IMF projects Pakistan's GDP growth at 3.6% for FY26, below govt target of 4.2%
The fund in its latest report, 'World Economic Outlook Update, Global Economy: Tenuous Resilience amid Persistent Uncertainty', upgraded GDP growth estimates for the last fiscal year 2024-25 by 0.1% to 2.7%.
Finance Division in its monthly economic outlook for June 2025 claimed that real GDP grew by 2.68% in the fiscal year 2024-25.
Finance ministry projects July inflation at 3.5-4.5% as price pressures ease
The World Bank has projected GDP growth rate for Pakistan at 3.1% for the fiscal year 2026 and the Asian Development Bank (ADB) at 3% for FY26. In its latest report, ADB revised Pakistan's GDP growth estimate for fiscal year 2025 slightly upward to 2.7% from its earlier projection of 2.5%.
IMF stated that global growth is projected at 3% for 2025 and 3.1% in 2026. The forecast for 2025 is 0.2 percentage point higher than the reference forecast of the April 2025 WEO and 0.1 percentage point higher for 2026.
'This reflects stronger-than-expected front-loading in anticipation of higher tariffs; lower average effective US tariff rates than announced in April; an improvement in financial conditions, including due to a weaker US dollar; and fiscal expansion in some major jurisdictions,' it added.
The report further stated that global headline inflation is expected to fall to 4.2% in 2025 and 3.6% in 2026, a path similar to the one projected in April.
The overall picture hides notable cross-country differences, with forecasts predicting inflation will remain above target in the United States and be more subdued in other large economies. Risks to the outlook are tilted to the downside, as they were in the April 2025 World Economic Outlook.
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Business Recorder
17 hours ago
- Business Recorder
Tax-to-GDP ratio: flawed debate
There has been persistent pressure on successive Pakistani Governments by policymakers, especially those affiliated with multilateral donor agencies, to increase the Percentage Tax-to-GDP ratio. It is true, that the fiscal deficit continues to increase. However, the assumption that it is a tax shortfall that grows the deficit needs to be challenged — Nadeem Ul Haque & Raja Rafi Ullah, The Odd Fascination with Tax-to-GDP Ratio (PIDE Knowledge Brief No. 78:2022) 'If we want lower taxes for growth, then spending must be curtailed so that governments won't need so much money. The next time you hear a politician promise another tax break for some special group of taxpayers, think how much that hurts the economy and you as a taxpayer. It's time to simplify the system and reduce its onerous impact that undermines economic growth' — Jack M. Mintz, the Palmer Chair of Public Policy, School of Public Policy, University of Calgary, Canada The recent claim by the Chairman of Federal Board of Revenue (FBR) that for the recently-ended fiscal year (FY) 2024-25 its tax-to-GDP ratio improved by 1.5 percent needs reconsideration [in FY 2024 FBR's tax-to-GDP ratio was 8.8 percent and not 9.5 percent, which was of total national taxes]. It is well-known that the debate over tax-to-GDP ratio in Pakistan has always been lopsided, failing to take into account the fact that the Pakistani nation remains the most heavily taxed in the entire region. Adding insult to injury, the citizens in return even do not get clean drinking, what to speak of free education, decent healthcare, affordable housing/transport and social protections like universal pension for all, out of taxes paid by the citizens. In federal tax collection by the FBR, there has been an overwhelming reliance on indirect taxation [even under the garb of direct income taxation through presumptive and minimum tax regimes through withholdings on a number of transactions having no nexus with income], without evaluating its impact on the economy and life of the less privileged sections of society. This flawed tax policy has been contributing towards the rich-poor divide as well expanding inequalities in income/wealth distribution. In the face of declining income tax contribution in GDP of less than 3 percent (after excluding indirect ones levied under Income Tax Ordinance, 2001), the finance minister of successive regimes — civil and military alike — and Revenuecracy have been making tall claims about 'impressive' (sic) increase in taxes before the International Monetary Fund (IMF) and elsewhere. The reality of this 'impressive' performance has been exposed in various columns by these scribes. However, the IMF and World Bank in the past kept mum, as they were party to portraying all-good 'projection saga' during the era the Uncle Sam needed Pakistan; first for dismemberment of the then USSR and later for imposing New World Order in the name of 'War on Terror' (sic). Back in 1995, the then Prime