a deficit of almost 8 percentage of the GDP and a near zero primary surplus in 2023-24.

During the discussions with the IMF on a three-year Extended Facility, the projections in the Annual Plan and by the Federal Ministry of Finance have probably been subjected to examination.

Hopefully, realistic targets will be set in the Macroeconomic Framework of the new Programme. Otherwise, there remains the risk that after IMF Programme quarterly reviews, a string of new fiscal and other measures may have to be announced in the form of min-budgets to meet the performance targets. This will create great uncertainty in economic activities in the country.

Copyright Business Recorder, 2024