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Business Recorder
3 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
26-05-2025
- Business
- Business Recorder
FY2025-26: Budget estimates
The federal and provincial budgets for 2025-26 are likely to be announced in early June. Already, the first review report by the IMF Staff, which was released on the 17th of May, contains detailed estimates of both; the likely fiscal outcome in 2024-25 and budget estimates for 2025-26. The objective of this article is to identify, first; the deviations in the projected outcome in 2024-25 from the original budget estimates and second, to examine the magnitude of the key fiscal indicators for 2025-26. The budgetary outcome, according to the IMF Staff Report, is likely to be significantly better than originally envisaged. The budget deficit is estimated at Rs 6,486 billion, as compared to the initially targeted level of Rs 7,344 billion. This is perhaps the first time in many years we are likely to see this type of positive outcome. The budget deficit in 2024-25 is estimated at 5.6 percent of the GDP, as compared to the initial budget estimates of 6 percent of the GDP. How has this favorable outcome been achieved? It is primarily due to a significant containment of expenditure by Rs 1132 billion and a quantum jump in non-tax revenues of Rs 1614 billion. The steep reduction in interest rates in 2024-25 is likely to lead to a saving in the cost of debt servicing by as much as Rs 914 billion. The position on the revenue side is a projected shortfall in 2024-25 of only Rs 274 billion, despite a shortfall in FBR revenues of Rs 581 billion. Other sources of revenues are expected to yield Rs 307 billion higher revenues than originally targeted. The efforts by the government in restricting the size of the budget deficit to below the initially projected levels must be recognized, as has been done by the IMF. A large primary surplus of over 2 percent of the GDP is likely to be generated in 2024-25. Turning to the budget estimates for 2025-26, the first impression from the numbers in the IMF staff report is that the federal and provincial budgets for 2025-26 will not be expansionary in character, as in 2024-25. Total expenditure of the federal and provincial governments combined is targeted to increase by only 5.5 percent on 2025-26. This implies a fall in the public expenditure to GDP ratio from 21.6 percent of the GDP in 2024-25 to 20.3 percent of the GDP in 2025-26. Total current expenditure is anticipated to fall by 1.1 percent of the GDP. Interest payments are expected to be lower by 1 percent of the GDP, with the SBP policy rate down already to only 11 percent. Subsidies and grants are also expected to be lower in absolute terms. Development expenditure is targeted to stay at 2.5 percent of the GDP. The revenue estimates for 2025-26 are also more on the conservative side. The target growth rate of total revenues in 2024-25 was as high as 40 percent. It has apparently now been set in agreement with the IMF at close to only 15 percent. FBR revenues were projected to increase substantially by 39 percent in 2024-25. The actual increase is estimated at 32 percent. The big decline is anticipated in federal non-tax revenues in 2025-26. The SBP profits reached a peak level of Rs 2,500 billion in 2024-25. The quantum fall in interest rates implies that they will be much lower in 2025-26. Consequently, non-tax revenues are likely to fall by 33 percent. Based on low growth rates in total expenditure and total revenues of 5.5 percent and 6.9 percent respectively, the overall budget deficit is expected to show a 1.6 percent only change in magnitude in 2025-26. This implies that it will be 5.1 percent of the GDP in 2025-26, as compared to 5.6 percent of the GDP in 2024-25. The primary surplus will be somewhat lower at 1.6 percent of the GDP. There is a need for an assessment of the key budgetary magnitudes for 2025-26 in the IMF Staff Report. We focus initially on the expenditure side. The first key magnitude is the level of defence spending in 2025-26, in the presence of the military confrontation between Pakistan and India. The provision made in the Staff Report is for an increase of 12.2 percent, with the level of expenditure on defense services rising to Rs 2,414 billion. This implies an increase in absolute terms of Rs 262 billion. It is likely that a provision will have to be made for another Rs 300 billion. The absolute decline of Rs 96 billion in the combined spending on subsidies and grants also appears to be too optimistic. In particular, a provision has to be made for inflation indexation of the cash transfers and increase in the coverage of the Benazir