Pakistan Federal Budget 2022-23

Sustainable Growth: A balance between austerity and relief

KASB Research
research@kasb.com
11 June 2022
1
Executive Summary (1/2)
 The Federal Budget 2022-23 aims at sustainable growth through a balance of austerity Table 2: Summary of Budgetary Estimates
PKR bn FY20 FY21 FY22E FY23F
and relief. The total outlay for FY23 was set at PKR 9,500bn (+12% YoY), intending to
Tax Receipts 4,208 4,691 6,000 7,004
support the targeted GDP growth rate of 5.0% (vs. 6.0% recorded in FY22).
FBR Taxes 3,908 4,691 6,000 7,004
Figure 1: GDP Growth Rate targeted at 5.0% Table 1: Sector-wise growth targets Direct Taxes 1,623 1,789 2,204 2,573
Indirect Taxes 2,285 2,902 3,796 4,431
8.0% FY20 FY21 FY22E FY23F*
6.1% Non-tax Receipts 1,296 1,704 1,315 2,000
5.7% 6.0%
6.0% 5.0% Services -1.2% 6.0% 6.2% 5.2% Capital Receipts 756 1,701 2,508 2,408
External Receipts 2,273 2,287 3,114 3,166
4.0% 3.1%
Industrial -5.8% 7.8% 7.2% 5.0% Privatization Proceeds 150 0 0 96
2.0% less: Provincial Share 2,402 2,704 3,512 4,100

0.0% Agriculture 3.9% 3.5% 4.4% 4.5% Total Expenditure 8,345 8,489 10,624 12,421
Current Expenditure 7,586 7,626 7,523 8,694
-2.0% -0.9%
GDP Growth -0.9% 5.7% 6.0% 5.0% Defence 1,225 1,299 1,484 1,527
FY18 FY19 FY20 FY21 FY22E FY23F
Debt Servicing 3,955 2,851 3,144 3,950
Source: SBP, Finance Ministry Source: SBP, Finance Ministry
Development Expenditure 759 863 434 1,024
*KASB Estimates Source: Budget Document

 The targeted outlay will be financed through a higher tax collection target of PKR
7,004tn (+17% YoY). Notable measures were introduced to improve Pakistan’s tax to
GDP ratio to 9.2% of GDP (vs. 8.6% in FY22). Particular focus was observed on enhancing
direct taxation, including a 2% increase in taxation rates for individuals and
corporations. Nevertheless, the majority of the taxation growth will be driven by
increased economic activity and inflation.

 Total Expenditure is budgeted to rise by 17% to PKR 12.4tn in FY23. Notably, austerity
measures, particularly the removal of energy subsidies, will enable the federal
government to enhance the development expenditure to PKR 1.0tn. Moreover,
Federal PSDP is set at PKR 727bn for FY23 against a revised figure of PKR 550bn in
FY22.

2
Executive Summary (2/2)
 The federal government also aims at reducing the country’s external imbalances Table 4: Macroeconomic Overview
PKR mn FY20 FY21 FY22E FY23F
through policy measures. For FY23, it budgets an 8% YoY reduction in imports to USD
Total Revenues 6,272 6,903 7,315 9,004
70bn and a 12% YoY increase in exports to USD 35bn. These measures would allow
Tax Revenues 4,748 5,273 6,000 7,004
Pakistan to reduce its current account deficit (CAD) to more manageable levels of 2.2%
Non-tax Revenues 1,524 1,631 1,315 2,000
of GDP.
Total Expenditure 9,648 10,307 10,624 12,421
Current Expenditure 8,532 9,084 7,523 8,694
 The government estimates that short-term austerity measures would enable Pakistan
Mark-up 2,620 2,750 3,144 3,950
to focus on long-term sustainable growth. By FY25, the government is eyeing 6.2% GDP
Defence 1,212 1,316 1,484 1,527
growth, a 10% tax to GDP ratio, and a budget deficit at 2.8% of GDP.
Development 1,204 1,316 434 1,025
Budget Balance (% of GDP) -8.1% -7.1% -8.6% -4.9%
Table 3: Medium-term macroeconomic forecast
Primary Balance (% of GDP) -1.8% -1.4% -2.4% 0.2%
FY22E FY23F FY24F FY25F Pakistan Economic Overview
Economic Growth (%) 6.0% 5.0% 5.8% 6.2% Imports (USD bn) 43.6 54.3 76.0 70.0
Inflation (%) 11.7% 11.5% 8.6% 7.4% Exports (USD bn) 22.5 25.6 31.3 35.0