Minister, Nawaz Sharif, claimed during a meeting, held in Washington on October 21, 2015, with that time Managing Director of IMF, Ms. Christine Lagarde, 'We have achieved the highest tax-to-GDP ratio and Pakistan's economy has been stabilising due to prudent policies of my government'. This claim was diametrically opposite to what was stated by the then Auditor General of Pakistan (AGP) in his report making 'astonishing disclosure' that the tax-to GDP ratio of FBR 'reached its lowest level on the conclusion of the World Bank funded Tax Administration Reform Project (TARP)'. It was strange that in the presence of report of AGP, our Prime Minister, his finance minister and other 'financial experts' were trying to convince the IMF that 'all is well'. Nawaz Sharif on assuming the power for the third time as prime minister gave unprecedented tax waivers and concessions to the non-filers and tax evaders—even then, his amnesty schemes miserably failed. It could only yield Rs. 1.3 billion! In these columns efforts have been made to explain reasons for the poor tax collection. However, the citizens for the last many decades rightly raise the question, 'Do you know how rulers play havoc with the taxpayers' money'? They insist that we must calculate cost to national exchequer in providing tax-free perquisites and benefits to indomitable militro-judicial-civil-complex and public office holders in the form of palatial residences, army of servants, expensive cars, golf courses, rest houses etc. They call on first ending this colossal wastage of funds and money spent on fruitless foreign tours, state banquets etc. and then debate the issue of low tax-to-GDP ratio. Although in these columns a detailed roadmap for reforming the existing tax system and raising taxes to the level of Rs 30 trillion is presented, the self-styled stalwarts and wizards sitting in Ministry of Finance (MoF) and FBR want 'advice' and 'assistance' from IMF and World Bank despite. Needless to say, they miserably failed in the past to reform tax system. The situation can aptly be described what great Urdu poet Mir Taqi Mir said in the following couplet: Mir kya sada hein beemar howe jis key sabab, usi attar key londey sey dawa letey hein (What a simple soul is Mir; he seeks cure from the healer's boy who is the cause of his ailment). It is tragic that in a country where billions of rupees are made in speculative transactions in real estate and shares, tax-to-GDP ratio has been pathetically low hovering around ten percent for over a decade. Those who matter in the land are least bothered to tax undocumented economy and counter benami transactions. The mighty sections of society are engaged in these transactions and FBR being their handmaid has no intention to tax them. The definition of the term, 'business' given in section 2(10) of the Income Tax Ordinance, 2001, covers 'adventure in the nature of trade'. However, our tax machinery is sitting idle causing enormous loss to the national exchequer by not bringing adventures in the nature of trade (speculative transactions) in real estate and shares into tax ambit. The elected representatives (sic), in fact, clipped the power of FBR to tax speculative transactions in real estate as adventure in the nature of trade by including immoveable property in the definition of 'capital asset' through Finance Act, 2012 with effect from tax years 2013. Earlier, they have been giving undue tax exemptions on gains arising on speculative transactions in shares and stocks. Higher tax-to-GDP ratio in industrialised countries is primarily due to the higher level of revenue from social security, payroll taxes, corporate taxes and taxes on domestic consumption while taxes collected from international trade and non-tax revenue are lower. In contrast, in Pakistan the major portion of revenue comes from indirect taxes, particularly taxes on international trade and domestic consumption, while direct taxes have a pathetic share [4.3 percent of GDP in FY 2024 that included 50 percent pass through withholding taxes]. The extending of extraordinary tax-free benefits to the powerful classes, failure to tap actual tax potential, indulgence in wasteful expenditure and funding of inefficient public sector enterprises are continuously pushing the country to more and more expensive borrowings — both internal and external. The unrelenting huge fiscal deficit and rising quantum of debt are the major source of macro-economic imbalances over the last many years. Making the things worse, the growth-retarding tax policy is playing havoc with stagnant economy. Sole stress on oppressive indirect taxes is not only widening the rich-poor divide, but has also failed to enable Pakistan to reduce even revenue deficit—we are not mobilising enough to meet current expenditure. The question is: where does the fault