The State Bank of Pakistan expresses apprehension about meeting the specified primary surplus target for fiscal years 2024 and 2025.
Pakistan's Far-Reaching Financial Challenge for FY2024-25
The State Bank of Pakistan (SBP) has thrown down the gauntlet, declaring that it might be a herculean task for Pakistan to reach the envisioned primary surplus of 1% of the GDP without expanding the tax base and reforming state-owned entities (SOEs) during the upcoming fiscal year 2024-25. Here's a breakdown of the situation.
In a bold move, the SBP expressed its concerns in its recent Monetary Policy Statement. If these concerns materialize, Pakistan would fail to meet a significant commitment it has made to the International Monetary Fund (IMF) under the ongoing 37-month long $7 billion Extended Fund Facility (EFF).
The Elusive Primary Surplus of 1% of GDP for FY25
The latest Economic Update & Outlook from the Finance Ministry, published in April 2025, shares a different narrative. It suggests that the fiscal deficit dropped to 2.2% of GDP in the first nine months of FY2025 (July-March) compared to 3.1% in the same period, and improved the primary surplus to Rs3,452.1 billion (3% of GDP) from Rs1,834.0 billion (1.7%).
Budgeting Basics: The Fiscal Balance Excludes Interest Payments
The SBP firmly advocates for reforms to solidify the fiscal sector's resilience and achieve the primary surplus, primarily by widening the tax net and rejuvenating SOEs. However, the MPC remains optimistic that the overall fiscal deficit will remain close to the FY2025 target.
The Federal Board of Revenue (FBR) recorded an impressive 26.3% year-on-year growth in tax revenue from July-April 2024-25, though it fell short of the target. To boost non-tax revenues, the government imposed higher petroleum development levy rates. Plus, overall expenditures remained relatively contained during July-March FY2025.
Resilience Amidst Global Economic Contraction
Conversely, the SBP anticipates that Pakistan's economic growth will persist in the second half of FY2025 and continue expanding in FY2026, in contrast to the IMF's projection for a contraction in the global economy in the following two years.
The SBP reports that Pakistan's real GDP growth for the second quarter of FY2025 was 1.7% year-on-year. Although the growth for the first quarter was revised upward to 1.3% from 0.9%, this cumulative growth for H1-FY2025 stood at only 1.5%.
SlowStart and a Speedy Recovery
Preliminary high-frequency indicators hint at vigorous economic activity, as evident from rising sales of passenger vehicles and petroleum products (excluding furnace oil), increasing electricity generation, and flourishing business and consumer confidence.
The SBP has kept its FY2025 growth projection unchanged within the range of 2.5-3.5% and anticipates it to accelerate further in FY2026. However, global uncertainties, particularly surrounding tariffs, have led the IMF to significantly revise down its 2025 and 2026 growth projections for both advanced and emerging economies.
In light of these challenges, reaching Pakistan's primary surplus target of 1% of GDP for FY2024-25 would necessitate stringent adherence to revenue mobilization and expenditure discipline, particularly given the weak industrial output and political uncertainties. To achieve this goal, proposed reforms could focus on three areas: bolstering tax revenue, rationalizing expenditures, and advocating for sectoral reforms to stimulate growth.
Wider initiatives might involve streamlining tariffs and rate structures, expanding the tax base, clamping down on smuggling, restructuring subsidies, enhancing public sector efficiency, modernizing the agricultural sector, and overhauling the energy sector. The objective is to boost revenue, reduce fiscal drains, and promote growth in line with Pakistan's broader fiscal consolidation agenda under its IMF program.
- The SBP's concerns in the Monetary Policy Statement are centered around the elusive primary surplus of 1% of GDP for FY25, which could potentially hinder Pakistan's commitment to the IMF under the $7 billion Extended Fund Facility (EFF).
- The fiscal deficit has shown some growth, dropping to 2.2% of GDP in the first nine months of FY2025, compared to 3.1% in the same period, and improving the primary surplus to Rs3,452.1 billion (3% of GDP).
- To solidify the fiscal sector's resilience and achieve the primary surplus, the SBP advocates for reforms such as widening the tax net and rejuvenating state-owned entities (SOEs).
- In the second half of FY2025, Pakistan's economic growth is anticipated to persist and continue expanding in FY2026, despite the IMF's projection for a contraction in the global economy in the following two years.
- Reaching Pakistan's primary surplus target of 1% of GDP for FY2024-25 would necessitate stringent adherence to revenue mobilization and expenditure discipline, and could focus on bolstering tax revenue, rationalizing expenditures, and advocating for sectoral reforms to stimulate growth.
- To promote growth in line with Pakistan's broader fiscal consolidation agenda under its IMF program, wider initiatives might involve streamlining tariffs and rate structures, expanding the tax base, clamping down on smuggling, restructuring subsidies, and overhauling the energy sector.
