Finance Minister Muhammad Aurangzeb has expressed his intention to tax the “holy cows” as he revealed that Pakistan’s gross domestic product (GDP) stood at 2.38% up from the estimated two per cent.

“There are no sacred cows. Everyone will have to contribute to this economy because schools, hospitals, colleges, and universities can run through philanthropy but the country does not,” he said while responding to a question after presenting the Pakistan Economic Survey in Islamabad on Tuesday.

“The country can only run through tax,” he added.

In FY22-23, the GDP contracted by 0.2% while the Pakistan rupee depreciated by 29%. “Our foreign exchange reserve went down to two weeks of import cover.” As per the survey, the real GDP grew by 2.4% during 2023-24 (July to March) compared to a contraction of 0.2% in 2022-23, but lower than the targeted 3.5%.

The survey is an annual report that charts the country’s economic progress for the outgoing financial year, ie, from July 1, 2023 to June 30, 2024, and is one of the stages of the federal budget process that the public is exposed to.

“There is no plan B, and if there was a plan B, the IMF wouldn’t be called a lender of the last resort,” Aurangzeb said as he shared Prime Minister Shehbaz Sharif’s steps to ensure the nine-month standby agreement is completed.

“Signing of the standby agreement was very important. If we had not done that then we would have been in a different position today,” he said and added that the difficulties on the large-scale manufacturing side were due to the impact of interest rates and the energy equation.

The finance minister, a former CEO of Habib Bank Limited, added that the country’s saviour was agriculture because of the bumper crop. He was of the view that dairy and livestock would remain a “big upside” for the country in the years to come and that agriculture was going to be a “huge lever of growth.”

He assured that the provinces would be given due credit for delivering what they said would deliver. The current account deficit for the next fiscal year was $200 million, he said and added: “The target to have CAD under $1b has come into reality.”

He expressed hope that there would be another surplus after having $3.2 billion worth of remittances.

Aurangzeb appreciated the interim government for taking measures to ensure stability in the currency by stopping hundi hawala and illegal trade via the Afghan border. He also praised the State Bank of Pakistan’s efforts in this regard. “Banks which had exchange companies were asked to open more booths and those who don’t were asked to open.”

The finance minister said: “Satta bazi and speculative activity won’t come again.” He added that the foreign exchange reserves were not quantum but the quality was not funded by death stock.

While speaking about talks with the International Monetary Fund, he said that they were “productive and constructive” against the backdrop of the completion of the nine-month standby arrangement.

“The discipline shown has been accepted. Pakistan can show discipline and we can follow through. We will remain committed to doing structural reforms.”

He called for increasing the tax-to-GDP ratio. Aurangzeb reiterated that there were “no strategic state-owned enterprises (SOEs). “I am very clear this is a Pakistan programme which is being funded by the Fund.”

He shared that the government intended to privatise the Pakistan Agricultural Storage & Services Corporation.

‘There won’t be sacred cows’

When asked, he said that the government would see why the Track and System did not work. Moreover, the taxation system would be digitised to minimise human intervention.

“As far as I am concerned, there are no sacred cows. There are no sacred cows. Everyone will have to contribute to this economy because through philanthropy can run schools, hospitals, colleges, and universities but it cannot run the country,” he said.

“The country can only run through tax,” he added.

According to Aurangzeb, the power theft in the sector was around Rs500 billion. The government has to improve the corporate governance of power distribution companies (DISCOs).

“We are going to take these DISCOs to the private sector,” he said and stressed that they cannot remain in the public sector.

State Finance Minister Ali Pervaiz added that plants have the capacity to provide electricity to everyone. “A few hours of load-shedding are being done on losses feeders to control the circular debt,” he said and described it as a financial problem.

Share of foreign exchange reserves

When asked, he did not exact statistics about the amount of funds taken from the market for the foreign exchange reserves.

“A significant amount has come from open market operations,” Aurangzeb said.

He agreed that some of the National Economic Council decisions were reversed. The finance minister was of the view that the elected government should revise some of the projects.

Repayment won’t be an issue: Aurangzeb

In response to a query, he said that the repayment of loans would not be an issue.

“The easiest way to describe it is the way we have managed 2023-24. It’s going to be the same pattern more or less we see in 2024-25. We will see rollovers,” he said about the economy’s outlook for the next fiscal year.

He was of the view that some of the commercial bank borrowing would coming back in. “When we went through a delayed programme in the last fiscal year, some of the appetite disappeared especially from the Middle East commercial banks and that the peak they used to have of $2 billion to $2.5 billion, these were short term trade finance supporting the balance of payment.”

But those went down to zero and the country had to repay them after the delayed programme, resulting in low ratings.

“On the external financing side, we are entering the year on the much stronger note than we were at the beginning of the last year. We will follow almost the same pattern in terms of our repayment schedule. The repayment is not going to be a big issue for next fiscal year. I do see some of the commercial bank borrowing coming in.”

Aurangzeb added that the country was “keen” to go for the inaugural of Panda bond during next fiscal year to have diversified funding base. “On the external finance side, once the Fund programme in place I don’t see that as a big challenge.”

Where Pakistan saw progress and decline in growth

• Machinery & Equipments recorded the highest growth of 61.5 per cent, followed by Pharmaceuticals (23.2%), Furniture (23.1%), Wood products (12.1%), Chemicals (8.0%), Wearing apparel (5.4%), Leather products (5.3%), Coke & Petroleum products (4.9%), Rubber products (3.6%) and Food (1.7%).

