Budget 2024-2025: Govt eyes accelerating GDP

growth to 3.6pc
Overall federal, provincial development spending to go
beyond Rs3.5tr
• Energy sector gets largest share • 59pc drop in social
sector funding

ISLAMABAD: The Annual Plan Coordination Committee (APCC) on

Friday cleared a National Development Plan (NAP) of over Rs3
trillion for 2024-25, including the federal Public Sector Development
Programme (PSDP) of Rs1.221tr, to accelerate economic growth to
3.6 per cent from 2.38pc in the outgoing FY24.

The PSDP of Rs1.221tr is almost 30pc higher than the current year’s
allocation of Rs950bn, which has now been slashed to Rs717bn owing
to fiscal constraints. In addition, the power companies would also be
making another Rs185bn investment outside the PSDP, thus taking
the federal development spending to Rs1.406tr.

Excluding the Power Division, the Rs2.869tr NAP also included a

frugal Rs700bn Annual Development Plan (ADP) of Punjab and an
extravagant Rs763bn of Sindh when seen in the context of the two
provinces’ overall revenue proceeds.

Khyber Pakhtunkhwa has separately announced a Rs627bn ADP,

while the APCC, presided over by Deputy Chairman Planning
Commission Jehanzeb Khan, was silent about Balochistan’s ADP. As
such, total national development spending is estimated to go beyond
Rs3.5tr.

As a major departure from existing policy, the federal government

has slashed its social sector responsibility by reducing its allocation
for next year to Rs83bn, down by 59pc from Rs203bn in FY24.

Likewise, the centre has frozen the development allocations for Azad
Kashmir, Gilgit-Baltistan, and tribal merged districts at their current
year position. Instead, it has increased federal investments in
infrastructure by 60pc to Rs877bn and in Science & Technology by
148pc over the current year to Rs104bn.

Of the federal PSDP, the energy sector will receive the largest
allocation next year at Rs378bn, 212pc higher than the current year’s
original allocation of Rs121bn. Likewise, the water sector has been
allocated Rs284bn, an increase of 92pc over the current year’s
Rs148bn.

The transport and communication sector, on the other hand, will

receive only Rs173bn next year compared to Rs245bn this year, down
by 29pc.

The major loser will be the social sector, whose cumulative funding
will be down by 59pc to Rs83bn as the centre transfers health and
education-related responsibilities to the provinces.

As such, allocations for the health sector have been reduced by 35pc
to Rs17bn, and education spending, including higher education, has
been slashed by almost 62pc to Rs32bn from Rs83bn during the
current year.

On the positive side, the allocation for so-called Sustainable

Development Goals (SDG) misused for political schemes has been
completely abolished for next year, against Rs61bn during the current
year. Governance allocation has been increased by 38pc to Rs29bn.
The agriculture sector would get Rs14bn next year against Rs9 bn this
year.

The growth target for next year has been set at 3.6, to be supported by
2pc growth in agriculture, 4.4pc in the industrial sector and 4.1pc in
services. The growth prospects are subject to “political stability,
exchange rate stability on the back improvement in external account
and external inflows, macroeconomic stabilisation under IMF’s
programme and expected fall in global oil and commodity prices”, the
planning commission said.

The agriculture sector’s growth for next year at 2pc reflects a

substantial contraction in the growth momentum. The output of
important crops is expected to face a contraction of 4.5pc due to the
severity of the dry weather spell and inadequate water availability due
to lower-than-normal rainfall, especially in the case of Kharif crops.
Other crops and livestock subsectors are envisaged to grow at 4.3pc
and 3.8pc, respectively.

The industrial sector is expected to recover in 2023-24 with a

targeted growth of 4.4pc on the back of expected LSM growth of
3.5pc. This is expected to get a boost from improved inputs and
energy supplies on the back of anticipated fall in global oil and
commodity prices, further easing import restrictions, higher public
sector expenditure and stability in the exchange rate and a decline in
interest rates.
Owing to these factors, construction materials prices are expected to
decrease, which will support the construction industry in achieving a
growth target of 5.5pc in 2024-25.

The services sector is also expected to grow at 4.1pc. The envisaged

growth of 3.1pc in commodity-producing sectors will complement the
targeted growth in the services sector. An uptick in economic activity
in industry, especially manufacturing sectors, will largely translate
into better growth in wholesale and retail trade, transport, storage
and communications, etc.

The total investment-to-GDP ratio is expected to increase from 13.1pc

in 2023-24 to 14.2pc in 2024-25 due to expected economic turnout,
improved business environment, and political stability.

Fixed investment is expected to grow by 27.6pc on a nominal basis,

whereas as a percentage of GDP, it is expected to increase from 11.4pc
in 2023-24 to 12.5pc in 2024-25. National savings are targeted at
13.3pc of GDP for 2024-25, up from 13pc this year.

The government expects the fiscal deficit to narrow due to fiscal

consolidation measures, with a focus on enhancing tax revenue and
curtailing non-development expenditures, including subsidies.

Monetary policy will be aligned with the objectives of inflationary

expectations and growth revival. With falling global inflation,
domestic average inflation is expected to moderate to 12pc next year.

The Planning Commission said the current account deficit was

expected to widen in 2024-25 with further easing of import
restrictions to achieve the growth objectives, especially the revival of
the industrial sector.

The scheduled repayments of external debt will put pressure on forex

reserves and the exchange rate. However, a positive outlook for
remittances, exports, and external inflows will mitigate these
pressures.

Published in Dawn, June 1st, 2024

Uncertainty clouds budget

presentation : Meeting of the pivotal National Economic
Council yet to be scheduled
• Premier, finance minister unavailable until June 8 to lead
key consultations
• Annual Plan Coordination Committee meeting continues
amid differences
• Budget Strategy Paper not shared with parliament due to
political uncertainties

ISLAMABAD: The announcement of the federal budget for 2024-25

remains in unusual limbo, with key customary ingredients still
missing, casting doubts on its presentation in parliament on June 10.

