Forecasting a Balanced Budget Surplus in FY2024-2025: The SBP Expresses Difficulties Meeting the Objective
Pakistan's Struggle to Achieve the Projected Primary Surplus of 1% GDP in FY25
The State Bank of Pakistan (SBP) has issued a realistic appraisal, stating the challenge of achieving the targeted primary surplus of 1% of the GDP in the absence of a wider tax net and reforms within state-owned entities (SOEs) during the current fiscal year 2024-25.
While the fiscal deficit has reduced to 2.2% GDP in the first nine months of FY25 compared to 3.1% in the previous year, the need for reforms in the tax system and SOEs to put the fiscal sector on a sustainable path remains crucial.
The SBP insists on expanding the tax net and reforming SOEs to make the economy more robust. The monetary policy committee (MPC) affirmed its earlier assessment that the overall fiscal deficit may remain near the FY25 target, but acknowledges that the tax revenue growth has been below target, even though it recorded a significant 26.3% year-on-year growth during July-April FY25.
One approach proposed to boost non-tax revenues is through increasing petroleum development levy (PDL) rates. Additionally, improved expenditure control has been observed during July-March FY25.
In contrast, the SBP anticipates the Pakistani economy to maintain growth in the second half of FY25 and beyond, despite the IMF's expectation of a global economic contraction in the next two years.
To attain the desired primary surplus, enriching the tax net and establishing a more efficient tax system is vital. Reforms such as digitizing the tax collection system, making the tax policy stable, reducing import tariffs, improving revenue collection efficiency, and promoting a progressive tax structure could help achieve the objective.
Moreover, reforms within SOEs are also essential for success. Adopting performance-based management systems, privatizing or restructuring loss-making businesses, enhancing transparency, conducting regular audits, and introducing market-based pricing mechanisms are critical steps to improving the state of Pakistan's economy.
A summary table of essential reforms includes:- Broaden the tax base through digitization, policy stability, and progressive taxation- Improve governance, operational efficiency, and reduce fiscal burdens within SOEs through performance management, privatization, market pricing, and transparency
If fully implemented, these reforms have the potential to restore the economy's stability and pave the path for sustainable, inclusive growth.
- In the pursuit of achieving the projected primary surplus of 1% GDP in FY25, it's crucial to enrich the tax net and establish a more efficient tax system, which could generate significant interest from the finance sector and fuel the growth of the business and DeFi landscapes.
- To boost non-tax revenues and strengthen the economy's momentum, increasing petroleum development levy (PDL) rates could play a key role, while improved expenditure control has been observed during the first nine months of FY25.
- As reforms within state-owned entities (SOEs) are essential for success, adopting performance-based management systems, privatizing or restructuring loss-making businesses, enhancing transparency, conducting regular audits, and introducing market-based pricing mechanisms are critical steps that could create a ripple effect in finance, growth, and the overall business environment.
