Pakistan: Federal Budget Hoping Against Hope

Certainly concerted efforts have been made to mend relationship with International Monetary Fund (IMF) while preparing Federal Budget for the next financial year.  Intentions may be good but a lot will depend on the commitment and plans to meet the targets. 

Keeping in view the fragile nature of the coalition government, diversity in the mind set of party leaders and high commodity prices, there is many a slip between the cup and the lip.

The Government of Pakistan, in Federal Budget FY23 has set a GDP growth target at 5% and inflation at 11.5%. Many analysts say that the GoP will have to make extra efforts to achieve these targets, mainly because the central bank has already raised policy rate by 675bps another 100bps is anticipated in the name of tightening of monetary and fiscal policies.

Inflation target will also likely be missed as global commodity prices are likely to remain on upward trajectory. The inflation and Petroleum Development Levy (PDL) collection target are at odds. The PDL collection target has been set at Rs750 billion for FY23. There is hardly a realization that higher PDL collection will result in CPI outages, conversely efforts to contain CPI may result in shortfall in PDL collection.

Other than the aggressive PDL collection targets, which will likely be missed, the GoP has done well to protect masses from further inflationary pressures. Personal income taxes have also been relaxed which will improve purchasing power of the masses and help in face saving of the coalition government.

The tax collection target is a slightly lower than Rs7.3 trillion which was initially being reported in the press, but still represents a 17%YoY jump from estimated collections in FY22. Efforts have been made to make taxation more equitable, with new revenue measures targeting large landowners and the big corporates and retailers. However, little effort has been made to bring agriculture sector in the tax net.

The budget projects a uniform increase in all major taxation heads, including direct taxation, sales taxes, custom duties and FED but the most notable increase comes from the projected Rs750 billion collection of PDL. Given the soaring crude oil prices in international market, analysts see a likely shortfall in collection under this head which will need to be compensated elsewhere.

Similarly, target of GIDC for FY23 is set at Rs200 billion which is also less likely to be achieved. It may be recalled that the GoP had collected a paltry amount of Rs14 billion under this head during 9MFY22. Out of the incremental tax collection targeted for FY23, the new tax measures are estimated to bring in up to Rs375 billion whereas the remaining amount will be generated through growth in Nominal GDP.

The total outlay envisaged in the budget FY23 is Rs9.5 trillion; out of which current expenditures are targeted at Rs8.7 trillion, while the development expenditures are estimated at Rs808 billion. Of that, the Interest payments are estimated at Rs3.95 trillion, up 29%YoY. This constitutes a whopping 45% of current expenses and 42% of the overall expenses.

The defense expenditures are estimated at Rs1.5 trillion – up 11%YoY, which constitutes 18% of current expenses and 16% of overall expenditures.

Federal Pension expense is estimated at Rs530 billion - up 0.7% YoY as against revised estimates of Rs525 billion for FY22. Furthermore, government plans to setup a pension fund which is likely to fund pension expenditures going forward.

Subsidy disbursements are slated to shrink to Rs699 billion for FY23 from Rs1.5 trillion for FY22. To recall, GoP announced a generous package of subsidies on the consumption of fuel and electricity during 2HFY22 which resulted in the slippages under this head.

Analysts expect the total debt servicing cost to exceed the budgeted target of Rs3.1 trillion as the budget document estimates hefty contribution from external sources for budgetary funding. They expect heavier reliance on local sources for budgetary borrowings where the cost of debt will be higher, thus pushing the overall debt financing number even higher.

This article was first published in Eurasia Review

Pakistan: Likely facets of Federal Budget FY23

Government of Pakistan (GoP) is scheduled to announce Federal Budget FY23 on June 10, 2022. Relations between International Monetary Fund (IMF) and Pakistan have not normalized despite change of Prime Minister. 

While it is anricipated that the upcoming budget will have measures that can ensure austerity and economic stability, the incumbent government is likely to opt for policies which can help the coalition remain in power over the next 18 months.

Budget outlay for FY23 is estimated at around Rs9.5 trillion as against budget of Rs8.5 trillion for FY22.

GoP is anticipated to set tax revenue collection target at Rs7.25 trillion for FY23, which will be 19% higher from the revised target of Rs6.1 trillion for FY22. It is likely to impose new taxation measures of about half a trillion in FY23 budget.

Current expenditure target is likely to be set at 12% of GDP for FY23 or Rs8 trillion which is around 11% YoY higher than what was budgeted for FY22.

Similarly, government is likely to set aside nearly Rs4 trillion for markup payment and Rs1.6 trillion for Defense expenditure.

Federal Public Sector Development (PSDP) is estimated at Rs800bn, as against Rs466 billion disbursed in 10MFY22 and revised budgeted of Rs603 billion for FY22.

