This year’s budget held special significance for the Pakistan Tehreek-e-Insaf (PTI) government, as many viewed it as the last opportunity for the incumbent government to show its mettle. The last two to three years were marred by the economic slowdown, the Covid-19 pandemic, and high inflation. If this were to continue, it could take a toll on PTI’s vote bank in the next election and therefore a course correction was in order. But no one expected that such course correction would come in so swiftly. Hafeez Shaikh was let go, apparently on his insistence on electricity tariff increase, and Shaukat Tarin was sworn in as the new finance minister.
Soon after, this year’s growth estimates took everyone by surprise. Pakistani economy turned out to be much more resilient to the pandemic, but it is hard to ignore the role played by the Covid stimulus package, smart lockdowns and rapid vaccinations. Pakistan is once again back on the growth trajectory.
While it was critical to sustain this rapid recovery, we were also facing tough IMF conditionalities, which if fully implemented, could very well slow down the economy once again. While no one would disagree on the need for fiscal discipline proposed by IMF, many would question its timing, scale, and modus operandi.
More than anyone else, it’s the politicians who clearly did not have time for a long economic cycle to run its course. They knew that they were fast running out of time and would have to go back to their voters in 2023.
But to give credit where it’s due, the government held its end of the bargain and has come up with an excellent budget, perhaps the best that’s possible within the given constraints. It is interesting to see that so far no one has criticised the direction of the budget, and even the worst of the critique has been about the government’s ability to pull it off.
So what’s so great about this budget?
First and foremost, the budget has introduced a number of proposals to support industry, businesses and investors. In particular, the budget has brought good news for construction, automobile, information technology and a number of other sectors. The budget includes reduction or exemption of duties on raw materials and inputs for various sectors such as electronics, pharmaceutical, textiles, footwear, paints, etc. Export of services for the IT sector have been zero-rated, while zero-rating has also been proposed for local supplies or import of raw materials, components, parts and plant and machinery for registered exporters authorised under Export Facilitation Scheme, 2021.
The construction sector amnesty scheme has been extended by another six months, which will have a positive impact on cement and all construction-related industries. A number of incentives have been granted on electric vehicles including exemption of sales tax on CKD kits, while sales tax on small domestically assembled cars has been reduced. A number of generous incentives have also been introduced for the planned special technology zones. Lastly, the capital gains tax (CGT) has also been reduced on sale of securities that is likely to further support a rapid stock market recovery.
The budget has also introduced a number of incentives for the SMEs, which brings the spotlight on the long-ignored segment. A separate scheme of taxation is proposed for SMEs, giving them flexibility to be taxed either on their profitability or turnover. The threshold for levy of minimum tax (individuals/AOPs) has been enhanced, while the threshold for annual turnover to qualify as cottage industryhas been increased from Rs3 million to Rs10 million. The budget also includes proposals like common bonded warehousing, introducing a one-page tax return for SMEs, etc. that will have a positive impact on the small and medium-sized businesses.
One the taxation side, the budget 2021-22 promises to bring a major cultural transformation. After many years, we are again heading back to self-assessments, which will bode well for the businesses and will prevent harassment by tax officials. The budget also includes deletion of 12 withholding taxesincluding that on banking transactions and air travel. Electronic processing and issuance of refunds is also promised to facilitate businesses, whereas the arbitrary powers of the tax officials have been curtailed in many cases.
On the development side, the budget has increased the size of public sector development programme (PSDP) by a massive 38% increasing it to Rs900 billion. The national PSDP target is also set at Rs2.1 trillion (about 61 per cent higher than the last year). Such magnitude of increased spending is likely to help stimulate growth.
Then comes the Ehsaas programme, for which the government has made a generous allocation of Rs260 billion. The government is also planning to give interest-free loans, provide free technical trainings and other initiatives for 4-6 million families at the bottom of the pyramid. The government has also allocated $1.1 billion for Covid-19 vaccination and set an ambitious target of vaccinating 100 million people by June 2022. In addition, the subsidies for power sector have been increased, aiming to minimize the need for tariff increases during the year.
All in all, these measures are likely to boost business confidence significantly and will stimulate growth, hopefully beyond the set target of 4.8 per cent.
However, there are a few things that need to be kept in mind. First is the ambitious revenue target of Rs5.8 trillion next year, which amounts to 24 per cent increase over this year. Soon after introducing the budget, the government had to retrack its proposal on taxing the cellular calls and internet usage, whichwould take away about Rs100 billion from the estimated revenues and would have to be compensated from elsewhere. In addition, the government foresees about Rs242 billion coming in from administrative measures. Although there is a plan to achieve this target through bringing e-commerce retailers within the tax net, installing POS machines at retailers and providing incentives to general public to demand sales tax receipts, this would need a strong management push throughout the year. Similarly, the public should also expect increase in petroleum prices to meet the Rs610 billion targetfor Petroleum Development Levy. Unless the global oil prices start receding, this would be passed on to the public.
The negotiations with IMF is another area which needs some attention. With this ambitious budget, the IMF program is likely to be affected. This in turn may impede our ability access funding from other sources. Therefore, an amicable settlement with IMF, if not immediately then in a few months, is critical.
Lastly and most importantly, comes the question of whether this growth is sustainable. While we’ll only get to know thisin due time, there are some good measures in place to support the industry targeting import substitution. Any consequent dip in imports, in the medium term, continued healthy remittance inflow on the back of FATF-action plan, and a realistic exchange rate will definitely help in averting a future balance of payment crisis.
For now, it seems that Pakistan is finally out of the woods and the next 2-3 years are going to witness some decent growth.