Finance Minister Muhammad Aurangzeb announced Saturday that provincial grants totaling over Rs1 trillion will support Pakistan’s defence spending and provide a buffer against Middle East-related inflation. The government is also negotiating tax relief measures with the IMF while allocating Rs430 billion to mitigate potential external economic shocks.
Why provincial grants are being used for defence
The government has raised defence spending by 18% due to regional uncertainty, according to Aurangzeb. These provincial grants are intended to meet security requirements and provide a fiscal cushion against the inflationary effects of the ongoing Middle East war.
Aurangzeb noted that the conflict’s impact on energy infrastructure could persist into the next fiscal year. He specifically highlighted concerns regarding the Strait of Hormuz and the availability of LNG and other resources.
“To expect that the Strait of Hormuz will open up, that things will normalise, or whether it’s LNG or other resources that have been hit, will normalise in a week or two weeks, that’s not going to happen,” Aurangzeb said.
The minister added that these geopolitical tensions are likely to spill over into the upcoming fiscal period. To prepare for such exogenous shocks, the government has set aside a Rs430 billion cash buffer.
IMF negotiations and tax relief concerns
The government is currently in “constant consultations” with the International Monetary Fund regarding proposed tax relief measures, the finance minister stated. While the government has proposed Rs360 billion in relief, sources indicate the IMF has raised objections to certain provisions.
Specifically, the IMF has expressed concerns over halving the withholding tax on property transactions. This specific measure could cost the exchequer Rs115 billion. The government and the IMF are expected to settle these issues in the coming days.
When asked if the government might withdraw relief or add new taxes to offset the Rs100 billion impact, Aurangzeb said that any subsequent actions would be taken in consultation with the IMF.
Relief measures for civil servants
The government approved approximately Rs20 billion in relief measures for civil servants to address recent employee protests. According to the Secretary of Finance, the merger of previous allowances into basic pay resulted in a total raise that is higher than the initially announced 7%.
Specific allowance adjustments
The relief package includes several targeted adjustments for various departments:
- Disparity Reduction: A 5% increase of basic pay for employees in BPS-1 to 22 already receiving the allowance.
- Conveyance Allowance: An increase of 50% over the existing amount.
- Civil Armed Forces: The constant attendant allowance rose from Rs7,000 to Rs30,000 per month.
- Immigration & Passport Department: A 100% IMPAS Allowance on running basic pay.
- National Highway and Motorway Police: A special allowance for grade 22 employees increased from 10% to 50%.
Economic growth and sector targets
Cabinet ministers characterized the budget as “pro-salaried” and “pro-people,” suggesting it will stimulate national growth. Minister of State for Finance Bilal Azhar Kayani stated the budget targets the salary class, industrialists, exporters, and the construction sector.
Agricultural financing has crossed the Rs2 trillion mark, representing a 15% increase year-on-year. Additionally, the government has implemented reductions in minimum and advance taxes for exporters, including the elimination of the first six slabs of super-tax.
NFC and resource distribution
Aurangzeb stated there is a necessity to revise the National Finance Commission (NFC) resource distribution formula. He argued that the current system, which allocates 82% of resources based on population, contributes to higher population growth rates.
Regarding Khyber-Pakhtunkhwa, the minister confirmed that Prime Minister Shehbaz Sharif’s commitment to introduce legislation for increasing the provincial share for merged districts will be honored.
The government’s next steps may include formalizing a three-year framework for provincial contributions to federal spending, a discussion that Aurangzeb said is already underway.
Frequently Asked Questions
How much has defence spending increased?
The government has raised defence spending by 18% due to regional uncertainty.
What is the purpose of the Rs430 billion cash buffer?
The buffer was set aside in the budget to meet exogenous shocks.
Why is the IMF objecting to the proposed tax relief?
The IMF has raised objections to halving the withholding tax on property transactions, which would cost the exchequer Rs115 billion.
How do you view the impact of regional instability on Pakistan’s national budget?