Karachi, June 7, 2023 – Pakistan is gearing up to announce its crucial budget for the Fiscal Year 2023-2024 on June 9, 2023. This budget holds significant importance as the country faces multiple crises, including devastating floods and a deteriorating external account position, compounded by political challenges.
Insight Securities analysts highlight the challenging economic landscape, with record-high inflation and upcoming elections in October 2023, potentially influencing the government to present a populist budget to garner public support.
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Considering the imminent conclusion of the current IMF program, the resumption of the program seems unlikely as three reviews are still pending, leaving limited time for negotiations. However, given the substantial external payment burden in the coming years, the analysts believe Pakistan will need to enter another IMF program and implement strict policy actions on structural reforms.
Balancing the need for reforms while restoring economic growth and providing relief to the public in a high inflationary environment remains a key concern for stakeholders.
Regarding the capital market, analysts anticipate a neutral impact from the upcoming budget. Investors will focus on the government’s efforts to address long-term structural issues, generate additional revenues without burdening documented sectors with excessive taxes, and provide clarity on the economic and political fronts.
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The revenue collection target for the upcoming budget is expected to be set at PKR 9.2 trillion, a 23% increase compared to the target of PKR 7.5 trillion in the outgoing fiscal year. However, achieving this target may prove challenging due to economic slowdown and import restrictions, which have already led to a shortfall of PKR 430 billion in tax collection for the current fiscal year.
To bridge the gap, the government may impose additional taxes on industries and increase taxes on wealthy individuals while providing cash handouts to the lower segment of society. The restoration of sales tax on petroleum products could also contribute to additional revenue collection.
The significant rise in interest rates and higher borrowing needs have resulted in a surge in markup expenses. Interest payments for the period July-March 2022-2023 reached PKR 3.5 trillion, a 69% increase year-on-year. The analysts project markup expenses to exceed PKR 7 trillion in FY24, which accounts for over 80% of the tax collection target. This rise in interest payments may limit allocations to essential sectors such as health and education.
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The federal Public Sector Development Program (PSDP) target for the next fiscal year is likely to be set at PKR 950 billion, but there is a possibility of lower actual realization as funds may be diverted to other areas.
The government’s target for the fiscal deficit in FY24 is 6.5% of GDP, driven by higher expenditures. Managing fiscal slippages in an election year will be a key concern, as any unfunded expenditures may widen the financing gap and impact relations with the IMF.
Resumption of the IMF program is crucial for managing external accounts, given the substantial debt repayments in the coming years. The current program is expected to conclude in June 2023 without further disbursements. The FY24 budget will provide clarity on the government’s strategy to address the external crisis, and an IMF-compliant budget will boost market confidence.
While the reduction in the current account deficit (CAD) is primarily due to restricted imports, the analysts expect the government to continue monitoring imports to maintain a sustainable CAD and revive economic growth. Fresh financing from multilateral institutions, flows from friendly countries, and rollovers will be essential for the country.
The inflationary pressure in Pakistan is expected to ease in the coming months, although there are upside risks that could pose challenges. In the first 11 months of the fiscal year 2022-2023, headline inflation reached approximately 29% compared to around 11% in the same period the previous year. This significant increase in inflation can be attributed to higher food prices, supply chain constraints, PKR devaluation, and the rationalization of energy tariffs.
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According to estimates, the Consumer Price Index (CPI) reached its peak in May 2023, recording around 38%. However, with the high base effect coming into play, analysts anticipate that headline inflation will begin to recede from June 2023. It is worth noting that the government aims to achieve an average inflation rate of 21% in FY24, as reported by news sources. However, the devaluation of the Pakistani Rupee (PKR) and ongoing supply-side challenges could potentially lead to higher inflation.
Based on current projections, analysts estimate that headline inflation is likely to average around 22.9% in FY24, compared to 29.3% in FY23. Managing inflation will remain a crucial task for the government as it seeks to strike a balance between stabilizing prices and promoting economic growth. Factors such as exchange rate stability, effective monetary policy measures, and supply chain reforms will play a crucial role in mitigating inflationary pressures and ensuring a more favorable economic environment.
The inflationary pressure in Pakistan is expected to ease in the coming months, although there are upside risks that could pose challenges. In the first 11 months of the fiscal year 2022-2023, headline inflation reached approximately 29% compared to around 11% in the same period the previous year. This significant increase in inflation can be attributed to higher food prices, supply chain constraints, PKR devaluation, and the rationalization of energy tariffs.
According to estimates, the Consumer Price Index (CPI) reached its peak in May 2023, recording around 38%. However, with the high base effect coming into play, analysts anticipate that headline inflation will begin to recede from June 2023. It is worth noting that the government aims to achieve an average inflation rate of 21% in FY24, as reported by news sources. However, the devaluation of the Pakistani Rupee (PKR) and ongoing supply-side challenges could potentially lead to higher inflation.
Based on current projections, analysts estimate that headline inflation is likely to average around 22.9% in FY24, compared to 29.3% in FY23. Managing inflation will remain a crucial task for the government as it seeks to strike a balance between stabilizing prices and promoting economic growth. Factors such as exchange rate stability, effective monetary policy measures, and supply chain reforms will play a crucial role in mitigating inflationary pressures and ensuring a more favorable economic environment.
