IMF sets stringent fiscal path for next fiscal year

Express Tribune

11-05-2025

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The International Monetary Fund has set a more stringent fiscal path for Pakistan by setting the primary budget surplus target for the next fiscal year at 1.6% of the size of the economy which, this time, is projected to be achieved by largely containing expenditures.
Compared to this fiscal year's 1% of the GDP primary budget surplus target, which is calculated after making interest payments, the IMF has set the target at 1.6% for fiscal year 2025-26, according to the details the Fund released on Saturday after the approval of the new loan.
Unlike in this fiscal year when the primary surplus target had been designed to achieve by solely depending upon increasing taxes, the next fiscal year's goal largely hinges upon restricting expenditures.
The details showed that compared to 0.7% of the GDP increase in total revenues to GDP ratio, the IMF has projected a 1.3% of the GDP reduction in expenditure.
The IMF macroeconomic table showed that the total revenues of the federal and provincial governments are estimated at Rs15.2% of the GDP or Rs19.6 trillion at next year's projected size of the economy. Out of this, the Federal Board of Revenue's target will be Rs14.3 trillion and around Rs4 trillion is estimated to be recovered on account of non-tax revenues. Rest will come from the provinces.
The total expenditures by all five governments estimated at 21.6% of the GDP for this fiscal year, are projected at 20.3% of the GDP or about Rs26.3 trillion, according to the IMF's projections. These are hardly Rs1 trillion higher than this year's estimated expenses, requiring all the governments to keep their belts tightened.
Since the primary surplus target is exclusive of interest payments, the Finance Ministry sources said that the containment in the expenditures would largely be on the development side with no room available on the defense spending side.
Pakistan cannot afford to reduce or contain the defense budget in the light of new tensions in the region and around 2% of the GDP will be allocated for defense expenditures, said the Finance Ministry sources. The government has indicated to increase the defense budget by at least 18% compared to the last year, they added.
Nigel Clarke, Deputy Managing Director of the IMF and Chairman of the IMF board that approved on Friday two packages worth $2.4 billion, said that risks to Pakistan's outlook remain elevated particularly from global economic policy uncertainty, rising geopolitical tensions, and persistent domestic vulnerabilities.
He said that against this backdrop, the Pakistani authorities need to maintain sound macroeconomic policies and accelerate reforms to safeguard the macroeconomic gains and underpin stronger and sustainable, private sector-led medium-term growth.
The Finance Ministry is planning to allocate Rs921 billion or 0.7% of the GDP for the development budget for the next fiscal year.
An amount of about Rs1.35 trillion or little over 1% of the GDP is being set aside for giving subsidies in the next fiscal year, said the sources. Out of this power sector subsidies are estimated at Rs1.04 trillion or 0.8% of the GDP, said the sources.
Some of the cabinet ministers are not in favour of allocating a large pie of the budget for the development when particularly it cannot be spent during the course of the fiscal year. There are huge wastages at the name of the development spending, which was also admitted by the Planning Ministry this week.
The IMF has projected the overall budget deficit at 5.1% of the GDP or Rs6.6 trillion for the next fiscal year. In terms of the size of the economy, the deficit is 0.8% of the GDP less than this fiscal year but almost at the same level in absolute terms.
The IMF on Friday completed the first review of the programme and allowed an immediate disbursement of around $1 billion by turning down Indian's unwarranted opposition to it. The IMF Executive Board also approved the Resilience and Sustainability Facility (RSF), with access of about $1.4 billion.
The IMF said that under the bailout package key priorities include entrenching macroeconomic sustainability through consistent implementation of sound macro policies, including rebuilding international reserve buffers and broadening of the tax base. It also emphasized the need for advancing reforms to strengthen competition and raise productivity and competitiveness; reforming SOEs and improving public service provision and energy sector viability; and building climate resilience.
The IMF noted that inflation fell to a historic low of 0.3% in April, and progress on disinflation and steadier domestic and external conditions, have allowed the State Bank of Pakistan to cut the policy rate by a total of 11% since June 2024.
The IMF said that Pakistan's gross official foreign exchange reserves are projected to reach $13.9 billion by end-June 2025 and continue to be rebuilt over the medium term. It has projected $17.7 billion reserves in the next fiscal year and a low current account deficit of 0.4% of the GDP.
However, it does not see any increase in the foreign direct investment in the next fiscal year, estimated at only 0.6% of the GDP for the next fiscal year too.
Nigel Clarke, Deputy Managing Director said that "Pakistan has made important progress in restoring macroeconomic stability despite a challenging environment. Since the approval of the Extended Fund Facility, the economy continues to recover, with inflation sharply lower and external buffers notably stronger, he added.
"The steadfast implementation of the FY2025 budget and the passage of key fiscal reforms, notably the Agricultural Income Tax, underpin the process of rebuilding policy making credibility. Continuing to mobilize greater revenue from under taxed sectors and the noncompliant will make the tax system more equitable and efficient, according to the IMF.
"The State Bank of Pakistan's (SBP) tight monetary policy stance has been pivotal in reducing inflation to historic lows. Monetary policy should remain appropriately tight and data-dependent to ensure inflation is anchored within the SBP's target range, the fund emphasized.
A more flexible exchange rate will facilitate the adjustment to external and domestic shocks, aiding the rebuilding of reserves, according to Nigel.