Sources said the critical National Economic Council (NEC) meeting,

essential for reviewing the current year’s macroeconomic situation
and development programme and approving the next year’s
economic and development agenda, has yet to be scheduled. In fact,
the government has yet to constitute the National Economic Council.

Also, Prime Minister Shehbaz Sharif and Finance Minister

Muhammad Aurangzeb will be on a four-day visit to China and thus
unavailable to lead key consultations until June 8. IThus, the first
available date for an NEC meeting could be after June 8, provided the
relevant documentation with provinces, the prime minister and the
president are circulated through electronic means for constituting
and notifying the NEC.

Under Article 156 of the Constitution, the president is ultimately

required to constitute the NEC, led by the prime minister as its
chairman and comprising the four chief ministers and one member
from each province to be nominated by the respective chief minister
and four other members, normally key federal ministers, as the
premier may nominate.

Under this article, the NEC “shall review the overall economic
condition of the country and shall, for advising the Federal
Government and the Provincial Governments, formulate plans in
respect of financial, commercial, social and economic policies; and in
formulating such plans it shall, amongst other factors, ensure
balanced development and regional equity and shall also be guided by
the Principles of Policy set out in Chapter 2 of Part-ii”.

Officials confirmed that the NEC had not been notified as of Monday
night. Interestingly, the Annual Plan Coordination Committee
(APCC) continued its meeting on Monday, although the Planning
Commission had announced last week that the forum had
recommended to the NEC a Rs1.221 trillion development budget of
the federal government along with 3.6 per cent growth target for the
current year.
Planning minister bypassed

Officials also confirmed that it was the first time that the APCC
meeting, led by Planning Commission Deputy Chairman Jehanzeb
Khan, had taken place without even informing the planning minister
about its schedule or development and macroeconomic indicators.

The minister, who was on a visit to China and Malaysia, was

reportedly flabbergasted to learn on his return that he had been
completely bypassed, the sources said, adding that the APCC meeting
on May 31 was also unusual as it missed some of the major sectors in
the allocation of funds and project review. These sectors included the
National Highway Authority, the Ministry of Finance, its
development portfolio and the water sector, to name a few.

Therefore, some changes could not be ruled out by the time the NEC
meeting is called, although the political head of the planning ministry
appeared helpless for now. However, the rules of business required
the planning minister to authorise and sign the summary of the
presentation of the APCC recommendations to the NEC.

Moreover, aspirations of the governments of Azad Kashmir

and Gilgit-Baltistan had also remained unaddressed, as their
development portfolios for the next year have been kept frozen at the
current year’s level of Rs51 billion each. The two leaderships were in
hectic contacts with the ministers for finance and planning on
Monday.

An official, who attended the second-round APCC meeting on

Monday, said the sectors missed on May 31 were “cleared” on June 3,
but the overall envelope of the federal Public Sector Development
Programme (PSDP) would remain unchanged at Rs1.221tr, as
indicated by the Ministry of Finance.

The official said these agencies had been told that they could
prioritise their development projects within their allocated budget.
For example, the Higher Education Commission was told that its
allocation would remain at Rs21bn for the next year against Rs63bn
in the current fiscal year, but they should update in a day about their
priority projects for inclusion.

Budget strategy paper

Interestingly, it is also unusual that the budget strategy paper (BSP)

for the next fiscal year has not yet been shared with parliament,
though it is more because of political uncertainties emanating from
the legal status of reserved seats and because of the absence of
standing committees of the Senate and the National Assembly,
particularly those related to finance.

This will be the first time in recent history that the BSP has not gone
through the parliament, and there is no time left for the exercise.
Customarily, the BSP, which envisages broad outlines of the budget
allocations, is presented to these standing committees of the
parliament.

It would be even more unusual for the federal budget prepared in

consultation with the IMF to go directly from the federal cabinet to
parliament and, if the Senate and National Assembly standing
committees on finance are not constituted, to be passed without the
expert review and debate of the parliamentary committees.

Sources in the Finance Ministry said they expected to present the

budget to the federal cabinet and the parliament on June 10, but this
appeared to be difficult given the latest situation on the ground.

Even if the NEC is constituted and called on June 8 immediately after

the prime minister’s return, it would be a very tight schedule for
presenting the Economic Survey and the budget on June 9 and 10,
respectively, they said.

They, however, pointed out that the macroeconomic plan and

development agenda was not approved by the NEC in 2018 when
three chief ministers had walked out and boycotted the NEC meeting
presided over by the then prime minister Shahid Khaqan Abbasi, and
the PSDP and the budget of the following year was selectively revised
by the preceding PTI government.

Published in Dawn, June 4th, 2024

Analysis: Budget 2024-2025 :Will regressive taxation

continue to dominate?
PAKISTAN continues to rely heavily on indirect taxes,
with about 55 per cent of its tax revenue coming from such
sources. Inherently regressive in nature, indirect taxes are
the low-hanging fruit that policymakers turn to time and
time again to increase federal revenue because it is easy.

Regressive taxes take a bigger percentage of income from those who

earn less. For instance, a person earning Rs25,000 a month pays the
same amount of tax when loading credit on their mobile as someone
earning Rs2.5 million, highlighting the disproportionate burden on
lower-income individuals.

One of the proposals being floated to increase the Federal Board of

Revenue (FBR)‘s collection, in line with the International Monetary
Fund’s conditions, is to raise the General Sales Tax (GST) from the
current 18pc to 19pc.

Research by the Pakistan Institute of Development Economics (Pide)

indicated that about half of the household income for roughly 30pc of
the poorest households is spent on food. This was based on the
Household Integrated Economic Survey of FY19, when the GST was
at 17pc.

One proposal being floated to increase FBR revenue is to

raise GST from 18pc to 19pc

While it is true that when a homemaker shops for vegetables, the

vendor pushing the hand cart doesn’t charge GST while selling
eggplants. However, from the field to the table, the process adds GST
all along the way at various stages of inputs and processes.