• The sectors which recorded negative growth are Automobiles (37.4%), Tobacco (33.6%), Computer, electronic & optical products (16.0%), Textile (8.3%), Electrical equipment (7.5%), Non-metallic mineral products (3.9%), Beverages (3.4%), Iron & steel products (2.2%) and Paper & Board (2.0%).

• The Mining and Quarrying sector posted growth of 4.9 per cent during FY2024 against a contraction of 3.3 per cent last year.

• Large Scale Manufacturing (LSM) declined by 0.1 per cent during Jul-Mar FY2024 compared to a decline of 7.0 per cent last year.

Government expenditures increased

In FY2024, the consolidation measures boosted revenues, however, expenditure remained under pressure due to higher markup payments.

The fiscal deficit stood at 3.7 per cent of GDP during July-March FY2024 the same as last year.

• Measures to control non-mark-up spending and revenue mobilization helped in improving the primary surplus to Rs1615.4 billion (1.5% of GDP) during July-March FY2024 from Rs503.8 billion (0.6% of GDP) last year.

• Total expenditure increased by 36.6 per cent to Rs13,682.8 billion in July to March FY2024 from Rs10,016.9 billion last year. Current expenditures grew by 33.4 per cent to Rs12,333.3 billion during July-March FY2024 from Rs9,244.6 billion last year.

• Total development expenditures grew by 14.2 per cent to Rs.1,158.1 billion against Rs1,014.0 billion last year. The Federal PSDP (including development grants to provinces) stood at Rs 321.6 billion during July-March FY2024 against Rs328.8 billion last year, showing a decline of 2.2 per cent.

• Total revenues grew by 41.0 per cent to Rs9,780.4 billion in July-March FY2024 against Rs6,938.2 billion last year. Non-tax collection grew by 90.7 percent to Rs2,517.9 billion during July-March FY2024 against Rs1,320.5 billion last year.

• Total tax collection grew by 29.3 per cent to Rs7,262.5 billion during July-March FY2024 against Rs5,617.7 billion last year.

Planning commission’s estimates

According to the Planning Commission’s estimations made in the Annual Plan Coordination Committee (APCC), Pakistan’s economy “faced significant challenges at the beginning of 2023-24, primarily due to lagged impacts of economic disruptions of the previous year.” But the economy moderately recovered in 2023-24 and grew by 2.4%.

In the years 2023-24, the primary driver of growth was the agriculture sector, growing by 6.3%, owing to bumper outputs of wheat, cotton and rice.

The industrial sector grew by 1.2% mainly due to a slowdown in large-scale manufacturing activities. There was growth in mining and quarrying, small-scale manufacturing, and construction.

The services sector also registered 1.2% growth as wholesale and retail trade experienced a mere 0.3% growth. The transport, storage and communications sector also recorded a low growth of 1.2% due to subdued demand.

Total revenue collection grew by 41% during July-March 2023-24 that outpaced the 36.6% growth of total expenditure. Both tax and non-tax revenues grew by 29.3% and 89.8%, respectively. Markup expenditure constituted 40% of the total expenditure.

During July-April 2023-24, average inflation was recorded at 26% as compared to 28.2% in the same period of last year. A continuously declining inflationary trend has been observed since January 2024.

The federal government is set to present a federal budget worth Rs18 trillion rupees to the National Assembly today, with a focus on bolstering defense spending, introducing new taxes, and reforming the pension system.

The budget is expected to include a 10-15% increase in salaries for government employees. A significant portion of the budget, Rs2.1 trillion rupees, will be allocated to defense.

The budget document reveals a projected Rs9.5 trillion for interest and debt payments, while non-tax revenue is estimated at an initial figure.

The government is expected to introduce new taxes and increase the tax burden by eliminating sales tax exemptions. Proposed increases in sales tax on various goods, withholding tax, and customs duties are anticipated.

The government aims to collect Rs12.9 trillion in tax revenue. To achieve this, the budget proposes a 5% sales tax on petroleum products, a 1% increase in GST, and the elimination of unnecessary tax breaks, among other measures. This is expected to generate an additional Rs2 trillion in revenue.

The budget projects over Rs1050 billion in revenue from petroleum levies. The elimination of unnecessary sales tax exemptions is expected to generate an additional 5.5 trillion rupees in revenue.

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The budget proposes imposing sales tax on agricultural goods, seeds, fertilizers, tractors, and other equipment. A 10% sales tax on food, medicines, and stationery is also being considered. The budget allocates Rs800 billion for subsidies in the energy sector.

Pension reforms are proposed, including the introduction of a voluntary contributory pension system for new recruits. Retired employees are expected to receive pensions for 20 years instead of lifetime benefits.

The duration of family pensions is proposed to be reduced to 10-15 years, while the daughter’s pension is set to be eliminated, and commutation benefits are expected to be reduced.

The budget allocates Rs827 billion for infrastructure, Rs253 billion for energy, Rs279 billion for transport and communication, Rs206 billion for water projects, Rs280 billion for the social sector, and Rs45 billion for healthcare.

The budget also allocates Rs93 billion for education and higher education, Rs75 billion rupees for SDGs, Rs42 billion for agriculture, Rs28 billion for governance, Rs79 billion rupees for science and IT, Rs64 billion for merged districts in Khyber Pakhtunkhwa, and Rs75 billion for Azad Kashmir and Gilgit-Baltistan.

