Federal budget pro-growth but food inflation remains concern, says think tank

PRIME Institute has termed Pakistan's federal budget for fiscal year 2021-22 pro-growth, but added that economic gains could be wasted if inflation rises.

In its post-budget comments, PRIME, an Islamabad-based think tank, said that the federal budget strategy for FY22 is pro-growth and spending-led. The latest budget has called for a reduction in existing indirect taxes with no new direct tax on salaried class and businesses.

"However, the gains from higher growth rate can be wasted in the case of increased food inflation," stated PRIME.

It commented that if international oil prices do not come down, a possible hike in petroleum levy is likely to result in cost-push domestic inflation.

Budget speech 2021-22

The federal government on Friday announced its third budget in an attempt to generate stimulus and offer enough incentives that would help it reach a growth target of 4.8%. The government total budget outlay was set at Rs8,487 billion, while the national PSDP outlay at Rs2,102 billion.

The report pointed out that the budget FY22 entails increase in power subsidies but not food subsidies.

Commenting on the budget, PRIME Executive Director Ali Salman said that “the government has presented a pro-growth budget by tax cuts and demonstrating fiscal prudence, though some of the additional indirect taxes on key commodities will backfire.” He also said that the budget sanctity has to be ensured and hoped that no mini-budgets are introduced in the next fiscal year.

Salient features of Budget 2021-22

PRIME report says the government’s commitment to improved recoveries from state-owned enterprises as well as higher targets from privatisation proceeds is appreciable. "This is high time that the government delivers on its promises of turning around loss-making public sector enterprises."

The report highlighted that contrary to the claims 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, the government has proposed to increase the turnover tax on wheat from 0.25 percent to 1.25 percent, while sales tax on flour bran is set to enhance from 7 percent to 17 percent. 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,” said the report.

It said that the direct and indirect cash transfers to low-income group through the Ehsaas programme is 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,” it said.