Dubai June 13 2022: Citi think the FY23 Budget will get the government closer to unlocking the $900mn from the IMF 7th Review but we await further Fund feedback.
There are reports that the IMF is also asking the government to renegotiate CPEC energy deals amid the disclosure that Pakistan has outstanding dues to Chinese IPPs of about Rs340bn, out of which PM Shehbaz Sharif recently approved the release of Rs50bn. While it would not surprise us if the IMF were to want full disclosure of these CPEC–related liabilities, we think it would be difficult to tie IMF loan disbursal to renegotiating contracts which are beyond the control of Pakistan authorities, while this would complicate Pakistan’s ongoing need for Chinese financing and investment.
Government pushes for a significant narrowing of the fiscal deficit, moving primary balance towards a small surplus. The government aims to narrow the budget deficit to only 4.9% of GDP in FY23 versus an estimated 8.6% of GDP in FY22, the latter being a big slippage from the original target of about 6.3% of GDP, partly on the back of a much larger than expected subsidy bill that was 1.2ppts of GDP higher than the original budget allocation. Following two large back-to-back fuel price hikes within a week totalling about Rs 60/litre or about a 40% increase, FY23 budget implicitly sustains the unwind of energy subsidies with the spending allocation for subsidies reverting to almost the original provision in the FY22 Budget. The government is now aiming to achieve a small primary surplus of 0.2% of GDP in FY23F versus a primary deficit of 2.4% of GDP in FY22E.
FY23 Budget assumes a 17% increase in tax revenues to PKR7 trn but falls below the PKR7.255 trillion figure that had been earlier reported in prior talks with the IMF. While this tax collection growth would be an improvement from an estimated 14% increase in FY22, and aims to improve the composition of tax towards direct rather than indirect taxes to cushion the poor, it’s not clear the revenue target will be considered ambitious enough. The tax to GDP ratio is only aimed at rising to 9.2% of GDP in FY23F from 8.6% of GDP in FY22E, which looks very low versus EM peers and Pakistan’s own history. With interest expense expected to rise, this would mean the interest expense is still forecast to eat up an uncomfortably large 44% of total revenues, and may highlight lingering concerns about growth and inflation. The FY23 Budget assumes a reversal of sharp petroleum development levy cuts under ex PM Khan with PDL receipts projected to rise to Rs750bn in FY23F versus only Rs135bn in FY22E, or equivalent to about 0.8% of GDP.
Personal income tax (PIT) reforms falls short of IMF’s prescriptions. Finance Minister Miftah Ismail said over the weekend that the IMF was still concerned about fuel subsidies and the need to raise more direct taxes. In particular, the government did not increase the tax rate on monthly income salary earnings of Rs100,000, in contrast to IMF proposals, as the government instead opted to imposes taxes targeting the rich via their property, luxury vehicles and windfall profits. The Finance Minister said they would need to make further changes in the budget after 15 days.
The government is trying to rein in spending despite a pre-election year. Aside from cutting subsidy spending budget, the Public Sector Development Program (PSDP) budget is expected to be largely flat vs the current fiscal year, with a sharp reduction in Federal PSDP to offset rise in provincial PSDP spending. Nonetheless, the two largest spending items – interest and defense expenses – are still forecast to rise by almost 25% and 11%, respectively.
