Tuesday 7 June 2022

Pakistan: Likely facets of Federal Budget FY23

Government of Pakistan (GoP) is scheduled to announce Federal Budget FY23 on June 10, 2022. Relations between International Monetary Fund (IMF) and Pakistan have not normalized despite change of Prime Minister. 

While it is anricipated that the upcoming budget will have measures that can ensure austerity and economic stability, the incumbent government is likely to opt for policies which can help the coalition remain in power over the next 18 months.

Budget outlay for FY23 is estimated at around Rs9.5 trillion as against budget of Rs8.5 trillion for FY22.

GoP is anticipated to set tax revenue collection target at Rs7.25 trillion for FY23, which will be 19% higher from the revised target of Rs6.1 trillion for FY22. It is likely to impose new taxation measures of about half a trillion in FY23 budget.

Current expenditure target is likely to be set at 12% of GDP for FY23 or Rs8 trillion which is around 11% YoY higher than what was budgeted for FY22.

Similarly, government is likely to set aside nearly Rs4 trillion for markup payment and Rs1.6 trillion for Defense expenditure.

Federal Public Sector Development (PSDP) is estimated at Rs800bn, as against Rs466 billion disbursed in 10MFY22 and revised budgeted of Rs603 billion for FY22.

Consolidated PSDP (Federal and Provincial) is anticipated at Rs1.4 trillion (1.8% of GDP) for FY23, as against Rs1.2 trillion for FY22.

A few taxation measures that are under consideration include: 1) increase in super tax for Banking sector and re-imposition of super tax on highly profitable companies, 2) increase in tax rate for individuals earning high salaries, 3) reduction in tax concessions and exemptions for various sectors, 4) increase in regulatory duties on luxury items, 5) luxury tax on immovable properties and vehicles,  and 6) increase in taxes for non-filers.

With the economic slowdown, tax revenue target of Rs7.25 trillion will be difficult to achieve for FY23. However, it will depend on the types and amounts of new taxes to be imposed in Budget FY23.

Upcoming budget is likely to be Neutral for Stock Market as we do not anticipate any change in Capital Gain Tax (CGT) rate of 12.5% and tax rate of 15% on dividend income. The budget is likely to be Neutral to Positive for sectors including Technology & Communication, Fertilizer, Insurance and Chemical Sectors. On other hand, it is likely to be Neutral to Negative for sectors including IPPs, Autos, Banks, Oil & Gas Exploration, Cement, Textile, OMCs, Tobacco, Steel and Pharmaceuticals.

Analysts believe that negatives relating to imposition of new taxes on listed companies are already priced in as valuations remain attractive. Market participants are keen to see the overall balance of payment situation and focus to remain on IMF and other foreign exchange inflows along with trend of international commodity prices. 

Pakistan market is currently trading at a discount. Analysts prefer sectors that offer high dividend yield, beneficiary of rising interest rates and currency depreciation.

 

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