The delay in finalizing Pakistan’s Budget Strategy Paper (BSP) for the next three-year period is directly linked to the ongoing negotiations with the International Monetary Fund (IMF) over the terms of the country’s next lending program, an anonymous government official has revealed.

Speaking to Business Recorder, the official stated that without concluding the negotiations with the IMF and finalizing the macroeconomic targets agreed with the Fund, the BSP would be meaningless, as it has to be based on those targets.

The official added that even the broad contours of the budget for the upcoming fiscal year 2024-25 have not yet been shared with the federal cabinet, which is highly unusual. In previous years, the BSP used to be finalized well before the budget presentation and shared with the cabinet by mid-May.

The BSP is an important document as it highlights the government’s policies and priorities for the next three-year period.

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A senior finance ministry official acknowledged that he is unaware whether the BSP has been prepared or not, but confirmed that in the past, the document was submitted to the federal cabinet for approval at least two weeks before the budget, and then shared with the standing committees of both houses of parliament for feedback and recommendations.

The official explained that the BSP outlines the government’s policies in terms of revenue, expenditure, and other macroeconomic targets for the medium-term, with the primary objective of facilitating medium-term policy formulation based on reliable projections of revenue and expenditure, as well as new measures, specific needs, and the government’s strategic priorities.

The standard rate of sales tax in the country will likely remain unchanged at 18% for the upcoming fiscal year starting on July 1, 2024.

According to a report in Business Recorder, sources familiar with the matter have revealed that a proposal to increase the sales tax rate from 18% to 19% was discussed between the Federal Board of Revenue (FBR) and top government decision makers, but this proposal has been rejected once again.

Prime Minister Shehbaz Sharif reportedly declined the suggestion to raise the standard sales tax rate.

The FBR had proposed a 1% increase in the sales tax, projecting that it would generate an additional Rs40-50 billion in revenue for the 2024-25 fiscal year.

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However, the Prime Minister has decided against implementing this increase, citing concerns over the potential inflationary impact it could have on the general public.

As a result, the sales tax rate will remain at 18% for the next fiscal year, rather than being raised to 19% as the FBR had proposed.

The Economic Survey of Pakistan 2023-24, the pre-budget document, containing the details of major socio-economic achievements during the outgoing fiscal year 2023-24, will be launched on Tuesday (today).

Federal Minister for Finance and Revenue Muhammad Aurangzeb will launch the pre-budget document, according to a press release issued by the Finance Ministry on Monday.

The Economic Survey will provide details about the major socio-economic developments, performance, and trends of various sectors of the economy, including agriculture, manufacturing & industry, services, energy, information technology & telecom, capital markets, health, education, transport and communication etc.

Annual trends of major economic indicators regarding inflation, trade and payments, public debt, population, employment, climate change, and social protections will also be described in detail in the survey.

According to the Planning Commission’s estimations made in the Annual Plan Coordination Committee (APCC), Pakistan’s economy “faced significant challenges at the beginning of 2023-24, primarily due to lagged impacts of economic disruptions of the previous year.” But the economy moderately recovered in 2023-24 and grew by 2.4%.

In the years 2023-24, the primary driver of growth was the agriculture sector, growing by 6.3%, owing to bumper outputs of wheat, cotton and rice.

The industrial sector grew by 1.2% mainly due to a slowdown in large-scale manufacturing activities. There was growth in mining and quarrying, small-scale manufacturing, and construction.

The services sector also registered 1.2% growth as wholesale and retail trade experienced a mere 0.3% growth. The transport, storage and communications sector also recorded a low growth of 1.2% due to subdued demand.

Total revenue collection grew by 41% during July-March 2023-24 that outpaced the 36.6% growth of total expenditure. Both tax and non-tax revenues grew by 29.3% and 89.8%, respectively. Markup expenditure constituted 40% of the total expenditure.

During July-April 2023-24, average inflation was recorded at 26% as compared to 28.2% in the same period of last year. A continuously declining inflationary trend has been observed since January 2024.

NEC approves five-year national development plan

The National Economic Council approved on Monday the five-year National Development Plan alongside approving the annual economic growth targets for the financial year 2024-25 and macroeconomic framework for the annual plan.

Prime Minister Shehbaz Sharif presided over the NEC meeting in Islamabad. Officials said that the key objectives of the plan include “development of every part of the country especially the less developed areas,” increase in exports, promotion of the small and medium industry, social protection and poverty alleviation, increase in the capacity building of the work force, and a framework to protect from the impacts of climate change.

The NEC directed the planning ministry to ensure the positive role of the provinces in the national economy and to present a comprehensive framework to increase the country’s exports. The council also called for including the provinces in the consultation process to achieve the overall economic growth target of the country.

The prime minister emphasised that the government would ensure the “best utilization” of the existing resource for revival of the economy and prosperity of the people. He further said that in all important decisions regarding the economy, the federation “would ensure consultation with the provinces and other stakeholders” so that as a result of the collective vision for the development of the country, such decisions were made that were positive and involved the consent of all.

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“The National Economic Council is the biggest forum for important decisions regarding the country’s economy, which will be used for important decisions for the recovery of the economy,” he added.

The prime minister also directed the council to set up a committee which in consultation with the provinces and other stakeholders, should formulate the proposals to not only make the council active but also to harmonise it with the modern requirements.