lies? Even the World Bank-IMF funding and 'guidance' has failed to bring desired results. Who is responsible for the prevailing pathetic state of affairs? Our debt burden has increased monstrously, fiscal deficit is simply unmanageable, inflation is crushing the poor, taxes are evaded and avoided by the rich and whatsoever is collected is wasted by the rich and mighty. What a tragedy that the elites (ashrafiya) not only evade taxes but also thrive at taxpayers' expense. They are the de facto beneficiaries of all the State's resources—generated mainly by the suppressed land-less tillers and diligent industrial workers. Pakistan is not a poor country — the State's kitty is empty because of colossal wastage of taxpayers' money on unproductive expenses (perks and perquisites of ruling elites) and non-exploitation of vital natural resources as well unwillingness of the rich to pay income tax. The absentee landowners (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper personal taxation on their enormous income and wealth. An unholy anti-people trio of indomitable militro-judicial-civil complex, inefficient politicians and greedy businessmen—controlling and enjoying at least 90 percent the State resources—contribute below 1 percent towards national revenue collection but is beneficiary of 90 percent of available national resources. The existing exploitative, rotten, regressive, ill-directed and unfair tax system is rapidly widening the existing divide between the rich and the poor. The lack of political will to tax the rich and the mighty remains our dilemma — not scarcity of resources. Equity demands higher taxes from those who have higher income and wealth, but in Pakistan since the first martial law all fiscal policies have decreased tax burden on the rich and increased its incidence on the poor. Pakistan's tax-to-GDP ratio at FBR level alone can rise to 20 percent, if we bring 5 million ultra-rich into tax net, heavily tax speculative transactions in real estate (it will promote construction industry as prices of land will come down), tax all speculative deals at stock exchanges (it will induce genuine investment in companies, withdraw all tax-free perquisites given to militro-judicial-civil complex and public office holders and confiscate untaxed assts. The existing tax system is highly unjust. It protects the rich and mighty having monopoly over economic resources. The common people are paying an exorbitant sales tax of 18 percent (in fact 35-55 percent on finished imported goods after mandatory value addition and income tax at source) on essential commodities as well as Rs 80 per litre as petroleum and environment levies on petrol/diesel but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes. Our present tax revenue potential, if monstrous black economy is dealt with iron hand, is not less than Rs 30 trillion provided that the existing tax base is made wider and equitable, black economy is discouraged, tax machinery is completely overhauled and exemptions and concessions available to some privileged sections of society are withdrawn. However, this is not possible without simplification of the tax system [FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021, and FBR, tax potential & enforcement—II, Business Recorder, March 7, 2021]. Copyright Business Recorder, 2025
Business Recorder
17 hours ago
- Business Recorder
SBP's over-cautious and lopsided monetary policy
In their August 2024 published article 'Understanding the international rise and fall of inflation since 2020' in the 'Journal of Monetary Economics', three writers from the Research Department of International Monetary Fund (IMF), and one other highlighted two reasons broadly that are apparently at odds with the otherwise policy prescription from both IMF through its extended fund facility (EFF) programme, and by 'Chicago boys'-styled local policymakers. Hence, while the research paper, which is based on data from 10 advanced economies and 4 emerging economies, saw broadly the role of external factors in driving up inflation, and that the secondary cause in the shape of monetary policy needed lesser usage in terms of tightening given such shocks had mostly influenced core inflation; that does not include the food and energy components, and in turn highlights the advanced impact of such shocks that have come through as secondary impacts after first influencing inflation that in turn is captured by more volatile measure of inflation in the shape of overall consumer price index (CPI). The paper points out in this regard: 'Our results strongly suggest that global drivers, especially the sharp movement in energy prices, played a dominant role in driving the international rise and fall in inflation since 2020. Local policies also played a role. First, the transmission of headline shocks to underlying