Income Support Programme (BISP), in the presence of almost 110 million people now below the poverty line. Also, the slow pace of privatization of State-Owned Enterprises (SOEs) implies continuing increase in the burden placed on the federal budget by these entities Overall, it is likely that there has been under-provisioning of federal current expenditure by about 0.7 percent of the GDP, equivalent to Rs 900 billion. This will raise the budget deficit to 5.8 percent of the GDP. The projected level of revenues is also optimistic in nature. The problem starts with overestimation of FBR revenues in 2024-25 at Rs 12,332 billion. This implies a shortfall in relation to the target of Rs 581 billion. The shortfall has already exceeded Rs 820 billion in the first ten months of 2024-25. The more likely level of FBR revenues in 2024-25 is Rs 11,800 billion. The targeted level is Rs 14,307 billion of FBR revenues in 2025-26, withthe required growth rate of 21 percent. The normal increase is Rs 1,320 billion, in line with relatively low nominal GDP growth. As such, taxation proposals yielding Rs 1,200 billion will be required in the federal and provincial budgets. The yield from the agricultural income tax will play a role in achieving this target. The target increase in provincial tax revenues in 2025-26 is Rs 236 billion, including the normal increase. This will have to be increased to Rs 500 billion to target for an increase initially in the yield from the agricultural income tax of Rs 350 billion. The full revenue potential of this tax has been estimated at Rs 880 billion in the recent RASTA project of Pakistan Institute of Development Economics. However, in the event compliance in terms of payment of the tax is low, there may be a need to introduce withholding taxes, especially on large electricity bills. Further, focus will have to be on broadening the base of the sales tax on services and on development of provincial property-related taxes like the urban immoveable property tax and the capital value tax on property. Overall, there appears to have been significant underestimation of expenditures and a likely overstatement of FBR revenues in 2025-26. This has led to the estimation of a lower budget deficit in 2025-26. Modification of the numbers in the IMF Staff Report imply that the likely budget deficit in 2025-26 is not 5.1 percent of the GDP, but significantly higher at almost 6.5 percent of the GDP. Consequently, the primary surplus will be a negligible magnitude, and may even turn negative. The quality of financial management by both the federal and provincial governments will be tested in 2025-26. Already, there appears to be some difficulty in finalizing the budget for 2025-26, as demonstrated by extension of the date for presentation of the federal budget. Copyright Business Recorder, 2025
Yahoo
13-05-2025
- Business
- Yahoo
Opinion - Argentina presents a huge geostrategic opportunity for the US
The U.S. has an immediate and actionable vital national security interest in the economic survival, recovery and growth of Argentina. On April 11, the International Monetary Fund approved a $20 billion balance-of-payments loan to Argentina to shore up the country's foreign-exchange reserves. On the same day, the World Bank Group and the Inter-American Development Bank Group approved development finance packages for Argentina of $12 billion and $10 billion, respectively. This extraordinary $42 billion financial transfusion is a clear message of hope for Argentina's economic survival, recovery and growth. The U.S. must move quickly to seize the opportunity provided by a rising Argentina to enhance American geostrategic security by helping the country to unlock its substantial reserves of critical minerals and escape the sovereign debt trap. Argentina has substantial reserves of strategically important critical minerals such as lithium and shale oil and gas. It is in the U.S. strategic interest to deny China access to such resources. Argentina's lithium reserves of about 20 million tons account for 20 percent of total world reserves. Lithium is the key ingredient for rechargeable batteries that power electric vehicles — a sector dominated by China. With recoverable shale reserves of 16 billion barrels of oil and 308 trillion cubic feet of gas, Argentina would rank among the top five globally. President Trump should help ensure that American finance, technology and expertise are available to Argentina to unlock the economic potential of its lithium and shale oil and gas resources, and that the U.S. market remains open to exports from Argentina. Beyond critical minerals reserves, Argentina has enduring strategic value by virtue of geography, overlooking