Dr. Ikramul Haq & Abdul Rauf Shakoori
The federal government is expected to present budget 2024 for the fiscal year (FY) 2024-25 on June 7, 2024. This will be the first budget of the government of Pakistan Muslim League Nawaz (PMLN) after coming into power in the wake of general elections of February 8, 2024. It is led by the second time elect Prime Minister, Shehbaz Sharif, who earlier served under 16-month tenure of Pakistan Democratic Movement (PDM) that began after ousting Prime Minister Imran Khan through a first time successful vote of no confidence in Pakistan’s history on April 9, 2022.
The significance of this budget cannot be overstated, as Pakistan is currently grappling with formidable economic challenges. The country is struggling to meet its balance of payment needs and is negotiating a new bailout package from the International Monetary Fund (IMF). This new package is important for stabilizing economy, which is facing historically low GDP growth of just around 3%. Additionally, the policy rate of 22%, coupled with stagflation, poses a challenging scenario, both for consumers and businesses. Despite the government’s claims of achieving the lowest inflation rate in the last 23 months, it remains alarmingly high at 17.3%.
The upcoming budget is therefore critical, as it will not only have to address perpetual economic woes, but also show a pathway to recovery. The government’s focus will likely be on measures to control inflation, stimulate economic growth, provide relief to the common people and to balance fiscal responsibility with necessary expenditure to support the economy. Pakistan’s negotiations with the IMF are particularly important in this context. Securing a new package will not only help stabilize the economy but also build investors’ confidence. The government thus needs to demonstrate a commitment to introduce economic reforms with prudent fiscal management to secure IMF’s support.
However, the critical aspect that could provide relief to both the common people and businesses hinges on measures announced in the budget for revenue mobilization and deficit reduction. Effective steps in this direction would not only reduce reliance on global lenders like the IMF but also facilitate the initiation of essential infrastructure and social sector development projects. This dual approach could stimulate economic growth, create jobs, and improve public services, thereby enhancing overall economic stability.
Undoubtedly, the daunting challenge ahead for the government is to reduce the fiscal deficit, which was recorded at around 7% of the GDP for the fiscal year 2023-24 and expected to further widen this year. The upcoming budget will reveal the government’s strategy to address this issue, whether through effective revenue generation measures or by cutting crucial development expenditures. Balancing these priorities will be critical in determining the country’s economic trajectory.
The federal and provincial governments must recognize that with rapidly growing population, delaying long-overdue structural reforms is not an option. Comprehensive tax reforms are essential to bring the tax-to-GDP ratio in line with the country’s economic profile otherwise the government’s struggle to generate sufficient revenue to support essential public services and development projects will continue. Moreover, reducing the fiscal deficit is not just a matter of economic policy but a necessity to ensure long-term financial stability.
Achieving prudent and consistent revenue targets is contingent upon documenting the economy. The Small and Medium Enterprises Development Authority (SMEDA) estimates that the informal sector constitutes around 40% of the economy. Similarly, the World Bank reported an informal economy size of approximately $457 billion in 2022. Implementing measures to formalize this substantial portion of the economy will not only enhance monitoring of economic activities but also significantly boost tax-to-GDP ratio. Formalization will lead to better compliance, increased transparency, and ultimately, a more robust and equitable economic framework.
While documenting the economy, the government needs to simplify taxation laws and address the concerns of businesses. The upcoming budget should address issues related to capital gains tax (CGT), super tax etc. Introducing conducive tax system is essential to attract local and foreign investors.
The government must settle the issue of inter-corporate dividends, minimum tax requirements for listed companies, and jurisdictional conflicts over sales tax on services. Additionally, issues like the minimum advance tax on turnover, determining market value of properties, and the use of fake retailer profiles need to be resolved. This would create a business-friendly environment and foster economic growth.
Pakistan has experienced substantial investment inflows exceeding US$60 billion through China-Pakistan Economic Corridor (CPEC), marking the completion of its initial phase. However, there is ongoing debate regarding whether this influx constitutes investments or loans regardless of which, Pakistan has yet to realize significant benefits from these investments. The anticipated revenue generation potential of CPEC projects has not materialized, resulting in adverse consequences due to project delays.
On the one hand, Pakistan bears a considerable portion of its loans to China, posing a significant burden on its treasury, and on the other, the imposition of capacity charges has exacerbated the hardships faced by the nation. Despite substantial investments in infrastructure, key projects such as the Gawader port remain non-operational, casting doubt on the efficacy of funds allocated. Furthermore, Pakistan’s efforts to establish economic zones to attract investments have fallen short of expectations outlined in the CPEC agreement.
Foreign investment in economic zones has been minimal, with China itself refraining from investing, as a result, these have yet to achieve full operational capacity, leading to a shortfall in anticipated investments, hindering revenue generation efforts. Consequently, Pakistan faces challenges in both revenue generation and debt servicing. The forthcoming budget is important in addressing these critical challenges by presenting comprehensive strategies to make these zones operational, stimulating investment, and fostering job creation opportunities for its citizens.
Additionally, the upcoming budget should prioritize addressing the concerns of exporters and provide incentives to augment local manufacturing. Despite Pakistan’s strategic location amid a region with population exceeding three billion, its textile sector is struggling to expand its export share, due to non-competitive energy tariff in the region making it imperative for the government to thoroughly consider this matter and provide policy guidelines accordingly.
This may involve amending existing laws related to income tax, sales tax, federal excise duty and customs duties to facilitate a conducive environment for export growth. Additionally, our foreign office should explore offering incentives to investors from neighboring countries to encourage their participation in cross-border trade and investment activities for revitalizing the export sector.
While Pakistan’s dependence on foreign remittances is undeniable, the country has yet to fully leverage its skilled human capital to enhance remittance inflows and bolster its foreign policy objectives. By prioritizing export of skilled labour, Pakistan could achieve dual benefits i.e, increased remittances and foreign investment.
A proactive approach entails empowering Pakistan’s foreign offices to engage with local private sectors and incentivize them to accommodate skilled Pakistani workers. This initiative holds the potential for substantial long-term gains, including generation of foreign exchange and attracting foreign investment. Moreover, it serves as a strategic driver for advancing Pakistan’s foreign policy objectives on the global stage. Pakistan faces significant challenges posed by trade-based money laundering, largely stemming from a large informal economy. This phenomenon exacts a considerable toll on our economic stability for which, the forthcoming budget must delineate clear directives for the comprehensive registration of all businesses and digitization of their operations.
Comprehensive measures in budget 2024 hold the promise of mitigating various illicit practices, including the proliferation of fictitious invoices, instances of under and over-invoicing, and misclassification of manufacturers. By formalizing business activities and transitioning to digital platforms, Pakistan stands to fortify its financial integrity framework and foster a more transparent and conducive business environment.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.