FBR Taxes (% of GDP) 9.0% 9.0% 9.4% 10.0% Remittances (USD bn) 23.1 29.5 31.1 33.2
CAD (% of GDP) -1.5% -0.8% -4.1% -2.2%
Budget Deficit (% of GDP) -7.1% -4.9% -4.0% -2.8%
Inflation (%) 10.7% 8.9% 11.7% 11.5%
Primary Balance (% of GDP) -2.4% 0.2% 0.9% 1.8% Source: Budget Document
Source: Budget Document

3
Targeting revenue growth of 23% YoY (1/3)
Revenue collection targeted at PKR 9.0tn Table 5: Revenue Targets and Receipts
PKR bn FY20 FY21 FY22E FY23F
 The government has set a revenue growth target of PKR 9.0tn, an increase of 23% YoY FBR Taxes 3,908 4,691 6,000 7,004

in FY23. Direct Taxes 1,623 1,789 2,204 2,573

Customs 546 700 817 953
 This increase will be achieved through a 17% YoY increase in FBR tax collection to PKR Sales Tax 1,427 1,927 2,635 3,076
7.0tn. The budget projects a uniform increase in all major taxation heads, including FED 312 275 344 402
direct taxation, sales taxes, custom duties and FED. We believe FBR’s target is Other Taxes 300 n/a n/a n/a
achievable purely through the projected inflation (11.5%) and the targeted GDP growth Petroleum Levy 260 n/a n/a n/a
rate (5.0%). Non-tax Revenues 1,296 1,704 1,315 2,000
Dividends 48 40 70 80
Energy Taxation
Share of SBP Profits 785 700 474 300

 The most notable increase stems from the projected PKR 750bn collection of Petroleum Petroleum Levy n/a 500 135 750

Development Levy (PDL) against PKR 135bn collected in FY22. Based on our estimates, GIDC 11 25 25 200

the targeted PDL will only be achievable through maximizing the levy at PKR PTA License 125 34 100 50
Source: Budget Document
30/liter on the sale of Motor Gasoline (MoGas) and Hi-Speed Diesel (HSD).

 Another notable increase includes a targeted GIDC collection of PKR 200bn against Figure 2: GDP Growth Rate targeted at 5.0%
PKR 20bn collected the year prior. The PTI government had abolished GIDC on the PKR bn
condition of the clearance of its payables. The higher collection target (10x YoY) under 8,000 12.0%
the GIDC head likely implies the collection of the overdue balance. 7,000 11.0%
6,000
Corporate Taxation 10.0%
5,000
 The corporate tax rate for Pakistan’s banking sector will increase to 45%, including 4,000 9.0%
the super tax, compared to 39% in FY22. 3,000 8.0%
FY17 FY18 FY19 FY20 FY21 FY22E FY23F
 The corporate tax for other entities will remain unchanged at 29.0%.
Tax Collection % of GDP
 Notably, the budget proposed a 2% tax on all persons, inclusive of companies, earning Source: Budget Document
annual income in excess of PKR 300mn.

4
Targeting revenue growth of 23% YoY (2/3)
Real Estate Taxation
 Property valued in excess of PKR 25mn will be subject to a 1% tax on its fair market value. Moreover, said property will also be deemed to have
received 5.0% of its fair value as rental income. One property, however, will remain exempt from this clause.
 The taxation rate on the sale of property within the first year has been increased to 15.0%. Each subsequent year, the tax liability will reduce by 2.5%
till it reaches 0% by year 6.

