Fiscal Reforms Drive Economic Growth for Pakistan in FY25

Following a challenging Fiscal Year 2023-24 (FY24), which saw an average inflation rate of 23.4%, there was hope that the budget for FY25 might offer some relief to the public. However, the fiscal policies implemented by the Federal Government (FG) appear to be primarily revenue-focused and short-term in nature, disappointing those who anticipated a more substantial easing of the economic burden.

Pakistan’s path to growth and stability could benefit from a homegrown strategy rather than a reliance on the International Monetary Fund (IMF) and its complex policies. Concerns have been raised about the Fiscal Deficit and Current Account Deficit (CAD), leading to dependence on IMF assistance, which often results in stringent measures like interest rate hikes. Although the State Bank of Pakistan‘s (SBP) recent decision to reduce the interest rate to 19.5% is a positive step, it remains challenging for businesses to operate under such conditions.

The Finance Bill 2024-25, later enacted as the Finance Act 2024-25, has placed significant pressure on the salaried class by increasing their effective tax rates. This has sparked peaceful protests across the country. The salaried class, being one of the most documented sectors, sees their taxes deducted directly by employers. As reported by Shahbaz Rana on July 25, 2024, the salaried class contributed PKR 368 billion in income tax for FY24, while exporters and retailers paid a combined PKR 111 billion.

Moreover, projections suggest that FY25 inflation may reach 25%, contrary to the FG’s estimate of 12%, due to additional taxation, electricity and gas price adjustments, and other economic factors. The FG’s proposal to impose PKR 1.7 trillion in additional taxes to meet an ambitious PKR 12.97 trillion revenue target is expected to fuel inflation further and reduce individual incomes.

To alleviate the burden on the salaried class, it is recommended that income tax on salaries up to PKR 1,200,000 be kept at a minimum, ensuring continued inclusion within the tax net. While the FG has taken some positive steps, such as bringing exporters into the Minimum and Normal Tax Regimes, further efforts are needed to enhance economic documentation and generate revenue.

Economic Impact and Recommendations

Transitioning exporters to the new tax regime could significantly boost government revenue, promoting economic growth and transparency. However, timely processing of income tax refunds for exporters is crucial to maintaining trust between the government and the business community.

The imposition of a 0.5% withholding tax on distributors, dealers, wholesalers, and retailers is another positive step, increasing revenue and documentation within the economy. However, concerns remain about the fairness of taxes levied on traders and shopkeepers, as these measures are based on estimations that may not align with ground realities.

For sustainable economic growth, Pakistan must implement policies that reduce the CAD and Fiscal Deficit without solely relying on interest rate and exchange rate adjustments. Reducing inflation through currency stabilization could lead to significant savings on domestic debt interest payments, freeing up resources for other critical sectors.

While the FG has made efforts to balance revenue generation with economic documentation, further measures are necessary to ensure equitable taxation and long-term fiscal stability. Addressing these challenges will require a mix of prudent policies, efficient tax administration, and a commitment to reducing economic disparities across sectors.