Besides GST, customs duties and the federal excise duty are the other
major indirect taxes imposed on the economy. In the run-up to the
budget, rumours abound of tariff hikes on imports of used cars and
increased FED proposals for tobacco. While the petroleum levy is
classified under non-tax revenue in the budget, it is similar to
regressive in nature. Proposals to reintroduce a carbon tax or
significantly raise the petroleum levy to Rs100 per litre are spine-
chillingly alarming.

An increase in indirect taxes burdens those already crushed under the

weight of inflation. An increase in direct taxes has a similar effect of
taxing those who are already taxed — already roughly 3pc of filers pay
90pc of income tax collected.

Various stakeholders, including institutions such as the Asian

Development Bank and the International Monetary Fund, have
repeatedly called for widening the tax net through real estate,
agriculture and retailers. However, these sectors have stubbornly and
successfully resisted all efforts to be taxed in proportion to their
revenue.

Fighting a ‘mafia’
Last month, the Regional Tax Office in Rawalpindi awarded
certificates to honour the first four traders who have officially
registered themselves under the Tajir Dost Scheme. The scheme is
the latest attempt to integrate traders and wholesalers into the formal
tax net. Introduced at the start of 2024, the voluntary registration
period concluded on April 30. In the first month of its voluntary
registration, fewer than 100 traders signed up, indicating the absolute
lack of interest in joining the formal net.

Retailers and wholesalers contribute 18pc to GDP but their tax

contributions stand at a mere 4pc, probably because only 300,000 of
about 3.5m retailers are actively filing tax returns. Taxing retailers
may net an increase in revenue of Rs400 billion to Rs500bn,
according to some estimates.

Since 2019, three distinct schemes have been proposed to bring the
retail sector into the net. However, insufficient political will and
strong opposition from the trading community have brought the
efforts to nought.

Comparing the retailers to the ‘mafia’, former chief of the FBR

Shabbar Zaidi lamented the ‘failed’ system of the state that has been
unable to tax the retailers. “They bring down the shutters and block
the entrance to the markets,” he says, explaining why the government
has repeatedly failed to impose taxes.

The agri anomaly

Similar to the retail sector, the agricultural sector’s tax revenue is

insignificant compared to its contribution to GDP. Agriculture
accounts for roughly a quarter of Pakistan’s GDP, but agricultural
income tax (AIT) is only about Rs2.5 billion, far below its potential of
around Rs800 billion, suggests a study by Pide.

Farmers must file two income tax returns: one to the FBR and the
other to the provincial authorities. Tax return filing to the FBR is
mere paperwork to ensure that the farmer remains on the filers list —
the provincial authorities collect the actual tax, explains Khalid
Wattoo, a farmer and development professional.

However, there is an anomaly. AIT is taxed at a much lower rate than

other industries. For example, up until Rs4.8m, agriculture income is
taxed at 10pc, whereas income from other sources is taxed at over
30pc, says Mr Wattoo.
A farmer, who is also an industrialist — a definition that may apply to
many feudal landlords who are incidentally in politics as well — can
declare his income as agricultural and pay a lower tax rate, effectively
turning his income “white.”

Reduce taxes to increase tax revenue

The real estate sector presents another challenge. Its actual value is
difficult to gauge and even more complicated to tax due to much of its
capitalisation existing off the books.

Pakistan Stock Exchange’s (PSX) capitalisation is about $30-40

billion, but real estate capitalisation (across Pakistan) is about three
to four times that of the PSX, estimates Hassan Bakhshi, former
chairman of the Association of Builders and Developers (Abad).

About $30bn in remittances flow in every month, and roughly half of

it is used to purchase real estate and renovations, says Mr Bakshi,
supporting his estimate by quoting a State Bank of Pakistan report.
However, since the wealth does not exist on paper, it remains largely
untapped as a source of tax revenue.

Anecdotal evidence suggests that an increase in tax rates will result in

a decrease in registrations, he argues. Higher tax rates promote the
transfer of property through the power of attorney. For example, a
man wants to sell his bungalow to a builder. Instead of outright
selling the property, he transfers it through a power of attorney to
evade the higher taxes. This creates additional litigation problems
since if the man dies before the bungalow is demolished, the property
is transferred to his heirs, and the power of attorney is void. The heirs
can choose to honour the agreement, or it can get tied up in the
already overburdened courts.

In Pakistan, the paper value of a property and its market value are
vastly different. Mr Bakhshi contends that to bring the paper value
closer to market value, the government needs to decrease taxes and
close the gap over time. The DC values cannot be hiked overnight
with a stroke of the pen but increasing them over a span of five to 10
years will close the gap realistically.

All praises for the housing and construction policies under the PTI
government, Mr Bakhshi compared the real estate sector to
Bollywood of the 1970s. “In the past, Indian producers had to go to
the underworld to raise financing for their films. Similarly, builders
had to resort to informal credit before PTI’s focus on real estate. By
opening financing lines for builders, builders got access to formal
financing,” he says.

Under PTI’s taxation system for builders and developers, a fixed tax
rate per square foot of construction was implemented, leading to
about 2,200 projects being registered for the first time because of the
system’s simplicity and its predictability of costs.

“If you want to raise tax revenue from real estate, replicate what the
PTI government had done in terms of fixed tax per square feet,” he
says.

Published in Dawn, June 8th, 2024

Budgeting Chaos
‘STABILISATION’ is the favourite word of
mainstream economists. The IMF loves it, and has recently
hinted that Pakistan’s economy has ‘stabilised’ enough for
it to dole out another three-year handout close to the $6
billion that our finance czars have been craving.

I cannot understand what has been stabilised, except if a slight dip in

inflation from over 30 per cent to something like 20pc is a sign of
major progress. The economy is still mired in an endemic balance-of-
payments crisis, which sucks up all foreign exchange reserves to
regularly pay off the interest on our $135bn external debt burden.

And what is ‘stabilising’ about taking on even more debt from the
IMF, Gulf emirs and other ‘friends’ via the fantastical SIFC, and an
increasingly hollowed-out CPEC?

