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Pakistan’s Fiscal Surplus Achieved for the First Time in Over Two Decades – Q1FY25

pakistans fiscal surplus

ISLAMABAD – In a historic financial turnaround, Pakistan’s fiscal surplus reached Rs1.7 trillion in the first quarter (July-September) for the current fiscal year 2024-25. This notable shift, after over two decades of continuous budget deficits, was driven by unprecedented profits from the State Bank of Pakistan (SBP) and record-breaking non-tax revenue. This fiscal surplus marks a critical milestone in Pakistan’s financial management and stability.

Pakistan’s Fiscal Surplus Q1FY25
  • For the first time in 24 years , Pakistan has achieved a fiscal surplus of Rs1.7 trillion in Q1, driven by record profits from the State Bank of Pakistan and boosted non-tax revenue. This milestone marks a shift in the country’s economic landscape, highlighting improved fiscal management and revenue generation.

Key Drivers of Pakistan’s Fiscal Surplus

As per the finance department GoP document, the fiscal surplus, equivalent to 1.4% of GDP, was primarily bolstered by a massive State Bank of Pakistan profit contribution. In the first quarter alone, the central bank posted an all-time high surplus profit of Rs2.5 trillion, a result of the country’s highest-ever policy rate of 22%, as well as record revenue from the petroleum levy, which reached Rs262 billion, up 18% from the previous year. This increase in non-tax revenue marks a 550% surge compared to last year, totaling Rs3.05 trillion in Q1 FY25. For the first time, non-tax revenue surpassed tax revenue, reflecting the significant role of non-tax sources in Pakistan’s fiscal improvement.

Rise in Revenue and Contained Expenditure

Total revenues for the quarter surged by 117% year-over-year, reaching Rs5.83 trillion, supported by both tax and non-tax sources. Tax revenue rose by 25%, reaching Rs2.77 trillion, with notable increases in direct taxes (up 31%) and sales tax (up 24%). The total revenue-to-GDP ratio also increased to 4.7%, nearly doubling from 2.5% a year ago.

On the expenditure side, total spending saw a modest rise of 13% to Rs4.13 trillion, driven by a 20% increase in defense spending (Rs410 billion) and an 11% increase in current expenditure, totaling Rs3.54 trillion. Debt servicing remained a significant expenditure at Rs1.3 trillion, although it showed a 5% decrease from the previous year due to the lower policy rate.

fiscal surplus

Achievements in Primary Surplus and Reduced Borrowing

Pakistan also recorded a primary surplus of Rs3 trillion, equivalent to 2.4% of GDP, a historic peak that almost doubles the full-year target of 1% of GDP. This surplus excludes interest payments and reflects strong fiscal management.

The fiscal improvement has allowed the government to reduce reliance on domestic and external borrowing. Domestic bank borrowing registered a decline, reaching a negative Rs1.87 trillion, compared to additional borrowing of Rs1.076 trillion in the same quarter of the previous year. Net external financing also showed a decrease, with a negative Rs157 billion, contrasting with Rs442 billion in additional financing last year.

Provincial Contributions and Challenges

The provinces collectively contributed a cash surplus of Rs160 billion, with Sindh, Khyber Pakhtunkhwa, and Balochistan showing surpluses of Rs131 billion, Rs104 billion, and Rs85 billion, respectively. However, Punjab faced a fiscal deficit of Rs160 billion due to exceeding its expenditure limits, which limited the provincial surplus from surpassing Rs500 billion.

Despite the positive fiscal indicators, the federal development budget saw a notable decline. Spending under the Public Sector Development Programme (PSDP) dropped by 45% to just Rs22.7 billion in Q1 FY25, compared to Rs41 billion a year ago. This reduction in development spending reflects the government’s prioritization of fiscal consolidation over infrastructure investment.

Implications and Future Outlook

Pakistan’s fiscal surplus has momentarily alleviated the need for additional revenue measures or a mini-budget to cover the Rs85 billion shortfall in tax revenue committed to the International Monetary Fund (IMF) for the first quarter. This surplus also demonstrates the potential of effective fiscal management and profitable central banking operations to strengthen the country’s economic stability.

With continued management and a focus on sustaining non-tax revenue sources, Pakistan may leverage this surplus to address structural challenges and create room for growth-oriented investments in the future. However, the reliance on non-tax revenue and limitations in development spending underscore the importance of a balanced fiscal strategy moving forward.

FAQs

A fiscal surplus occurs when a government’s revenue exceeds its expenditures over a certain period, leaving extra funds that can be saved, invested, or used to pay off debt.

Pakistan’s fiscal surplus of Rs1.7 trillion in the first quarter was primarily driven by record profits from the State Bank of Pakistan (SBP), which posted a surplus of Rs2.5 trillion due to high interest rates. Additionally, increased revenue from the petroleum levy significantly boosted non-tax revenue, which helped convert the budget deficit into a surplus for the first time in over two decades.

Non-tax revenue in the first quarter surged by 550% compared to the previous year, reaching Rs3.05 trillion, surpassing tax revenue for the first time. This substantial rise, fueled by the SBP’s profits and higher petroleum levy, strengthened Pakistan’s fiscal position and reduced the need for a mini-budget to meet revenue targets.

The fiscal surplus has temporarily alleviated the need for additional revenue measures or a mini-budget to cover the shortfall in tax revenue commitments to the IMF. This improved fiscal position provides some stability, but sustaining the surplus will require ongoing fiscal discipline and a balanced approach to future spending and revenue generation.

Conclusion

Pakistan’s fiscal surplus marks a notable shift after decades of budget deficits, largely attributed to substantial profits from the State Bank of Pakistan and increased non-tax revenues. This financial improvement offers temporary relief from additional revenue measures and demonstrates the impact of effective fiscal management. However, the reliance on non-tax revenue and reduced development spending suggest that maintaining this surplus will require a balanced fiscal strategy, focusing on both sustainable revenue sources and growth-oriented investments to support long-term economic stability.

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