Of tariffs and free trade
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The decision to open up the minerals and automobiles sector for international competition will have long-term ramifications. While trade liberalisation is welcome, it remains to be seen under what module the country's precarious production avenues and industries are being exposed.
Pakistan's companies have ever lived under the umbrella of protectionism, and traditional heavy tariffs on imports have been in vogue at the cost of consumers. Thus, lifting of the lid under IMF pressure by slashing average import tariffs by one-third - from the 10.6% to 7.1% - over five years will instantly result in a revenue loss of Rs278 billion.
With no statistics on board as to what amount of profit and economic activity this decision will generate, this roulette has a great litmus test to pass.
The 33% reduction in tariffs, apparently on the face value, seems to be a great concession to the Fund in order to keep afloat the Extended Fund Facility. Moreover, this barter of a pound of flesh will smoothen the approval of over $1 billion loan tranche in these dire times of economic sluggishness.
In the long run, it is a bad deal and could come to cripple domestic production and a further lag in exports. It is altogether surprising that Pakistan has decided to drink this poisoned chalice when developing states are more and more being inward oriented, and even the US is closing its borders to foreign companies by slapping punitive tariffs.
Last but not least, the move is borne out of exigency and it seems local stakeholders have not been taken on board, making it a problematic riddle in times to come.
In the woods for long, our economy cannot afford unbridled competition altogether. This is where reforms towards sustainability are desired, and protecting the local industry is a must.
However, a research is desired to evaluate as to what extent this protectionism has resulted in rescuing a few companies at the altar of general masses, for whom access to competitive products remains an uphill task. Opening up for free trade must go through a cautious route.
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Business Recorder
2 hours ago
- Business Recorder
Fragility not recognized
The history of Pakistan's economy can be aptly summarised in three words: fragility not recognised. That since 1947, except for very few years, Pakistan has lived off IMF programmes is a fact. We have had twenty-four programmes since 1950, roughly averaging one programme every three years. The problem is not the fragility of the state of the economy. The problem, in fact, lies in weak and unrepresented governments, all the time, that never had the 'courage' and 'strength' to tell the truth about Pakistan's real economic situation to the people so that real corrective efforts could be undertaken. This is happening again. Recently Fitch, a global rating agency, has improved the country's rating, which is a very commendable sign; however, it does not in any manner provide space for complacency. Nevertheless, the amateurish people from government and non-government sources are of the view that all economic problems have been solved and Pakistan has adopted a correct trajectory for sustained growth. This mantra has been repeated so many times that now these words do not mean anything for a common Pakistani. The author considers it is a national responsibility to state that proper facts be brought before the people and the government. In this regard the first step is to see what Fitch has said. It states as under: 'Key Rating Drivers Fiscal Consolidation, External Stabilisation: The upgrade reflects Fitch's increased confidence that Pakistan will sustain its recent progress on narrowing budget deficits and implementing structural reforms, supporting its IMF programme performance and funding availability. We also expect tight economic policy settings to continue to support recovery of international reserves and contain external funding needs, although implementation risks remain and financing needs are still large. Global trade tensions and market volatility could create external pressures, but risks are mitigated by lower oil prices and Pakistan's low dependence on exports and market financing. Policy Credibility Gradually Rebuilt: Pakistan and the IMF reached a staff-level agreement in March on the first review of the country's USD7 billion Extended Fund Facility and a new USD1.3 billion Resilience and Sustainability Facility, both set to last until 3Q27. Pakistan performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus, although tax revenue growth fell short of its indicative target. Provincial governments have also legislated increases in agricultural income tax, a key structural benchmark. This follows Pakistan's strong performance on its previous, more temporary arrangement, which expired in April 2024. Fiscal Performance Improving: We forecast the general government budget deficit to narrow to 6 percent of GDP in the fiscal year ending June 2025 (FY25) and around 5 percent in the medium term, from nearly 7 percent in FY24. Our FY25 forecast is conservative. We expect the primary surplus to more than double to over 2 percent of GDP in FY25. Shortfalls in tax revenue, in part due to lower-than-expected inflation and imports, will be offset