inflation was shaped by local characteristics. …However, our estimates suggest that the role of relative price shocks and their pass-through into core has at this point largely faded, facilitating the convergence of inflation to target-consistent levels. The continued stability of long-term inflation expectations on average across economies is also facilitating the return of inflation to target.' It is important to note that both the IMF and the SBP remained overly cautious with regard to monetary policy stance even though nothing significant has been transmitted in terms of global oil prices – which have mostly remained low relative to the highs seen during the early phase of Russia-Ukraine conflict, and mostly stable in general over the last number of months – and tariffs that were first announced in early April, and continued to remain paused most time since then, with the likelihood of being tapered down in general for most trading partners of United States, including for Pakistan. Yet, such relative easing of inflationary impact – both evidenced from the paper cited above, for instance, and the fact that monetary tightening has already run a lot of course, squeezing immensely aggregate demand for many months – continues to be met by unwarranted caution from both IMF and SBP. Hence, in their most recent country report on Pakistan that was released in May, which indicated that 'Monetary policy should remain tight and data dependent to ensure that inflation stays moderate, within the SBP's target range', and the latest monetary policy released in July 30 by State Bank of Pakistan (SBP) also surprisingly saw 'global oil prices' as 'volatile', and 'the impact of global trade tariffs as uncertain' and, in turn, kept policy rate well above both the CPI, and core inflation rate. The most shocking part is that mainly aggregate supply related causes like 'higher than anticipated adjustment in energy prices' are also being seen by SBP as grounds for involving the role of policy rate! Such over-cautious approach by IMF and SBP has already cost the economy dearly – average economic growth over the last few years of around the population growth rate of between 2-3 percent has already pushed significant number of people below the poverty line, while absolute numbers close in close to half of the population now below it as per recent World Bank figures in this regard, while unemployment rate is running very high when compared with numbers traditionally. The extent of over-caution by SBP can be seen from the fact that while inflation during the last eight months, that is during November 2024 to June 2025 has averaged 2.6 percent, policy rate has not come down in a way as to keep positive real interest rate in any reasonable limits, which as compared with June CPI numbers stands at 7.8 percent, and at 4.1 percent for the same month when compared with core inflation (non-food, non-energy). Hence, the decision to keep policy rate unchanged at 11 percent is surprising to say the least, and to say that it should have come down considerably, and well back in time is an understatement, and that is even after factoring in the role of base effect, not to mention the primarily aggregate supply side nature of external factors, and domestic energy price adjustments. The reason it is an understatement is because policy rate should not have gone up so high in the first place in response to considerable rise in inflation in recent years – before inflation started to come down – because in developing countries like Pakistan, and especially in the wake of Covid-19 pandemic, inflation is at least equally a supply-side/fiscal phenomenon. SBP as per its January 28, 2022 amended 'State Bank of Pakistan Act, 1956' is mandated 'to achieve domestic price stability by way of regulating the monetary and credit system' as its 'primary objective', it also carries the role to see its contribution towards 'supporting the general economic policies of the Federal Government to foster development and fuller utilization of the country's productive resources.' In that sense, a question that needs a plausible answer is whether an over-cautious approach of SBP – both under over-board austerity minded successive IMF programmes in general, including the current EFF programme, and similar mindset reflected by SBP outside of these programmes as well — where it has over-utilised the instrument of policy rate at the back of wrongly seeing the over-board need to restrict aggregate demand, when clearly there is a strong footprint of aggregate supply side factors in determining inflation can be seen both traditionally, and especially in the wake of Covid-19 pandemic, and in an overall world of existential threat of climate change crisis. It can clearly be seen that the mandate of SBP is not just price stability, but it