Can Budget 2025 Save Pakistan from Economic Ruin?

Pakistan’s fiscal policy, a crucial component of macroeconomic policy, is directly controlled by the government. It operates through changes in government spending, taxes, levies, and borrowing. The government can directly influence economic activity through current and capital expenditure. The indirect influence comes through the framework of subsidies, transfers to the private sector, and investments.

However, the country has been grappling with the damaging effects of fiscal account deficits (FAD), which occur when government expenditures exceed revenues. Empirical studies have shown that FADs lead to macroeconomic volatility, crowd out private investment, and impede economic growth.

In Fiscal Year (FY)24, Pakistan’s economy is estimated to have a FAD nearing a staggering 8.0% of GDP, the largest on record. This translates to an FAD of over Rs8,300 billion or $30 billion, the highest number in the country’s history. This has left Pakistan struggling with slugflation, dwindling private and public investment levels, and rising debts.

Debt distress has worsened with a painful weakening in the key sustainability indicators. Debt to revenue, interest to revenue, and especially the ratio of debt servicing to exports show issues of sustainability and liquidity being much more severe in FY24 compared to the past.

Despite these alarming figures, there is hope that Budget 2025 will be more than just an accounting exercise. It is expected to recognize the gravity of economic vulnerabilities and respond to the crisis. The budget should not burden the average citizen but rather address inflationary pressures by undertaking a fiscal correction.

The budgetary discussion in Pakistan often revolves around the dismal federal tax-to-GDP ratio, huge tax gaps, and differential treatment of the same levels of income from different sources. The more informed individuals highlight the tax structure as being distortionary and unfair.

There is a discussion of its inability to provide sufficient resources to pay for critical government services, while pushing the misallocation of resources within the economy by incentivizing unproductive sectors where hundreds of billions of illicit wealth is stashed. These are hard facts. One fully endorses the need to reform all these areas.

In recent news, the US dollar rate in Pakistan strengthened by Rs0.03 (0.3 Paisa) to Rs278.23 against the Pakistani rupee in the interbank market on May 6. Executives from Saudi Arabian mining company Manara Minerals are in Islamabad to continue talks about buying a stake in Pakistan’s Reko Diq gold and copper mine. These developments could have significant implications for Pakistan’s economy and should be considered in the context of the upcoming budget.

In light of the upcoming visit of the International Monetary Fund (IMF) mission to Pakistan, the government is set to finalize the initials of the budget for the financial year 2024-2025. The government’s push for the budget is to ensure a long-term debt plan by the IMF.

In fine, the critical approach to the study of fiscal policy provides a balanced and comprehensive understanding of economic phenomena. It allows us to appreciate the complexity of fiscal policy and its multifaceted impacts on society. This approach is committed to critical self-reflection, constantly questioning its own assumptions and biases, and open to revising its conclusions in light of new evidence or perspectives. It is this commitment to critical inquiry and intellectual rigor that makes the critical approach a powerful tool for the study of fiscal policy.

The fiscal policy and the upcoming Budget 2025 are of paramount importance to Pakistan’s economy. The government’s actions in the coming months will be critical in addressing the country’s economic vulnerabilities and setting the course for future growth and stability.

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