Consolidated PSDP (Federal and Provincial) is anticipated at Rs1.4 trillion (1.8% of GDP) for FY23, as against Rs1.2 trillion for FY22.

A few taxation measures that are under consideration include: 1) increase in super tax for Banking sector and re-imposition of super tax on highly profitable companies, 2) increase in tax rate for individuals earning high salaries, 3) reduction in tax concessions and exemptions for various sectors, 4) increase in regulatory duties on luxury items, 5) luxury tax on immovable properties and vehicles,  and 6) increase in taxes for non-filers.

With the economic slowdown, tax revenue target of Rs7.25 trillion will be difficult to achieve for FY23. However, it will depend on the types and amounts of new taxes to be imposed in Budget FY23.

Upcoming budget is likely to be Neutral for Stock Market as we do not anticipate any change in Capital Gain Tax (CGT) rate of 12.5% and tax rate of 15% on dividend income. The budget is likely to be Neutral to Positive for sectors including Technology & Communication, Fertilizer, Insurance and Chemical Sectors. On other hand, it is likely to be Neutral to Negative for sectors including IPPs, Autos, Banks, Oil & Gas Exploration, Cement, Textile, OMCs, Tobacco, Steel and Pharmaceuticals.

Analysts believe that negatives relating to imposition of new taxes on listed companies are already priced in as valuations remain attractive. Market participants are keen to see the overall balance of payment situation and focus to remain on IMF and other foreign exchange inflows along with trend of international commodity prices. 

Pakistan market is currently trading at a discount. Analysts prefer sectors that offer high dividend yield, beneficiary of rising interest rates and currency depreciation.

 

Getting Federal Budget approved should be the top priority of Shehbaz Sharif

In all probability, the incumbent government, headed by Shehbaz Sharif, is scheduled to present Federal Budget 2022-23 in the lower house on June 10, 2022. There is an overwhelming perception that the economic team hasn’t been able to put its much talked about plans and finalized the nitty-gritty.

This impression is based on the fact that Pakistan and International Monetary Fund are still polls apart, mainly because the Pakistani economic team is not paying heed to the instructions of the Fund.

Over the last six weeks the Shehbaz team has not met even the first target of raising prices of petroleum products and electricity and gas tariffs. Most of the time is being wasted on maligning the previous government headed by Imran Khan, rather than taking into account the harsh domestic and international realities.

The team faces the most tedious task of projecting income and expenses targets and meeting the deficit. It is too obvious that the coalition government has fewer options available to boost income and it will not be able to follow any austerity drive because of the mindset of the ruling elite. There is a consensus that the elected representatives will not be ready to accept any substantial cut in their salaries and perks.

It is feared that the axe will fall on federal and provincial public sector development programs. The top priority areas are: 1) improving irrigation system, 2) strengthening electricity and gas transmission and distribution infrastructures. The mounting circular debt can’t be contained without containing rampant pilferages.

For boosting country’s exports, cost of doing business has to be reduced. The top two expenses to be rationalized are interest rate and energy tariffs. The GoP expects to receive US$2 billion from IMF over the next two years. Experts believe that this much amount can be raised by exporting just one item, one million tons urea. The country has the surplus capacity to produce one million ton exportable surplus urea by ensuring uninterrupted supply of natural to the fertilizer plants.

There is no denying to that fact that huge quantities of wheat, edible oil, POL products and even urea fertilizer are being smuggled to the neighboring countries. The key problems are 1) highly porous borders and 2) restriction on the export of these commodities. These problems can be overcome by plugging boarders and bringing necessary changes in the Trade Policy.

Last but the foremost, the economic team has to come out of the illusion that hike in interest rate can help in containing inflation in the country. Let this be known to all and sundry that Pakistan suffers from cost pushed inflation. The biggest loser of hike in interest rate is the GoP. Let me reiterate that GoP is the biggest borrower and with each hike in interest rate, its debt servicing ability is marred.

 

 

 

Pakistan: Coalition on the path to collision

Pakistanis are getting jittery because of the ‘politically loaded’ statements from the ruling coalition as well as the opposition headed by Imran Khan. 

PTI Chairman on Sunday announced that his party's long march towards Islamabad for the country's "battle for real freedom" would begin on May 25, 2022.

He said the main demands for the march to the capital were the immediate dissolution of the National Assembly and announcement of a date for the next general election.

Khan wants to charge the mob by saying, "I want people from all walks of life to come because this is Jihad, and not politics. I've decided and told all my team that we have to be ready to sacrifice our lives."

Imran indicated that the march would convert into a sit-in and continue until his demands are accepted. "We will never under any situation accept them. No matter how long we have to remain in Islamabad we will remain there."