by lower spending and wider provincial surpluses. The lagged effects of high domestic interest rates in recent years still weigh on fiscal performance, but also drove the State Bank of Pakistan's (SBP) extraordinary dividend of 2 percent of GDP to the government in FY25. Downward Debt Trajectory: Government debt/GDP dropped to 67 percent in FY24, from 75 percent in FY23, and we forecast a gradual decline over the medium term, reflecting tight fiscal policy, nominal growth and a repricing of domestic debt at lower rates. Nevertheless, the debt ratio will still tick up in FY25 due to a rapid decline in inflation and will remain above the forecast 'B' median of just over 50 percent. The interest payment/revenue ratio, which we forecast at 59 percent in FY25, will narrow, but remain well above the 'B' median of about 13 percent, given a high share of domestic debt and a narrow revenue base. Lower Inflation, Economic Stability: We expect CPI inflation to average 5% yoy in FY25, from over 20 percent in FY23-FY24, on fading base effects from several rounds of energy price reforms, before picking up again to 8 percent in FY26, in line with urban core inflation over the past few months. The SBP held its policy rate steady at 12 percent in March, noting pressures on the current account (CA) and persistent core inflation, after 1,000bp of rate cuts between May 2024 and January 2025. We expect GDP growth to edge up to 3 percent in FY25. External Deficit Contained: Pakistan posted a CA surplus of USD700 million in 8MFY25 on surging remittances and favourable import prices. Imports picked up in early 2025 and we expect external deficits to widen from our forecast of a broadly balanced position for FY25 on stronger domestic demand. Nevertheless, they should remain below 1 percent of GDP in the coming years. We think some informal FX demand management persists after the loosening exchange rate and import controls, and market reforms in 2023. Risks from Global Volatility: International trade tensions could hurt Pakistan's goods exports, with exports to the US, mostly textiles, accounting for 3 percent of GDP (35 percent of the total) in FY24. Lower commodity import prices could soften the blow on the trade balance. Remittances, Pakistan's main source of external receipts, mostly come from the Middle East and tend to be resilient to the economic cycle. Pakistan has become less reliant on market and commercial financing in recent years, but market turmoil could still reduce access to loan funding. Reserve Recovery: We expect a further buildup of gross reserves after the SBP's purchase of FX in the interbank market brought them to just under USD18 billion in March 2025 (about three months of external payments), from about USD15 billion at FYE24 and a low of less than USD8 billion in early 2023. Measures of net FX reserves are much lower, reflecting FX reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP. Nevertheless, we still view gross reserves as the most relevant indicator of Pakistan's external liquidity. Funding Needs Still Large: The government will face about USD9 billion in external debt maturities in FY26 after over USD8 billion in FY25 (nearly USD5 billion in 2HFY25). Both figures exclude USD13 billion in bilateral deposits and loans that are regularly rolled over, of which USD4 billion is at the SBP. The next international bond maturity is in September 2025. Besides bilateral rollovers, the authorities secured USD4 billion in external financing in 1HFY25 from a mix of multilateral and commercial sources and are expecting to obtain USD10 billion in 2HFY25, of which USD4 billion would be from multilaterals and USD5 billion from various commercial loans, mainly refinancing from Chinese banks. Challenging Politics, Security: Prime Minister Shehbaz Sharif's PMLN party and its allies received a mandate that was weaker than we expected in elections in early 2024, although they still have a constitutional majority in the National Assembly and are backed by the country's influential military. Former prime minister Imran Khan, imprisoned since May 2023, remains highly popular. Domestic political and economic fractures are compounded by the increased frequency of security incidents along the border with Afghanistan and in the Balochistan province. Implementation Risks: Governments from across the political spectrum in Pakistan have had a mixed record of IMF programme performance, often failing to implement or reversing the required reforms. The current apparent consensus within Pakistan on the need for reform could weaken over time. Technical challenges will also be significant. Fitch is a credit rating agency. What it has demonstrated is that things have improved for Pakistan for availing more credit or rollovers of credit and IMF's money, which amounts to now around USD 10 billion is safe. They are right in their approach. It is their duty to do so; however, the primary question which a common man has to ask is whether these indicators, which are all borrowed derivatives from almost a failed idea of 'Washington Consensus', could provide any relief from economic pressure for ordinary Pakistanis. The undertone of these indicators suggests that the economy is going to shrink, leading to unemployment and decrease in real wages. If there is a dissection of all the key drivers as referred