Macro Analysis /

Pakistan Federal Budget FY23 – A Robin Hood budget

  • Pakistan’s FY23 Budget aims to resume the IMF programme. We think it will achieve this objective

  • Blanket subsidies have been removed in favor of targeted relief. Tax measures target real estate and large corporates

  • Most sectors see little to no impact. Banks and Autos are negatively impacted. There are positives for Tractors

Intermarket Securities
12 June 2022

In the last few weeks, the government has significantly reduced fuel subsidies, while passing legislation to reform state-owned entities and set up an Export-Import Bank to take over the SBP’s refinance facilities. Efforts to recapitalize two private sector banks have also accelerated. These measures are part of the structural benchmarks agreed upon with the IMF in February. The FY23 Budget is part of the same chain.

The tax collection target is a little short of the PKR7,250bn which was initially being reported in the press, but there is much common ground with the IMF. Taxation is more equitable, with new revenue measures targeting large landowners and the big corporates/retailers. The space this opens up, together with a sharp reduction in subsidies, allows the government to increase direct cash transfers to the most vulnerable, focus on development projects, and even reduce income tax for the middle class.  

Some aspects will be challenging, for instance meeting the large target for petroleum levy will likely be politically difficult, but it is heartening to note the finance minister stated in his speech that the government is not afraid of taking tough decisions. There are also risks to headline macroeconomic targets (i.e. 5% GDP growth, 11.5% CPI, 2.2% CAD) but in its broad brushstrokes, the FY23 Budget is a responsible one and should satisfy the IMF in our view. This should help successfully complete the pending 7th review of the IMF programme. 

Not unexpectedly, given the need for fiscal discipline, there are hardly any positives for listed corporates. Sectors such as Banks and Autos have been hurt but there is little to no impact for most sectors. In general, the Budget’s measures do not detract from the equity market’s cheap valuations, with market capitalization to GDP already near historical troughs. There are some misgivings regarding the elimination of tax credit on investment in mutual funds but any retail redemptions may be offset by a potential inflow from real estate into equities.   

 Positive Impact: Tractors, Technology, Pharmaceuticals, Entertainment, Textile

Neutral Impact: Cement, Steel, Fertilizer, Energy

Negative Impact: Banks, Autos, Insurance, Mutual Funds

 See our 13-page report for more details.