Federal Budget FY24 – A Tricky Balancing Act

1
 CIO’s Review
§ Amid forex reserves, barely enough for a month’s imports, the government chose to impose strict import controls.
This measure was aimed to buy time till the release of the pending IMF tranche. However, it is important to note
that this policy is putting a significant strain on tax collection, which coupled with escalating debt servicing could
lead to a more distressful scenario, if not addresses in time.
§ Earlier this month, we had highlighted how this policy will enable the government to meet due foreign obligations
in the next few months. Broader economic activity has been severely affected and adding to worries is the
increasing incidence of imports through grey channels coinciding with weaker remittances and a wider spread in
Interbank and open market exchange rates.

§ 50% of our tax collection is linked directly with Imports even if we exclude the taxable economic activity at later
stage. Import curbs from formal channels are thus straining tax collection, encouraging grey channel activity, along
with inefficiency and higher cost.

§ 79% of tax collection would be utilized in FY24 for debt servicing (near 62% if we reduce SBP profit from interest
cost). Shortfall in monthly tax collection figures quoted in media is alarming. A combination of sustained higher
interest rates along with tax collection shortfall can lead to more distressful scenario and needs urgent policy
action.

§ Delays in negotiation of new IMF program would force the government to continue import curbs until its conclusion
and leaves no room for lax policy and fiscal indiscipline. Balancing public expectations with elections around corner
and maneuvering the fragile economic scorecard is extremely challenging.

§ Next few slides share a detailed analysis on tax collection and trends in debt servicing costs.

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FBR Tax Collection Structure

FY18 FY19 FY20 FY21 FY22

Direct Taxes 1,537 1,446 1,523 1,731 2,285
Sales Tax 1,491 1,459 1,597 1,988 2,532
Federal Excise 206 238 250 277 321
Customs duty 608 686 626 748 1,011
Total 3,842 3,829 3,997 4,745 6,149

Import taxes
Direct Taxes 219 222 200 219 282
Sales Tax 824 810 876 1,116 1,741
Federal Excise 10 13 10 19 22
Customs duty 608 686 627 748 1,011
Total 1,662 1,731 1,712 2,102 3,055

Domestic Taxes
Direct Taxes 1,318 1,224 1,324 1,513 2,003
Sales Tax 661 649 721 872 792
Federal Excise 203 226 241 258 299
Total 2,182 2,098 2,285 2,643 3,094
Source: FBR

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Sustained Import Controls will result in Fiscal Slippages

Monthly Imports (USD Mn) Percentage of FBR Revenue

8,000 60.0%
7,000 55.0%
6,000
50.0%
5,000
45.0%
4,000
40.0%
3,000
35.0%
2,000

FY17

FY18

FY19

FY20

FY21

FY22
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22 Import Taxes Domestic Taxes
Source: PBS, FBR

§ The delay in IMF program has created serious issues in managing our external position. As a result, the government
has tried to control imports through administrative measures such as imposing import quota and selective imports.

§ It has only allowed imports of essential items such as petroleum and food products while discouraging imports of
machinery , automobiles and mobile phones. . The country’s import in April-23 clocked at USD 2.9bn down by 28%
month on month (MoM), the lowest level since April-11 (excluding covid). As 40%-50% of our taxes are collected on
import stage, the current policy will make it difficult to enhance our tax collection.

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Imported Goods are a Major Source of Taxes

§ The taxes and levy on petroleum are an important Taxes and Levy (PKR Bn) FY21 FY22
source of tax collection. In FY22 the amount was PKR
Petroleum Products 1,019 959
1 trillion which is around 16.7% of FBR Tax collection.
Vehicles 207 349
§ The latest data suggest that consumption of petrol
and diesel have declined by 35-40% largely on account Machinery 235 312
of demand decline and smuggling. This phenomenon
Iron & Steel 179 225
if continue in the medium term will deprive
government of a critical tax source. Plastic Resins etc. 98 134

§ The government is currently focusing on essential Edible Oil & Oil Seeds 81 103
imports and have placed unofficial curbs on non- Total 1,819 2,082
essential goods.
Source: FBR
§ As a result imports of vehicle, machinery and other
goods have declined significantly in the last few
months which will hamper tax collection.

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 0.80
1.00
1.20
1.40
1.60
1.80

100
200
300
400
500

0
Jun-20
Jun-20
Sep-20
Sep-20
Dec-20
Dec-20
Mar-21
Mar-21
Jun-21
Jun-21

Source: SBP
Sep-21
Sep-21
Dec-21
Dec-21
Mar-22
Mar-22
Jun-22
Jun-22

Transport Import (USD Mn)

Sep-22
Petrol & Diesel Sales (Mn Tonnes)

Sep-22
Dec-22
Dec-22
Mar-23
Mar-23
Declining Demand and Import Indicators

100
200
300
400
500
600
700

0
1,000
1,200
1,400

200
400
600
800

Jun-20 Jun-20
Sep-20 Sep-20
Dec-20 Dec-20
Mar-21 Mar-21
Jun-21 Jun-21
Sep-21 Sep-21

Dec-21 Dec-21

Mar-22 Mar-22
Jun-22
Metal Imports (USD Mn)

Jun-22
Machinery Import (USD Mn)

Sep-22 Sep-22

Dec-22 Dec-22
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Mar-23 Mar-23
Central Government Debt has ballooned in Recent Years

Central Government Debt (PKR Bn) Average Interest Rates

70.0 75.0% 20.0%
17.4% 18.0%
60.0 18.0%
70.0%
50.0 16.0%
65.0% 14.0% 12.0%
40.0
12.0%
30.0 60.0% 9.5% 9.4%
10.0%
20.0 8.0% 7.0%
55.0% 5.8% 5.9%
10.0 6.0%
0.0 50.0% 4.0%
FY23E

FY24E
FY17

FY18

FY19

FY20

FY21

FY22

2.0%
0.0%

FY23E

FY24E
FY17

FY18

FY19

FY20

FY21

FY22
Central Government Debt Debt/GDP

Source: SBP, MCBAH Estimates

§ The Central Government Debt has almost tripled in the last 6 years from PKR 20.8 trillion in Jun-17 to PKR 57.1
trillion in March 23.
§ In addition the policy rate has increased to 21% the highest in Pakistan’s history. The high interest rate and
elevated debt level will cause significant challenge to the government in managing the fiscal space in the
upcoming year.

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Debt Servicing to remain elevated

Government Debt Servicing (PKR Bn) Net Debt Servicing/ Tax Revenue
8,000 70.0% 67%
7,000 65.0% 62%
6,000 60.0%
5,000 55.0%
4,000 50.0% 46%
3,000 45.0% 40% 40%
2,000 40.0% 35%
1,000 35.0% 31% 30%
28% 28% 28%
30.0%
0
25.0%

FY23E

FY24E
FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22 20.0%

FY23E

FY24E
FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22
Debt Servicing SBP Profit

Source: Ministry of Finance & MCBAH Estimates

§ Pakistan Debt Servicing is on the rise and the net debt servicing (Debt Servicing Minus SBP Profit) will clock around
PKR 5.8 trillion which is around 62% of Tax revenue.

§ This has serious implications for the economy as government will be unable to focus on development expenditure
and on welfare schemes for the people. In addition any slippages on expenditure side can inflate fiscal deficit
leading to increased inflationary pressure.

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Disclaimer

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