Table 6: Real Estate Capital Gains Tax (CGT)

Present Proposed
< 1 year 10.0% 15.0%
Year 1 7.5% 12.5%
Year 2 5.0% 10.0%
Year 3 0.0% 7.5%
Year 4 0.0% 5.0%
Year 5 0.0% 2.5%
Year 6 0.0% 0.0%
Source: Budget Document

 The advance tax on filers on the sale and purchase of property will increase to 2.0% from 1.0% presently. The advanced tax on non-filers will
increase to 5.0% of the value.
Automobiles
 Advance tax on motor vehicles exceeding 1600cc will be increase. Moreover, a 2% advance tax on high-value hybrid and electric vehicles will be
levied.
 The rate of tax on non-filers will increase to 200% (vs. 100% presently)
Tobacco
 FED on locally manufactured cigarettes has been increased

5
Targeting revenue growth of 23% YoY (3/3)
 A fixed tax regime of PKR 3,000-10,000 levied on the electricity bill of small retailers.

 Payments being remitted outside Pakistan will be subject to a 1% advance withholding tax of 1.0% (2.0% for non-filers).

 Deductible allowance on the profit of debt has been withdrawn

 Tax credit for investments in new shares and insurance has been withdrawn

 Tax credit for investments in health insurance has been withdrawn

 Tax credit for contribution to an approved pension fund has been withdrawn

 100% tax credit from the income derived via the export of computer software or IT services has been withdrawn

 Advance tax on the import of edible oil, packaging material, paper & board and plastics has ben implemented.

6
Targeting relief measures (1/2)
Individuals

 The individual income tax slabs were revised to be more back loaded. The initial threshold of income tax liability was doubled to PKR 1.2mn/annum.
Notably, salaries below PKR 1.5mn/month will benefit from a reduced income tax liability.

 Behbood Savings certificates will be taxed at a maximum rate of 5.0% (vs. 10% prior).

 The import and local supply of solar panels will be exempt from sales tax.

 The condition of CNIC/NTN in case of supply to unregistered person has been removed.

Corporate Taxation

 Industrial undertakings and other business will be allowed to adjust 100% as depreciation charge in the first year.

 Industrial undertakings will be allowed to adjust tax deducted at the import stage on all material, alleviating a potential cash crunch.

 CD and ACD on tariff lines related to aluminum, polymers of ethylene and BOPP have been reduced.

Agriculture

 It has been proposed to withdraw sales tax on the supply of tractors, agricultural implements, and various seeds.

 PKR 21bn allocated for crop yields and uplift of livestock sector.

Pharmaceutical

 Custom duties on the import of 26 APIs have been removed.

REITs

 Reduced rate of 3.0% on provision of services by REIT management company

7
Targeting relief measures (2/2)
Corporates

 Outstanding DLTL of PKR 40.5bn will be released immediately. Moreover, sales tax refunds will be paid immediately.

Entertainment Industry

 A five-year tax holiday will be granted on film procedures and on the establishment of new cinema houses, production houses, and film museums.
Moreover, a 10yr tax rebate and an exemption on income tax will be offered on the export of film and drama.

 An 8% WHT on distributors and producers will be withdrawn. Moreover, the import of film-related machinery, equipment and other items will be
exempt from customs duty for five years.

8
Subsidies to fall by 54% YoY
 The government is reducing its targeted subsidy balance by 54% YoY to PKR 699bn for Table 7: Subsidies
FY23. PKR bn FY22E FY23F YoY (%)
Subsidies 1,515 699 -54%
 The subsidies granted to IPPs and PHPL will reduce by 59% and 70%, respectively. The IPPs 434 180 -59%
previous year had a higher base because of the clearance of IPPs payment as part of the PHPL 118 35 -70%
deal to revise down the tariffs. Industrial Support Package 15 7 -53%
Tariff Differential Subsidy 80 0 -100%
 The tariff differential subsidy of PKR 80bn as part of PM’s relief package will be withdrawn.
PDC Claims 250 0 -100%
 The Industrial support package on the incremental use of electricity will reduce by 53% to LNG subsidy 81 40 -51%
PKR 7.0bn. Urea Import 0 6 n.m
Source: Budget Document
 Notably, PDC claims will be phased out entirely as against nearly PKR 400bn claimed in
FY22. This is in-line with the government’s target to re-implement PDL into the petroleum
pricing structure.

 The LNG subsidy will reduce by 51% to PKR 40bn, suggesting higher prices for the
export-oriented sector.