None of these basic facts about Pakistan’s political economy will be

acknowledged during the upcoming budget announcement,
scheduled for June 12. The largely meaningless exercise is being
preceded by chaos as ministers engage in an internecine conflict and
bureaucrats do their own bidding. They’ll get their act together in
time for the budget performance and bandy about some numbers.
But it doesn’t take a rocket scientist to see that nothing is about to
change.

Blue-collar working and white-collar salaried classes will be

burdened with even more regressive taxes, while public spending on
anything other than yet more big infrastructure will decrease again.
There will be no honest figures circulated about matters that actually
affect the mass of the working people — (un)employment, the huge
shortage of affordable housing in metropolitan Pakistan, and the
multipronged deprivation of the almost 40 million landless people in
the rural areas.

What is ‘stabilising’ about taking on even more debt?

Finance Minister Muhammad Aurangzeb said recently that fixing

Pakistan’s economy does not require too many policy prescriptions,
that established strategic objectives simply need to be executed.
Among other things, the honourable minister has been very gung-ho
about privatising all public assets, and inviting investors to develop
(read: pillage) unexplored mineral and other resources. He need not
mention real estate, because that is a sector in which investors and
developers already enjoy windfall profits.

Pakistani officialdom and donors are on the same page about these
strategic objectives. In fact, they’ve been saying more or less the same
thing for decades in the name of ‘stabilisation’.

What’s remarkable is that there is so little critique of these now banal,

straitjacket policies. I think it is a damning indictment of many
purportedly independent voices that they continue to accede to such
tired refrains.

In much of the Western world, the mantra of liberalising trade and

finance while unabashedly privatising public assets has given way to
talk of state-led industrial policy — the US is even explicitly engaging
in protectionism vis-à-vis China. But in Pakistan, the ‘experts’ are
unable to think beyond standard neoliberal speak.

It is no wonder that real estate moguls like Malik Riaz become

powerful behemoths who cannot be tamed. Such figures are,
as recent events show, deeply embroiled in the palace intrigues that
constitute our establishment-centric political order. Which brings me
to the role of the establishment in our crisis-ridden economy: will any
of our ‘experts’ summon the courage to talk about the defence budget
or hidden subsidies over the next few days?

We do require new policy proposals, Minister Sahib. Most of all, we

need to talk about the redistribution of wealth. Our is a country
where a small ruling class — including a khaki bourgeoisie — owns
the vast majority of land, industrial and financial capital. This class is
content to continue enriching itself, while the IMF and other donors
are happy to allow such continuity so long as they get their interest
payments back in the name of ‘stabilisation’.

The ruling class and its foreign patrons are also intent on pillaging
nature and destroying local ecologies in the name of ‘development’,
which equates to future generations of working people being left with
an even bigger debt burden and more frequent climate breakdown
events to contend with.

If the status quo remains intact, more and more of our rapidly
expanding young, working population will seek out livelihoods,
housing and other basic needs in what is passed off as the ‘informal’
economy.

If our ministers, donors and other experts had a finger on the pulse of
the people, they would spend more time thinking about this than
playing with macroeconomic numbers and budgeting chaos; not least
because it is also in the ‘informal’ economy that the ruling class
makes billions, extorting the working poor in Chaman, Taftan and so
many other spaces. But our policy debate would rather live in the
pretend world of ‘stabilisation’.

The writer teaches at Quaid-i-Azam University, Islamabad.

Published in Dawn, June 7th, 2024

Approaching Budget
THE constitution of the National Economic Council to
review and approve the macroeconomic budgetary
framework, as well as proposed federal and
provincial development spending plans for 2024-25, gives
hope that the announcement of next year’s budget will not
be delayed beyond June 12.

Considering that the Annual Plan Coordination Committee had

firmed up its macro targets for FY25 at the beginning of this month,
the delay in the announcement has been surprising, if not perplexing.

Apparently, it was done to facilitate Prime Minister Shehbaz Sharif

undertake his China visit, which had many guessing about its
purpose just ahead of the budget presentation. Rumour has it that the
visit was undertaken in connection with IMF-dictated budget
targets and programme goals concerning Chinese debt and power
purchase agreements with Chinese companies.

That the government is making its budget in exceptionally

challenging conditions is an understatement. The present
macroeconomic environment is probably the most demanding any
government has faced in years — despite the newfound economic
stability under the IMF’s short-term SBA facility. Macroeconomic
conditions remain vulnerable to the slightest shock.

Politically, too, the situation is tough. On the one hand, a court

decision has, at least for now, deprived the fledgling government of
an absolute majority in parliament. On the other, it must find a
balance between stringent IMF demands and the public’s
expectations of relief. Caught between a rock and a hard place, the
finance managers have repeatedly reassured the people that the
burden of ‘adjustments’ to be made in the budget under an agreement
with the IMF would fall on the affluent.

Yet few have faith in those commitments, given the stern IMF
conditions that would require drastic direct and indirect taxation
and withdrawal of subsidies in the next budget, and a significant
increase in energy prices at the beginning of FY25 to qualify for a new
bailout.

In this context, the government’s budget priorities are clear:

economic stabilisation by containing the current account deficit in
the balance-of-payments, and reduction in the budget deficit and
borrowing requirements through primary budget surplus.
Stabilisation is crucial for Pakistan to make its external debt
payments on time, bring up its dwindling foreign exchange
reserves to a safe level, and achieve debt sustainability by narrowing
the gap between its income and spending by mobilising additional tax
revenue and cutting public expenditure.

It goes without saying that these goals require extensive policy

reforms. Both the prime minister and finance minister have time and
again expressed their commitment to carrying out the required
structural reforms under the new IMF programme. The budget for
the next year will be their first test. Many are sceptical of them
translating their words into well-defined actions in the budget. Will
they prove their doubters wrong? Published in Dawn, June 10th, 2024
Budget 2024-2025: NEC meets today amid
calls for more uplift funding
• Led by PM, 13-member council aiming for 3.6pc
economic growth rate
• Expected to consider 13th five-year plan, review
performance of Ecnec, CDWP
• Planning ministry pushes to raise PSDP to Rs1.5tr against
APCC-approved Rs1.22tr

ISLAMABAD: The newly constituted National Economic Council

(NEC) is set to convene today (Monday) to review ongoing and future
investments and set targets for the next fiscal year.

