Analysis Budget: foresight 20/20

Hindsight maybe 20/20 but Pakistani budgets epitomize foresight as being 20/20 – given previous budgets and with the country on a harsh upfront International Monetary Fund (IMF) programme as at present.

The basic thrust of previous budgets was sustained in the budget 2025-26 though there was a marked decline in the revised estimates of current expenditure 2024-25 attributable mainly to lower domestic borrowing costs — 11 percent discount rate at present against 20.5 percent in June 2024.

Current expenditure is budgeted to decline to 16.286 trillion rupees next year (with 8.206 trillion rupees budgeted mark-up) against 16.390 trillion rupees in the revised estimates of 2024-25 (with revised mark up of 8.945 trillion rupees) – a decline on the expectation of a further reduction in the discount rate though the IMF in the staff level agreement documents dated May 2025 warned that “the State Bank of Pakistan should continue to calibrate monetary policy carefully, removing monetary restraint gradually,” and suggested “effective communication (to) help the public better understand the Monetary Policy Committee’s reaction function and build support for its policy decisions,” – a pertinent suggestion due to the tremendous pressure by powerful pressure groups on the MPC to further reduce the rate. This pressure no doubt contributed to the “elevated risks” to the IMF programme that remains critical to averting the still looming threat of default. Today Pakistan has 16 billion dollar roll-overs from friendly countries as well as other support from multilaterals/bilaterals which remain contingent on an active Fund programme.

The downside of a lower discount rate however is the negative impact on national savings schemes budgeted at 141,288 million rupees next year against 164,944 million rupees in the revised estimates of 2024-25 – a decline of 17 percent.

Within current expenditure pension increase has been limited – from 1.014 trillion rupees in the budgeted and revised estimates of 2024-25 to 1.055 trillion rupees next year, a decline not sourced to ensuring employee contribution as the key reform but restricting those reemployed after retirement opt to get either the pension or the salary. A reduction in subsidies, a standard Fund condition, is envisaged - from 1.378 trillion rupees in the revised estimates to 1.186 trillion rupees next year - sourced to a decline in subsidy to power sector by around 150 billion rupees (premised on the projection of savings due to renegotiations with the Independent Power Producers and borrowing from commercial banks at cheaper rates to retire the circular debt) and subsidies on industries and production by 44 billion rupees.

Subsidies overshot the budgeted amount in the current year by about 15 billion rupees and the lower amount earmarked in the budget 2025–26 runs the risk of overshooting the mark substantially by June 2026 if as noted by the IMF “domestic political economy pressures to unwind and delay reforms remain present and may intensify.”

The other components of current expenditure are contained though time will tell whether the government has prudently accepted IMF interventions and is relying on getting waivers and/or inflows from sources as yet unexplored, including a rise in export revenue and remittance inflows, that would stay the Fund concerns or else SBP may be able to contain core inflation (possibly through manipulation) to adjust monetary policy and reach its budgeted targets.

Federal Board of Revenue collections are budgeted to rise by 20 percent from the revised estimates with 51.5 percent of total collections envisaged from indirect taxes (whose incidence on the poor is greater than on the rich). Not credited under indirect taxes so as not to share the revenue with provinces is petroleum levy, a sales tax on petrol and products payable by the general public, with envisaged collection of 1.468 trillion rupees next year, a rise of 26 percent from the revised estimates of the current year.

Direct taxes would continue to account for 49 percent next year as well with the largest share from the levy of withholding taxes in the sales tax mode, an indirect tax, which accounts for nearly 75 to 80 percent of all collections. This source continues to be dishonestly credited under direct taxes in spite of exhortation by the Auditor General of Pakistan to desist from this activity. The budget 2025-26 envisages a rise in the following withholding taxes in the sales tax mode but credited under direct taxes: (i) cash withdrawals by non-filers from 0.6 to 1.0 percent, (ii) an increase in dividend tax rate to 25 percent and 15 percent on mutual funds, (iii) on specific services from 4 to 6 percent, (iv) non-specific service flat rate of 15 percent, and (v) income from sports to 15 percent from 10 percent.

The shortfall in FBR collections this year was one trillion rupees, though the actual amount will be updated by the end of the current month, and it would be a challenge next year to reach the target. The usual post budget technical briefing on finance bill given by Chairman FBR was summarily cancelled, which has raised serious concerns about revenue projections for next fiscal year.

External resources are budgeted at 5.777 trillion rupees for 2025-26 with loan repayments at 5.472 trillion rupees and repayment of short term credits at 199.8 billion rupees or in other words net inflows would be a meagre 105.5 billion rupees – an amount only 20 billion rupees less than the additional 84.99 billion rupees allocated to running of civil government next fiscal year compared to the revised estimates of this year (which may be raised further as it is not known whether the 10 percent increase in salaries and the 7 percent increase in pensions of 7 percent of the country’s total workforce paid for at the taxpayers’ expense was budgeted.

Benazir Income Support Programme was budgeted at 716 billion rupees – a rise of 21 percent from 20242-5; however, with poverty levels at a high of 44.2 percent as per the World Bank 716 billion rupees (against last year’s 592,383 billion rupees) is unlikely to reduce the poverty levels. The budgeted allocation for Federal Public Sector Development Programme in the current year was 1400 billion rupees, revised down to 1.1 trillion rupees) and the current year’s lower allocation of one trillion rupees indicates a decline of 28.5 percent from the amount budgeted for 2024-25. Whenever the usual spectre of a more than budgeted narrowing of the fiscal space rears its head, PSDP is mercilessly slashed.

Copyright Business Recorder, 2025