also has the secondary concern to target inflation in a way that allows economic development, and utilisation of 'country's productive resources'. Clearly, an over-board monetary austerity mindset, in turn, unnecessarily squeezing the aggregate demand and not placing enough emphasis on improving institutional factors on the aggregate supply side — like fixing economic institutional quality, and improving productive—, and allocative efficiencies of underlying organisations, and markets through bettering governance, and incentive structures, including regulation — has allowed the endeavour of price stability to unnecessarily result in excessive economic growth sacrifice, along with producing only short-term reduction in inflation, with secondary impacts feeding into inflation in terms of higher transaction costs, and greater inflationary built-up cost-push inflationary channel at the back of lack of aggregate supply-related focus. More broadly, protecting fiscal space, especially in the wake of heightened geopolitics related security, and greater climate change/SDGs/economic resilience related spending needs in recent times require lowering the debt burden for instance, and SBP's overcautious and lopsided approach to rely too much on policy rate to control inflation is not allowing it to play its role for overall economic development. In this regard, while the independence of SBP needs to be protected, yet greater say of government needs to be reflected through greater footprint of government in the monetary policy committee (MPC) of SBP, in addition to filling MPC with more broad-based economic thinking in terms of economic ideological representation; it appears the neoliberal-minded influence, both traditionally and currently, seems to be in majority in terms of most members of the committee apparently showing strong signs of following this school of thought, as reflected through the overall arguments in monetary policy statements in general, including the latest one. More perhaps could be learnt from the workings of Monetary Authority of Singapore (MAS) in this regard. A mind-set of shock therapy has not helped the economy. What is needed is adopting both macro- and micro-level initiatives in a more focused and innovative way. Excessive market power – for instance in the case of sugar sector – resulting in price gouging or, in other words, dealing with 'greedflation' or 'seller's inflation' requires adopting a more balanced aggregate demand, and supply side focus. External factors influencing inflation also need to be taken in the same balanced way. For instance, noted economist Isabella M. Weber along with her co-authors, in their (2025) published article 'Implicit coordination in sellers' inflation: How cost shocks facilitate price hikes' point towards the need to make microeconomic policy interventions at the sectoral level to deal with cost-push inflation that results from seller's inflation. The paper pointed out in this regard, 'we provide descriptive evidence in support of the hypothesis that economy-wide cost shocks function as implicit coordinators for price-making firms to hike prices, which translates supply shocks and commodity market fluctuations into price increases across sectors. In the absence of coordination, price-making firms risk losing market share when they increase prices. But economy-wide cost shocks signal to all firms that this is the moment to increase prices and thus coordinate pricing while the window of opportunity is open. If supply constraints occur in addition to cost shocks, that can further strengthen the coordination signal.' Moreover, the research paper recommended, among other things, the following: 'First, measures should be taken to reduce price volatility in critical upstream sectors to prevent economy-wide cost shocks in the first place… Greater regulation and oversight, sector investigations, and antitrust enforcement in too-essential-to-fail sectors can further help contain sharp price increases. Price controls can be an emergency measure of last resort, if other stabilization efforts fail. Second, policy measures can be implemented to impose a potential cost on firms that excessively hike prices in response to cost shocks.' This provides one way that rather than seeing an otherwise wrongly over-board role of interest rate as a policy instrument to control inflation, for instance, sector specific price controls can be adopted. Another way, as a complimentary step could be to adopt 'dual-track' pricing system as adopted by China during the 1980s, for instance. Copyright Business Recorder, 2025
Business Recorder
18 hours ago
- Business Recorder
Discount rate remains unchanged
