Pakistan Introduces Budget Tailored To IMF Demands

Pakistan federal budget, presented in parliament on June 12 by Finance Minister Muhammad Aurangzeb, projects a total outlay of Rs 18.9 trillion, with an ambitious Rs 13 trillion tax collection target

Pakistan Introduces Budget Tailored To IMF Demands

Pakistan’s budget for the 2024-2025 fiscal year was introduced in parliament by the Finance Minister Muhammad Aurangzeb on June 12. The budget sets ambitious revenue targets for the fiscal year at Rs 13 trillion, against a total spending of Rs 18.87 trillion (approximately $68 billion), and proposed a GDP growth target of 3.6% and targeted inflation at 12%.

The nuclear-armed nation’s cash-strapped government seeks to bring about a steep drop in the public debt-to-GDP ratio and to improve the balance of payments position, as it seeks to bolster its case for a fresh bailout deal with the International Monetary Fund (IMF). Pakistan is in talks to secure a loan from the global lender of last resort for anywhere from $6 to $8 billion.

Pakistan’s public debt remains a significant burden, as debt servicing continues to be the government’s single largest expense at Rs 9.8 trillion. The country’s external debt and liabilities crossed the $130 billion mark this year, posting a 27% increase.

Finance Minister Muhammad Aurangzeb claimed that there were no “sacred cows” in the economy, and that the government was looking to widen the tax base to avoid burdening existing taxpayers.

The government’s approach in this budget is widely being seen as conservative given the ruling coalition’s political limitations, even as Pakistan desperately needs to scale back the nearly Rs 3.88 trillion in tax exemptions that the government gave out in the preceding fiscal year.

Pakistan boasts one of the lowest tax-to-GDP ratios in the region, which is due to the under-taxation of various sectors like agriculture, real estate and retail.

The government has nonetheless increased income tax for the salaried class, even as it sought to tax wholesalers, retailers and property investors.

The rise in the proposed budget’s tax targets comprises a 48% increase in direct taxes, and a 35% hike in indirect taxes. The petroleum levy was also increased by Rs 20 per liter of petrol and diesel.

Government employees are promised salary increases of up to 25%.

The defense budget has been set at Rs 2.12 trillion, a 17.6% increase from last year – but still around 1.7% of GDP, a figure that remains unchanged from last year.

The increased incidence of taxes as per the new spending plan will not only serve to incentivize further growth in Pakistan’s informal economy, but will also have an inflationary impact.

In an attempt to boost economic growth, the State Bank of Pakistan cut interest rates for the first time in four years – reducing the policy rate by 150 basis points.