June 11, 2020 (MLN): In the midst of a global pandemic, Pakistan government is going to announce the budget for FY21 on June 12, 2020. The FY20-21 budget which covers the period between July 1, 2020 and June 30, 2021 is likely to be free of new taxes to support growth as the government’s focus has shifted more towards how to pull out all stops to spur consumer demand and investment.

This undoubtedly is the toughest time for the government to formulate a budget as the country is facing the worst economic slowdown in more than a decade, thus the government is expected to announce measures to restore employment, economic growth and control the Covid-19 pandemic whilst constraining fiscal imbalances and meeting IMF’s revenue collection target.

The economy needs mediations both at the macro and micro levels. There is an urgent need to stimulate consumption by putting more disposable income in the hands of people. Thus, the main theme of the COVId-19 budget should be growth and job creation. Explicably, at a time of dwindling revenues, this is bound to be a tightrope for the federal government.

There are challenges aplenty, both on the domestic and external front. The key challenge for the government will be to manage IMF mandate and to restrict the fiscal deficit for the upcoming year, as government will not only have to factor in higher expenditures associated with the COVID-19 outbreak, but also take hit on revenues as a result of overall economic slowdown.

In addition to tax reforms, revenue generation and documentation of the economy which have always been the cornerstone of the budget philosophy, the government being acquainted of the current risks, should prioritize the three growth pillars in the forthcoming budget that are Liquidity, Investments and Savings.

The business community also demanded major relaxation in taxation measures in order to enflame economic activity in the country. Moreover, the IMF, in the third round of budget negotiations also agreed to give relief in revenue collection target during the first quarter of FY21 and agreed upon to increase tax revenue from other sources to plug the fiscal deficit. For that, Pakistan assured the IMF that it would increase its non-tax revenue and that the IMF would keep all conditions temperate till September 30.

Since fiscal relaxation from the IMF is for short duration, and the sturdy revenue collection target of Rs 5.1 trillion requires imposing new taxes in the range of Rs 400-500 billion which might delay in short-run as the government would avoid to take any such measures in the short-run and will focus more on administrative measures to plug-in revenue drains. However, once a situation turns complaisant; a mini budget cannot be ruled out, says AKD securities in its budget report.

Key Fiscal Targets:

Before moving towards the budgetary measures that government has planned to announce in the budget speech scheduled tomorrow, it is relevant to first look at the fiscal targets which government has set for the FY21. According to the Ministry of Planning and Development, the government has set the GDP growth rate of 2.3% in FY21 which possibly be supported largely by Agriculture and Services sector.

Growth rate of 2.9% has been set for agriculture sector in FY21 against the expected growth of 2.67% in FY20, while for services sector, growth target of 2.8% has been set against the expected negative growth of 0.59% in FY20.

For Industries, the government has set a meagre target of 0.1% due to negative growth expected in manufacturing sector.

FBR tax revenue target set at Rs 4.95 trillion for FY21 compared to Rs 5.5 trillion set initially in FY20. This implies a growth of around 30% YoY which seems rather over-optimistic.

Current Account Deficit for FY21 is set to be 1.6% of GDP compared to 1.53% projected in ongoing fiscal year.

Inflation is target at 6.50% in FY21 against the target of 11% to 12% set in FY20 budget.

In addition, Pakistan plans to seek a total of $15 billion gross foreign loans in the next fiscal year to repay debt and principal which is estimated to be around $10 billion, while the remaining amount will be used to increase foreign exchange reserves in the absence of non-debt creating inflows.

Earlier, in budget FY20, the government had projected a budget deficit at 7.2% of the GDP but due to increased expenditure in the wake of COVID- 19 has put further pressure in addressing widening fiscal gap. As a result, the budget deficit is now expected to rise to 9.2% of GDP or Rs 4 trillion as per IMF projections. For FY21, the budget deficit target is expected to hover around 9% of GDP.

Expected Key Budgetary Measures:

Taking cues from the media reports, the major changes and imposition of new taxes are unlikely in the forthcoming budget while infrastructure capital expenditure is likely to be slashed. In addition, a relief bend towards COVID-19 affected business and individuals and a higher expenditure is likely to be allocated under health and social benefits.

