By Staff Reporter
ISLAMABAD: Pakistan’s fiscal surplus narrowed to 0.8% of gross domestic product at the start of the fiscal year, less than half the level of a year earlier, with a 36.6% jump in interest payments and a surge in development spending overwhelming a 90% cut in subsidies, the finance ministry said.
The overall surplus came to 1.198 trillion rupees, compared with 1.7% of GDP, or 2.124 trillion rupees, in the corresponding period of fiscal 2026, according to the ministry’s Monthly Economic Update & Outlook, issued Thursday. The primary surplus, which strips out interest costs, declined to 1.6% of GDP, or 2.3 trillion rupees, from 2.3% of GDP, or 2.94 trillion rupees, a year ago.
Total expenditure rose 20.7%, driven primarily by “a 69.5pc surge in development expenditure, significantly outpacing the 14.7pc growth in current expenditure,” the report said. Non-interest spending fell 8.1%, mainly reflecting the sharp cut in subsidies. “In contrast, mark-up payments increased by 36.6pc,” it said.
Collections by the Federal Board of Revenue rose 7% to 3.086 trillion rupees in the July-September quarter, exceeding the target by 33.2 billion rupees. Direct taxes grew 5.5% and indirect taxes 8.3%. Within the latter, sales tax recorded the strongest gain at 11.6%, followed by federal excise duty at 3.6% and customs duties at 0.5%. Growth in the first two months of the year was a more modest 3.6%.
The government said it would keep policy pointed at stability. “Fiscal policy remains focused on preserving stability through stronger revenue mobilisation, prudent expenditure management and targeted support for the vulnerable segment,” the ministry said, adding that the surplus “provides a useful starting point.”
Rate decision
The ministry also endorsed the State Bank of Pakistan’s decision, despite the added burden on the budget. The central bank’s Monetary Policy Committee raised the benchmark rate by 50 basis points to 12% on Monday, in line with market expectations, with Governor Jameel Ahmad saying nine of 10 members voted in favor. It was the first increase since April.
The move “aims to anchor inflation expectations, contain second-round effects, and keep inflation within the target range while preserving macroeconomic stability and supporting sustainable economic growth,” the ministry said, pointing to the intensifying Middle East conflict and persistently high global energy prices.
In its own statement, the central bank said geopolitical developments had “worsened the inflation outlook” relative to its earlier assessment, and judged the hike necessary to keep the real policy rate adequately positive on a forward-looking basis. The statement showed headline inflation at 10.3% in September, above the committee’s expectations, and core inflation near 8.4%, with a warning that sustained increases in food and energy prices could push up inflation expectations and feed into core prices. The committee also stressed the need to build external and fiscal buffers. The ministry’s own numbers show the fiscal one moving the other way.
The ministry projected headline inflation of 9.5% to 10.5% for October, against 5.8% a year earlier, with the path after that “sensitive to international energy prices, food supplies and base effects.” Optimus Capital Management had forecast October at 9.4%, just under the bottom of that range. Topline Securities, assuming Brent crude near $100 a barrel, expects average inflation of 9% to 9.5% for the fiscal year.
External accounts
The external picture was mixed. The current-account deficit widened to $874 million in the first quarter, almost 16% above the $755 million recorded a year earlier. A $3 billion Eurobond sale in September, which the ministry called the “quarter’s significant development,” more than offset it. Portfolio investment recorded net inflows of $2.9 billion, against net outflows of $633.3 million a year earlier, while foreign direct investment rose about 20% to $720 million.
“Together, these developments helped deliver an overall balance of payments surplus of $3.1 billion, compared with a deficit of $274 million in the corresponding quarter last year,” the report said. By Oct. 16, the central bank’s liquid reserves stood at $21.5 billion, and total liquid reserves at $26.8 billion. Strong growth in workers’ remittances and services exports, the ministry said, left the rupee stable and reinforced “confidence in the economy’s ability to meet its external obligations and absorb external shocks.”
Outlook and risks
The ministry named geopolitical tensions, trade disruptions, elevated commodity prices and uncertainty around technology investment as the main downside risks. It still struck a cautiously optimistic tone, saying the recovery in fiscal 2027 “is expected to draw support from improving crop prospects, selected manufacturing industries, domestic construction activity and expanding external earnings.” It expects steady demand in the U.S., the U.K. and other OECD markets to support goods and services exports, and stronger farm output to help food processing, rural incomes and trade.
“Continued progress on tax administration, energy efficiency, and state-owned enterprise reform is expected to support a durable expansion while containing pressures on the external account,” the report said.
Pakistan and the International Monetary Fund reached a staff-level agreement on Oct. 8 on the fourth review of the $7 billion Extended Fund Facility and the third review of the Resilience and Sustainability Facility, a deal that would unlock about $1.2 billion once the IMF’s executive board approves it. The central bank expects the economy to grow between 3.5% and 4.5% this fiscal year.
April’s 100-basis-point increase to 11.5% was the first in almost three years, following cuts from a record 22% reached in June 2023. The next rate decision is scheduled for Dec. 14, and minutes of the October meeting are due Nov. 20.
Copyright © 2021 Independent Pakistan | All rights reserved
