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Business Recorder
5 days ago
- Business
- Business Recorder
The provincial budgets of FY26
The four provincial budgets were announced last week. The first budget presented was that of Sindh, followed by Punjab, Khyber-Pakhtunkhwa and Baluchistan. The provincial budgets for 2025-26 are expected to be in line with the projections agreed with the IMF as revealed in the IMF Staff Report of 17th of May. This report was released following the successful completion of the first review of the three-year Extended Fund Facility. There has been a visible shift of focus towards the fiscal performance of provincial governments in the IMF Programme. Performance criteria and indicative targets include the public expenditures on health and education, which are mostly by the provincial governments. In addition, the four provincial governments combined are expected to achieve a target level of tax revenues and a pre-specified level of provincial cash surplus. This is to bring down the consolidated budget deficit and facilitate the achievement of a target level of primary surplus. The IMF Staff Report indicates the following expectations regarding provincial budgets in 2025-26: (i) Growth rate in provincial own-tax revenues of over 27 percent. This is linked to the effective implementation and significant generation of revenues from the new Agricultural Income Tax Act, legislated by each Provincial government in the beginning of 2025. (ii) Moderate growth in current expenditure of under 15 percent, to provide fiscal space for enhanced allocations to education and health. (iii) Modest growth rate of 12 percent in development expenditure from the likely level of Rs 1870 billion in 2024-25 to Rs 2100 billion in 2025-26. (iv) Generation of a sizeable combined provincial cash surplus of Rs 1500 billion, implying a big jump of 50 percent over the likely level of Rs 1000 billion in 2024-25. The above expectations are based on a rapid growth in federal transfers to the four provincial governments combined of 22 percent. The fundamental question is whether the four provincial budgets are consistent with the realisation of the above targets. The first critical magnitude is that of the projected size of federal transfers to the provinces. The federal budget document, Budget in Brief of 2025-26, reveals that the total transfers consisting of NFC Divisible Pool transfers, straight transfers and grants will aggregate to Rs 8206 billion, with the growth rate of 17.3 percent. This is somewhat lower than the expectation of 22 percent growth. The next critical target in the IMF Programme is extraordinary growth in provincial own-tax revenues, facilitated by substantial higher collections from the agricultural income tax. The truly surprising discovery from the four provincial budget documents is that the overall national collection from the agricultural income tax will be only Rs 19 billion. Surely, with the same income tax rate as for non-agricultural incomes and with agricultural incomes approaching 22 percent of the economy, the revenue estimate should have been in hundreds of billions. A feasible target of Rs 150 billion could have been set for the first year in 2025-26, with due allowance for the low outputs from wheat and cotton. Clearly, the powerful lobby of the very large farmers has prevailed once again. There is substantial variation in the budgeted growth of current expenditure in 2025-26 by the four provincial governments. The highest growth rate that has been set is by the government of Sindh at 25.3 percent and the lowest at 0.9 percent by the government of Punjab. Combined the growth rate of current expenditure is 14.8 percent, which is in line with the IMF expectations. However, the four provincial governments have set very ambitious growth rates for development spending. It ranges from a maximum of 43.6 percent in the case of Baluchistan to a low of 11.9 percent in Punjab. Combined, the proposed level of development expenditure is Rs 3105 billion. This is substantial larger than the level indicated for 2025-26 in the IMF Staff Report of Rs 2099 billion. Clearly, the provincial governments are proposing to promote growth through investment in infrastructure and services. We come now to effectively the bottom line, corresponding to the targeted magnitude of the cash surplus by each provincial government. There is substantial variation here also. The government of Punjab hopes to generate a large cash surplus of Rs 943 billion, which is 41 percent higher than the likely level this year. This will be equivalent to 63 percent the combined national targeted cash surplus of Rs 1500 billion indicated by the IMF. The big surprise is that the government of Sindh expects the provincial budget to actually be in deficit of Rs 38 billion. This is very unusual since limits have been placed on borrowings by provincial governments. The Khyber-Pakhtunkhwa and Baluchistan governments have shown small surpluses of Rs 126 billion and Rs 51 billion, respectively. Overall, given the provincial budgets, the combined provincial cash surplus is targeted at Rs 1082 billion, significantly below the amount revealed in the federal budget of Rs 1500 billion, and Rs 1500 billion also in the IMF Staff Report. Consequently, this will increase the consolidated budget deficit by 0.4 percent of the GDP and reduce the primary surplus from 2 percent to 1.6 percent of the GDP. Overall, the provincial budgets have generally been disappointing. The agricultural income tax is not being effectively implemented. Other taxes like the urban immoveable property tax and the sales tax on services continue to remain underdeveloped. There is under-budgeting of the cost of increasing salaries and pensions, which will further reduce the provincial cash surplus. The time has come for much greater focus on the finances of provincial governments. They now account for 30 percent of national public expenditure but finance only 17 percent of this expenditure. The first time focus in the IMF on key provincial budget magnitudes needs to be sustained and strengthened whenever necessary, especially on mobilization of substantially larger revenues. Copyright Business Recorder, 2025