above, it means that this state of affair has emerged on account of two factors (a) reduction in the discount rate from 22 to 12; (b) highly conservative use of foreign exchange and rollovers of cheaper debt against costlier debt from the market. For the creditors this appears to be fine which is also the objective of Fitch; however, the author does not find any reason to be complacent or satisfied. In the author's view the increase of discount rate to 22 percent was exceptionally incorrect. Unfortunately, it has been the tragedy of Pakistan's economics that money lenders decide about the fate of 250 million who have gallantly fought a country, which is seven times of her size. These money lenders, and their agents, the credit rating people are right insofar as their arguments or stances are concerned; however, it is our duty to also see the other side of the picture. The question for us is whether or not with this kind of economic order Pakistan would be able to feed her 250 million people and take 20 million uneducated children to schools. In the author's view the answer is in the negative. The whole government budget (around 90+) is spent on consumption expenditure leaving no place for infrastructure development. The main rail track is almost the same as it was 'bequeathed' to us by British colonizers in 1947. Furthermore, the private sector has been so heavily taxed that there is no amount left for saving and investment. The effective saving rate in Pakistan is 'zero' for the reason that such savings are used by the banks and national saving institutions to meet current expenditure of the government. The money lenders are giving positive signs for the reason that they have big stakes in the country. However, it would be 'our' mistake and complacency to think that they have taken into account the fate of the borrower who has effectively not 'invested' in the economy for at least two decades. No country can achieve sustainable growth unless there is an investment in the economy. It is our duty to look for out-of-the-box solutions to overcome the perennial issue of 'consumption over investment' in Pakistan. The first step is to forge national economic and political consensus for at least two decades. Copyright Business Recorder, 2025
Business Recorder
2 hours ago
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Pakistan's vision amidst FY26 Budget
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The budget 2025-26 is no different from the past routine except that the incumbent Finance Minister, Muhammad Aurangzeb, in his second Budget presentation, has brought around professionalism and discipline in the otherwise chaotic fiscal and economic dynamics of the country. With political expediency, along with persistent IMF dictates, ruling the roost, this is the best the Finance Minister could have achieved. To expect something profound coming out the budget demands drastic actions on ground like cuts in government expenditure starting from the self-fixed and out of proportion financial privileges of our legislators and state functionaries, bringing the untaxed sectors like agriculture into the tax net, arresting the losses emerging out of loss-making public sector enterprises, radical reforms to achieve growth in the agricultural and industrial sector of the country. The political hierarchy is not ready for it - although all of it is doable for the good of the country and its people. The announced budget and IMF-driven conditions appear effective in restoring macroeconomic stability. However, they fall short in translating fiscal discipline into meaningful growth, poverty reduction, and sustainable economic transformation. Without deeper structural reforms, especially in growth, taxation, infrastructure, agriculture, and industrial policy these weaknesses may persist for a long time to come. Critics have widely spoken and written on taxation and tariffs' imbalances. These cosmetic taxation trade-offs benefiting one segment and depriving the other will not change the destiny of the people of the country. There are far bigger and serious issues which challenge the fiscal, economic and social sovereignty of the country. The budget, understandably, is silent on how to address them — as there are no ready answers for it. The budget has come up with a very ambitious GDP growth target of 4.2 percent growth — without presenting the mechanism to achieve it. This target seems detached from reality — the country's economy is likely to grow 2.7 percent in the fiscal year ending June 2025. The IMF expects GDP to grow by 2.6pc in FY25 and for the economy to grow 3.6 percent in FY26. With fiscal austerity over-riding stimulus, a 7 percent reduction in overall spending and cuts in capital outlay, the budget emphasises deficit reduction rather than growth-driving investments. Despite tax incentives, there is no coherent strategy to revive agriculture and large-scale manufacturing—sectors vital for employment and exports. Foreign Direct Investment (FDI) is the prime-mover of growth. The government had channeled funds into the Board of Investment (BOI) and Special Investment Facilitation Council (SIFC), but these efforts lacked a robust policy foundation. Despite modest FDI gains, analysts believe they are 'short-term, ad-hoc measures' with 'no significant increases' in investment