Khyber Pakhtunkhwa Chief Minister Ali Amin Gandapur has urged Prime Minister Shehbaz Sharif to review the federal government’s decision to cut 91 ongoing projects of the province from the federal Public Sector Development Programme (PSDP) 2024-25.

“The decision is undoubtedly contrary to previous decisions reached in the SIFC [Special Investment Facilitation Council] Apex Committee meeting on 3/1/2024,” he said in a June 5 letter to the premier.

He raised the matter related to decisions taken in the Annual Plan Coordination Committee meeting on May 31. The committee excluded 91 projects “with an estimated throw forward of Rs1,327,529.93 million” from the draft PSDP 2024-25.

While mentioning the above mentioned apex committee meeting, he said that it was decided that all ongoing projects would be completed to avoid waste of investment already made and legal/contractual issues. It was also decided that authorisation of allocated funds for such projects should be made to ensure their timely implementation.

Gandapur said that violation of both decisions would “jeopardize the development trajectory of KP”.

He reminded the federal government that the province did not pitch any new project for the PSDP 2024-25 while in violation of one of the decisions, a total of 279 projects worth Rs2,917 billion with an allocation of Rs63.9 billion were included in the PSDP.

He added that the allocation disparity between the provincial government’s approved budget and the federal government’s indicative budget ceiling for merged districts ADP and MA-AIP has exacerbated the situation.

Gandapur urged the PM to intervene to address the genuine demands of the KP government and review the proposed budgetary allocations and inclusion of omitted projects in the PSDP 2024-25.

Pakistan’s coalition government is expected to lay out 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, officials and analysts said.

Pakistan is in talks with the IMF for a loan estimated to be anything between $6 billion to $8 billion to avert a default for an economy that is growing at the slowest pace in the region.

“The budget holds critical significance for Pakistan’s IMF programme and must close the gap between our revenue collection and total expenditure; it is thus likely be contractionary,” said Ali Hasanain, associate professor of economics at the 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 have been brought under control, it came at the expense of a sharp drop in growth and industrial activity as well as high inflation, which averaged close to 30% in the last financial year and 24.52% over the last 11 months.

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

Prime Minister Shehbaz Sharif has expressed public commitment to 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 note on the budget last month that fully implementing all the measures that the IMF is likely prescribing, such as increasing revenue through widening the tax base and power tariff hikes, will be tough for Sharif’s 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 front-loading tough fiscal measures could face a backlash from the public,” it added.

It will also be the first test for new Finance Minister Muhammad Aurangzeb, formerly the chief of HBL, Pakistan’s largest bank, who was brought in by Sharif to formulate fresh policy solutions to address persistent problems in the $350 billion economy.

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

Mustafa Pasha, chief investment officer at Lakson Investments, said he believes taking such steps would be difficult.

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“Any attempt to tax agriculture, retail and real estate will likely be poorly structured and face legal challenges which will prevent any collection,” he said, although he added that failure to address IMF demands would likely lead to a delay in a new programme which Pakistan cannot afford for long.

Another key point to look out for in the budget will be targets set for proceeds from privatisation. Pakistan is looking to make its first major sale in nearly two decades as it sells a stake in its national airline.

It is expected to be the first in a series of sales of loss-making entities, particularly in the troubled power sector.

The State Bank of Pakistan cut its key interest rate by 150 basis points on Monday in a widely expected move, marking its first rate reduction in nearly four years in its effort to boost growth amid a sharp decline in retail inflation.

The decision to cut the key rate to 20.5% comes two days ahead of Pakistan’s annual budget and a week after data showed inflation slowed to a 30-month low of 11.8% in May.

“The significant decline in inflation since February was broadly in line with expectations, (but) the May outturn was better than anticipated earlier,” the State Bank of Pakistan (SBP) said in a statement.

The SBP last changed rates in an emergency meeting in late June last year, when it raised rates by 100 basis points to a record high of 22%.

Economic activity slowed over the last two years in Pakistan as it implemented tough reforms under an International Monetary Fund (IMF) bailout in a bid to stabilise its crashing economy.

Finance Minister Muhammad Aurangzeb, speaking at a business conference in China last week, said he expected rates to come down in the face of falling inflation.

However, bank’s monetary policy committee meeting said in Monday’s statement that there were upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments.

The SBP had raised rates by a total of 1,500 basis points between September 2021 and June 2023 to rein in high inflation.

The last hike in rates to a record 22% came as the country looked to secure a short term $3 billion bailout from the International Monetary Fund in a bid to stave off an imminent default.

The global lender had stressed the importance of keeping a tight monetary policy to control inflation, which had stayed above 20% since May 2022 and hit a record high of 38% last year.

High rates, however, have kept government’s borrowing costs elevated and with the new government looking to tighten its purse strings, lower rates will be critical in helping it reduce domestic borrowing costs.

“As anticipated, SBP has taken a step towards narrowing the real interest rate gap to stimulate the economy and reduce its debt servicing burden,” Muhammad Ali, market analyst at AKD Securities, said.

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GDP growth in the current financial year to June 30 is expected to be between 2-3% after posting a de-growth of 0.17% in FY23. The government is targeting achieving 3.6% growth in the year starting July amid an uptick in economic activity.

The government is also in talks with the IMF for a longer-term bailout of around $6 billion to $8 billion for which it is expected to formally apply after the budget is passed by Parliament.

The Monetaty Policy Committee of the State Bank of Pakistan is set to meet to deliberate wherther to continue or change the interest rate in the country, and analysts believe a rate cut could be on the cards.