EDITORIAL: The Monetary Policy Committee (MPC) under the chairmanship of Governor State Bank of Pakistan Jameel Ahmed decided to keep the discount rate unchanged at 11 percent. This has surprised many, given the macroeconomic data routinely released by government entities in recent weeks and months. Consumer price index (CPI), or headline inflation, reported to be the prime determinant of the discount rate, has been declining since November 2024 — from 4.9 percent, to 4.1 percent in December, 2.4 percent in January, 1.5 percent in February, 0.7 percent in March and 0.3 percent in April. The MPC reduced the discount rate to 13 percent on 16 December, 12 percent on 12 January and 11 percent on 5 May even though the decline in CPI was much sharper during these months than previously. True that CPI rose to 3.5 percent in May and declined to 3.2 percent in June this year; however, the rate has been kept unchanged since May, indicating that the CPI may not be the primary determinant of the discount rate. Core inflation has also been steadily declining since March this year — from 8.2 percent to a low of 6.9 percent in June. The Monetary Policy Statement (MPS) noted that high frequency economic indicators were depicting a global economic recovery (and not just in Pakistan) — a stance that is clearly at odds with the International Monetary Fund (IMF). According to the IMF, 'forecasts for global growth have been revised markedly down compared with the January 2025 World Economic Outlook (WEO) Update, reflecting effective tariff rates at levels not seen in a century and a highly unpredictable environment.' The MPS further claimed notable year-on-year growth in automobile sales, fertilizer off-take, credit to private sector, imports of intermediate goods and machinery — sales and purchases that are not indicative of higher output, but a decline in inventories while post-Trump's inauguration the dollar lost value against all major currencies except the rupee, which accounts for lower import costs. The MPS makes reference to purchasing manager's index in recent months for the first time which begs the question as to how it is calculated. One may assume that it is part of the technical assistance (TA) extended by the IMF to Pakistan to deal with 'important shortcomings that remain in the source data available for sectors accounting for around a third of GDP while there are issues with the granularity and reliability of the Government Finance Statistics (GFS).' The September IMF documents note that the TA will support government efforts to improve GFS and formulate a new Producer Price Index. It is relevant to note that Business Recorder was informed by the Pakistan Bureau of Statistics that the TA began in July 2025 and will not be completed till end June 2026. The MPC appeared to be unaware of the fact that the large-scale manufacturing (LSM) growth was at negative 1.52 percent July-April 2025 (the most recent data released) against 0.26 percent in the comparable period of the year before; private sector credit rose from 323.5 billion rupees in 2023-24 to 676.6 billion rupees July-June 2024-25 with the rise associated with the stock market rather than the LSM. And maintained that barring flood-related risks agriculture sector is expected to recover in the current year — a risk that compromised the target last year and the recent ongoing floods may well belie this optimistic projection. In relation to the discount rate decisions taken by the MPC it is appropriate to cite the observation by the IMF in its May 2025 documents uploaded on its website titled the first review under the extended arrangement: 'while the reduction in headline inflation has been impressive, core inflation remains elevated, and the SBP should continue to calibrate monetary policy carefully, removing monetary constraint gradually and contingent on clear evidence that inflation is firmly anchored within SBP's target range'. In other words, the decision to remove monetary constraints on repatriation of profits under contractual obligations (in spite of reserves on 18 January cited at USD 14,456.6 million though the Governor SBP noted during his press conference that rollovers account for USD 16 billion) may be the primary reason for the Fund staff not to give the green light to the MPC to reduce the discount rate. The Governor SBP held a press conference after the MPC meeting, which must be appreciated as it is in line with the Fund recommendation to undertake effective communication 'as it will help the public better understand the MPC's reaction function and build support for policy decisions.' Sadly, it is fairly obvious that he failed to convince the naysayers in the industrial community that the decision to keep the rate unchanged was an appropriate one. The central bank seems to have taken a cautious approach with a view to ensuring price stability amid a surge in energy prices that has worsened the inflation outlook. Copyright Business Recorder, 2025