Business Recorder
03-06-2025
- Business
- Business Recorder
External financing in FY2025-26
One of the key indicators in the federal budget is the projected level of external financing to partly finance the budget deficit. The expectation in 2024-25 was that there would be total external financing inflow of approximately US$10.3 billion into the federal government account, excluding rollovers. Net of repayment the financing was expected to be US$2.3 billion. The Ministry of Economic Affairs has recently reported on the gross inflows up to the end of April 2025. They have aggregated to US$5.7 billion, equivalent to only 55 percent of the annual target. They should have reached 83 percent of the annual target by the end of April. The biggest shortfall is in commercial loans. The target is US$3.8 billion, whereas the actual loans received aggregate to less than US$0.8 billion. Given the enhanced risk perceptions of lending to Pakistan, it is not surprising that private creditors have reduced their exposure to Pakistan. The surprising outcome is the significant shortfall also in inflows from multilateral development agencies. The Asian Development Bank is, more or less, on target and has disbursed 76 percent of its annual commitment by April. However, the big shortfall is in the inflows from the World Bank. Only 51 percent of the annual target has been met up to April. The IMF Staff Report of the 17th of May, following the first review of the IMF Programme, contains estimates of the likely inflow of external financing by the end of 2024-25. These IMF estimates include the requirements of inflows to the private sector in Pakistan. The good news is that the expectation is of a gross inflow of US$18.9 billion, including rollovers, which will be $2.5 billion above the requirements of amortization of debt. The expectation is that the foreign exchange reserves of the SBP will rise by $4.5 billion by the end of 2024-25. US$2 billion will be the inflow from the IMF, which has already taken place. Consequently, the projection is that by end of June 2025, the level of foreign exchange reserves will reach US$14 billion. This will provide import cover of 2.8 months and put Pakistan in a somewhat more secure position. There is need, however, to appreciate that total external inflows, of both foreign direct investment and loan financing, will be significantly smaller in 2024-25. Inclusive of inflows into the private sector, the IMF estimate of the actual external financing of Pakistan is US$20.9 billion. This is 23 percent less than the total inflow of US$26.3 billion in 2023-24. We turn now to the outlook for 2025-26. The first part of the external financing requirement is the size of the current account surplus or deficit in the balance of payments. The IMF Staff report has projected a small deficit of US$1.5 billion. Exports are expected to show a growth rate of 5.4 percent, while imports are projected to increase by 3.4 percent. The turmoil in the global trade after the US announcement of higher tariffs is likely to adversely impact on the volume of global trade. Further, the shortfall in major crop outputs like cotton and wheat will raise the volume of agricultural imports. Also, if a target GDP growth rate of 3.6 percent is to be achieved then this will imply larger imports of inputs and capital goods. The IMF has been cautious about the level of remittances, which are likely to increase by 20 percent in 2024-25, and are the main reason for a near zero current account deficit. The expectation is that they will fall marginally in 2025-26. Also, only 3 percent growth is anticipated in interest payments and repatriation of profits. The latter may be significantly higher due to increase in risk perceptions about investment in Pakistan. Overall, there is the risk that there may be a larger deficit in the current account in 2025-26, which could approach US$4 billion, equivalent to almost 1 percent of the GDP. The balance of payments projections of the IMF for 2025-26 are based on a double-digit depreciation of the rupee. The projection of the level of amortization of external debt, both public and private, is of a significant increase of almost 18 percent. It is expected to rise from US$14.7 billion in 2024-25 to US$17.3 billion in 2025-26. Fortunately, repayment to the IMF will be less by almost $1 billion. Turning to the available financing, the IMF has been cautious about the projection of foreign direct investment in 2025-26. The expectation is that it will remain at the same level as in 2024-25 of US$2.1 billion. However, the tense security situation may lead to some postponement of investments in South Asia. Further, the IMF is also not expecting significant increase in the disbursement of loans in 2025-26. They are projected at $17 billion as compared to US$16.7 billion in 2024-25. Overall, the lack of optimism in the IMF projections is clearly indicated by the expectation that the available financing will be virtually the same as the total external financing requirement of US$19.3 billion. This is in contrast to the expected surplus of US$2.5 billion from sources other than the IMF in 2024-25. The assumption in the projections is that the IMF Programme will continue throughout 2025-26. Two reviews during the year will be successfully completed and Pakistan will meet the quantitative performance criteria and implement the agreed agenda of reforms. Uninterrupted continuation of the IMF Programme in 2025-26 will lead to a loan disbursement of $2 billion from the IMF. In addition, there will be some inflows from the resilience facility, which has not yet been included in the IMF projections. Overall, Pakistan's reserves are projected to increase by $2 billion. In addition, there could be other prospective financing of US$1.4 billion. Overall, the above IMF projections indicate a relatively high level of risk and uncertainty in the level of external financing in 2025-26. The requirement may be higher because of a larger current account deficit and the need for purchase of armaments. Foreign direct investment may be adversely affected by the security situation. On top of all this, Pakistan will have to continue performing well within the framework of the IMF Programme. Copyright Business Recorder, 2025
