Finance Minister Muhammad Aurangzeb unveiled the federal budget for the 2024–25 fiscal year last week where he emphasised the need for a shift from a “government-determined economy to a market-driven economy,” the goal of which is to “increase exports”. Critics of the budget argue that its parameters are not in line with this mandate and will negatively impact the manufacturing industry. However, others believe that the government may have hit a conservative sweet spot where it can facilitate economic stability without overspending while increasing its tax revenue.

The tax revenue targets and policy outlined in the budget may seem ambitious and controversial, but there is a belief that taxing exporters may be the government’s key to facilitating its debt payments and spending. Raza Jafri, CEO of EGF Hermes Pakistan, stated, “I was pleasantly surprised to see the government go after areas where there has been a clamour in the past.”

As a result of this, he noted that there was a “relief rally” in the stock market the morning after. Asif Inam, Chairman of the All Pakistan Textile Mills Association (Aptma), held a contrasting view, commenting that this budget is a “disaster” for the textile manufacturing and exporting sectors. Inam harshly criticised “changing the tax rate on exports from 1 per cent final tax to 29pc on profits”.

Furthermore, Mr Inam noted that the “energy relief that was supposed to be given was not”. With the textile sector already facing high production costs as a result of increasing raw material and current energy costs, the absence of an energy relief plan reduces its competitiveness in the global market, barring it from improving its performance.

While not hitting all the marks, the budget may encourage debt repayment and reduced spending

To make matters worse for their cost of production, Mr Inam noted that there was discussion around the reduction of duties and that “the duties that were supposed to be removed were not”. Such constraining conditions for the textile industry will render them incapable of meeting the desired results Mr Aurangzeb hopes for.

In his budget speech, Mr Aurangzeb claimed that the thought process behind the upcoming fiscal year’s budget centres around the idea that “economic imbalance” in the country can be remedied by “structural factors like investment, economic output, and exports”. However, the strong distaste for the budget in one of Pakistan’s largest export manufacturing sectors may prove that he was unable to translate his belief into the presented budget.

Mr Inam’s comments on the upcoming fiscal year budget do reflect the real concerns of the manufacturing industry, especially when he cited the lack of “loss relief”, but we must question whether it is within the government’s abilities to provide these measures given the current state of Pakistan’s economy.

A relatively conservative budget like this may not hit all the marks for desired manufacturing in­­centives, but it may be best if Pakistan’s government wishes to focus on debt repayment and a reduction in spending.

CEO of Chase Securities, Ali Nawaz, noted, “The federal budget offers no incentive for the manufacturing sector; however, on a broader level, this budget will lead to fiscal consolidation and approval of the IMF [International Monetary Fund] programme, leading to a stable economic environment and therefore providing a conducive business environment for companies to operate.”

Mr Nawaz’s perspective is important to consider, as unlike most federal budgets Pakistan has seen in its recent history, he alludes to a certain foresight in the crafting of this budget. In recent history, it is undeniable that a lack of economic stability in the country has led to a fall in the stability of the manufacturing sectors and exporters in the country.

High interest rates have limited investment opportunities and the extension of lines of credit. Therefore, the lack of short-term relief and amenities for our manufacturing sectors may cause these industries to see improvement in the long term. Mr Nawaz elaborated on this, “No such measures taken in the budget will promote investment-led growth, but this budget will lead to a gradual economic recovery, improving investor confidence in the country.”

There is no doubt that the budget lacks adequate direction. Some policies within the budget may result in a semblance of long-term economic growth, but the upcoming fiscal year may see some serious pains within the manufacturing sector. With a significant budget deficit and debt accumulation, the finance minister must tread carefully, as Pakistan’s economy may not be able to take another hit to its export-oriented manufacturing sector.

Published in Dawn, The Business and Finance Weekly, June 17th, 2024