I am surprised at the logic and narrative of Khan. If he wants fresh elections, he should ask his party members (MNAs) to resign and the coalition will have no option but to go for fresh election.

I have a feeling that Khan fears that in case his party members resign the stage would be set for the creation of an interim government and elections would be deferred till completion of the electoral reforms.

PML-N-led coalition government appears unwilling to take the blame for any unpopular decisions it may have to take to fix the economy. It wants guaranteed backing of the powerful military establishment to help it see through the remaining period of its tenure till August 2023.

The coalition believes it can handle the PTI march if other things are sorted out with the establishment. Interior Minister Rana Sanaullah has expressed his wish to arrest Khan provided he gets the ‘go-ahead’, as he thinks even one day in prison would make the ousted premier forget politics.

It is highly regrettable that neither Khan nor Sharif understands the gravity of situation. Pakistan has to satisfy the International Monetary Fund (IMF) and seek the ‘fitness certificate’ to pave way for the immediate release of US$1 billion. This would be the preamble for release of funds by other multilateral financial institutions as well as friendly countries.

It is therefore suggested that the ruling junta should show some endurance and Khan should also support the incumbent government in the preparation and approval of the federal budget for the next financial, likely to be announced on June 10, 2022.

In my opinion even the most contentious issues should be discussed and resolved in the parliament and should not be taken to the streets. At present the top national priority is approval of the federal budget.  It is better that Khan and Sharif develop working relations at the earliest.

Pakistan Stock Market Takes a Dip of Nearly 8 Percent

With announcement of FY18 Deferal Budget and Pakistan’s formal inclusion in the MSCI EM Index, the week ended 2nd June 2017 remained eventful. Contrary to the expectations, fiscal prudence superseded election year populist measures in the Budget, while unexpected tax restructuring for the stock market induced further volatility (15% CGT regardless of the holding period, enhancement of tax on dividend to 15%). On the other hand, the transition to MSCI EM Index triggered a sell‐off on the likely rebalancing of the portfolios. The benchmark of Pakistan Stock Exchange index lost 4082 points or 7.75%WoW to close the week at 48,555. The average daily volumes declined to around 295 million shares, but the average traded value soared to its decade high of over US$240 million. Other key news flows during the week included: 1) Hussain Nawaz appearing before the JIT, 2) CPI based inflation in May’17 rising to over 5%, at 30‐month high, 3) GoP reducing the MOGAS/HSD prices, 4) LHC dismissed petitions filed by commercial importers against the anti‐dumping duty on flat steel products, 5) MoF reportedly agreed to provide Rs45 billion to IPPs and OMCs in lieu of circular debt. MSCI Pakistan EM index large and mid‐cap constituents were major losers during the week, where: HBL, LUCK, UBL, MCB and OGDC.With Pakistan formally part of MSCI EM Index, analysts expect short‐term volatility to continue where the market is likely to take guidance from foreign activity. That said, any development with regards to the revised margin financing product along with Panama‐gate’s JIT proceedings are likely to drive sentiments accordingly.

As eventful as it was, the market gained 2.6%MoM during May'17 in anticipation of a populist budget while gearing up for Pakistan's formal inclusion in the MSCI EM index. However, gains remained limited (the market lost 4% since the presentation of Budget FY18) where, contrary to expectations, fiscal prudence superseded election year populist measures in

Budget FY18. Also, an unexpected tax restructuring for the stock market induced further volatility. On the other hand, the transition to MSCI EM Index triggered a sell‐off with the benchmark index losing 1.7%, just a day before formal inclusion of Pakistan in MSCI EM. In this regard, profit taking was evident in MSCI EM stocks with traded value recorded at US$508.7 million, touching its decade high. Going forward, foreign activity is likely to guide the market sentiments in the short term with the market seeing increased volatility until complete re‐balancing of portfolios. However, analysts expect key themes like: 1) materialization of CPEC projects, 2) healthy corporate earnings growth, 3) interest rate reversal and 4) the pressures on the PkR to take center stage until general elections next year.

Despite widening trade deficit, rising by nearly 37% in 10MFY, focus on export‐oriented sectors remained missing in the recently announced FY18 budget. While relief measures under the export package (zero‐rating regime, discounted EFF & LTTF and duty‐free machinery import) were extended and new protectionist measures introduced (GST @10% on import of fabric and 5% RD on import of filament yarn), no solid initiatives were undertaken with regards to energy subsidy (to reduce power cost) and refund claims except allowing of payment of refunds. Moreover, the 1% increase in GST on retail sales to 6% further add to the woes of industry players having a  higher proportion in the local sales mix should they choose not to pass on the cost increment to consumers.