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Business Recorder
4 days ago
- 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
