There will be no winners, say experts ahead of budget announcement

Battling one of its worst economic crises in history, Pakistani authorities are set to present the federal budget for fiscal year 2023-24 on Friday. Finance Minister Ishaq Dar will be seen juggling between keeping the International Monetary Fund (IMF) onboard for a teetering bailout programme Pakistan so desperately needs, and pacifying the public that is dealing with the repercussions of an economic fallout through record inflation.

Ahead of the budget, Business Recorder reached out to market experts, who were of the view the government lacks the fiscal resources to offer any kind of relief.

“Historically, during election year, governments tend to announce a populist budget,” Sana Tawfik, analyst at brokerage house Arif Habib Limited (AHL), told Business Recorder on Wednesday.

“However, this will not be the case this time around as Pakistan is under an IMF programme. I don’t see any major relief as the IMF would be the priority.”

Pakistan’s bailout programme with the IMF has been stalled at the ninth review, while talks on the staff-level agreement have dragged on over securing necessary financing assurances to bridge the balance of payments gap.

Days after Prime Minister Shehbaz Sharif announced a fuel package – intended to be a cross-subsidy – the plan was scrapped as the IMF seemingly expressed concerns over its implementation.

Separately, the government has also shared some of the details of fiscal year 2023-24 budget with the Fund already. Last year, then-finance chief Dr Miftah Ismail also faced a similar predicament.

Tawfik said the government would need to stay focused on increasing its revenue while cutting down on expenditure.

“Government is more likely to rely on indirect taxation rather than direct, as it fears backlash,” she said.

“We expect measures announced in the mini-budget to continue. Federal Excise Duty (FED), Super Tax could increase. Moreover, Petroleum Development Levy (PDL) may also increase, which will put a higher inflationary pressure on the citizenry,” she said.

Facing dwindling foreign exchange reserves, the government also has another challenge in addition to falling rupee revenue – it has very few dollars at hand as well ahead of rising debt repayments.

“Debt servicing of Rs7.5 trillion is expected in the coming fiscal year, which leaves very limited space, if any, to provide relief to the public,” Arsalan Siddiqui, Head of Research at Optimus Research, told Business Recorder.

“Apart from debt servicing, there are other expenses as well i.e. defence, development etc. We cannot generate enough revenue to meet our expenses,” he said.

The National Economic Council (NEC) on Tuesday approved Rs1,150 billion federal development budget and set an estimated 3.5% Gross Domestic Product (GDP) growth target for the next financial year 2023-24. Pakistan posted a growth of 0.3% this fiscal year, it was announced earlier.

“The PSDP figure came as a surprise to us, and it’s unlikely that the absolute amount would be disbursed unless the government manages to raise its revenue,” said Arsalan.

The expert said that the Federal Board of Revenue’s (FBR) target of Rs9.2 trillion for the upcoming fiscal is also “unlikely to be achieved owing to the current macroeconomic indicators”.

“However, major support could come from other revenue sources i.e. State Bank of Pakistan’s revenue and PDL. Revenue to the tune of Rs2.7-2.8 trillion could be generated from these sources,” he said.

Economic experts have also repeatedly stressed on resumption of the IMF programme, terming it crucial for the debt-ridden economy.

The Fund has stressed introducing structural reforms in the debt-ridden economy, but is not a big endorser of non-targeted subsidies. “The government cannot announce any major subsides as it needs to keep the IMF on board,” said Arsalan.

Experts said the government, running fiscal slippages with delayed IMF tranches, would target the corporate sector to boost its revenues. However, this has already happened at the cost of economic growth.

“It is unlikely that any sector walks away with any meaningful wins in the federal budget, scheduled to be revealed in 2 days,” said JS Global in a report on Wednesday.

“We believe the budget will likely carry more negative earning implications for banks, as it has been among the key sectors historically for the government to reap tax collections,” it said.

The brokerage house was of the view that there is a likelihood of Super Tax increasing from current levels of 4% for the sector to 10%. “Another likely tax measure could be flat tax on income from Federal Government Securities (FGS),” it added.