June 8, 2019 (MLN): The budget announcement for fiscal year 2019-2020 is lurking right around the corner, stimulating rising pressures and anticipation within the markets whose participants have all the more reasons to expect rougher times ahead.
Making its way through difficult times already, the government has summoned all hands on the deck to steer the country out of its misery and revive its economic standing.
Now that an Extended Fund Facility (EFF) of $6 billion has been finalized with the International Monetary Fund (IMF), the funds from this bailout are seemingly at an arm’s reach.
However, while this is an encouraging thought, one can’t overlook the consequences that tagged along including Rupee devaluation and higher interest rates.
A report published by Arif Habib Limited (AHL) points out that “the approval of IMF program is subject to some prior conditions which will also be addressed in the budget; these include reducing the primary deficit to 0.6% of GDP led primarily by augmenting tax collection to an ambitious Rs.5.5 trillion.”
We can already see that lately, the authorities have not been shying away from taking firm decisions in the long-term interest of the country, therefore the upcoming budget announcement is seen as another opportunity for the relevant authorities to take stern measures.
A research note by EFG Hermes reestablishes this expectation as its analysts believe that this time around Pakistan does not have an easy escape route.
“The upcoming budget on 11 June should see higher tax income through reintroduction of super tax, the cancellation of phased corporate tax reduction, rise in GST/FED and the change of tax slabs,” says the note.
Shifting our focus to the local equity markets, AHL expects that the Capital Gains Tax (CGT) on securities will be aligned along with the rates of CGT on sale of immovable property. Meanwhile, “companies could feel the brunt of continuation of super tax on corporates earning above Rs.500 million and corporate tax rate at 29%.”
Adding to this, they said that as a result of a tight IMF program as well as a crucial economic requirement, fiscal space is expected to face severe tightening in the upcoming fiscal year.
“GoP targets Fiscal Deficit to reduce to approximately 6% of GDP during FY20 compared to 7.3% estimated for the current year, while CAD is targeted to reduce to 3% of GDP compared to around 5% for the current fiscal year.”
Stringent cuts in expenditure and mammoth revenue estimates are being targeted by the gov’t which will further keep aggregate demand in the economy on a tight rope, said AHL.
“A number of measures on the taxation front can be expected such as WHT on salaried class individuals, change in regime from zero-rated to imposition of GST on five export-oriented sectors, increase in GST rate across the board, increase in regulatory duties on imports, and restoration of taxation on mobile phone cards will beef up revenue generation of the gov’t.”
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