 Subsidies for the import of urea will increase to PKR 6.0bn, suggesting potential import
of 42kT of urea at current prices.

9
Elevated reliance on debt to fund the budget
Table 8: Capital Receipts
 The government’s reliance on debt will remain elevated, with new debt receipts estimated at PKR bn FY20 FY21 FY22E FY23F
PKR 21.8tn. The government will be repaying PKR 19.7tn in debt, implying net debt receipts of Debt Receipts 15,978 16,236 22,034 21,776
PKR 2.1tn. Permanent Debt 1,649 2,163 4,711 4,395
PIBs 1,330 1,700 1,239 1,585
 Nearly 80% of the domestic debt is budgeted to be acquired through short-term T-Bills (PKR
Sukuk Bonds 300 437 1,725 1,200
17.4tn).
Floating Debt 14,197 14,073 17,323 17,381
 The government also plans to float PKR 1.2tn worth of Sukuk Bonds, increasing potential T-Bills 13,546 14,017 17,298 17,356
investment avenues for Islamic Banks. Loan Recoveries 132 184 306 286
Debt Payments 15,222 14,719 19,832 19,654
 On the foreign front, the government has earmarked PKR 372bn (USD 1.8bn) through the Permanent Debt 998 962 1,690 2,424
issuance of new Eurobond and Sukuks in the international market. PIBs 920 957 1,239 1,585
Sukuk Bonds 71 0 0 0
 The government also expects PKR 149bn (USD 745mn) will be utilized from Saudi Arabia’s
Floating Debt 14,224 13,756 18,142 17,230
deferred oil payment facility, implying the import of 6.2mn barrels of crude oil at current
T-Bills 13,391 13,430 17,859 17,198
prices.
Net Receipt 756 1,517 2,202 2,121
Source: Budget Document

Table 9: External Receipts

PKR bn FY20 FY21 FY22E FY23F
Loans 2,181 2,229 2,964 3,125
IDB 127 129 232 223
Eurobond/Sukuk 0 403 343 372
IMF 457 77 0 0
Saudi Oil Facility 139 0 70 149
Banks 624 762 822 1,390
Others 92 28 32 28
Total External Receipts 2,273 2,287 2,964 3,125
Source: Budget Document

10
Reviving focus on development spending
 Austerity measures, including a sharp reduction in subsidies, will enable the Table 10: Federal PSDP
PKR bn FY22E FY23F
government to increase its development spending by 45% to PKR 800bn (Federal
Total PSDP 550 800
PSDP PKR 727bn).
Federal PSDP 550 727
 Notably, the government has allocated PKR 100bn on the development of water Water Resource 91 100
resources. PKR 55bn was earmarked for the development of Dasu Hydropower project, Dasu Hydropower 57 55
PKR 12bn was earmarked for the Neelum Jhelum Hydropower project, and PKR 14bn Neelum Jhelum Hydropower 14 12
was earmarked for the extension of the Tarbela Dam. Tarbela Dam 10 14
National Highway Authority 87 118
 The National Highway Authority was allocated PKR 118bn (+37% YoY) for the Power Division 47 43
development of highways. IT & Telecom 4 6
Source: Budget Document
 The IT & Telecommunications sector was allotted PKR 6.0bn (+44%).

 Increased focus on development spending is projected to support Pakistan’s

construction industry, particularly the cement and steel sector.

