Pakistan Study Group Report - June 2024

A meeting of the Pakistan Study Group (PSG) was held in hybrid mode on 20 June 2024. The main items on the agenda were the developments in Jammu and Kashmir, Pakistan’s Federal Budget-2024-25, Shehbaz Sharif’s visit to China and the withering of the CPEC. The meeting was attended by Dr Arvind Gupta (Director, VIF), Tilak Devasher, Lt Gen Ata Hasnain (R), Dr Shalini Chawla, Rana Banerjee, Amb Satish Chandra, Sushant Sareen, and other distinguished fellows and researchers from the VIF.

Developments in Jammu and Kashmir

Looking at the current security scenario in Jammu and Kashmir, it is true that violence in the region has reduced to a considerable extent, but the decreasing number of attacks does not mean peace. The level of infiltration by several extremist groups in the Kashmir region has been controlled to a considerable extent, however, there exist challenges in the Jammu region. Despite the presence of security forces, terrorist groups have managed to establish hideouts and carry out strikes in the Jammu region. In tackling terrorist activities in the future, it is recommended that strategies like selective disruption operations can yield better results. Meanwhile, there is a great emphasis on securing the border and villages to prevent terrorist activities in the region. There is a need to develop human intelligence to revive the Special Operations Group and focus on cutting off terrorist financing and disrupting their funding sources. In addition, while countering security threats, it is important to strengthen the local administration in Jammu and Kashmir to prevent outsiders from entering the area.

Pakistan’s Federal Budget-2024-25

Finance Minister Muhammad Aurangzeb unveiled a budget of Rs. 18.877 trillion for the fiscal year (FY) (2024-2025) with a 30% increase from the previous year's budget. The budget mentions bringing the public debt-to-GDP ratio to sustainable levels and prioritizing improvements in Pakistan's balance of payments position and has also projected a sharp drop in its fiscal deficit for the new financial year to 5.9% of GDP, from an upwardly revised estimate of 7.4%. Further, the budget also proposes significant increases in both direct and indirect taxes, with direct taxes expected to rise by 48% and indirect taxes by 35%. Moreover, the most significant part of this budget is that the government has increased income tax rates for salaried individuals in the budget as it sets an ambitious tax collection target for the current FY. The defence budget has acquired a major share of the total budget, with the army receiving the highest allocation. In terms of numbers, the budget offers a positive economic outlook, expecting 3.6 percent growth for 2024-25 by keeping the inflation rate around 12 percent.

Despite an ambitious target, the budget has been criticized by people in Pakistan considering the current socio-economic scenario in the country. It has been stated that in the current budget, the taxed are being taxed again, just like the previous years, while the untaxed remain untaxed, though there has been a slight increase in withholding taxes which is likely to increase the cost of doing business. In addition, it can be said that inadequate steps have been taken to tap into the undocumented economy, and the focus remains on generating higher tax revenues by increasing rates on the existing taxpayers, which will significantly increase the tax burden on the salaried class. Therefore, it appears that the budget has induced more fears than economic security, and the success of this budget will depend on the state’s efforts to address challenges related to the common man’s fears of taxation, inflation, and economic stability.

Amidst criticism, Pakistani economic analysts view the budget to be broadly in line with the IMF guidelines. Pakistan is currently engaged in talks with the International Monetary Fund (IMF) for a longer and a larger program as it seeks permanent macroeconomic stability. The current budget is likely to support Pakistan’s ongoing negotiations with the IMF for a new Extended Fund Facility (EFF) that will be crucial for the government to unlock financing from IMF and other bilateral and multilateral partners to meet its external financing needs.

Shehbaz Sharif’s visit to China and the withering of the CPEC

It has been observed over the past several years that the security scenario in Pakistan has deteriorated considerably, and the recent attacks on Chinese nationals highlight the paradigm shift in targets for several non-state actors present in this region. Shehbaz Sharif’s visit to China in June 2024 addressed some pressing issues, especially concerning China’s security concerns for their citizens inside Pakistan. The visit holds importance from the point of security of Chinese nationals (especially businessmen and workers) which has gained prominence in Pakistan-China bilateral talks. Chinese officials have repeatedly expressed concerns about the security of its nationals and political instability in Pakistan. Another significant change observed during Shehbaz Sharif’s visit was that though Pakistan signed 23 agreements and memorandums of understanding, there was no announcement of new Chinese investment or rollover of pending payments. The Joint Statement released after his visit saw major changes from the earlier statements. The security of Chinese nationals in Pakistan and political and economic stability in the country were mainly highlighted in the joint statement. The statement further emphasized an upgraded version of CPEC with eight major steps aligning with Pakistan’s 5Es Framework – yet there are no new major projects to show for it. More importantly, it appears now that security has gained prominence in China- Pakistan bilateral interactions, along with dropping of Pakistan from “the highest priority” to “a priority” in China’s foreign policy, both in 2023 and 2024.