Business Recorder
05-05-2025
- Business
- Business Recorder
Tax revenue target for 2025-26
The process of preparation of the federal and provincial budgets is underway now and the respective budgets will be announced in the earlier part of June 2025. One of the crucial determinants of the size and level of fiscal effort is the overall tax revenue target for 2025-26. This article will attempt to make the likely revenue projections for the federal government and the four provincial governments combined. The first step will be to estimate the likely revenue outcome in 2024-25 of tax revenues. Thereafter, a disaggregation is undertaken of tax revenues into FBR revenues, petroleum levy revenue and provincial tax revenues. A comparison is made with the projections in the IMF Programme for 2024-25, after incorporation of changes following the review mission by IMF staff in March. The target for 2024-25 of total tax revenues is Rs 14,954 billion, as given in the IMF Staff report. Over 86 percent is to come from FBR revenues, with the target at Rs 12,913 billion. The remainder is Rs 1,123 billion is from the Petroleum Levy and other levies and Rs 918 billion from provincial tax revenues. The overall growth rate targeted in tax revenues in 2024-25 is an ambitious 34 percent. FBR revenues are expected to show even faster growth of 38.7 percent. Provincial tax revenues are projected to increase by 18.6 percent and the Petroleum Levy by only 4.6 percent. The information on total tax revenues in the first six months has been released by the Federal Ministry of Finance. The overall growth rate is 24.6 percent. This is significantly lower than the target growth rate of 34 percent. As such, there was already a revenue shortfall of Rs 500 billion by the end of December. The latest numbers up to the end of March 2025 are available of the total revenue collection by the FBR. It stands at Rs 8,464 billion, with a shortfall already of over Rs 700 billion. Provincial tax revenues continue to exhibit low growth. However, the rates of Petroleum Levy have been enhanced with falling international price of oil. Consequently, additional revenues of up to Rs 100 billion are likely to accrue from this source. Based on the performance in the first nine months, the projected outcome of FBR revenues in 2024-25 is likely to be close to Rs 11,800 billion. This implies an annual shortfall of over Rs 1,100 billion. In fact, FBR is unlikely to even meet the downward revised target in agreement with the IMF of Rs 12,300 billion, following the March Staff mission. Total tax revenues are projected now at Rs 13,700 billion in 2024-25. This means that there will be a shortfall of up to Rs 1,250 billion. However, it is important to note that the target in the IMF Programme for total tax revenues was 12.3 percent of the GDP, thereby leading to a big increase in the tax-to-GDP ratio of 1.8 percent of the GDP in 2024-25. The nominal GDP level is likely to be lower in 2024-25 than the initially projected level by the IMF. Consequently, the total tax revenues are likely to approach 11.8 percent of the GDP. Therefore, the shortfall will be relatively small at 0.5 percent of the GDP. The next year's target in the IMF Programme of FBR revenues is of Rs 15,070 billion. With projected revenues in 2024-25 of Rs 11,800 billion, this will require achievement of a relatively high growth rate of almost 28 percent. The various tax bases are currently showing low nominal growth rates because of the colossal drop in the rate of inflation. As such, a target growth rate of FBR revenues of 28 percent borders on being unrealistic. The IMF Programme expects the FBR revenue to GDP ratio to rise to 11.0 percent of the GDP, as per the original projections in 2025-26. With the revenues at close to 10 percent of the GDP this year, a feasible target is 11 percent of the GDP in 2025-26, so that the original target for 2025-26 is met. The likely rate of increase in the nominal GDP in 2025-26 is 14 percent. As such, the appropriate target for FBR in 2025-26 is Rs 14,370 billion. This will imply a growth rate of 21.8 percent. The original target of Rs 15,000 billion requires a significantly higher underlying rate of inflation in the economy in 2025-26. The focus next year is also likely to be on provincial tax revenues. An extraordinary growth rate of 74 percent has been targeted for these revenues in 2025-26. Clearly, this is based on the expectation that the new Agricultural Income Tax law will be implemented from July 1st, 2025 and substantial additional revenues of over Rs 500 billion will be collected in 2025-26. A recent estimate in the RASTA research project of the Pakistan Institute of Development Economics is that the potential revenue from the agricultural income tax on crop income is Rs 880 billion, on the tax base of 2023-24. This is equivalent to 0.8 percent of the GDP. Therefore, subject to proper assessment of individual tax liability and effective collection, revenue of Rs 500 billion from the agricultural income tax is feasible. The petroleum levy has been targeted to yield Rs 1,193 billion in 2025-26. The significant fall in oil prices should enable the target to be enhanced to Rs 1,400 billion. Overall, a summary is presented below of the likely outcome in 2024-25 and feasible targets in 2025-26 of tax revenues. The above targets will enable achievement of the overall target for tax revenues in 2025-26 as envisaged in the IMF Program of 13 percent of the GDP. =========================================================== Tax Revenues (Rs in Billion) =========================================================== 2024-25 2025-26 (Projected) (Target) =========================================================== FBR Revenues 11,800 14,370 Provincial Tax Revenues 840 1,470 Petroleum Levy 1,300 1,400 Total Tax Revenues 13,940 17,240 % of GDP 11.8 13.0 =========================================================== Copyright Business Recorder, 2025
