Pakistan’s coalition government is poised to unveil ambitious fiscal targets in the 2024-25 budget, scheduled for Wednesday, in a bid to secure a new bailout agreement with the International Monetary Fund (IMF). Discussions with the IMF for a loan estimated between $6 billion and $8 billion are underway to prevent a potential default, amidst sluggish economic growth in the region.
Ali Hasanain, head of the economics department at Lahore University of Management Sciences, emphasized the pivotal role of the budget in Pakistan’s IMF program, stressing the imperative to narrow the gap between revenue collection and total expenditure. Expectations are for a contractionary budget.
Pakistan narrowly averted default last summer with a short-term IMF bailout of $3 billion over nine months. While fiscal and external deficits have been managed, these measures have resulted in reduced growth, industrial activity, and high inflation, averaging nearly 30% in the last financial year and 24.52% over the last 11 months. The growth target for the upcoming year is set at 3.6%, compared to 2% this year and economic contraction last year.
Despite Prime Minister Shehbaz Sharif’s commitment to tough reforms since his February election, challenges persist, including high prices, unemployment, and a dearth of new job opportunities, intensifying political pressure on his coalition government. Implementing IMF-prescribed measures, like broadening the tax base and raising power tariffs, is anticipated to be arduous due to the government’s fragile coalition, vocal opposition, and the complexity of structural reforms.
The budget will serve as a litmus test for new Finance Minister Muhammad Aurangzeb, tasked with crafting fresh policy solutions for the $350 billion economy. Previous finance ministers shied away from difficult actions such as subsidy cuts, expenditure reductions, and tax hikes in sensitive sectors like real estate, agriculture, and retail. Mustafa Pasha, chief investment officer at Lakson Investments, expressed doubts about effectively taxing these sectors due to potential legal hurdles and inadequate structuring.
Another pivotal aspect of the budget will be the targets set for privatization proceeds. Pakistan plans to divest a stake in its national airline, marking the first major sale in nearly two decades. This move is expected to kickstart a series of divestments, particularly in the troubled power sector.