the vital sea lines of communication that connect the south Atlantic to the south Pacific. President Javier Milei, together with his economy minister, Luis Caputo, must find a way to monetize the country's strategic value. Accordingly, Milei should persuade Trump to support a proposal to convert all of the outstanding Argentine sovereign debt held by official creditors into grants by the end of 2026. Such a conversion would eliminate about $98.9 billion of debt (equivalent to about 14.7 percent of GDP) per the projected statistics contained in the IMF Staff Report. In return, 10 years following the date of such conversion, Argentina would voluntarily pledge to donate each year to a special purpose development fund for Latin America (managed jointly by the IMF and the World Bank Group) an amount equal to up to a maximum of 0.25 percent of nominal GDP in terms of U.S. Dollars, provided that after giving effect to such donation the Argentine federal budget will have an overall surplus of at least 2 percent of GDP, a step necessary to safeguard the country's financial resilience. The Argentine stock market has outperformed the U.S. stock market over the 12 months ending in April, delivering an extraordinary return of 48.5 percent compared to 12.25 percent. The same has been true over the comparable three-, five- and 10-year periods. Clearly, investors are signaling confidence in Argentina's growth potential. But if Argentina is to grow, it must be unshackled from the grip of a heavy debt-service burden. In conjunction with the proposal to convert all of the debt held by official creditors into grants, Milei should also offer to swap at face value all of the outstanding Argentine sovereign debt held by private-sector creditors for a like amount of Argentina Perpetual Participation Certificates (a twist on the old British Consols). The proposed swap would cover about $165.5 billion of Argentine sovereign debt held by private-sector creditors (equivalent to about 24.7 percent of GDP), per the IMF Staff Report. In lieu of interest, the holders of the participation certificates would be paid an aggregate annual amount equivalent to 0.75 percent of nominal GDP of the preceding calendar year. If nominal GDP grows in any subsequent year, the size of the participation payments for that year would increase; if nominal GDP declines, the size of the payments would decrease. The participation payments would be free of Argentine taxes. Likewise, any realized gains or losses as a result of trading participation certificates would not be included in Argentine taxable income. Participation certificates denominated in Argentine Pesos and U.S. Dollars would be listed on the Buenos Aires Stock Exchange and New York Stock Exchange, respectively. According to the IMF Staff Report, private Argentine citizens collectively hold about $200 billion in cash and cash equivalents outside the country. This 'flight capital' represents a unique pool of 'country knowledgeable,' investible capital that could potentially anchor Argentina's program to privatize state-owned enterprises. While it is difficult to estimate the total cash proceeds of such privatizations, $15 billion may be a reasonable figure. As an example, the Argentine petroleum company YPF is owned 51 percent by the state and 49 percent by the public. The shares held by the public have a current market value of about $6 billion. The shares held by the state would have a similar valuation. Opportunity is knocking at the door of a rising Argentina. What will the answer be? Samir Tata is the founder and president of International Political Risk Analytics, an advisory firm based in Reston, Virginia, and author of the book, 'Reflections on Grand Strategy.' Copyright 2025 Nexstar Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
The Hill
13-05-2025
- Business
- The Hill
Argentina presents a huge geostrategic opportunity for the US
The U.S. has an immediate and actionable vital national security interest in the economic survival, recovery and growth of Argentina. On April 11, the International Monetary Fund approved a $20 billion balance-of-payments loan to Argentina to shore up the country's foreign-exchange reserves. On the same day, the World Bank Group and the Inter-American Development Bank Group approved development finance packages for Argentina of $12 billion and $10 billion, respectively. This extraordinary $42 billion financial transfusion is a clear message of hope for Argentina's economic survival, recovery and growth. The U.S. must move quickly to seize the opportunity provided by a rising Argentina to enhance American geostrategic security by helping the country to unlock its substantial reserves of