The council aims to achieve a 3.6 per cent growth rate amid the
planning division’s push to increase next year’s federal Public Sector
Development Programme to Rs1.5 trillion, against the Rs1.22tr
recommended by the Annual Plan Coordination Committee (APCC)
last week.

Led by Prime Minister Shehbaz Sharif, the highest constitutional

forum on economic policymaking would take up a six-point agenda.
The 13-member body also comprises four provincial chief ministers,
four federal ministers (for foreign affairs, defence, finance, and
planning) and four provincial cabinet members from the respective
provinces.

The meeting would review the outcome of the 2023-24

macroeconomic framework and approve next year’s (2024-25)
economic priorities and targets. It is also expected to consider the
13th five-year plan (2024-29) and approve it for implementation. The
meeting would also review the implementation status of the current
year’s public investment programme and approve the investment
plan for the next fiscal year, envisaging almost Rs4tr development
spending by the Centre and the provinces.

The APCC has cleared a national investment plan of about Rs2.869tr,

including Rs1.22tr of PSDP, and annual development plans (ADPs)
Rs700bn for Punjab, Rs763bn for Sindh, and Rs627bn for Khyber
Pakhtunkhwa. Balochistan’s ADP would also be finalised during the
NEC meeting, given its limited resources and high dependence on
federal transfers.
Punjab has reportedly firmed up a much higher ADP than initially
indicated, which could match the federal PSDP. The power sector
would also be showing Rs185bn allocation for their development
projects from their own resources generated from consumers under
the approval of the Nepra. Therefore, the overall national
development plan for the next fiscal year is expected to surpass Rs4tr.

Push for higher PSDP

The NEC is also expected to review the performance reports of the

Executive Committee of the National Economic Council (Ecnec) and
the Central Development Working Party (CDWP) for the outgoing
fiscal year, including decisions taken by the two forums and their
implementation. It will also consider a report on the performance of
the state-owned entities.

Sources said the Ministry of Planning was still pushing for increasing
the size of the 2024-25 PSDP to Rs1.5tr instead of Rs1.221tr approved
by the APCC, which is headed by the Planning Commission’s Deputy
Chairman Jehanzeb Khan.

The sources said some critical areas had been left out by the APCC
and there were some additional demands from the coalition partners
that the planning minister and the prime minister would likely
accommodate.

“There’s nothing wrong in aiming for higher PSDP investment,

though its implementation would depend on the actual resource
availability during the course of the fiscal year,” a senior government
official said.

Growth targets

The growth target for the next year has been proposed at 3.6pc, to be
supported by 2pc growth in the agricultural sector, 4.4pc in the
industrial sector, and 4.1pc in services. The growth prospects are
subject to “political stability, exchange rate stability on the back
improvement in external account and external inflows,
macroeconomic stabilisation under IMF’s programme and expected
fall in global oil and commodity prices”, the Planning Commission
said.

The agricultural sector’s growth target of 2pc reflects a substantial

contraction. The output of important crops is expected to face a
contraction of 4.5pc due to a severe dry weather spell and inadequate
water availability due to lower than normal rainfall, especially in the
case of kharif crops. Other crops and livestock sub-sectors are
envisaged to grow at 4.3pc and 3.8pc, respectively.

The industrial sector is expected to recover in 2023-24, with a

targeted growth of 4.4pc on the back of expected large-scale
manufacturing (LSM) growth of 3.5pc.

This is expected to get boost from improved inputs and energy

supplies on the back of anticipated fall in global oil and commodity
prices, further easing of import restrictions, higher public sector
expenditure, stability in exchange rate and a decline in interest rates.
Owing to these factors, prices of construction materials are expected
to fall, which will support the construction industry to achieve a
growth target of 5.5pc in 2024-25.

The services sector is also expected to grow by 4.1pc. The envisaged

growth of 3.1pc in commodity producing sectors will complement the
targeted growth in the services sector. Uptick of economic activity in
the industry, especially the manufacturing sector, will largely
translate into a better growth in the wholesale and retail trade,
transport, storage and communications, etc.

The total investment-to-GDP ratio is expected to increase from 13.1pc

in 2023-24 to 14.2pc in 2024-25 due to expected economic turnout,
improved business environment and political stability.

Fixed investment is expected to grow by 27.6pc on a nominal basis,

whereas as a percentage of GDP, it is expected to increase from 11.4pc
in 2023-24 to 12.5pc in 2024-25. National savings are targeted at
13.3pc of GDP for 2024-25 against 13pc this year.

The government expects the fiscal deficit to narrow down on the back
of fiscal consolidation measures with a focus on enhancing tax
revenue and curtailing non-development expenditures, including
subsidies. The monetary policy will be aligned with the objectives of
inflationary expectations and growth revival. With falling global
inflation, domestic average inflation is expected to moderate to 12pc
next year.

Published in Dawn, June 10th, 2024

Budget 2024-2025: NEC approves

Rs 3.8tr PSDP to boost economy.
• Okays provinces’ cumulative uplift plans worth Rs2tr
• GDP growth target set at 3.6pc
• External debt payments to put pressure on forex reserves

ISLAMABAD: In a return to previous practice, the National

Economic Council (NEC) decided on Monday to continue funding
constituency-based schemes and ongoing provincial projects, while
approving an indicative national development plan worth Rs3.792
trillion for the next fiscal year to increase the economic growth rate to
3.6 per cent from the current 2.4pc.

The expansionary public investment stance is likely to come under

tight scrutiny of the International Monetary Fund (IMF) as the
authorities continue negotiations for a $6-8bn bailout for over three
years.

