Pakistan Federal Budget FY22: Too Many Ifs and Buts

The Federal Budget strategy for FY22 is stated to be pro-growth and spending-led. The total size of the outlay is Rs8.5 trillion which is almost 19% higher as compared to the outgoing year’s budgeted expenditure of Rs7.1 trillion. The increased spending is expected to boost economic activity through total development expenditure of Rs964 billion, which is up 22% from previous year’s budget. The GDP growth target for FY22 has been set at 4.8% which is viable given the estimated growth rate of 3.94% for the outgoing fiscal year. Since primary balance posted a surplus of Rs159 billion during 10MFY21, debt assumption is expected to remain low during FY22. Further, the government borrowing from banks is projected to decrease to Rs681 billion in FY22. Similarly, the borrowing from non-bank sources is also projected to decrease to Rs. 1,241 billion from Rs. 1,395 billion.

Customs and Federal Excise Duties have been reduced to facilitate the industry and exports. The government has introduced tariff exemption on almost 600 industrial products and customs duty has also been reduced to 3% on import of raw materials. This step was much needed to make imports cheaper in the light of local currency depreciation. Federal Excise Duty on 850cc cars has also been done away with which will make locally manufactured cars cheaper for the middle and low-income groups. According to an estimate by Pakwheels2 , a price reduction of anywhere between Rs64,000 to Rs110,000 can be expected due to the withdrawal of FED and cuts in GST on cars 880cc and less. These measures will augment on-going demand in the automobile, manufacturing and industrial sector in the upcoming fiscal year.

Big-ticket items will consume 70% of PSDP. The Public Sector Development Program (PSDP) allocation is expected to grow by 40%, and approximately 70% would be consumed by eight entities namely Finance Division, Water Resources Division, National Highway Authority, PEPCO, Kashmir Affairs & Gilgit-Baltistan Division, Cabinet Division, HEC and VGF. This implies a relatively smaller amount for important sectors like special economic zones, national food security division etc.

Gains from higher growth rate can be wasted in case of increased food inflation. The government targets to keep inflation at 8.2% in FY22 which is significantly higher than the 6.5% target for FY21. The inflation has hit double-digits twice in the outgoing fiscal year and has remained above 8% during most of FY21. Now that a higher target rate has been set for FY22, a similar pattern may be expected due to the cascading effect of higher economic activity. Inflation may also go northward as a result of imposition of GST on milk and sugar, higher petroleum levy and a turn-over tax on flour mills.

If international oil prices don’t come down, a possible hike in petroleum levy is likely to result in cost-push domestic inflation. As per Finance Minister, the government might have to increase levy on petroleum products from Rs5/litre to Rs20/litre in order to achieve the petroleum levy target of Rs610 billion in FY22. Whether this would be inflationary or not is contingent upon the lifting of US sanctions against Iran, its oil production and resultant lower international oil prices. If this expectation is not realized, then the cost of production will likely increase resulting in cost-push inflation.

The Budget FY22 entails increase in power subsidies but not food subsidies. The government has increased total subsidies by 225% for FY22 likely to yield Rs682 billion. Most of this increase is on account of power subsidies worth Rs596 billion. This is an attempt to provide relief to the inflation-ridden public by bringing down the electricity tariffs. However, the effectiveness of these subsidies will be based on how efficiently these are targeted. Historically in Pakistan, power subsidies have more often than not been targeted inefficiently. With prevailing food inflation, rise in food subsidies was much needed but denied. The allocated amount for food security only increased by 2.9% in FY22 as against FY21, with no additional grants budgeted. This will likely have a negative effect on food security and prices.

Fiscal prudence on the Public Sector Enterprises (PSEs) and higher privatization proceeds in the books. The recoveries of loans and advances from PSEs and others are set at Rs178 billion in FY22, which is up 85.4% from the revised estimate of FY21, suggesting commitment to fiscal prudence and a signal of confidence on institutional reforms. Further, the privatization proceeds are projected at Rs252 billion, up 152% from FY21. This figure seems questionable. From past two years, the Ministry of Finance has not registered any inflows under this category, yet the budget estimates of the outgoing fiscal years (FY20 and FY21) still show Rs150 billion and Rs100 billion respectively under this category. It would therefore not be surprising if the same occurs in the incoming fiscal year also.

Since 2013 analysts have been advocating reducing tax rate, lowering import tariffs and reducing wasteful expenditures. The lowering of customs duties and tariffs on raw material imports as well as announcing of zero duty on IT products is certainly great news. Contrary to the narrative of being a pro-poor budget, ambiguity remains as to how this budget will reduce food inflation in the upcoming fiscal year. Under the Federal Budget FY22, government has proposed to increase the turnover tax on wheat to 1.25% from 0.25%, while the sales tax on flour bran is set to enhance to 17 % from 7%. Moreover, Rs7 billion would also be collected from sales tax on sugar. Since both are essential commodities, increase in their prices is likely to worsen food inflation. Direct and indirect cash transfers to low-income groups are a short-term solution for mitigating the effects of food inflation and other socio-economic issues, which this budget entails. However, a long-term and a more sustainable approach calls for increasing real incomes, employment opportunities, human capital development and sustaining economic growth in order to achieve a definite improvement in socio-economic indicators.

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