The government, on Thursday, admitted that independent estimates showed the unemployment rate rising to 10.3% and anticipated an increase in inflation in the coming months. These admissions reflect the impact of harsh economic realities and a highly inflationary, tax-heavy budget.
Finance Minister Muhammad Aurangzeb and Secretary Finance Chaudhry Imdad Ullah Bosal provided the first briefing to the National Assembly Standing Committee on Finance regarding the new International Monetary Fund (IMF) programme and the government’s assessment of macroeconomic conditions. Pakistan Peoples Party’s Syed Naveed Qamar chaired the meeting.
Aurangzeb stated that Pakistan and the IMF have not yet finalised the loan size of the new bailout package. Meanwhile, Bosal revealed that, according to the World Bank, the unemployment rate in Pakistan climbed to 10.3% in 2024, up from 6.3% three years ago.
The policy statements from the finance minister and secretary finance painted a bleak picture, suggesting that living conditions for the people would not improve soon. Despite worsening conditions, the government imposed significant financial burdens on both salaried and non-salaried individuals by reducing their disposable incomes through higher taxes and increasing the cost of living via sales tax and federal excise duties.
“We expect a slight uptick in inflation in the coming months, but I believe there is ample room to reduce interest rates,” said the finance minister in response to a question from Qamar, who asked why interest rates remained at 20.5% when inflation had decreased to 12.3%.
“The current account deficit has stabilised, but we still need to address it as we are not out of the woods yet,” said Bosal in his key policy statement for the new fiscal year. He further mentioned that stabilisation policies would continue this fiscal year too.
The finance ministry provided some insights into the ongoing negotiations with the IMF. The committee was informed that the IMF had set prior actions, including adjustments in electricity and gas prices and the approval of a budget with a primary budget surplus of 1% of GDP. The government has also agreed on several structural benchmarks with the IMF, including increasing agricultural income tax rates, amending the Pakistan Sovereign Wealth Fund Act, privatisation programmes, reducing the size of the government, reforming State-Owned Enterprises (SOEs), ending gas supply for captive power plants, and requiring civil servants in grades 17 to 22 to disclose their assets.
“We will have to move towards undertaking many structural reforms,” said Qamar after the meeting.
The finance minister thanked the four provincial chief ministers for their cooperation in reaching a deal with the IMF on agricultural income tax. “During this month, we are going to strike a deal with the IMF,” announced Aurangzeb. “We have almost completed all the prior actions,” he added.
In response to a question after the briefing, the finance minister said the size of the new IMF programme would be decided next week and would exceed $6 billion. He mentioned that the programme’s size could be increased during the first review. Prime Minister Shehbaz Sharif had instructed the finance minister to secure an over $8 billion loan from the IMF, according to finance ministry sources. The minister informed the committee that the new IMF programme would last between 36 to 39 months.
Responding to a question from Qamar, Aurangzeb noted that the majority of the $9.4 billion reserves of the central bank were market purchases.
Bosal stated that the last official labour force survey was conducted in 2021 when the unemployment rate was 6.3%. Since then, no new official survey had been conducted. However, according to the International Labour Organisation, unemployment increased to 8.2%, while the World Bank projected it at 10.3% in 2024. Briefing on the status of foreign investment, the finance secretary noted a modest increase in foreign direct investment to $1.7 billion in the last fiscal year, with a target of $2.1 billion for the new fiscal year. The Special Investment Facilitation Council (SIFC), involving civil-military leadership, was established to attract significant foreign investments. However, the figures shared by Bosal indicated that SIFC had not played a significant role in the last fiscal year, nor did the government expect major inflows in the current fiscal year.
The finance ministry informed the committee that significant progress had been made with the IMF on a comprehensive economic policy and reform programme. Virtual discussions are ongoing to finalise the programme’s details.
As per IMF conditions, the FBR’s tax-to-GDP ratio is expected to increase to 10.4% this year from last year’s level of 8.8%. “We hope to reach a Staff Level Agreement (SLA) soon. However, the programme would be subject to approval by the IMF Executive Board,” added Bosal. The government is working to rationalise spending to address the fiscal deficit, and administrative and policy measures are being taken to reduce inflationary pressures in the short to medium term, he said. The federal fiscal deficit is expected to remain around Rs8.4 trillion or 7.9% of GDP for the just-ended fiscal year, said Bosal – a statement that is tantamount to admitting that the government failed to meet its federal fiscal deficit target of Rs7.5 trillion. The federal deficit remained Rs883 billion higher than the budget target.
During the first 11 months of the last fiscal year, the overall fiscal deficit was 4.9% of GDP, but it increased due to heavy debt servicing payments in June. The government aims to achieve over Rs400 billion primary budget surplus target of the IMF for the last fiscal year. For the current fiscal year, the federal primary balance target is Rs1.275 trillion or 1.03% of GDP, excluding adjustments, he said. The agreed primary surplus target with the IMF is Rs1.234 trillion or 1% of GDP. The chairman of the standing committee questioned the Federal Board of Revenue (FBR)’s real performance, noting that the 30% increase in FBR collection was largely due to 24% inflation. The FBR chairman responded that domestic taxes increased by nearly 40%, but overall ratios were lower due to slow growth in import taxes.
Bosal also highlighted the goal of achieving the new fiscal year’s Rs13 trillion target, supported by Rs1.8 trillion in policy and enforcement measures.
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