11
Sector-wise impact (1/3)
Commercial Banks (Negative)
Table 11: Taxation on ADR
 Increase in tax rate to 45% from the current rate of 39%. This would erode the banking sector’s earnings by Old New
an average of 10.5% on an annual basis. 5.0% 10.0%
<40%
 In a bid to encourage lending, the government has proposed to increase the tax rate in case of adverse ADR. 40-50% 2.5% 4.0%
Presently, the ADR stands at 48.6% on Pakistan’s banking sector. >50% 0.0% 0.0%
Source: Budget Document
Automobiles (Negative)
 Advance tax on motor vehicles exceeding 1600cc is proposed to be increased. This measure aims to tax the Table 12: Advance Tax on Vehicles
high-end luxury segment, in-line with the overall theme of the budget. Engine Capacity (cc) New Tax Old Tax
< 850 10,000 -
 Advance tax shall also be collected at the rate of 2% of the value in cases of high value hybrid and electric
vehicles. 851-1000 20,000 5,000
1001-1300 25,000 7,500
 The rate of tax for non-filers shall be enhanced to 200% from the current 100%, further incentivizing
individuals to file their taxes. 1301-1600 50,000 12,500
1601-1800 150,000 18,750
Packaging (Negative) 1801-2000 200,000 25,000
 ACD, CD on aluminum, polymers of ethylene (11% to 3%), BOPP (20% to 16%) downward rationalized 2001-2500 300,000 37,500
2501-3000 400,000 50,000
 Reduction in CD by 4% to 16% on cartons, boxes and cases of corrugated paper
>3000 500,000 62,500
 Exemption of CD & ACD on import of raw materials of paper sizing industry and chlorinated paraffin wax Source: Budget Document
industry.
Fertilizer (Neutral)
 Sales tax has been enhanced on fertilizer from 2.0% to 10.0%. Moreover, sales tax on its inputs have also been
increased. We estimate fertilize prices will likely rise by PKR 150/bag. The fertilizer companies, however, will
likely welcome the levy as they would be able to adjust their input sales tax without the risk of payment
delays.
 GIDC collection target enhanced to PKR 200bn. This collection likely implies the payment of the overdue
GIDC balance.
 The CNIC/NTN requirement for sales to unregistered person abolished. Notably, the fertilizer sector was
facing issues on its sales to unregistered dealers, creating an additional burden of PKR 50/bag.

12
Sector-wise impact (2/3)
Textiles (Neutral)

 Reduction in CD and ACD on 10 tariff lines will improved the cash-cycle of the textile sector. The outstanding DLTL
balance would likely dissipate over time.

 Refund of PkR 40.5bn in DLTL claims would improve the liquidity of the textile sector. Notably, the textile sector faces
considerable cash-flow crush led by delays in the clearance of its receivables.

 Import of Synthetic Filament yarn, monofilament (0-11%), staple fibers of polypropylene (0-11%), synthetic staple fiber (0-
11%) rationalized.

 New gas rates to be announced on competitive rates (in line with regional countries) to boost exports. This measure
would coincide with the government’s target to improve overall exports to USD 35.0bn. We estimate the government is
targeting textile exports to potentially cross USD 22.0bn in FY23.

 LNG subsidy reduced by 50% suggests that the textile industry may rely on domestic gas at preferential rates.

Pharmaceutical (Positive)

 CD have been exempted on 26 more APIs and on one drug “Grafalon”. The reduction in CD would improve the
profitability of the pharmaceutical sector, and potentially enhance affordability of particular drugs.

Information Technology (Negative)

 RD on import of optical fibre cables has been increased from 10% to 20% to encourage the local manufacturers.

 PKR 17bn for improving and promoting IT exports

 The tax exemption status on the export of IT software and services has been withdrawn. Instead, the tax rate of 0.25% of
proceeds Export proceeds of computer software or IT services will be levied.

Oil and Gas Marketing Companies (Positive)

 10% CD rate on import of motor spirit has been replaced with 10% RD. Notably, a few OMCs were bypassing the CD on
the import of fuel through the Bilateral free trade agreement, potentially benefitting from a PKR 10/liter improvement
in margins. This change would rectify the exploit and normalize the import structure.

 The OMC sector’s cash flows have come under significant pressure because of the implementation of the PDC. The
phasing out of this mechanism would significantly improve the sector’s cash-flows.

13
Sector-wise impact (3/3)
Chemicals (Neutral)

 Continuation of 20% RD on import of Disodium Carbonate to protect the local industry

 Withdrawal of 15% RD on import of Chrome yellow.

 CD on Plastic polypropylene reduced to 3% from 11%

 Sulphur dye reduced to 11% from 16%

Construction (Positive)

 PKR 800bn allocated for the Federal PSDP will likely enhance construction related activities
originating from the public sector. We believe cement and steel sectors are likely to benefit from
this development.

 PKR 100bn allocated for hydropower dams, of which the majority is earmarked for Dasu Dam.

Food (Neutral)

 Exemption of customs duties on import of membrane for filtering / purifying water from 16% CD &
4% ACD.