Presided over by Prime Minister Shehbaz Sharif, the four-hour-long

NEC meeting approved more than 47pc increase in the federal Public
Sector Development Programme (PSDP) to Rs1.4tr compared to the
current year’s Rs950bn.

The federal development programme actually goes

up by 58pc or Rs1.5tr if another Rs100bn public-private partnership
(PPP) projects are included in it. Another Rs197bn investment would
be made by state-owned entities in development activities, taking the
total size to Rs1.696tr.

The federal PSDP is even 15-23pc higher than Rs1.221tr approved by

the Annual Plan Coordination Committee (APCC), led by Deputy
Chairman of Planning Commission Jehanzeb Khan, a few days ago.
As Planning and Development Minister Ahsan Iqbal appeared to have
struck back, the NEC made a fresh allocation of Rs75bn for
parliamentarians’ schemes, called Sustainable Development Goals
Achievement Programme, almost 23pc higher than the revised
expenditure of Rs61bn under this head during the current year.
Provincial demands were also entertained, resulting in higher PSDP
allocation.

All four provinces, with a slight exception from Punjab, objected to

the APCC recommendations to exclude provincial nature projects
from federal funding through the PSDP. The NEC approved their
cumulative annual development plans worth Rs2.095 trillion and
agreed to continue funding the ongoing high-priority provincial
projects with over 80pc completion status with a reciprocal view to
discourage such projects reaching the federal budget in future.
This came after the Sindh chief minister pointed out that his province
suffered significantly during four years of the PTI-led government
when no funding was provided to their projects. Therefore, he added,
Sindh deserved to be compensated for injustices of those four ‘missed
years’.

He also contested the mandate of the caretaker government during

which period the NEC had decided to exclude provincial projects and
demanded that it be considered to be ignored ab initio. This helped
restore some of its funding.

The Balochistan chief minister also made a case for the province’s
longstanding deprivations, highlighting that the development and
infrastructure portfolio in the country’s largest province by area was
already very weak. He warned that the proposed changes would
severely impact various development roads and projects. Moreover,
due to its limited resources, Balochistan has historically relied on the
federal government for support, making it even more crucial to
continue receiving funding.

The Khyber Pakhtunkhwa chief minister also raised concern over

non-allocation of funds for some of the critical ongoing projects in
the province. However, it transpired that the drafts he carried had
already been revised and allocations in the federal PSDP increased.
Sources said he was satisfied with the updated development
allocations.

The Centre explained to the chief ministers that its fiscal position had
deteriorated after the 7th National Finance Commission Award and
its interest payments had gone up significantly, while the share of
provincial projects in PSDP had expanded from 12-13pc to almost
60pc in 15-16 years.

This double jeopardy adversely affected federal projects of strategic

and national importance that was a national loss, including that of
the provinces.

In view thereof, the meeting decided with consensus to transform the

NEC into a vibrant and proactive forum for which the cabinet division
was directed to notify a special committee comprising federal and
provincial representatives to address contemporary needs.

An official said the provinces were able to secure revival of federal

funding to a number of ongoing projects enabling the chief ministers
to claim victory in their capitals. The allocations were made so thinly
that these would only lead to cost and time overruns.
These adjustments, however, affected some federal programmes
cleared by the APCC. For example, the allocation for transport and
communications was increased to Rs279bn instead of Rs173bn
cleared by the APCC. Conversely, energy sector’s allocation was
restricted to Rs253bn against Rs378bn sanctioned by the APCC. Like-
wise, the water sector allocation was also contained at Rs206bn
instead of Rs284bn cleared by the APCC. The overall infrastructure
(transport, energy and water, etc) sector’s share was brought down to
Rs824bn from Rs877bn cleared by the APCC.

On the other hand, social sector allocation was enhanced to Rs280bn

instead of Rs83bn cleared by the APCC. Higher education appeared
to be the main beneficiary as its allocation was increased to Rs93bn
instead of just Rs32bn recommended by the APCC. Special areas like
AJK, GB and merged tribal districts also gained through their
interactions post-APCC meeting as the share of AJK, GB was
increased to Rs75bn from Rs51bn and that of the merged districts to
Rs64bn from Rs57bn.

The Rs1.4tr total federal PSDP would also include a foreign financing
of Rs316bn.

This included an allocation of Rs852.5bn for federal ministries

(including Rs175bn foreign assistance), while three corporations
(NHA, Wapda & power companies) would get Rs356bn next year
(including Rs136bn FEC).

The provincial ADPs of Rs2.095tr would include foreign exchange

component of Rs616bn and Rs1.48bn of local financing. The overall
public investment of Rs3.79tr would, therefore, include Rs932bn of
foreign funding and Rs2.86tr of local resources.

The growth target for next year has been set at 3.6pc, to be supported
by 2pc growth in agriculture, 4.4pc in industrial sector and 4.1pc in
services. The growth prospects are subject to “political stability,
exchange rate stability on the back of improvement in external
account and external inflows, macroeconomic stabilisation under
IMF’s programme and expected fall in global oil and commodity
prices”, the Planning Commission said.

Total investment-to-GDP ratio is expected to increase from 13.1pc in

2023-24 to 14.2pc in 2024-25 due to expected economic turnout,
improved business environment and political stability. Fixed
investment is expected to grow by 27.6pc on a nominal basis, whereas
as a percentage of GDP, it is expected to increase from 11.4pc in
2023-24 to 12.5pc in 2024-25. National savings are targeted at 13.3pc
of GDP for 2024-25 against 13pc this year.

The commission said the current account deficit was expected to

widen in 2024-25 with further easing of import restrictions for
achieving growth objectives.

The scheduled repayments of external debt will put pressures on

forex reserves and exchange rate. However, a positive outlook of
remittances, exports and external inflows will mitigate these
pressures, it said.

Published in Dawn, June 11th, 2024

Budget for stabilisation

PRIME MINISTER Shehbaz
Sharif’s new budget for the next fiscal year has laid out
some ambitious targets — in line with the demands of the
IMF to help Pakistan strengthen its case for a larger and
longer bailout so that it can anchor its newfound economic
stability of the last one year.