critical minerals and escape the sovereign debt trap. Argentina has substantial reserves of strategically important critical minerals such as lithium and shale oil and gas. It is in the U.S. strategic interest to deny China access to such resources. Argentina's lithium reserves of about 20 million tons account for 20 percent of total world reserves. Lithium is the key ingredient for rechargeable batteries that power electric vehicles — a sector dominated by China. With recoverable shale reserves of 16 billion barrels of oil and 308 trillion cubic feet of gas, Argentina would rank among the top five globally. President Trump should help ensure that American finance, technology and expertise are available to Argentina to unlock the economic potential of its lithium and shale oil and gas resources, and that the U.S. market remains open to exports from Argentina. Beyond critical minerals reserves, Argentina has enduring strategic value by virtue of geography, overlooking the vital sea lines of communication that connect the south Atlantic to the south Pacific. President Javier Milei, together with his economy minister, Luis Caputo, must find a way to monetize the country's strategic value. Accordingly, Milei should persuade Trump to support a proposal to convert all of the outstanding Argentine sovereign debt held by official creditors into grants by the end of 2026. Such a conversion would eliminate about $98.9 billion of debt (equivalent to about 14.7 percent of GDP) per the projected statistics contained in the IMF Staff Report. In return, 10 years following the date of such conversion, Argentina would voluntarily pledge to donate each year to a special purpose development fund for Latin America (managed jointly by the IMF and the World Bank Group) an amount equal to up to a maximum of 0.25 percent of nominal GDP in terms of U.S. Dollars, provided that after giving effect to such donation the Argentine federal budget will have an overall surplus of at least 2 percent of GDP, a step necessary to safeguard the country's financial resilience. The Argentine stock market has outperformed the U.S. stock market over the 12 months ending in April, delivering an extraordinary return of 48.5 percent compared to 12.25 percent. The same has been true over the comparable three-, five- and 10-year periods. Clearly, investors are signaling confidence in Argentina's growth potential. But if Argentina is to grow, it must be unshackled from the grip of a heavy debt-service burden. In conjunction with the proposal to convert all of the debt held by official creditors into grants, Milei should also offer to swap at face value all of the outstanding Argentine sovereign debt held by private-sector creditors for a like amount of Argentina Perpetual Participation Certificates (a twist on the old British Consols). The proposed swap would cover about $165.5 billion of Argentine sovereign debt held by private-sector creditors (equivalent to about 24.7 percent of GDP), per the IMF Staff Report. In lieu of interest, the holders of the participation certificates would be paid an aggregate annual amount equivalent to 0.75 percent of nominal GDP of the preceding calendar year. If nominal GDP grows in any subsequent year, the size of the participation payments for that year would increase; if nominal GDP declines, the size of the payments would decrease. The participation payments would be free of Argentine taxes. Likewise, any realized gains or losses as a result of trading participation certificates would not be included in Argentine taxable income. Participation certificates denominated in Argentine Pesos and U.S. Dollars would be listed on the Buenos Aires Stock Exchange and New York Stock Exchange, respectively. According to the IMF Staff Report, private Argentine citizens collectively hold about $200 billion in cash and cash equivalents outside the country. This 'flight capital' represents a unique pool of 'country knowledgeable,' investible capital that could potentially anchor Argentina's program to privatize state-owned enterprises. While it is difficult to estimate the total cash proceeds of such privatizations, $15 billion may be a reasonable figure. As an example, the Argentine petroleum company YPF is owned 51 percent by the state and 49 percent by the public. The shares held by the public have a current market value of about $6 billion. The shares held by the state would have a similar valuation. Opportunity is knocking at the door of a rising Argentina. What will the answer be? Samir Tata is the founder and president of International Political Risk Analytics, an advisory firm based in Reston, Virginia, and author of the book, 'Reflections on Grand Strategy.'
