Analysis: Economic Survey

Business Recorder

8 hours ago

Economic Survey 2024-25, with most data limited to nine months as all previous surveys, emphasized progress 'underpinned by effective macroeconomic management, improved fiscal and external account balances and a significant reduction in inflation' while ignoring dangerously high poverty levels - 44.7 percent estimated by the World Bank though independent economists place it at 2 to 3 percent higher - and accusing those who raise concerns as a deliberate attempt to fuel public discontent.
Federal Finance Minister Muhammad Aurangzeb on 9 June 2025 released the Survey for the current year which epitomized even more of a non-event than previous years on two counts given that up to date data was available and uploaded on government and State Bank of Pakistan (SBP) websites.
First, there was an addition of a key statistic - quarterly Gross Domestic Product (GDP) - launched by Pakistan Bureau of Statistics (PBS) on 28 November 2023 with World Bank technical support to enable short term policy responses by the government.
Divide between nominal vs real GDP
The PBS has so far been off the mark for the first two quarters of the current year – as the July-September rate was revised upwards by 0.3 percent (from 1.34 to 1.37 percent) and downwards by 0.2 percent in the next quarter (from 1.73 percent to 1.53 percent).
The correction provides little comfort level in the accuracy of the third quarter's estimate (July-March 2025) of 2.4 percent and even less for the 2.68 percent growth rate projection for the entire fiscal year as the last quarter must show a rate higher than the sum of the first three quarters but the third quarter rate may also have to be revised upward to reach the annual projection.
Sadly, the 1.8 percent lower GDP growth than the budgeted projection of 3.5 percent in the current year did not lead to any timely pro-growth policy decisions or as the Survey claimed effective macroeconomic management as the government continued its contractionary policies on both fronts: (i) monetary, in spite of what the Finance Minister correctly pointed out was a massive decline in the discount rate to 11 percent from 22 percent the year before though this rate remains double the average of regional competing countries; and (ii) fiscal with the one trillion dollar lower tax collection than was budgeted that led to a cut in development expenditure disbursements with negative repercussions on growth and a rising reliance on petroleum levy (an indirect tax itemized under other taxes so as not to share the revenue with the provinces) that reduced take-home pay further pushing many more below the poverty line.
Aurangzeb praised the Prime Minister's personal engagement in ensuring the rise in tax to GDP ratio – a rise that is largely premised on the 1.8 percent reduction in the growth rate as the shortfall in the budgeted tax revenue for the current year was as noted above estimated at one trillion rupees.
Next year's tax targets may also be compromised as the IMF has stipulated in its first review report dated May 2025 to 'substantially streamline and reduce tariffs (customs and regulatory duties) and reduce non-tariff barriers and move away from special duties applied to imports for particular industries.' These measures are expected to increase reliance on withholding taxes in the easy to collect sales tax mode (currently accounting for 75 to 80 percent of the 40 percent of all direct tax collections) with major negative implications on the value of each rupee earned on the income of the poor relative to the income of the rich.
And secondly, IMF noted in its staff level agreement documents dated October 2024 that 'important shortcomings 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 GFS. The authorities are prioritizing addressing these weaknesses, supported by Fund TA on the Government Finance Statistics and a new PPI index, and the Pakistan Bureau of Statistics will soon begin fieldwork for four major surveys ahead of the upcoming NA rebasing to FY26.'
The analysis of the Survey, as in previous years, presents as positive a macro-picture as possible, focusing this year on foreign exchange reserves (less than the sum total of roll overs by friendly countries but higher than last year), a narrowing of the trade deficit (due to administrative measures targeted to reduce imports ) and a low inflation rate (less than the 2 percent considered necessary to oil the wheels of industry) while understating the rise in negativity of the large scale manufacturing sector this year (July-March) as opposed to the same period last year – negative 1.47 percent as opposed to 0.22 percent.
Aurangzeb praised the professionalism of Discos' boards which he claimed was the reason behind the remarkable increase in recoveries as well as the expected Cabinet approval to borrow from commercial banks to reduce the circular debt (a proposal that was rejected last year as the discount rate at the time was too high).
Electricity rates have declined on the expectation that the savings from the successful contract renegotiations with Independent Power Producers as well as the reduction in the circular debt repayments meet costs however in case costs rise the IMF has warned that government to uncap Debt Service Surcharge which is currently at 10 percent of power sector revenue.
To conclude, the Survey leaves one with the distinct impression that there is little empirical evidence in the claim that 'the foundational elements for economic recovery are becoming increasingly robust and investor confidence is re-emerging' though one would fully support the Survey's contention that it is critical to transition 'from short term stabilisation measures to comprehensive structural reforms'- stabilisation defined as increased reliance on external borrowing with associated harsh upfront conditions while structural reforms are required to show empirically positive results in the tax and power sectors and state owned entities before declaring them as steps in the right direction.
Copyright Business Recorder, 2025