The government should set ambitious fiscal targets

ISLAMABAD:

The coalition government is expected to set ambitious fiscal targets in the 2024/2025 (July-June) budget on Wednesday that will help strengthen its case for a new bailout deal with the International Monetary Fund (IMF), officials and analysts said .

Pakistan is in talks with the IMF for a loan estimated at between $6 billion and $8 billion to avert a default for the region’s slowest-growing economy.

“The budget is critical to Pakistan’s IMF program and must close the gap between our revenue collection and total expenditure. It is therefore likely to be contractionary,” said Ali Hasanain, Associate Professor of Economics at Lahore University of Management Sciences.

Pakistan narrowly averted a default last summer thanks to a short-term IMF bailout of $3 billion over nine months. While its fiscal and external deficits came under control, it came at the expense of a sharp decline in growth and industrial activity as well as high inflation, which averaged close to 30% in the last financial year and 24.52% in final 11th year. months.

The growth target for next year is expected to be higher at 3.6% compared to 2% this year and an economic contraction last year.

Prime Minister Shehbaz Sharif has publicly pledged tough reforms since being elected in February elections, but high prices, unemployment and a lack of new job opportunities have piled political pressure on his coalition government.

Standard Chartered said in a budget note last month that fully implementing all the measures likely to be set by the IMF, such as raising revenue through widening the tax base and increases in energy tariffs, would be difficult for the Sharif government .

“A weak coalition government, a vocal and popular opposition and the difficulty of implementing deep-rooted structural reforms were seen as reasons for caution,” Standard Chartered said in the note.

“A key concern among local stakeholders was the risk that tough fiscal measures could face public backlash,” he added.

It will also be the first test for new finance minister Muhammad Aurangzeb, a former head of Habib Bank Limited (HBL), brought in by Sharif to formulate new policy solutions to address persistent problems in the $350 billion economy.

Previous finance ministers have avoided thorny steps such as cutting subsidies, reducing government spending and increasing tax revenue from politically sensitive sectors such as real estate, agriculture and retail.

Mustafa Pasha, Chief Investment Officer at Lakson Investments, said he believed such measures would be difficult.

“Any attempt to tax agriculture, retail trade and real estate will likely be poorly structured and face legal challenges that will prevent any collection,” he said, though he added that failure to meet the IMF’s demands would likely delay a new program that Pakistan cannot sustain for long.