Pakistan Strategy: FY22 Budget Preview

  • The FY22 Budget is aiming to be broadly pro-growth, based on the proposed measures
  • Major industries that will draw the most incentives remain exporters, construction, and agriculture
  • The market is likely to continue the recent rebound post Budget, if the expected measures are passed

Focus on growth without fiscal indiscipline

The new team at the Finance Ministry, led by Mr. Shaukat Tarin, is aiming for a pro-growth Budget for FY22 (set to be announced on 11 June). 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 (and in the PTI government's tenure). Stimulus measures following the onset of Covid-19 has already put Pakistan on a growth path – as the GDP growth of 3.9% in FY21 followed -0.4% the year before.

Following are the broad expectations for the Budget

  • Incentives for exporters, including the IT sector, will continue

  • Continued emphasis on construction activity as the federal PSDP is expected to be c.40% higher than in the outgoing FY21 (PSDP is the public development expenditure)

  • Agriculture Package to maintain the growth in farmer income (buoyed partly by surging global commodity prices during FY21)

  • Renewed focus on import substitution through rationalization of tariffs on imported raw materials and intermediary goods for domestic industries

Arguably, the above policy goals have featured in earlier Budgets. What is different this time is that the government has attained some fiscal space to instate more congruent and wide-ranging pro-growth measures, in our view. Also, the proposed federal budget allocation of PKR900bn for PSDP remains below the average PKR1tn in the previous government's tenure. 

Challenges for fiscal balance will be relatively moderate compared with the recent past

There has been little clarity around the revenue measures that the government is likely to employ to achieve the above goals. As in the past few years, the Tax collection target (for the tax authority FBR) remains ambitious (reportedly set around PKR5.4tn vs. PKR3.8tn raised in 10MFY21). However, unlike in recent years, the GDP is expected to grow by more than 4% and imports can reach US$60bn again (first time since FY18 ahead of the macroeconomic contraction during FY19-20); this means that the government can aim for a higher revenue target without significant tax changes, in our view. A lot of non-tax revenue measures also remain pending – notably, the privatization of RLNG based power plants and stake sale (without management control) in loss-making SOEs. These can complement FBR’s collections.

Nonetheless, we rule out any major change in corporate tax rates (although the government should reconsider the turnover tax rate). There should also be no more change in FED on cement, tobacco or automobiles. To expand the tax base, however, the government may impose punitive measures on the unregistered sectors, retailers for example.

It is worth highlighting that the Pakistani authorities are presently in talks with the IMF for 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. The last time the Budgets were broadly pro-growth (during FY16-17), the KSE-100 rallied 2-4% in the following two weeks. 


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