A former state bank governor told Geo on the condition of anonymity considering the current economic situation of Pakistan, a 2% reduction in the policy rate would have been appropriate.

However, the former governor added that since negotiations with the IMF program are ongoing, they also desire that the interest rate should not be reduced significantly. Therefore, the most likely outcome is that the Monetary Policy Committee may decide to reduce the policy rate by only 1% as a signaling measure to the market.

Inflation has slowed down to 11.7% which could prompt a rate cut.

The Monetary Policy Committee of the State Bank of Pakistan, chaired by Governor Jameel Ahmed, decided to maintain the policy rate at 22% during its meeting on April 19.

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The committee is set to convene again on June 10, at which time it will make the necessary announcements regarding the key economic indicators of the country, including the policy rate decision.

Others, including S&P Global market intelligence have also predicted a rate cut.

Due to elevated inflation, heightened global financial market uncertainty, and the upcoming budget announcement in June, the SBP maintained its policy rate at 22% during its April 29 meeting.

Nevertheless, the recent softening in headline inflation increases the likelihood of the SBP lowering its policy rate in June 2024.

According to well-informed sources, the United States has decided to send a delegation from the Treasury Department to Pakistan to assess the country’s economic situation, the prospects of a new IMF program, and the overall business and investment climate.

The move comes after the recent visit of Iranian President Ibrahim Raisi, who unfortunately passed away in a helicopter accident last month, and the important visit of the Pakistani Prime Minister to China.

The sources revealed that the US Embassy in Islamabad has informed the Ministry of Foreign Affairs (MoFA) that a delegation from the Department of Treasury, led by Deputy Under Secretary/Assistant Secretary Brent Neiman, will visit Islamabad on June 12-13, 2024.

The delegation will also include Alex Entz, Senior Advisor, and Colin Mahoney, Deputy Director for South and Southeast Asia.

The purpose of the visit is to hold one-on-one and delegation-level meetings to gather insider and official information to evaluate Pakistan’s financial and economic position, current challenges, and the country’s strategy to address these challenges, particularly in the financial and energy sectors.

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Prior to the delegation’s visit, the top US diplomat in Islamabad, Donald Blome, has recently held a series of meetings with the Foreign Minister/Deputy Prime Minister, Ishaq Dar, and the Finance Minister, Muhammad Aurangzeb, before their departure to Beijing as key members of Prime Minister Shehbaz Sharif’s entourage. The Chief of Army Staff, General Asim Munir, also joined the delegations in crucial meetings with the Chinese President and Prime Minister.

The primary point of contact for the US Embassy’s visit is Robert Newsome, Deputy Economic Counselor, and Shadman Mawaz Khan, Economic Specialist.

The United States had previously reacted strongly to Islamabad and Tehran’s desire to build the long-delayed gas pipeline and enhance bilateral trade, and the US has offered cooperation to meet Pakistan’s energy needs through alternate sources.

Pakistan’s central bank announced that the country received a record-high amount of $3.2 billion in worker remittances during May. Saudi Arabia was the top contributor to these remittances.

Remittances from Pakistanis living overseas provide billions of dollars to the Pakistani economy each year.

These remittance inflows are crucial for Pakistan, as they help boost the country’s foreign exchange reserves, stabilize its balance of payments, and support the value of the Pakistani currency.

In May, Pakistani expatriates sent a total of $3.2 billion in remittances. This represented a 15.3% increase compared to the previous month, and a 54.2% increase compared to the same month the previous year, according to official data released by the State Bank of Pakistan, Arab News reported.

“Remittances inflows during May 24 were mainly sourced from Saudi Arabia ($819.3 million), United Arab Emirates ($668.5 million), United Kingdom ($473.2 million) and United States of America ($359.5 million),” the SBP said in a statement.

“Cumulatively, with inflow of $ 27.1 billion, workers’ remittances increased by 7.7 percent during the first eleven months of FY24 compared to the same period last year,” it stated.

Remittances from overseas Pakistanis play a crucial role in supporting Pakistan’s external accounts, particularly at a time when the country is facing an economic crisis. This crisis has weakened the Pakistani currency and caused the country’s foreign exchange reserves to decline significantly.

“This is higher than our expectations as we projected full-year remittances at $28bn, while Pakistan has achieved remittances of $27bn in 11MFY24,” Karachi-based Topline Securities brokerage firm said in its report.

Pakistan had set a worker remittance inflow target of $28.5 billion for the current fiscal year ending in July.

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Pakistan’s benchmark stock index fell 0.15% on Friday, dragged by concerns about tax hikes after the government announced a date for the annual budget.

According to the PSX website, the KSE-100 index shed 108.92 points to close at 73,754.01 against the previous closing of 73,862.93.

Pakistan will present its annual budget later than expected on June 12, a statement from Parliament said on Thursday, the second postponement this week.

The budget would come ahead of Islamabad seeking a new loan from the International Monetary Fund in view of last month’s advance discussions about a long and longer Extended Fund Facility.

“45% tax on dividend and capital gain. Don’t know how reliable this is? Assuming IF this is True.. simple maths and accounting will explain that this 45% is not actually 45% but is far lower,” Mohammed Sohail, the Topline Securities CEO, said in a social media post.

