June 09, 2023 (MLN): All eyes are on today's budget wherein the government is likely striking a delicate balance between voters' friendly budgetary measures while meeting IMF conditions.

Federal Minister for Revenue Senator Ishaq Dar has stressed over and over again that the government is determined to present an investment-friendly budget for Fiscal Year 2023-24.

On the IMF front, it seems unlikely that the government will be able to complete the IMF program on time, which has been delayed since November, as the budget FY2023-24 is expected to be aligned with boosting business activities in Pakistan in difficult times.

Since elections are expected within this CY23, it is true that government will present a vote-winning budget on Friday.

The higher revenue will likely be a key theme with various tax measures under consideration as the next tranche hinges on the government’s firm commitment to fiscal targets, according to market experts.

With tight economic conditions including heightened fiscal crisis and external imbalances, the key challenges for the government are to achieve the below-mentioned targets:

• The total outlay for the fiscal year 2023-24 is estimated at Rs13-15 trillion (12.4% to 14.2% of GDP) as against the budget of Rs9.6tr in FY2022-23.
• The fiscal deficit target is expected to be Rs6.8tr in FY24, which would be around 6.5% of the GDP.
• Ministry of Planning has set a GDP growth target of 3.5% for FY24 as compared to 0.29% GDP growth expected within FY23.
• The revenue collection target for FBR has been set at Rs9.2tr (8.76% of GDP) for FY24, up by 23% YoY as compared to the budget target of Rs7.5tr for FY23.
• The non-tax revenue will be Rs2.5tr (2.4% of GDP) as compared to Rs1.6tr (2% of GDP) estimated for FY23.
• The total expenditure target has been set at Rs14.6tr for FY24 (13.9% of GDP), which is around 12% YoY higher than budgeted in FY23.
• The government is likely to set aside Rs7.6-8tr for interest payment for the FY24 budget and Rs1.8tr is likely to be set aside for the Defense sector.
• For pension, the government is expected to set a target of Rs780bn for FY24 as opposed to Rs550bn budgeted in FY23.
• The government is likely to set a target of Rs980bn for power subsidies, however, the Energy Ministry has demanded Rs1.54tr in power subsidies for FY24.
• The current expenditure is expected to rise 15% YoY, worth Rs13.2tr for FY24. This uptick in current expenditure is mainly due to higher interest expenses up by a significant 30% YoY against the budget of FY23.
• The development expenditure is expected to be at Rs1.35tr in FY24 against Rs964bn in FY23.
• The public sector spending (PSDP) target for FY24 will be at Rs950bn against Rs727bn budgeted in the FY23.
• The Planning Ministry is also proposing an allocation of Rs150bn through Public Private Partnership
• Assuming no current account deficit and debt rollover by friendly countries and their
• institutions, a shortage of $4-6bn in FY24 is expected.
• Overall manufacturing sector is expected to project a growth of 4.3%, followed by agriculture sector growth of 3.5% and service sector growth of 3.6% for FY24.
• Investment level for FY24 is projected to be set at 15.1% of the GDP as compared to 13.6% set in the FY23 budget.
• National Savings Rate is expected at 13.4% of GDP.
• Inflation for FY24 is expected to be around 21% as compared to 29% for FY23 and compared to the 8-10% historical average
• The ministry is expected to set aside Rs7.6tr for debt servicing.

Expected Budgetary Measures for Fiscal Consolidation

Pakistan is confronted with a formidable financial obligation in the upcoming FY24, as it is required to make a substantial repayment of approximately $25bn. This substantial amount, excluding the current account deficit, presents a significant challenge for the country.

The likelihood of obtaining the necessary funds from international creditors becomes increasingly improbable without the extension of the current IMF program or the establishment of a new one.

The Ministry of Planning has set a target GDP growth rate of 3.5% for FY24, demonstrating their commitment to stimulate economic growth and generate increased revenue. This objective is pursued through sectoral development, including the manufacturing, agriculture, and service sectors, aiming to foster overall economic growth.

In addition, measures are expected to control government spending, attract investment, encourage savings, balance trade, manage inflation, and consolidate fiscal resources. These comprehensive budgetary measures align with the Ministry’s strategy to address multiple facets of the economy and promote stability and prosperity.

Higher Revenue Collection – a key theme

Among promising austerity measures, the vigorous taxation approach will largely be aimed at in the coming budget. Keeping in view a target of Rs9.2tr set by the fund, the target seems highly optimistic as economic slowdown and restriction on imports have severely dented the collection in 11MFY23.

To meet the target, the government is expected to continue its effort toward broadening the country’s tax collection by means of continuation of tax measures introduced previously such as super tax, further increasing tax rates, higher tax on non-filers, and improving tax collection infrastructure.

The government might impose additional taxes on industries to bridge the gap between budgeted and actual tax collection.

Furthermore, authorities can also enhance the tax on wealthy individuals and provide cash handouts to the lower segment of society.

Given the huge tax collection target, Government can opt to continue levying the super tax of 10% on FY24 profits.

Moreover, a new advance tax is expected on listed and unlisted companies, at rates of 5% and 7.5% respectively. The tax will be adjustable when dividends are distributed.

At 5% this would generate an amount in the range Rs300-350bn for FBR. According to news reports, last 3 year reserves of listed is Rs2.8tr which will generate Rs140bn for the government, as per the estimates of Topline Securities.

Moreover, Revenue Mobilization Commission (RRMC) has recommended a taxation regime for wholesalers and distributors which will help in the documentation of the economy and will have a positive impact on the revenue front.

In addition, Govt can also restore sales tax on petroleum products, which will result in an additional collection of around Rs757bn, a report by Insight Securities highlighted.

Continuation of the current PDL on petroleum products will also enhance non-tax revenue by Rs253bn.

The revenue collection target heavily relies on the resumption of economic activity which is witnessing a massive slowdown due to demand destruction on the back of a high inflationary environment and import restrictions.

Going by the different brokerage houses' predictions, the inflation will settle around 23% in FY24, which is higher than the government’s inflation target of 21%.

Though everyone is expecting an investor-friendly budget, it remains to be seen how the government carries IMF conditions and at the same time presents voters' friendly budgetary measures.

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Posted on: 2023-06-09T10:41:45+05:00