Overall, the budget seeks to boost the government’s tax revenues by

over 40pc to Rs12.97tr from a projected collection of Rs9.25tr during
the outgoing year through significant tax measures.

The average annual increase in tax collection during the last five
years has averaged around 20pc and is estimated to be 30pc this year.
The additional tax measures of Rs2.2tr, equal to 1.8pc of GDP, seek to
broaden the scope of consumption tax, significantly increase the
existing personal tax burden on salaried and non-salaried
individuals, do away with tax exemptions for various sectors of the
economy, bring some untaxed incomes into the net, tighten the noose
around non-filers, and boost the petroleum levy by Rs20 per litre to
Rs80. The remaining increase of Rs1.5tr in tax revenues is expected
to come from a nominal expansion in the economy due to a targeted
inflation rate of 12pc and 3.6pc GDP growth.

The additional tax measures and the proposed increase in the

petroleum levy will help raise the tax-to-GDP ratio for next year to an
estimated 11.5pc of the size of the economy from this year’s estimated
9.6pc. Another major goal of the budget is to produce a primary
surplus of 1pc of the size of the economy to hold down its fiscal deficit
to 6.8pc for debt sustainability. The deficit would be further slashed
to 5.9pc provided the provinces also throw up a surplus of Rs1.2tr as
envisaged in the budget.

While the measures announced by Finance Minister Muhammad

Aurangzeb are a step in the right direction, and seek to tax ‘sacred
cows’ such as real estate investors, stock investors, exporters, the
retail supply chain, and the like, these lack any “disruptive policy
changes”, and represent incremental measures towards
documentation of the economy.

Perhaps, political conditions in the country are not conducive for the
government to implement the radical measures needed for taking a
major leap towards boosting the economy. However, while the tax
and deficit targets are ambitious, it is not impossible to pull those off.

Yet doubts remain about the authorities’ ability to enforce the new
measures fully and ensure greater compliance. While the government
has raised the tax collection target to narrow the fiscal gap, the
budget makes little effort to cut expenditure.

Though, in his budget speech, the finance minister talked about

‘right-sizing’ the government, he did not announce any tangible
policy measure in this direction. Rather the total current expenditure
is estimated to surge by 21pc to Rs17.2tr, with power and other
subsidies jumping to Rs1.4tr and defence expenditure by 14pc to
Rs2.1tr. Likewise, the consolidated development expenditure of the
centre and provinces has been spiked by over 58pc to nearly Rs3.8tr
as the government hopes to kick-start moderate economic growth
through its spending on large infrastructure projects, in the absence
of any appetite for new investment in the private sector.

Apart from accessing the IMF funds, the other major objective of the
new budget is to shore up the stability it managed in the last one year.
While fiscal consolidation aimed for in the budget will likely deepen
stability, sustainable economic recovery remains dependent upon
foreign flows from multilateral and bilateral partners. These are
needed to bolster international reserves so that they cover three
months of imports.

Although the authorities are hopeful that the new IMF deal will help
them unlock these flows and improve the nation’s credit ratings,
enabling them to access commercial loans, there is little indication of
any substantial boost in foreign flows from these sources in the near
term. The IMF deal would be helpful in unlocking multilateral funds,
but that is not enough to reassure bilateral or commercial creditors or
foreign investors. Sadly, the new budget does not do much in this
respect.

Published in Dawn, June 13th, 2024

Budget 2024-2025 Protecting

‘sacred cows’ again
The government claims it is unable to do much to appease the
business community given the current circumstances, even if it
wishes to. The business community’s tough stance towards the
budget was expected. Although the government asserts it is in talks
with business leaders, significant revisions in fiscal policy are
unlikely.

Therefore, minor adjustments to reverse or scale down certain

taxation measures may occur. Fiscal space for these changes has been
created by cutting Rs250 billion from the Public Sector Development
Programme (PSDP). These modifications are not expected to affect
the essence of the budget, which will have already been passed by the
National Assembly when this story is published. The revised PSDP
has been reduced to Rs1.1 trillion from the originally proposed
Rs1.4tr.

The core objective of budget FY24 is to manage the country within its
means, which entails containing the fiscal deficit as desired by the
International Monetary Fund (IMF). To achieve this, the government
has opted to mobilise higher revenues rather than reduce the size of
the budget. Consequently, the size of the budget has increased by 25
per cent, rising from Rs14.4tr last year to Rs18.8tr this year. The
revenue target has also been set at Rs12.9tr, which is 46pc higher
than the last year.

The business community, aware of the economic challenges and the

implications of IMF supervision in budget formulation, was irked by
the proposed taxation steps. They consider these measures to be
unfair, harsh, and potentially counterproductive, fearing they might
mobilise less revenue by paralysing businesses. In response, they
have opposed these measures through multiple platforms, launched
media campaigns, and threatened lockdowns and street protests if
the government fails to show empathy and flexibility.

‘Punjab has budgeted only 0.07pc (Rs3.75bn) and Sindh

only 0.02pc (Rs6bn) of their budgets as agricultural
income tax’
Finance Minister Muhammad Aurangzeb responded briefly to a
query on this matter, stating, “We are constructively engaged with the
industry”. However, he did not disclose the expected outcome of
these ongoing interactions.

Former finance minister Miftah Ismail ruled out the possibility of a

direct confrontation between businesses and the government, noting
that businesses typically prefer to lobby for their demands.

Younus Dhagha, former caretaker minister in Sindh, who heads the

Policy Research and Advisory Council (PRAC), supported the
business community’s position. He argued that the protest is
justified, as the budget makers have shown no intention of bringing
‘sacred cows’ into the tax fold.

“Placing the entire burden of new taxes on trade, industry, and the
salaried class will strangulate the economy. The taxation regimes of
the federation and all four provinces show no sign of taxing the
agricultural elite. Punjab has budgeted only 0.07pc [Rs3.75bn] and
Sindh only 0.02pc [Rs6bn] of their budgets as agricultural income
tax. This undermines the finance minister’s claims of sparing no holy
cows and ensuring horizontal equity in the new taxation regime,” he
noted.