He was of view that banks many years back were moved from full and final tax to the adjustable income tax. Banks average pre-tax margin was 40 per cent, he said and added that a company makes Rs100m in dividend. “Then at the end of the period when they file tax return they will adjust all expenses. With 40% margin [dividend after expenses will be Rs40m] pays 49% income tax at Rs20. So the actual effective tax on dividends by this bank after expenses is around 20% (not 45%),” he said.

“In case of non bank above calculations would be at the rate of 29% corporate tax rate. Meaning Rs15m withholding tax on Rs100m dividend will result in actual tax of Rs11.6m…thereby a refund of Rs3.4m,” Sohail said.

The PSX analyst added that such a scenario can help high-net-worth individuals-led corporations wherein they can increase their accounting expenses to lower the effective tax. “Rich individuals can easily form a firm to save on such taxes.”

Meanwhile, Pakistan’s central bank is widely expected to cut its key interest rate next week by 100 basis points after holding it at a record 22% for seven straight policy meetings, according to a Reuters poll of market watchers.

Analysts believe the market is reacting to reports of higher taxes, in order to meet revenue measures pushed for by the IMF.

“Given the market has almost doubled over the past year with some names providing multifold returns, investors would rather book capital gains at a 15% tax rate before June 30, than the proposed and speculated marginal tax rate which could be up to 45% in the highest bracket,” said Adnan Sheikh, the assistant vice president of research at Pak Kuwait Investment company.

The KSE 100 index is up 12% year to date, and 72% in the last 12 months.

Petrol and diesel prices could be lowered by as much as Rs12 in Pakistan, according to sources.

The expected reduction in petrol prices is being attributed to the global market.

The global market has seen a decrease of $5.14 in prices, and as a result, prices in Pakistan are also expected to drop by up to 12 rupees.

After the reduction in global market prices for petrol, the price has now settled at $89 per barrel.

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Meanwhile, the global market has seen a $4 reduction in the price of diesel. As a result, the price of diesel has now reached $93.88 per barrel.

The federal government would present the annual budget for the fiscal year 2024-25 in the National Assembly on June 12 (Wednesday).

A meeting of the chief whips of all political parties in Parliament discussed the schedule for the upcoming budget session. The session is expected to take a break from June 13 to 19, said a press release.

It will resume on June 20, with dates from June 20 to 24 allocated for the general discussion on the budget. The debate on cut motions is scheduled for June 26 and 27, while June 28 is designated for the discussion and approval of the Finance Bill.

The current session of the National Assembly is expected to continue until June 29.

Additionally, it was agreed to continue the debate on the President’s address on June 6 and 7. The chief whips also discussed the formation of standing committees and the House Business Advisory Committee.

Pakistan’s financial year runs from July to June and its budget for fiscal year 2025, the first by Sharif’s new government, has to be presented before June 30.

The budget was originally due to be presented on June 7 but was delayed because of Prime Minister Shehbaz Sharif’s visit to Beijing from June 4-8, Reuters last week reported while quoting two sources, a top finance ministry official and an official close to the prime minister.

Finance Minister Muhammad Aurangzeb, who is accompanying Sharif to Beijing, will present the budget, which the finance ministry official said would be one of the “most crucial” ahead of a new loan from the IMF.

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An IMF mission held two weeks of technical and policy level talks with Pakistani officials before it left last week to discuss fiscal consolidation measures to lay the groundwork for the new loan.

The talks made significant progress towards reaching a staff-level agreement for an extended fund facility, the IMF said after they concluded.

The IMF had opened discussions on the new loan after Islamabad completed a short-term $3 billion programme which helped stave off a sovereign debt default last summer.

The Asian Development Bank (ADB) has approved a $250 million loan to assist Pakistan in driving sustainable investments in infrastructure and public services through public-private partnerships (PPPs).

ADB’s Promoting Sustainable Public–Private Partnerships Program aims to support the implementation of government policies that create an enabling environment for fiscally affordable PPPs and promote inclusive economic growth.

“This program is part of our comprehensive support package for Pakistan’s public sector management, balancing the country’s fiscal consolidation and growth objectives,” said Yevgeniy Zhukov, ADB’s Director General for Central and West Asia.

The program will help the Government of Pakistan establish a conducive environment for strategic and fiscally sustainable PPPs, which will contribute to the country’s development goals.

The reforms supported by the program will increase the absorptive capacity of PPP infrastructure investments by strengthening the legal and institutional framework for public investment and financial management. It will also facilitate efficient infrastructure planning and promote sustainable development practices, such as climate risk screening and gender considerations in project assessments and PPP contracts.

“Mobilizing private finance through PPPs can help bridge the financing gap in public infrastructure projects, which is crucial,” said ADB Economist Sana Masood. “This program will ensure that PPPs in Pakistan are structured and implemented effectively to deliver greater efficiency, innovation, and value for money.”

The program is supported by a $700,000 technical assistance grant, and an additional $950,000 has been approved by ADB to support the identification of PPP pipeline, capacity building, and sector strategy development.

Since 1966, ADB has committed over $52 billion in public and private sector financing to promote inclusive economic growth and improve infrastructure, energy, transport, and social services in Pakistan. ADB remains committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while continuing its efforts to eradicate extreme poverty.

The federal government has refuted claims made by a leading news channel about a change in the policy of net metering, which allows residential and commercial electricity consumers to sell solar energy generated at rooftops to power distribution companies.

Geo News reported earlier on Wednesday that the government had decided to amend the net metering regulations and to introduce two different tariffs for the purchase and selling of solar energy. The TV channel also claimed that net-metering was being discontinued and that the government will also introduce a fixed tax on consumers who have installed solar systems.

