Income estimates slashed to Rs9.1tr

Just days after the budget approval, the federal government has downwardly revised its net income estimate to Rs9.1 trillion for the new fiscal year. This revised figure is Rs656 billion short of the government’s total requirements for record interest payments this year.

The Ministry of Finance on Friday released the Medium-Term Budget Strategy Paper (2024-2027), which contradicted the major fiscal numbers approved by the National Assembly just three weeks ago. The new report indicates that the federal budget deficit will be significantly higher than initially approved for the fiscal year 2024-25. The key reason for the contradictory fiscal framework numbers is a revision in non-tax revenues, particularly the central bank profit estimates.

The finance ministry stated in the report that net federal revenue for this fiscal year would be Rs9.1 trillion, roughly Rs1.26 trillion less than the budget documents indicated. Initially, non-tax revenue was estimated at Rs4.84 trillion, but the ministry has revised this down to Rs3.6 trillion. The ministry noted that the SBP’s profit has been adjusted to 1% of GDP or Rs1.24 trillion—1% of GDP less than mentioned in the budget documents.

The finance ministry has not provided any justification for these different estimates of SBP profits, which are fully owned by the federal government. Consequently, the net federal income is now projected at Rs9.1 trillion compared to Rs9.8 trillion earmarked for interest payments. This shortfall, of Rs656 billion less than the requirements for interest payments, indicates that the government will rely heavily on borrowings to fund its activities.

In the new report, the federal government projects a budget deficit of Rs9.75 trillion due to revised non-tax revenue estimates for this fiscal year. This figure is approximately Rs1.26 trillion higher than the approved budget.

The debt office presented the new borrowing plan to the finance minister on Friday, but the matter was deferred due to a lack of certain information. The Rs9.75 trillion federal deficit will be financed by taking on highly expensive domestic and foreign loans. The higher deficit is a direct result of uncontrolled federal spending, which is projected at Rs18.9 trillion—30% higher than last fiscal year.

The contradictory figures published in the budget strategy paper and the budget documents highlight a lack of coordination among different wings of the finance ministry. The spokesman for the finance ministry, Qamar Abbasi, was unavailable for comment.

“A primary objective of the Medium-Term Fiscal Framework is to facilitate policy formulation based on reliable projections of revenues and expenditures,” the budget strategy paper reads. It reflects upon various sources of revenue and heads of expenditure, considering historical trends and emerging challenges.

The new report also lists challenges to the economy, including high inflation, current account deficit, low foreign exchange reserves, and substantial debt burden. It underlines that Pakistan’s economic trajectory requires a blend of short-term and long-term measures to navigate these challenges and strengthen macroeconomic sustainability for balanced growth.

According to the report, there are many risks to the country’s fiscal framework, including high interest rates, lower non-tax revenues, higher subsidies, low economic growth, instability in the exchange rate market, and higher debt levels. Any increase in interest rates on external and domestic debt can lead to a rise in federal expenditures, significantly impacting the overall fiscal scenario without additional measures. The central bank has set interest rates at 20.5%, while the inflation rate was 12.4% in June.

The report suggests that any significant reduction in non-tax revenue collections may lead to a substantial decrease in net federal revenue and a consequent increase in the fiscal deficit. Already, the federal deficit will be at least Rs1.4 trillion higher than last fiscal year, undermining claims of fiscal stability and countering efforts to maintain high interest rates.

The report warns that a combination of higher interest rates, low tax revenues, and higher subsidies will substantially increase the fiscal deficit, further escalating the already high debt stock. Lower GDP growth could reduce revenue generation and decrease net federal revenue due to subdued economic activity.

The finance ministry also noted that a more significant than expected depreciation of the Pak rupee could severely impact fiscal sustainability by increasing the cost of servicing external debt. Repayments and interest on foreign-denominated loans would become more expensive in local currency terms. The government has pegged the new budget at a Rs295 to dollar parity.

The ministry said that a weaker rupee could lead to higher import costs, fuelling inflation and putting pressure on public expenditure, especially if subsidies on essential goods like fuel and food are in place. The combined effect of these factors could lead to a higher fiscal deficit and increased debt burden, exacerbating fiscal vulnerabilities. Depreciation could also undermine investor confidence, leading to capital outflows and further currency depreciation, creating a cycle of financial instability.

The report indicates that public debt may increase from Rs71.2 trillion last fiscal year to Rs79.3 trillion by June next year, an increase of Rs8.1 trillion. However, this projection seems conservative given the government’s forecast of a federal budget deficit of Rs9.8 trillion for the new fiscal year. In percentage terms, the finance ministry projects the debt-to-GDP ratio to decrease to around 68% at the end of the last fiscal year, primarily due to higher nominal GDP and exchange rate stability. The debt-to-GDP ratio is expected to reduce to 64% by June next year.