Pakistan's FY 24-25 Budget: A Balancing Act for Economic Stability

The coalition government has presented its first budget for the fiscal year 2024-25, with a clear focus on the ongoing negotiations for the IMF program. This budget aims to maintain the current economic trajectory while addressing key financial challenges.

Economic Growth and Stability

The budget sets a GDP growth rate target of 3.6% for the next financial year, an improvement from the expected 2.4% for the ongoing year. While this target is ambitious, it remains below the rate needed to significantly reduce poverty. However, the positive growth direction and early signs of economic recovery suggest that this target is achievable, barring any major internal or external shocks.

Inflation and Fiscal Policies

Inflation is expected to be a concern, especially with measures such as the increase in the Petroleum Development Levy and anticipated rises in energy prices. Nevertheless, with the State Bank of Pakistan's tight monetary policy and the government's contractionary fiscal policy, the targeted inflation rate of 12% appears broadly achievable.

Taxation and Revenue Generation

The government has set an ambitious tax collection target for the Federal Board of Revenue (FBR) at Rs. 12,970 billion, a 38% increase from last year’s goal. This target, though stretched, could be approached with improved tax enforcement and new taxation measures. However, the budget falls short in broadening the tax base, focusing instead on increasing tax rates for existing taxpayers.

Sector-Specific Measures

While the budget includes measures to encourage growth in sectors such as agriculture, it lacks significant incentives to boost local manufacturing for import substitution and export growth. Some new measures aim to encourage higher filing of income tax returns by making business transactions expensive for non-filers, though empirical evidence on their effectiveness is limited.

Notable Proposals

• Deduction of advance tax from consideration paid for acquiring shares at the time of payment or registration.
• Allowing carry forward of business losses for ten years for Pakistan International Airlines Corporation Limited.
• Clarifying tax credits for coal mining projects in Sindh supplying coal to power generation projects.
• Exempting tax for AOP members with a turnover of Rs. 300 million or more, subject to filing audited financial statements.
• Imposing higher tax rates on non-filers and restricting foreign travel for non-filers.

Challenges and Opportunities

The economic targets set in the budget are broadly achievable, focusing on enhancing tax revenues from the existing tax base and preferring stability overgrowth. This approach may provide the government with sufficient fiscal space to negotiate long-term lending with the IMF. However, without key reforms and structural changes, the opportunity for the economy to shift to a high growth trajectory remains limited.

In summary, the FY 24-25 budget aims to balance economic stability with growth, leveraging fiscal and monetary policies to manage inflation and revenue generation. The focus remains on maintaining current economic directions while setting ambitious targets that hinge on improved enforcement and strategic measures.

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