Revenue Measures:

As imposition of new taxes are unlikely, the government is expected to achieve tough revenue target by increasing its non-tax revenues and imposing additional taxes on luxury items (high-end automobiles, farmhouses and others) and cigarettes and beverages. For the non-tax revenues, as sales and excise duty is expected to show a significant slowdown, government eyes to ramp up petroleum levy.

A likely increase in Petroleum Levy which currently stands at Rs 30 per litre on Petrol and POL products estimated to generate Rs 300-350 billion, a report by IGI Securities stated.

The other measures such as sales tax which is expected to remain at 17%, however, every 1%

rise in GST results in additional tax collection of Rs70-80bn. Additionally, reduction of FED on cement from current RS 2,000 per ton to Rs 1,500 per ton and reduction in import duties on raw materials for non-agri products are also expected.

Development Budget

Due to augmented need of funds for social welfare, job security and financial assistance of SME’s, it is expected that development budgeted will largely focused on social and health sectors this time around.

Given the tough revenue target for FY21, Federal Public Sector Development Projects (PSDP) is expected to be set at Rs 650 billion compared to Rs 701 billion in Fy20 which is expected to be revised downward by 14% to Rs 630 billion owing to miss revenue collection target and mounting financial burden.

Break-up wise 59% of the total PSDP will be utilized for infrastructure development, 35% for social sectors and 6% for others. The allocated percentage for social sector is expected to increase from 16% currently to subside the negative impacts of Covid-19.

In addition to this, government also expected to launch Public Private Partnership Authority (PPPA), earmarking another Rs 200 billion in FY21, for over 30 mega projects. With this, total allocation is expected to exceed prior year’s target, a report by Arif Habib Limited highlighted.

 Defence Budget:

For FY21, out of the total expected outlay of Rs 7.6 trillion, defence spending is expected to go up by +20% YoY to Rs 1.38 trillion compared to Rs 1.15 trillion set in FY20. Moreover, civil administration expenses are expected to remain relatively unchanged this time around.

Research note by IGI securities highlighted that a key relief is expected from domestic debt servicing with 525bps reduction in Fy20 and eyeing additional easing could potential bag in further debt saving.

Subsidy

Subsidies in FY20 were budgeted at Rs 272 billion, majority of which were targeted to relieve to domestic consumers of 300 units of electricity or below per month so as to isolate them from the burden of electricity tariff hikes. This time, a similar amount is expected for the next fiscal year and the main focus would be given to provide support to the lower income groups targeting sectors such as housing, Power and food Security.

Power sector subsidy is likely to be reduced by Rs 50-70 billion. While on fertilizer front, Rs 37 billion to rfarmers in the form of Rs 243/bag for Urea, and Rs 925/bag as part of Rs 50 billion agriculture relief package already announced.

Other expected relief measures

Agricultural, Construction and Export-oriented sectors are likely to remain the main focus of government incentives in the budget FY21. Besides already announced agri-package worth Rs 50 billion and construction package which include reduced FED, fix tax regime, lower tax rates for ‘Naya-Pakistan Scheme’ and likely reduction of sales tax for construction raw materials, the government may make the Agriculture package part of the Federal budget with a few more additions and provide some relief for the construction industry as well, in the shape of lower taxes and/or other measures to support the economy, Naya Pakistan Housing Program and construction of dams, a report by Topline Securities stated.

According to report, salaries and pensions of government employees may be increased and tax rate on essential food items is likely to be reduced.

Furthermore, the government is likely to allocate Rs1,000 billion separately for COVID-19 pandemic for providing relief to the masses and the business community. The government can further extend relief to the daily wagers through cash payments, suspension of utility payments for small consumers etc. Regulatory & additional customs duties are also likely to be reduced by up to 2%.

The government is also considering to enhance limit on CNIC requirement to Rs 100,000 from current Rs 50,000. This would facilitate small retailers/businesses/traders in terms of cost of transaction and boost economic activities. Furthermore, minimum tax exemption limit on salaried class may be increased.

In order to support vulnerable section of the population amid COVID-19 outbreak, government is prioritizing higher allocation to safety net programs like Ehsaas and Kamyab Jawan Program.

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