June 10, 2021 (MLN): The upcoming Budget for FY22, which is set to be rolled out on June 11, 2021, is likely to be pro-growth with an overall focus on increasing Expenditures.
A few months ago, the expectations were more skewed towards consolidation given that Pakistan had just resumed the previously stalled IMF program. However, with the arrival of Mr. Shaukat Tarin as Minister of Finance, who categorically stated that his efforts during his tenure will be concentrated towards reviving and improving the growth rate of the economy, it is expected that the upcoming budget will target higher growth next year. In this regard, the government has been undergoing discussions with IMF to maintain its growth-centric policies, as against the international body advocating prudent policies and measures for fiscal consolidation.
As Pakistan is already negotiating for maximum possible fiscal space to develop a growth-focused budget with higher expenditure on the development side and provision of subsidies, it can be said that the economic growth, improve employment, drive demand, aid pandemic support measures and manage fiscal imbalances would be the key themes of the upcoming budget. Moreover, Infrastructure, agriculture, manufacturing sector, as well as incentives to stimulate construction and housing, are expected to be on the prioritized list.
Perhaps these policy goals were also featured in the previous Budget, what’s different this time around is that the government has achieved some fiscal space to instigate more consistent and wide-ranging pro-growth measures.
Key Fiscal Targets
- The overall outlay of the budget is expected at Rs8tn with an expected fiscal deficit of 5.5%-6% of GDP for FY22 compared to an estimated deficit of 6% of GDP during FY21.
- The revenue collection target for FBR has been set at Rs5.8trn for FY22, which will be lower than IMF’s target of Rs6trn. Still, the target seems to be ambitious, as it is likely to be 23% higher compared to the estimated collection of Rs4.7trn in FY21. Additional revenue measures worth Rs350bn are also expected.
- The non-tax collection target will be set at Rs1.42tn.
- For FY22, the government is expected to earmark Rs900bn for Federal PSDP, an increase of 38% YoY over the budgeted figure of FY21. A key element is total development outlay, which includes provincial spending. It is expected that government is likely to set a provincial spending target of Rs1.0trn taking the total development outlay to Rs1.9trn compared to last year’s budgeted outlay of Rs1.324trn (up 44%).
- Government is likely to set mark up interest and defense expenditure targets atRs3.1trn and Rs1.4trn, up 4% and 9% from last year’s budget, respectively.
- The government also intends to increase salaries and pensions by 15-20%
- The fiscal deficit is expected to be around Rs2,915bn in FY22 thus the fiscal deficit maybe 5.6% of the GDP.
- For subsidies, the government is expected to set a target of Rs 530bn for FY22.
- The Current account deficit for FY22 is projected to be around at USD2.3billion which would put the current account deficit at less than 1% of the GDP in FY22.
- The cotton bales output expected for FY22 would be around 10.5mn bales.
- The government may also earmark funds for COVID-19, to procure more vaccines in the upcoming year. As per a Minister, the government has spent US$250mn for procuring vaccines in FY21 and more than this is likely during FY22.
Expected Budgetary Measures
The government is targeting a GDP growth of 4.8% for FY22, compared with 3.9% in the previous year; if achieved, this will be the highest GDP growth since FY18. Stimulus measures following the onset of Covid-19 has already put Pakistan on a growth path. Going forward, a growth-friendly budget with an expansionary fiscal policy coupled with a low-interest rate regime is likely to keep economic activity upbeat.
To achieve higher growth in FY22, Agriculture would be the key focus area in the upcoming budget. Within the Agriculture space, the federal government together with provinces is likely to continue targeted subsidies to farmers which could bring Tractors in particular into the limelight and may give shape to earlier announced subsidies on fertilizers, along with few more steps to enhance agriculture productivity. This in turn is also likely to help check food prices, which has been a major reason behind higher CPI inflation.
According to the report by Topline Securities, the government is also targeting cotton production of about 10.5mn bales in FY22, which fell abysmally by 34% YoY to 5.6mn bales in FY21. Cotton has a weight of~4% in overall agriculture output. Moreover, to continue the momentum in industrial growth, the government is likely to reduce customs duties, etc.
Besides growth, social safety and welfare schemes are also expected to remain in focus amidst COVID-19 and inflationary pressures with the Ehsaas program likely to stay in limelight along with proposals regarding upward revision in minimum wage rate and continued government assistance in the ongoing fight against the pandemic.
Also, it is evident from media reports that power tariff hikes are unlikely in the forthcoming budget as the new Finance Minister has clearly stated that masses will not be burdened by additional tariffs while clearing up of the frightening circular debt would be achieved through other means.
Finance Minister has also hinted that incentives will be provided to export-oriented sectors and services sectors with a particular focus on IT space.
On the revenue front, targets are once again ambitious and stringent, possibly leading to an increased debt burden. The government is expected to achieve this by focusing on broadening the tax base through augmented documentation as opposed to introducing various new major taxes. News reports also suggest that improving fiscal health will be achieved through a focus on taxation reforms and harmonization of taxes. For FY21, the government refrained from introducing any new taxation measures in the budget and only undertook a variety of measures for tariff rationalization in order to revive the stalled economic activity. In the upcoming budget, the government is unlikely to impose any major new taxes or increase taxes, whereas it may reduce/abolish some Custom Duties & Withholding Taxes. However, the possibility of adjustments of tax burdens on higher income groups, increasing taxes on unnecessary items, and rationalization of General Sales Tax (GST) cannot be ruled out. Moreover, work towards automation of the tax system and implementation of the track and trace system is likely to be a key focus in achieving higher tax revenue.
Ensuring and implementing sustainable growth will require relaxation in taxes and duties while improving corporate cash flows. Many proposals have been put forth in this regard, where the government has reportedly approved a reduction in a total of almost 600 tariff lines spreading over various industries including construction, steel, textiles, etc. Furthermore, there has been sustained pressure by steel manufacturers to reduce turnover tax on their dealers inadvertently opening up a new revenue stream for the government as turnover taxation discourages dealers from entering into the tax net.
Non-tax revenues will also remain in focus. Petroleum Levy (PL), an important component of the non-tax revenues is likely to remain slow as the government is practicing the policy of not completely passing on the impacts of higher international petroleum products’ prices to end-consumers by taking a hit on PL.
The government may adopt a more targeted approach towards power subsidy, which in last year's budget amounted to Rs140bn. However, the government is expected to keep total subsidies at around Rs530bn compared to last year’s budget of Rs209bn.
Fiscal Balance to Remain Under Pressure
All these expected measures together are likely to keep pressure on fiscal balance. Maintaining fiscal stability and improving fiscal health, while adopting a pro-growth and expansionary fiscal policy will be a real challenge for the government. Successfully striking this balance depends largely on successful negotiations with the IMF. The actual budget is not expected to be “Significantly” different from the commitments made to the IMF earlier, however, IMF may allow some relaxation in tax collection targets, albeit setting them close to Rs6tn.
Meanwhile, it is pertinent to mention that Pakistani authorities are presently in talks with the IMF for the finalization of the proposed Budget measures. There remains a possibility that some of the above measures do not appear in the final announcement on Friday, in the interest of keeping the fiscal deficit low.
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