 Reduction of customs duties on import of flavoring powders for food preparation for snacks
manufacturers.

14
Concluding Remarks – A balance of austerity and targeted relief
 The federal budget 2022-23 aimed to strike a balance between austerity and Figure 3: GDP Growth Rate targeted at 5.0%
expansionary measures for sustainable growth. It focused on targeted relief in view of 9.0 12.0%
the high inflation environment.
10.0%
 The government aimed at higher tax collection through incentivizing documentation. 7.0
Various tax exemptions were also withdrawn as the government focused on enhancing 8.0%

direct taxation. 6.0%

5.0
 The budget revived the economy’s focus on development spending with a PSDP 4.0%
allocation of PKR 800bn. The allocation will likely support economic activity within the
3.0 2.0%
country, with particularly the Steel and Cement sector likely to benefit.
FY18 FY19 FY20 FY21 FY22E
 We believe the IMF’s fingerprints were evident on the proposed budget. The austerity PE (x) - L.H.S Yield (%) - R.H.S
measures, coupled with the proposed removal of energy subsidies, will provide a
significant push towards the revival of the IMF program. Source: KASB Research

 Additional avenues of external financing, coupled with the austerity measures, will
considerably alleviate Pakistan’s financial position. Comfort on this front would go a long Figure 4: GDP Growth Rate targeted at 5.0%
way in rebuilding investor confidence towards Pakistan’s capital market. 22.0% 1.3

 Pakistan’s market is presently trading at multi-year low multiples with its PE at 4.2x and 1.1
its PB at 0.7x. Moreover, profitability remains high at ROEs improved to 19% and yields 18.0%
rose 9.8%. 0.9

 We highlight our preference for defensive plays, particularly the food sector, because 14.0%
0.7
of its price inelasticity and pricing power. Despite near-term slowdown, we also believe
the textile sector will outperform because of its macroeconomic hedged 10.0% 0.5
fundamentals. FY18 FY19 FY20 FY21 FY22E

ROE (%) - L.H.S P/B (x) - R.H.S

Source: KASB Research

15
 Pakistan’s Macroeconomic Statistics
Table 13: Macroeconomic Snapshot
FY18 FY19 FY20 FY21 FY22E FY23F
Economic Snapshot
Production Statistics
GDP (USD mn) 315 278 300 348 372 392
GDP Growth (%) 6.1% 3.1% -0.9% 5.7% 6.0% 5.0%
LSM Growth 5.3% -2.3% -9.8% 14.9% 7.0% 6.0%
External Accounts Statistics
Total Imports (USD mn) 67,948 62,805 52,398 62,734 88,300 82,000
Services Balance (USD mn) (6,426) (4,970) (3,316) (2,516) (4,500) (5,000)
CA Balance (USD mn) (19,915) (13,434) (4,449) (2,820) (18,000) (8,613)
CA Balance (% of GDP) -6.3% -4.8% -1.5% -0.8% -4.8% 2.2%
SBP Reserves (USD mn) 9,765 7,285 13,724 18,716 9,500 12,500
Import Cover (months) 1.7 1.4 3.1 3.6 1.3 1.8
Monetary Statistics
Interest Rates - avg.(%) 6.0% 9.5% 12.0% 7.0% 9.4% 14.0%
Interest Rates - end (%) 6.5% 12.3% 7.0% 7.0% 13.8% 15.0%
CPI Inflation (%) 3.9% 6.8% 10.7% 8.9% 11.7% 11.5%
PKR/USD Parity - Avg. 110.0 136.4 158.3 160.1 175.5 200.0
PKR/USD Parity - End. 121.5 157.5 168.1 157.7 200.0 200.0
Fiscal Statistics
Tax Revenues (% of GDP) 13.0% 11.6% 11.4% 11.1% 8.6% 9.2%
Budget Balance (% of GDP) -6.6% -8.9% -8.1% -7.1% -8.6% -4.9%
Primary Balance (% of GDP) -2.2% -3.5% -1.8% -1.4% -2.4% 0.2%
Source: KASB Research

16
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production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from
them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of
current and future results.

Analyst Certification: All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of
the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

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