Election year brought a budget with a highly optimistic outlook and higher achievements to keep in mind the gains of polling achievements. Thus, it ignored the availability of the funds.
The base case plan appears to pin the burden of revenues on Corporate Pakistan – Higher super tax, hefty retrospective tax on ‘extraordinary earnings,’ tax on bonus shares. Modalities of some are likely to face legal challenges.
There are a few important points to consider in the budget review.
Another year of high fiscal deficit is ahead. The incumbent govt has presented its second consecutive budget with a whopping budgetary outlay of PKR 14.5 TRN, envisaging a growth of 30% Y/Y in FY24. Given high debt servicing and counter-inflationary measures, the current expenditure will surge by 27% Y/Y to PKR 13.3 TRN. The government has allocated PKR 1.15 TRN (up 47% Y/Y) under PSDP, which we believe may not be able to fully disburse amid the tight fiscal position. Despite targeting an astonishing growth of 28% Y/Y in tax collection and a sharp surge in non-tax revenues (up 83% Y/Y), the fiscal deficit is projected at PKR 6.9 TRN (6.5% of GDP) in FY24.
Interest payments exceed net federal receipts. Interest expense is projected at PKR 7.3 TRN (up 32% Y/Y), which constitutes 106% of net federal revenues (51% of total expenditures). To highlight, the govt is targeting net external financing of PKR 2.5 TRN (out of the total net funding need of PKR 7.5 TRN), which is on the higher side amid a low likelihood of raising commercial bank/Eurobond borrowing in the prevailing situation. This implies having higher reliance on domestic debt which is costly at the current policy rate of 21.0%. We expect the crowding-out effect in the banking sector and SBP’s OMO injection will continue to indirectly fund the high fiscal deficit. Thus, interest expense is likely to exceed the budgeted amount.
Subsidies contained to likely appease the IMF. The govt restricted subsidy allocation to PKR 1.1 TRN (down 3% Y/Y). The major drop was seen in the industrial energy package in FY24, which the IMF previously had shown reservations for the allocation of the amount in FY23B. Besides, all other areas of defence, grants, and pension expenses are depicting a high double-digit growth for FY24.
The FBR collection target seems unrealistic. Despite having low economic activities and import restrictions, the FBR tax collection target is set at 28% growth. The only major support will be coming from the increase in super tax by up to 10%, while other measures may not be enough to achieve PKR 9.2 TRN target. Thus, we expect either a lower collection or the introduction of a finance supplementary bill later to bridge the gap. However, SBP profits and petroleum levy will jointly contribute PKR 2.0 TRN as non-tax revenues, which provides a silver lining.
Negative for PSX. The increase in super tax by 6.0% on a recurring basis to 10% (income above PKR 500 MN) will impact earnings by 9-11% from the tax year 2023 and onwards (FY23/CY23 and ahead). A 10% imposition of advance tax on bonus shares is another adverse move to discourage investors.
Sector-wise outlook. The budget is generally negative for the sectors due to higher super tax imposition. However, keeping aside the impact of super tax, we have a positive stance on Cement and IT sectors. The proposed taxation on banks does not have much negative impact, which was assumed pre-budget. We foresee a neutral impact on banks, fertilizer, OMC, Steel, Automobile, Power, and E&Ps.
A few other vital considerations cannot be ignored too.
- Within beneficiaries, Construction sector appears to have received the most support (banks incentivized with lower tax rates for lending to the sector, advance tax on overseas Pakistanis investing in immovable properties abolished & REIT incentives extended). SMEs, IT and Agri are also on the list of beneficiaries.
- With FY23 posting fiscal deficit at 7% of GDP, a budgeted deficit at 6.5% of GDP for FY24 does not, prima facie, seem overly ambitious. Having said that, some budgeted line items will test the execution capability of government.
- 42% YoY increase in Provincial surpluses in an election year, raising US$1.5bn from Sukuk / Euro bonds and 28% increase in tax collection will be closely tracked to look for slippages and need for likely interim tax measures.
- From PSX standpoint (barring the reduction in turnover tax from 1.25% to 1.0%), most measures tilt towards the negative and could emanate a negative reaction.
- The key variable shaping medium term sentiments however is likely to be any indication of IMF response to budget and whether FM’s indication of securing the 9th review within June comes true.
