THE BUDGET for FY2024-25 brings Pakistan closer to clinching a new larger bailout from the International Monetary Fund (IMF). But does it have a broader long-term plan — or is it ‘disruptive’ enough — to put the flagging economy on a sustainable and inclusive growth trajectory? Most analysts remain skeptical.

Broadly, the new budget seeks to continue the fiscal consolidation the government has been pursuing under the recently concluded short-term IMF facility to reduce its debt burden, slash its fiscal deficit and cut borrowings. The government hopes to achieve this goal through a massive increase of Rs3.72tr of the economy in tax collection to Rs12.97tr, but without reducing its expenditure.

The new target is more than 40pc greater than what the authorities hoped to collect this year. The average annual growth in taxes during the last five years has averaged around 20pc and is estimated to be around 30pc this year.

The additional tax measures of Rs2.2tn, or equal to 1.8pc of GDP, seek to broaden the scope of consumption tax, increase existing personal income tax burden on salaried and non-salaried individuals, do away with tax exemptions for various sectors of the economy, bring certain untaxed or under-taxed incomes into the net, tighten the noose around non-filers, and boost petroleum levy by Rs20 per litre to Rs80 per litre.

The remaining increase of Rs1.5tr in the tax revenues is expected to come from nominal expansion in the economy due to targeted inflation rate of 12pc and 3.6pc GDP growth.

Another major goal of the budget is to produce a primary surplus equal to 1pc of the economy’s size to hold down the fiscal deficit to 6.8pc for debt sustainability as demanded by the IMF as a prior action for the new agreement. The deficit would come down further to 5.9pc provided the provinces also throw up a surplus of Rs1.2tr as envisaged in the budget.

“It is an IMF-dictated budget needed to secure new funding from the lender of last resort,” Tahir Abbas, a financial analyst at Arif Habib Securities, told Dawn.

“It sets an aggressive tax revenue target for the government, requiring the government to impose additional tax measures of over Rs2tn. However, no effort has been made to slash the burgeoning government expenditure.”

Asif Ali Qureshi, the chief executive officer (CEO) of Optimus Capital Management, agreed. “The revenue measures don’t match the target.

“For example, the budget projects 48pc growth in the income tax and 36pc in GST (general sales tax) revenues. How will this be achieved without major disruptive policy changes? Maybe there is something in the fine-prints of the budget, which is known to the authors of the document and we are unable to see,” he added.

A Topline Securities commentary on the budget said the new tax target, including the proposed increase in petroleum levy, is estimated to boost the FBR tax to GDP ratio next fiscal year to 11.5pc from this year’s 9.62pc. For the last five years, this ratio has remained 9.7pc of the GDP. “We believe the tax measures taken under this budget are quite balanced and less inflationary than expectations… These measures will pave the way for the new IMF programme, if approved by the parliament,” the note added.

One of the key takeaways from the budget speech was the message sent out by Finance Minister Muhammad Aurangzeb to the businesses that the era of government-controlled economy was over.

“It means that the era of protectionism and untargeted subsidies is over and the businesses would have to become competitive to survive,” Dr Shumail Daud Arain, the president of the Rawalpindi Chamber of Commerce & Industry (RCCI), commented. “It is a step in the right direction.”

Ali Hasanain, an associate professor of economics at the Lahore University of Management Sciences, also agrees that the budget is a step in the right direction.

But, he adds, “piecemeal reforms will not get us anywhere. Initial reading of the budget would convince most that it is mostly business-as-usual”.

Published in Dawn, June 13th, 2024