volume. Even with tariff rationalisation, non-tariff barriers, red tape, and weak infrastructure remain major disincentives for FDI. Poverty alleviation remains a serious challenge for the country. The IMF-mandated austerity measures have led to cuts in public sector development programmes, risking deeper joblessness and poverty cycles. While the Benazir Income Support Programme (BISP) saw a 20 percent funding boost to Rs 7.16 billion, this remains limited in addressing deep-rooted poverty. Nearly 45 percent of the population still lives below the poverty line, with extreme poverty at 16.5 percent. Low or negative growth in agriculture, industry, and services, combined with 2 percent population growth, means stagnant real wages, pushing an estimated 1.9?million people into poverty. There are perpetual tax system inefficiencies. Only ~1.3 percent of Pakistanis pay income tax and the tax-to-GDP ratio remains just ~10 percent. Reliance on withholding taxes is regressive, disproportionately burdening the poor and limiting redistributive potential. The debt servicing pressures remains a threat to country's sovereignty. High interest payments and fiscal guarantees to state-owned enterprises continue to constrain fiscal flexibility and reduce room for investment in growth sectors. The foremost challenges are political instability, weak institutional capacity and debt burden, where interest payments consume a large share of the budget (~50 percent+), crowding out development needs. In times to come Pakistan's annual budget is likely to be a short-term, reactive document rather than a long-term strategic tool for development. It shall remain heavily influenced by IMF programmes, with limited fiscal space and political will to prioritize inclusive growth and poverty reduction independently. If Pakistan is to transition toward a strategic budgeting model, it would need fiscal discipline beyond IMF pressure, reforms in tax collection and expenditure management, stronger institutions for long-term planning and above all political consensus and will to deliver on development priorities. Copyright Business Recorder, 2025
Express Tribune
2 hours ago
- Express Tribune
Debate opens in Senate amid fierce criticism
The budget debate in the Senate commenced with a blistering criticism from Opposition Leader Shibli Faraz, who blasted the government's economic policy, calling the budget "controversial by birth" and a reflection of incompetence and unprofessionalism. "This is the fourth budget of this installed regime, and it has broken all previous records of misgovernance," Faraz said, accusing the government of fabricating data and manipulating figures. "The numbers in this budget seem compromised ... it's a statistical deception. In the past, budget figures were never questioned, but this time doubts are widespread," he added. Faraz went on to say the current budget had "shattered the foundations" of Pakistan's already fragile economy. Referring to the controversial February 8 elections, he alleged that just as the government had manipulated numbers, it was playing the same game with the budget. He lamented that in Punjab, farmers were forced to dump wheat on the roads, calling it a failure of the state to protect agriculture. "They've destroyed the agriculture sector and stifled industry. How can growth happen when even Letters of Credit (LCs) aren't being opened?" he said. "There is no coherent policy for industrial development, only discouragement." "This is an IMF-dictated, anti-people budget. We've heard the 'South Asian Tiger' fantasy before. It's time to stop selling old fables," said Faraz, while lambasting the planning minister for "insultingly linking PTI with India". "PTI is not an anti-state party," he said. "How can a country progress when people can't even access the internet?" He denounced the government as a product of "Form-47 legitimacy", saying true representatives would never have presented such a budget. Shibli Faraz said that 61 million people fell below the poverty line post-2022 and that unemployment had surged by 14 million. He noted the lack of foreign direct investment and even remarked that "the Afghan currency is now stronger than the Pakistani rupee". He slammed the imposition of taxes on stationery and questioned the government's understanding of public priorities, citing the number of out-of-school children and deteriorating public services. Meanwhile, Finance Minister Muhammad Aurangzeb briefed the Senate Finance Committee on the budget, pushing back against the opposition's accusations. He revealed that India's director at the IMF Board had tried to delay Pakistan's recent funding approval, but "despite Indian objections, $700 million was approved". Aurangzeb asserted that Pakistan had met World Bank benchmarks and that the IFC had approved additional financing. "We expect policy rates to enter single digits this fiscal year," he added, saying fiscal and structural reforms, particularly in SOEs and energy, were showing results. He acknowledged that privatisation targets had not been met this year but expressed optimism for the next fiscal. "We have tried to reduce the burden on the salaried class and cut transaction taxes in the construction sector," Aurangzeb said. "On agricultural tax, the IMF has agreed to our stance following the prime minister's directive."