It said the prime minister had ordered the authorities to move summaries on the decisions he had made.

However, soon after the news report was aired, the Power Division issued a rebuttal, saying media outlets should have contacted the Power Division, Aaj News reported.

The statement said there was no truth in the reports of ending the policy of net-metering. No instructions have been received from the prime minister about net metering policy, the statement said.

LESCO, the utility supplying electricity to the Lahore region, also issued a statement and said that there was not truth in the claims about ending net-metering and that consumers should not believe in such reports.

The government plans to alter the solar net-metering policy were first reported by Business Recorder in April. The leading business daily said the government was planning to reduced the buyback rates for electricity from consumers who had installed solar systems.

Weeks later a report in Express Tribune claimed the solar net-metering was being replaced with ‘gross metering’. The arrangement would involve installation of two separate electricity meters at houses with solar systems: one for sending electricity produced by rooftop solar panels to the national grid and other for pulling electricity from the national grid at night.

Similarly, there was also a claim about levying a fixed tax on consumers with solar systems. The Power Division has already rejected the claim.

In a notable departure from the International Monetary Fund’s (IMF) forecast, the government has decided to prepare its upcoming 2024-25 budget based on an exchange rate of Rs295 to the US dollar.

The finance ministry has issued an official directive setting the average exchange rate at Rs295 per dollar for the next fiscal year’s budget calculations, The Express Tribune reported while quoting sources.

Such an assumption represents a depreciation of only 3.5% or Rs10 per dollar, in contrast to the IMF’s projection of nearly a 16% fall in the value of the local currency.

The Rs295 rate would be used to estimate the costs of foreign debt repayments, services, and imports, including defence-related procurements. It merits here to mention that it is an average rate, implying the year-end exchange rate in June 2025 could be higher.

In comparison, the IMF’s latest report released in May had assumed a rupee-dollar parity of Rs328.4, a significantly weaker projection than the government’s.

The IMF’s exchange rate assumptions have not always aligned with the actual market conditions. For instance, the Fund had anticipated the rupee to trade at Rs300 per dollar for the current fiscal year, but the actual average rate has been Rs285.

The planning ministry has also acknowledged that the exchange rate and foreign exchange reserves are likely to remain under pressure in the next fiscal year due to scheduled external debt repayments.

The government’s projections for foreign loan disbursements from multilateral and bilateral creditors, excluding any IMF borrowings, sovereign bonds, or foreign commercial loans, are around $6 billion for the upcoming fiscal year.

Pakistan pins hope on World Bank, ADB

In addition to its divergent exchange rate assumptions, the government is pinning high hopes on significant disbursements from the World Bank and Asian Development Bank to help stabilise the rupee in the upcoming fiscal year.

The government is anticipating around $2.5 billion in disbursements from the World Bank and another $1.6 to $1.8 billion from the Asian Development Bank. such inflows, combined with the possibility of a new agreement with the IMF, could help alleviate pressure on the local currency.

The government’s notified exchange rate of Rs295 per US dollar is crucial for determining key budget allocations, such as the defence budget, foreign debt servicing, the cost of running Pakistan’s diplomatic missions abroad, and the Public Sector Development Programme. For the next fiscal year, the government has estimated around $1.7 billion in inflows for federal project financing.

Any fluctuations in the dollar value or underestimation at the time of budgeting could render the entire budget unrealistic, leading to cost overruns and the need for supplementary grants. In the outgoing fiscal year, the government had set the rupee-dollar parity at Rs290, but the actual average rate ended up at Rs285.

Interestingly, the current interbank rate for the rupee stands at around Rs279 per dollar.

The IMF, in its recent staff-level report, has stressed the need for a flexible exchange rate to cushion against shocks and rebuild foreign exchange reserves. The Fund has also recommended that monetary policy remain tight to bring inflation to more moderate levels and remain agile to proactively respond to any signs of resurgent inflation.

The IMF’s assumption of a weaker rupee at Rs328.4 per dollar could imply that inflation may not fall to single digits in the next fiscal year.

Pakistan is seeking another IMF programme to improve its economy. The Fund has linked the signing of the new staff-level agreement for the next programme with the approval of Pakistan’s new budget in line with the IMF’s desired parameters and the prior approval of the IMF executive board for the staff-level deal.

Based on the indicative rupee-dollar parity, sources said that interest payments on external debt are projected to reach around Rs1.1 trillion for the next fiscal year.

The IMF has projected that Pakistan’s total interest payments on its debt will reach a record Rs9.8 trillion in the next fiscal year, significantly higher than the finance ministry’s estimate of around Rs9 trillion.

According to the IMF’s assessment, interest payments on domestic debt are expected to be in the range of Rs8.5 trillion while interest on external debt is projected at Rs1.15 trillion.

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The rupee-dollar exchange rate also has significant implications for the defence budget. The defence ministry has requested a budget of Rs2.27 trillion while the finance ministry has indicated a figure of Rs2.1 trillion thus far. The exchange rate value will impact the allocation for the Armed Forces Development Programme.

Finance Minister Mohammad Aurangzeb plans to unveil the annual budget on June 10, but the date remains uncertain due to the prime minister’s upcoming visit to China and a delay in holding the National Economic Council meeting.

