Macro Analysis /

Pakistan budget – Too little, too late

    Christopher Dielmann CFA
    Christopher Dielmann CFA

    Director, Macroeconomic & Sovereign Research

    Rohit Kumar
    Hasnain Malik
    Tellimer Research
    12 June 2019
    Published by

    On Tuesday, Pakistan’s PTI government presented the much anticipated, first full budget for FY 20 (which runs through June 2020). Revenue Minister Hammad Azhar wasted no time in laying blame on previous governments' mismanagement of economic and financial affairs, for which we maintain a high degree of sympathy. Unfortunately, we believe that the current budget proposal will do little to address the economic crisis facing the country. As we have said in our previous report, Pakistan faces serious structural challenges that will require a significant outlay of capital. However, until additional revenue generation can be achieved, it is unlikely that much will be resolved. 

    The current budget proposal shows a stark increase in both revenue and expenditure figures over the previous year; proposing a 25% increase in FBR tax revenue for a total of PKR5.55tn (cUS$37bn) as well as a 30% increase in federal expenditure, rising to PKR7.02tn (cUS$46.5bn). 

    Ultimately, we believe that there should be a significantly higher emphasis placed on overall fiscal consolidation over the 7.1% deficit that is currently being proposed. While this is a slight improvement over the 7.2% deficit in FY 19, it certainly will not be enough to stabilise the country’s debt trajectory. Moreover, we question the feasibility of achieving the proposed deficit, given the structural challenges faced by previous administrations regarding tax collection – especially as long as the proposed expenditure figures remain significantly easier to achieve. 

    Pakistan's fiscal balance deterioration continues to drive debt increases

    Source: IMF WEO, Tellimer

    The government’s current “tax reform agenda” consists of simplifying the tax regime, phasing out exemptions and concessions, and increasing taxes on targeted goods and industries, while leaving general sales tax rate and corporate tax rate at 17% and 29%, respectively. Combined with the widespread opposition to the budget, these additional measures are insufficient to offset the abysmal rate of tax collection, filed by 1.9mn people in a country of 220mn.

    At the same time, the planned increase in spending – driven by higher interest payments while defense spending is kept stagnant – is much more likely to come to fruition, which would leave Pakistan with a steeper deficit than expected. While expenditure cuts would not be prudent, given the popular climate, we believe the government cannot afford the planned increase. 

    The implications for growth are mixed, as slower growth in FY 20 has already been priced in, and the cost of stricter tax regime increases suggests a commitment to long-term economic stability. Despite the shortcomings of the revenue measures, the budget technically meets the IMF criteria, including a reduction in the primary deficit to 0.6% of GDP, likely moving forward the US$6bn bailout agreement in April and reach approval by the IMF’s Executive Board in coming weeks. 

    Overview of revenue and expenditure targets

    • GDP growth target of 2.4% for FY 20 compared with 3.3% in FY 19. 
    • Fiscal deficit target at 7.1% of GDP (7.2% in FY 19e).
    • Inflation target for FY 20 at 11%-13% (compared with 7.2%  in FY 19e).
    • FBR tax revenue target for FY 20 at PKR5,555bn (PKR4,150bn in FY 19e).
    • Defence budget to be maintained at PKR1.15tn.
    • Current account deficit targeted to be halved to US$6.5bn in FY 20 from US$13bn in FY 19e. 

    Key budgetary measures 

    • General Sales Tax (GST) maintained at 17% compared with expectations of an increase to 18%. (Positive for market) 
    • Taxes on individuals (both salaried and non-salaried) have been increased. 
    • Corporate tax rate held at 29% for coming years, which was earlier scheduled to be reduced by 1% each year to 25%. (Negative for non-financials)
    • FED on cement increased to PKR2/kg versus current PKR1.5/kg. This will require an increase of cPKR30/bag in cement prices to pass on the impact. Note that cement players are already facing pricing challenges, so it may not be possible to pass it on completely. (Negative for cement).
    • Income earned by banks from additional investment in government securities to be taxed at 37.5% compared with 35.0% currently. (Negative for banks)
    • Treasury Single Account (TSA) to be implemented, which will be negative for state-owned banks like NBP. (Negative for banks).
    • Tax on dividend income from IPPs raised to 15% from current 7.5%. This is negative for IPPs like HUBC PA and KAPCO PA, which are considered to be quasi bond securities due to high dividend yields. (Negative for IPPs)
    • Minimum turnover tax raised to 1.5% from current 1.25% and to 0.75% from 0.5% for OMCs. Some companies like SHELL PA, and PSMC PA occasionally come under minimum turnover tax when profits are low. (Negative for selected OMCs, autos and other industrials)
    • Imposition of 2.5% FED on cars with engines up to 1,000cc, 5% on 1,001-2,000cc and 7.5% on over 2,000cc. Earlier FED was 10% on cars with engines over 1,700cc. (Negative for Autos).
    • Increase in duty on LNG. (Negative for industrials like textile)

    Molly Shutt contributed to this research.