Can New Strategies Deliver a 2% Surplus in FY25?

Pakistan is setting an ambitious fiscal consolidation plan for the fiscal year 2024-25 (FY25), aiming to achieve a primary surplus of 2% of GDP through structural reforms and enhanced economic discipline. This strategy builds on last year’s notable performance, where a historic primary surplus of PKR 953 billion (0.9% of GDP) laid the groundwork for further stabilization, as highlighted by the International Monetary Fund (IMF).

Key Strategies and Fiscal Reforms

A recent report by Arif Habib Limited outlines the government’s multi-pronged approach:

• Broadening the Tax Base: Efforts to improve tax administration and curb corruption are central to increasing revenue.
• Provincial Contributions: Provinces are expected to contribute approximately 1% of GDP towards the surplus.
• IMF Support: The IMF’s Extended Fund Facility (EFF) backs Pakistan’s gradual fiscal consolidation, targeting a long-term 2% primary surplus supported by a 3% GDP net revenue mobilization effort.

Pakistan recorded its first budget surplus since 2004 in the second quarter of FY24, driven by a record PKR 2.5 trillion profit from the State Bank of Pakistan (SBP), which resulted in a primary surplus of PKR 3 trillion. The government is also reducing high expenditures on pensions, infrastructure, and subsidies to manage debt and control deficits. As a result, the fiscal deficit is projected to fall from 6.8% of GDP in FY24 to 5.9% in FY25 with some analysts even predicting a potential drop to 4.9% if reforms prove successful.

Revenue Challenges and Expenditure Control

The Federal Board of Revenue (FBR) is under pressure to meet its FY25 target of PKR 12.9 trillion, following an early shortfall of PKR 468 billion in the first seven months. Factors such as high tariffs on non-essential imports and a stable rupee have affected collections from customs duties and import sales tax. In response, the government is:

• Boosting Non-Tax Revenue: Including a PKR 2.5 trillion contribution from the SBP.
• Tax Reforms: Expected to generate an additional PKR 357 billion from personal and corporate income taxes.

On the expenditure front, non-development spending remains high. Rising markup payments increased by 42% in FY24 and are forecast to rise by another 20% in FY25. However, measures such as interest rate cuts and a T-bill buyback program funded by SBP profits are expected to lower debt servicing costs to PKR 7.8 trillion, compared to the budgeted PKR 9.8 trillion.

Privatization and Structural Reforms

The government is pushing forward with a robust privatization agenda, with the Cabinet Committee on Privatization approving the sale of 24 public sector entities. This initiative aims to relieve the fiscal burden imposed by loss-making state-owned enterprises (SOEs), which collectively reported losses of PKR 905 billion in FY23. Additional governance reforms under the SOE Act and the establishment of a Central Monitoring Unit are expected to enhance oversight and operational efficiency.

External Account and Trade Dynamics

Pakistan’s external account showed encouraging signs in FY24, with the current account deficit shrinking from $3.3 billion in FY23 to $1.7 billion. For FY25, a current account surplus of $940 million is projected, reflecting stabilization efforts. Nonetheless, the trade landscape remains challenging:

• Trade Deficit: Forecasted at $27 billion, driven by a 12% year-on-year rise in imports and a 6% increase in exports.
• Positive Indicators: Declining oil prices and a 28% growth in IT exports during the first half of FY25 provide a glimmer of hope.

IMF Support and Economic Outlook

Pakistan secured a 37-month Extended Fund Facility worth approximately $7 billion from the IMF last year, following a $3 billion Stand-By Arrangement. This support is fully financed for the first 12 months, with commitments from bilateral partners to manage existing liabilities. The SBP’s foreign exchange reserves have risen to $11.2 billion, with projections to reach $13 billion by FY25’s end. Furthermore, GDP growth is expected to increase to 2.75% in FY25, with a rebound to 5.07% forecast for FY26, contingent on continued reforms and investment.

Risks and Future Challenges

Despite these positive steps, Pakistan faces several risks:

• Currency Depreciation: Potential declines in the rupee could disrupt economic stability.
• Rising Energy Tariffs: Increased costs may impact both households and businesses.
• Climate-Related Agricultural Impacts: Weather volatility poses ongoing challenges for the agrarian sector.
• Geopolitical and Global Pressures: Uncertainties on the global stage and inflationary trends could further complicate the recovery process.

Nevertheless, continued monetary easing, measures to lower business costs, and initiatives to attract foreign investment are seen as crucial to sustaining economic momentum in the coming years.