The Cabinet Division has not yet constituted the NEC, and as a result, its meeting may now be held upon the prime minister’s return from Beijing. The NEC meeting is crucial, as it must approve the national development outlays for the federal and provincial governments and launch the Economic Survey of Pakistan.

If Pakistan meets the IMF’s condition on the agreed fiscal framework, including the necessary taxation measures, a staff-level agreement with the IMF could be reached as early as July. A timely IMF deal would help alleviate pressure on the local currency.

Pakistan’s Planning Ministry said on Friday that the economic outlook for the next year was positive, with a growth target of 3.6%, while inflation was likely to moderate to 12%.

Pakistan will present its annual budget on June 10, three days later than expected, two government sources said on Friday, as markets wait for details of plans seen as crucial to securing a new International Monetary Fund (IMF) loan. Pakistan’s fiscal year starts on July 1.

“The growth prospects hinge upon political stability, exchange rate, macroeconomic stabilization under IMF’s programme and expected fall in global oil and commodity prices,” the ministry said in its annual plan review.

Earlier in May, in its half-yearly report, Pakistan’s central bank said the economy was grappling with structural bottlenecks exacerbated by political uncertainty, despite some improvement in macroeconomic indicators. It predicted real GDP growth of 2%-3% for fiscal 2024.

The Planning Ministry said the fiscal deficit would narrow on the back of fiscal consolidation measures, and that domestic average inflation was likely to moderate to 12% owing to falls in global inflation.

Pakistani inflation is set to come in between 13.5% and 14.5% in May and to ease further to 12.5% to 13.5% by June, the finance ministry said on Wednesday in a monthly update. Pakistan has been beset by inflation above 20% since May 2022, registering a high of 38% in May 2023, as it navigated reforms as part of an International Monetary Fund bailout programme. However, inflation has slowed over the past few months.

The planning ministry added that the Annual Plan Coordination Committee had approved an estimated 1.22 trillion rupees ($4.39 billion) for public sector development spending during the next fiscal year, lower than the 2.8 trillion rupees ($10 billion) requested by the ministries, due to fiscal constraints.

The International Monetary Fund (IMF) has shared a draft proposal with Pakistani authorities outlining key conditions for a new loan program. These proposals are expected to significantly impact the upcoming federal budget for the next fiscal year.

The Pakistani economic team has begun finalizing the budget in light of the IMF’s conditions. The IMF has proposed a tax revenue target of 1290 billion Pakistani rupees for the next fiscal year, while the Federal Board of Revenue (FBR) is pushing for a target of 1250 billion rupees.

Sources reveal that ongoing online discussions and virtual meetings between the Pakistani economic team and the IMF are progressing. The IMF has proposed increasing the standard rate of the General Sales Tax (GST) from 18% to 19%. This change, if implemented, could generate an additional 180 billion rupees in revenue for the FBR over the next year.

The IMF has also proposed increasing the tax rate for high-income earners and raising the maximum rate from 30% to 40%. Additionally, the IMF suggests reducing the number of tax slabs for government employees from seven to four.

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The IMF has proposed eliminating the fifth schedule from the Sales Tax Act, which relates to zero-rating, and bringing all items except exports under the standard GST rate. The IMF also suggests removing unnecessary tax exemptions in the sixth schedule and limiting tax concessions under the eighth schedule to only essential food items and health and education-related goods. The proposed tax rate for these items would be around 10%.

Sources within the Ministry of Finance state that the budget process is entering its final stages. As Pakistan is negotiating a new program with the IMF, the government is expected to implement the agreed-upon conditions in the upcoming budget.

This will pave the way for signing a staff-level agreement after budget approval, allowing Pakistan to secure a new three-year loan program from the IMF.

Pakistan will present its annual budget for the financial year 2024/25 on June 10, two government sources said on Friday, ahead of seeking a new International Monetary Fund (IMF) loan.

The budget was originally due to be presented on June 7 but was delayed because of Prime Minister Shehbaz Sharif’s visit to Beijing from June 4-8, said the two sources, a top finance ministry official and an official close to the prime minister.

They spoke on condition of anonymity as they are not authorised to disclose the information. The information ministry did not respond to a request for comment.

Finance Minister Muhammad Auragzeb, who will be accompanying Sharif to Beijing, will present the budget, which the finance ministry official said would be one of the most crucial ahead of a new loan from the IMF.

An IMF mission held two weeks of technical and policy level talks with Pakistani officials before it left last week to discuss fiscal consolidation measures to lay the groundwork for the new loan.

The talks made significant progress towards reaching a staff-level agreement for an extended fund facility, the IMF said after they concluded.

The IMF had opened discussions on the new loan after Islamabad completed a short-term $3 billion programme which helped stave off a sovereign debt default last summer.

Pakistan is likely to seek at least $6 billion under the new programme and request additional financing from the IMF under the Resilience and Sustainability Trust.

Officials have said the talks focused on the budget targets and structural reforms to contain the fiscal deficit, which including raising tax to GDP, managing energy sector debt, the sale of state-owned enterprises and external financing.

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Analysts at Standard Chartered who recently visited the country to meet with policymakers, banks and investors said there was an expectation that the budget would be contractionary and focused on widening the tax base, rationalising spending and addressing structural weaknesses.

“The budget will also be an important test for the new finance minister, Muhammad Aurangzeb,” Standard Chartered’s Farooq Pasha said in a note to clients.

“A key concern among local stakeholders was the risk that front-loading tough fiscal measures could face a backlash from the public.”