Ehsan Malik, CEO, the Pakistan Business Council (PBC) articulated

the position mildly. “Whilst appreciating the challenges and
constraints, PBC is engaging with the government to resolve the
regressive measures proposed. Our advocacy focuses on the longer-
term implications of the mismatch between policies intended to
promote the growth of the formal sector and the short-term revenue-
seeking measures that disproportionately burden this sector,
discourage exports and deter investment, especially foreign direct
investment (FDI),” he remarked.

Abdul Aleem, Secretary General of the Overseas Investors Chamber

of Commerce and Industry (OICCI), expressed disappointment. “This
year’s budget process lacked engagement with the business
community, resulting in many surprises, especially for corporates. Ad
hoc measures like increased taxes on salaries, arbitrary disallowance
of 25pc of sales promotion and advertising expenses have led to
protests from key stakeholders.”

He also mentioned the government’s failure to broaden the tax base

by ignoring agriculture and trade income. “There is still an
opportunity for the government to engage in dialogue to avoid
protests, which could negatively impact prospects of FDI inflows,” he
stated.

Planning minister Ahsan Iqbal, defended the budget by highlighting

inherited challenges and the economic stabilisation efforts led by
Prime Minister Shahbaz Sharif. “No party, in or out of the
government, could have offered a significantly different budget. After
servicing debt liabilities, the government has limited room to
manoeuvre,” he said over the phone, citing projected revenue and key
expenditure figures from the 2024-25 budget.

“This is not about politics; the national interest is at stake. We hope

and expect the business community to endure the current tough
phase with patience. I assure you that with our collective efforts, the
economy will turn around,” he remarked.

Gohar Ejaz, former caretaker minister and articulate businessman,

criticised the government’s sole focus on revenue generation. He
advocated for belt-tightening and complete transparency in public
spending. “The government has taken steps in the budget to increase
taxes by 4pc of GDP to 13pc and non-tax revenue, including
petroleum development levy, by 1pc to 5pc of GDP. Thus, tax and
non-tax revenue total 16pc of GDP.

“However, the business community is not seeing any resolve of the

government to reduce the fiscal deficit of 7pc of GDP by controlling
PSDP, state-owned enterprises’ deficit, privatisation plans, or resolve
to cancel independent power projects agreements for capacity
payments. The business community supports the country with its
best efforts but also demands reforms not restricted to taxation,” said
Mr Ejaz.

Asad Ali Shah, a chartered accountant and analyst, was unconvinced

by the government’s budget stance. He noted, “The increased tax
rates for salaried persons, non-corporates, and exporters — from 1pc
fixed tax on turnover to normal tax regime raising rates from 29 to
40pc on profits — are highly unfair and counterproductive. Major
resistance from those affected wouldn’t surprise me. I urge the
government to seriously reconsider these measures”.

Nasim Beg, an investment expert, did not expect a unified response

from the business community. “There are several business groups,
PBC, OICCI, Federation of Pakistan Chambers of Commerce &
Industry, etc and textile exporters. Each is likely to act independently,
not as a unified collective. Each group will balance its rightful
demands with a sense of responsibility,” he argued.

Published in Dawn, The Business and Finance Weekly, July 1st, 2024

Supplementary grants
THE ex post facto parliamentary approval of huge
unbudgeted expenditures of Rs9.4tr — up by 389pc from
Rs1.9tr sanctioned a year earlier — during the last two
fiscal years underlines how the government is abusing the
powers it derives from the Constitution to deal with
possible budgetary shortfalls, and unexpected new
expenditures or cost overruns.

This practice of altering the original budget by obtaining

retrospective approval of fund re-appropriation or new expenditures
made during a given fiscal year, without parliament’s nod
to supplementary budget statements, is not new. But the rapid
growth of these unauthorised expenditures affirms that the fiscal
authorities have lately been interpreting Article 84 rather liberally to
bypass parliamentary and public scrutiny. This is despite the fact that
the constitutional provision is meant to give the government access to
funds for unforeseen financial needs in times of emergencies or
contingencies to ensure the unhampered functioning of public
services.

A story on the excess expenditures by three successive governments

between May 2023 and May 2024 through supplementary grants
reveals that subsidies and the power sector, water division, defence
and civil armed forces and related agencies stand out in exceeding
budgetary allocations or securing finances for unbudgeted
expenditure and initiatives.

Many expenditures for which the government sought retrospective

parliamentary approval have little to do with emergencies or
contingencies. Several expenditures, such as additional funds
for CPEC security, military pensions and other retirement benefits,
the Green Corporate Initiative of the armed forces, Pakistan-Iran
border fencing, K-Electric and public power generation plants, etc,
could have been anticipated when the original budget was passed.

The abuse of a constitutional provision meant for unforeseen

financial needs betrays bureaucratic disdain for parliament and
public opinion, in fact, even democracy. It is also a sort of violation of
a 2013 Supreme Court observation that “the amounts as approved in
the budget passed by the National Assembly have to be utilised for
the purpose specified in the budget statement.

Any re-appropriation of funds or their utilisation for some other

purpose, though within the permissible limits of the budget, are not
justified…“ The recent re-appropriation of funds for needless
payment of ‘honoraria’ to PMO officers, as well as for
parliamentarians’ development schemes and renovation and
construction of judges’ residences at a time when the government has
implemented additional taxes of Rs1.7tr underscores the urgency for
restricting the government’ powers under Article 84 to alter the
approved budget, except in extreme cases.

Even when an expense is made in emergency situations, it should be

immediately brought before parliament for debate and approval to
ensure the integrity of the budget, avoid unnecessary additional
expenses and reduce digressions from the approved original spending
framework. These changes are crucial to ensure tight fiscal discipline
and contain budget deficits.

Published in Dawn, July 9th, 2024