No state pension for new employees from next fiscal
Public sector employees hired from the next fiscal year onward will no longer be eligible for state-funded pensions upon retirement, as part of significant pension reforms, Finance Minister Muhammad Aurangzeb announced on Wednesday.
Speaking to the media on the sidelines of 'The Future Summit - What Matters Now,' Aurangzeb explained that, under the reforms, employees will contribute from their monthly salaries to build their own pension funds.
He projected a 12% growth in workers' remittance inflows, expecting overseas Pakistanis to send home $34 billion in the current fiscal year 2024-25, compared to $30.25 billion received last fiscal year.
The minister emphasized that the private sector must drive the country's economic growth and development, noting that this shift is beneficial for sectors where the government has reduced its involvement.
The pension reforms aim to curb government expenditures, as the federal pension bill currently amounts to between Rs800 billion and Rs1 trillion per year, or approximately 1% of GDP in FY25.
"Pension [expenditure] was a big element for the government, we have at least ceased bleeding," he said. "Those colleagues who are joining in the government from July 1, they are being hired on defined contribution [self-funded pension scheme]," he added.
The minister, however, explained that paying pensions to the current retired employees and those who joined government offices before July 1, 2025 remained an issue. "Stock has remained an issue. We are yet to deal with it."
To a question, he sounded very optimistic that the global credit rating agencies would upgrade Pakistan's credit rating to single 'B' category during the current fiscal year from category 'C' at present.
The minister also told the media that the growing size of the population in the country was no more a ticking bomb rather "the bomb has already exploded" and caused casualties.
"Forget about the government. It is good for the sectors where the government has ended its role. The private sector has to drive economic growth and development of the country," he stressed.
Earlier, addressing at the 8th annual summit organised by Nutshell, Aurangzeb said a fast-falling six-month Kibor had become industrialists and businesses' reference lending and borrowing rate, instead of the central bank's key policy rate.
Kibor (Karachi Inter-Bank Offered Rate), was hovering at 13% before the State Bank of Pakistan reduced the key policy rate by 250 basis points to 15% on Monday. The minister stated that the key rate should continue to decline.
"It is meant banks are making financing available to the private sector at affordable prices. "Some of you are actually getting your lending rates and borrowing rates and your borrowing cost now going down into single digit."
"The policy rate should continue to come down because of the larger real interest rate [at around 8%] at present," the minister told the audience.
"The reduction in the policy rate and Kibor – the reference interest rate – is all about giving relief now to a lot of segments of the economy which were reflecting in terms of low growth because of the high borrowing cost in the recent past," he said.
Pakistan has gained in terms of economic stability in the last fiscal year. It has consolidated those gains in the first quarter of this fiscal year, including upgradation of the country's credit rating in July-August 2024.
There are expectations that Moody's, Fitch and S&P would further upgrade their ratings in the ongoing fiscal year. "I think we have moved in the right direction. Obviously, hopefully, we will move towards a single 'B' during this fiscal year," he said.
He opined Pakistan would have to change its economic DNA through attracting foreign direct investment (FDI) in export-oriented projects and in import substitution sectors to achieve economic sustainability in medium to long run.
The growth rate of population at 2.55% has become an existential issue for the country. "This (population) is not the ticking bomb. This is the bomb which has exploded." Children under-5 were suffering from stunting, he warned.
"We need to take a holistic approach in terms of health, nutrition, family planning, safe water, sanitation and the hygiene agenda. Secondly the country had to reduce learning [education, skills] poverty, especially for girls, who remain out of schools."
He emphasised that taking care of human capital and climate resilience had to go hand-in-hand – a reference to the government's efforts for decarbonising the country, particularly the devastating floods in 2022.
At the summit, UAE Consul General Dr Bakheet Ateeq Al Rumaithi surprised the audience by delivering his speech in Urdu language. He extended Abu Dhabi's "great commitment" to Islamabad in terms of economic growth, support and investment.
Alvarez & Marsal and Global Practice Leader, A&M's Sovereign Advisory Services, MD Dr Reza Baqir, who is also a former governor of the SBP, said that repeated economic crises in Pakistan and return of the nation to the International Monetary Fund (IMF) time and again was due to recurrent fiscal and current account deficits.