Taxation, energy, privatisation part of economic reform agenda: Aurangzeb

Finance minister says Pakistan committed to enter into extended programme with IMF n IMF predicts Pakistan’s budget deficit to decline to 7.4pc of GDP in FY24 n Urges countries to start scaling back fuel, energy subsidies.

ISLAMABAD/WASHINGTON  -  Federal Minister for Finance Muhammad Aurangzeb says Pakistan is committed to enter into a larger and extended programme with the International Monetary Fund (IMF).

He was addressing the JP Morgan Seminar on Pakistan’s Economic Policy Outlook in Washington. The minister said government is focusing on three important reform areas including taxation, energy and privatisation.

He highlighted positive economic indicators including strong performance of the agriculture sector, diminishing inflationary pressures, stable exchange rate, declining trade deficit and strong remittances.

The International Monetary Fund (IMF) has projected that Pakistan’s budget deficit would decline to 7.4 percent of the Gross Domestic Product (GDP) in the ongoing fiscal year (FY24).

The IMF in its report, ‘Fiscal Monitor’ has noted that Pakistan’s budget deficit was 7.8 percent of the GDP in the last fiscal year FY23, which would be reduced to 7.4 percent of the GDP in the ongoing fiscal year. It further estimated that the budget deficit would come down to 7.3 percent in the next financial year FY25. Meanwhile, the primary budget—the difference between government revenues and spending, excluding interest payments—has estimated at a surplus of 0.4 percent of the GDP in FY24 that was in deficit of 0.9 percent of the GDP in FY23. It would further improve to 0.5 percent in the upcoming year.

The IMF has projected that Pakistan’s revenue would improve to 12.5 percent of the GDP in FY24 from 11.4 percent of the GDP in FY23. Meanwhile, the government’s expenditures would enhance to 19.9 percent of the GDP in FY24 from 19.2 percent of the previous year. However, the expenditures would decrease to 19.6 percent in the next fiscal year.

According to the report, general government gross debt would reduce to 71.8 percent in FY24 from 77.1 percent of the previous year. It would further reduce to 69.6 percent of the GDP in the next fiscal year. The general government net debt would reduce to 67.9 percent of GDP from 72.1 percent of the GDP of the previous year. It would reduce to 66.3 percent of the GDP in the next fiscal year.

Earlier, the IMF had projected the GDP growth rate for Pakistan at two per cent for the current fiscal year compared to -0.2 per cent in the fiscal year 2023. It also projected a decline in inflation, from 29.2 percent to 24.8 percent and unemployment from 8.5 per cent to eight per cent. The fund in its latest report, “World Economic Outlook (WEO): Steady but Slow: Resilience amid Divergence” released on Tuesday noted that Pakistan’s GDP is projected to be 3.5 per cent in the fiscal year 2025. The IMF has also revised downward the inflation rate projection to 24.8 percent for the current fiscal year and 12.7 percent in fiscal year 2025 against 29.2 percent in fiscal year 2023.

The unemployment in the country is projected to decrease to eight per cent in 2024 against 8.5 percent in 2023, which is projected to be 7.5 percent in 2025. The current account balance is projected at negative 1.1 per cent for 2024 compared to negative 0.7 percent in 2023 and projected negative 1.2 percent for 2025.

IMF says global debt levels face ‘Great Election Year’ risk

The path towards sustainable government debt levels around the world is under threat this year from the sheer number of elections taking place, the IMF said Wednesday in a new report.

“History suggests, and empirical evidence confirms, that governments tend to spend more and or tax less in election year,” Vitor Gaspar, the head of the International Monetary Fund’s Fiscal Affairs told AFP, ahead of the publication of the Fiscal Monitor report. To do this, the IMF recommended that countries should start by “immediately” phasing out pandemic-era support measures, scaling back fuel and energy subsidies, and enacting entitlement reforms in advanced economies with ageing populations.

In emerging market and developing economies, governments should “renew efforts to rationalize large government wage bills, and reform social safety nets,” the IMF said.

He added that the situation this year is particularly complicated because, “the political discourse is dominated by references to fiscal expansion and calls for fiscal support or public spending -- or both.”

The Fiscal Monitor report found that global public debt “edged up again” last year, reversing a couple of years of decline, due largely to a fall in revenues “as windfall revenues from inflation waned.”

“Fiscal tightening is projected for 2024, but it is subject to considerable uncertainty,” the IMF report continued.

Much of this uncertainty, the IMF said, is down to the fact that 2024 is the “Great Election Year,” when 88 economies or economic areas representing more than half of the world’s population have held, or are due to hold, elections.

“Clearly, given the stronger link between fiscal policy and politics, it is perfectly reasonable to think that political factors and political discourse will play an added role right now,” Gaspar told AFP.

The IMF predicts that current spending and taxation levels have put global public debt on track to rise from just over 93 percent of economic output last year to 99 percent by 2029.

This trend is “driven by the world’s two largest economies, China and the United States, where under current policies public debt is projected to continue increasing beyond historical highs,” the IMF report said.

The US experienced “remarkably large fiscal slippages,” last year, the IMF said, citing a steep decline in income tax revenues due to lower capital gains taxes and “delayed tax payment deadlines.”

While the IMF expects the US fiscal deficit to remain stuck above six percent over the next five years, the country’s strong economic position makes it a “very strong outlier in fiscal development around the world,” Gaspar said.

“The United States has ample fiscal space,” he continued. “There are many measures that can be taken on the spending side and the revenue side.”

Like the US, China’s fiscal deficit is projected to remain at elevated levels over the next five years, rising from more than seven percent of GDP last year to around eight percent by 2029.

“China stands out as a country where the deficit as stayed elevated throughout,” Gaspar said.

However, “China, as the United States, has policy room to correct the situation and can do it from a public finance viewpoint,” he continued, adding: “China does have room to maneuver.”

“They should act quickly in guaranteeing the credibility of their local government finances, in particular in cases where they are in danger given real estate and property development,” Gaspar said.

Given China’s role as a leading bilateral lender to many of the world’s developing economies, its fiscal position carries consequences for countries around the world.

“China is one of the largest economies in the world,” Gaspar said.

“It’s extremely important in some sectors, and therefore the relevance of spillovers is very pressing,” he added.

The Fiscal Monitor report called for countries to make a “renewed push” toward consolidating their fiscal positions -- especially given the expected loosening of tight monetary policy in many places through interest rate cuts later this year.

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