Pakistan gears up for tough fiscal budget bearing IMF thumbprint

KARACHI: As an expected consequence of the bailout deal signed with the International Monetary Fund (IMF), Pakistan’s government on Sunday announced its plans to present the first full budget day after tomorrow.
The budget, which will be for fiscal year 2019-20, will be presented in parliament and is expected to take in tough measures needed for austerity and fiscal discipline.
For the purpose, President Dr. Arif Alvi has summoned the 11th session of the National Assembly on Monday, while the adviser to the Prime Minister on Finance, Dr. Hafeez Shaikh, will present the budget during the assembly on Tuesday.
Pakistan and IMF had agreed to a $6 billion bailout program after months of negotiations, some of which call for reducing the fiscal deficit to 0.6 percent of the GDP, which at present hovers around 2.5 percent; in addition to a withdrawal of subsidies.
“Approval of the IMF program is subject to some prior conditions which will also be addressed in the budget. These include reducing the primary deficit to 0.6% of GDP, led primarily by augmenting tax collection to an ambitious Rs5.5 trillion,” Samiullah Tariq, Director of Research at Arif Habib Limited, said.
Against its manifesto, the government is expected to introduce unpopular and harsh measures in the budget in order to achieve the revenue target which may slow down the economy and further impact inflation and unemployment.
“Federal Budget emphasizes on austerity, fiscal discipline, external sector management and protecting the poor,” Dr. Khaqan Hassan Najeeb, Spokesperson for the Finance Division tweeted after a meeting on Saturday to finalize the budgetary measures.
Pakistan’s government is aiming at achieving a huge tax collection target of Rs5.550 trillion, which is Rs1.45 trillion higher than the current year’s revised estimate of Rs4.1 trillion.
Besides this, the reduction of subsidies from the current Rs680 billion to around Rs350 billion will require further fiscal tightening.
“Higher tax revenues of 3.5% of GDP (to the tune of Rs1.4-1.5 trillion) would be the key highlights of the budget.
However, we are of the view that the government may not be able to achieve the budgeted revenue targets given the continued economic slowdown,” Topline Securities said in report.
Analysts expect for the government to cut development expenditure to between Rs1.2 trillion and Rs1.3 trillion from the FY20 budgeted amount of Rs1.8 trillion.
“The Public Sector Development Program (PDSP) spending shall entail a Federal component of Rs925 billion incorporating a core of Rs575 billion and a foreign exchange breakup of Rs127 billion where federal projects would be allocated Rs295 billion. The provincial allocation for PSDP stands at Rs912 billion,” Muhammad Faizan, Head of Foreign Institutional Sales, Next Capital Limited, said.
In the upcoming budget, the government is expected to take revenue measures including an upward revision of GST to 18 percent, taxation on telecom, withdrawal of zero-rating from export-oriented sectors, increase import duties, and privatization proceeds, uniform taxation for petroleum products and revenues from amnesty scheme.
Government officials hoped that the policy measures will strengthen the economic basic of the country. “Sound policies will lay the foundation of sustainable growth and secure a better future for the people,” Dr. Najeeb said.
While this additional austerity measures will exacerbate inflationary pressures, Faizan said that after the “initial years of stagflation, the budget would be a critical stage toward putting the economy on a long-term growth trajectory and dispense much-needed clarity on macroeconomic policy framework thereby boosting investors’ confidence in the market”.
“It is going to be one of the most difficult budgets of our history. Austerity measures will hit growth. More people to lose jobs. Economic slow down is going to affect all industries. The new taxes are going to add to woes of all— common people as well as SMEs the most. The fiscal stabilization is the key. Every measure will be taken as undertaken with IMF to achieve it,” Dr. Ikram ul Haq, an expert on economic and taxation matters, said.
As part of the budget presentation move, the government will also be launching an Economic Survey of Pakistan – for the current financial year 2018-19 – on Monday. The survey will provide an overview of the national economy, highlighting performance and achievements in different sectors. Traditionally speaking, the launching of the Economic Survey is considered a prerequisite for the budget.