Daily Times

The IMF staff report shares interesting numbers and projections for the financial year 2024-25 such as the expected growth rate of 3.5%, a sharp decline in the monthly inflation from 24.8% to around 12% and the CAD to reach 4.6 billion dollars by the end of the year. Heading into the Budget season this is great news and simply the right amount of optimism required for Pakistan.It is clear that IMF and the Finance Ministry of Pakistan are not seeing things from the same lense and the difference is obvious from the projections.

In the backdrop if this staff report is a clear disagreement of Pakistan’s macroeconomic framework. Disagreements persist over the setting of targets. Pakistan has shared the macroeconomic framework and the deficit in the next financial year has been estimated at 9,600 billion rupees, so there is a possibility of spending more than 9,700 billion rupees in terms of interest on loans. In addition, the IMF has estimated the defense budget for fiscal year 2025, which is more than 2 trillion.

In addition, next year, the target of agricultural sector development is 3.5%, services is 3.8% and the target of industrial sector development is 4%, while more than 9700 billion is likely to be spent on loans. However, the real development in agriculture will not come without improved water management, a dedicated focus on high-value crops and reduced food subsidies. Similarly, trade liberalization and an export-oriented industrial/ business environment will be the driving factors provided that these are accompanied by simplifying regulations, reducing red tape, and improving access to finance for manufacturers. It is worth mentioning that IMF projects a 10% increase in imports due to a poor export base.

Pakistan’s defence budget has been of considerable discussion over the past few years. The International Monetary Fund has formally estimated Pakistan’s defense budget for the next financial year at 2,152 billion rupees, which is 19.29% higher than the 1,804 billion (6.26 billion US dollars) rupees of the current fiscal year’s budget. IMF estimates defense allocation at 1.72 percent of Gross Domestic Product (GDP) and nominal GDP at Rs 124,813 billion for the next financial year. At 12.4% of total expenditure and 1.7% of GDP, the FY23-24 numbersshow a decline compared to FY22-23 numbers of 14.3% and 1.87% respectively. What is  important to consider here that the current geo-political scenario demands a higher defense budget especially in the light of India’s hefty 75 billion US dollar defence budget. “Isn’t it unusual that an international organization is setting estimates for Pakistan’s defense budget?”This speaks volume about the control IMF currently holds on Pakistan’s economic and internal matters, should we be worried about it? Yes!

Federal current expenditure is estimated at Rs 16,712 billion for next year which is 16 percent higher while the provincial current expenditure is expected to rise from Rs 4,716 billion in the current year to Rs 5,325 billion – an increase of 13.3 percent. It is worth noting here that the first nine months of FY 2024, the total revenues of the country, federal and provincial, amounted to Rs. 9.78 trillion while total expenditures were Rs. 13.69 trillion, registering a fiscal deficit of Rs. 3.90 trillion. Perhaps there are now words of an “expenditure control” focus by the incumbent government but how well that go without a structured mechanism in place is not a surprise. We are talking about stringent tax reforms, spending efficiency measures, and controlling guarantees – all of which will be met with resistance.All of this will be accompanied by a potential spending surge, with interest payments estimated to exceed Rs. 9,700 billion – potentially exceeding total revenue from domestic exports.

All of the government’s expenditure cute is likely to increase from pension cuts and a decreased development budget. Do not be misguided by the impressive rise of 25 percent in development budget as the numbers show an increase of Rs. 2,590 billion from Rs 2,064 billion. The main reason for this deceptive number is its low base.

The document mentions the government’s goal of bringing inflation down. The IMF staff report, as referenced in the passage, might project a decline from the 24.8% average in 2023-24 to 12.7% in 2024-25, with a single-digit rate by June 2025. However, this is considered ambitious by the author.

The budget season has started off with a rocky start and the variance in the IMF projections compared with the Finance Ministry’s estimates only confirms experts’ opinion about is inflexibility and high dependency on the fund and the upcoming program. The second part of this article will critically dissect the budget season in terms of tax.

To be continued…