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June 14, 2019

What top consulting firms say about budget

Top Story

June 14, 2019

KARACHI: The PTI-led government’s tax heavy austerity budget was regarded as preaching fiscal discipline in the south Asian’s second biggest economy. Aiming to secure a $6 billion bailout from the International Monetary Fund (IMF), the government is forced to scale back spending in the upcoming fiscal year and also made aggressive tax revenue assumptions.

Analysts are closely scrutinising details of the budget of the present government, whose performance during the 10-month transition since the July-election has caused concern in business and financial sectors.


Analysts said the government mainly relies on sales and income taxes and customs duties to generate additional revenue of Rs1.405 trillion.

Indirect taxes, including customs duty, sales tax, federal excise duty, petroleum levy, gas infrastructure cess and gas surcharge are still projected to generate Rs3.7 trillion out of the total tax revenue of Rs5.8 trillion in the current fiscal year. Income tax and workers welfare fund under direct taxes are to raise Rs2.1 trillion in the current fiscal year.

“There is downward change in the ratio of direct and indirect taxes,” accounting firm AF Ferguson, a member of PricewaterhouseCoopers said. “A substantial and incremental shift is required to decrease disparity in income and reduce the burden of indirect taxes on common man.”

Analysts said the government will have two choices to manage public finances: increasing revenues or cutting expenditures.

“While the defence budget has seen no increments, it is already at historic highs,” JS Global said. “While civil expenditures have been cut through salaries, it begs one to wonder the overall impact of a few salary cuts.”

Shajar Capital said these initiatives are likely to result in higher inflationary pressure, slowdown in aggregate demand and restrict corporate earnings growth in the coming year. “The government is expecting higher inflationary environment in FY20 to be in the range of 11-13 percent triggered by higher taxes and lower energy subsidies.”

The government showed heavy reliance on various reform efforts to achieve highly-ambitious revenue target. The government managed to attain only 67 percent of the annual target of Rs4.4 trillion in the first 10 months of the current fiscal year.


Nine-year low growth of 3.3 percent, fiscal deficit and higher inflation are short-term costs of stabilisation, according to the analysts.

The one-year government took a series of structural reforms, including monetary tightening, spending cut and exchange rate adjustment to overcome macroeconomic challenges worsened by growing demand without corresponding resources to support it. The steps led to muted growth of 3.3 percent in the current fiscal year as opposed to the ambitious target of 6.2 percent.

“However, the situation calls for sustained efforts,” accounting firm AF Ferguson, a member of PricewaterhouseCoopers said.

“With the IMF stabilisation program expected to come into place along with the cost-cutting measures being put in place, the primary expectation for the next fiscal year is to achieve economic stability,” BDO Ebrahim & Co. said.


Policy rate hikes are likely to hurt investments in the country, which already has one of lowest investment-to-GDP ratio of 15.4 percent compared to 30 percent in India and 31 percent in Bangladesh. Alone in one year, the central bank lifted interest rates to 12.25 percent in May 2019 from 6.5 percent in May 2018.

“The intended effect of this hike was to curb consumption and boost savings, but it came at the cost of negative impact on investments by increasing the cost of borrowing and shaking investor confidence,” professional services firm Deloitte Yousuf Adil said in a report.

IGI Securities said unless investment growth accelerates, which in case of reducing development budget seems hard to come by, “we see attaining 2019/20 GDP growth estimates will be rather challenging”. Actual public sector development program’s disbursement was roughly 73 percent of the budgeted amount in the FY2019.

“Given moderate increase in PSDP target, construction activity may be flattish in FY20,” InterMarket Securities said. “High inflation and interest rates and power tariff hikes will continue to subdue demand for consumer durables.”


Al Meezan Investments termed budget negative for cement, steel, banks, textile, foods, real estate sector and oil marketing companies. However, it is positive for pharmaceuticals, refineries, and paper and board.

InterMarket Securities see positive impacts of budget on fertiliser, power, exploration and production, technology, cement and pharmaceutical sectors, while it forecast negative affects for auto, bank, oil and marketing companies and steel sectors.

Textile sector, which accounts for more than 60 percent of exports, seems to have fallen from the government’s priority list as 10 percent tax on ginned cotton and withdrawal of zero rating status are to hurt the sector’s competiveness in the international market.

“Procurement costs will increase across the textile value chain,” JS Global said. Deloitte Yousuf Adil said the poor performance of the large scale manufacturing sector underscores the importance of pushing ahead with reforms to strengthen small and medium enterprises and export industries in order to achieve a broad-based medium-term growth.”

The government withdrew zero-rating facility for the five-export oriented sectors to mobile revenue resources in the midst of a potential loan program from the IMF. “Withdrawing this facility will block working capital of export sector to the tune of Rs500 billion and on the contrary, it will increase much needed cash flow to the government amid daunting IMF tax target of Rs5,555 billion,” Tax adviser Tola Associates said.

Withdrawal of 10 percent tax credit for extension, expansion and balancing, modernisation and replacement for plants purchased after tax year 2019 would affect progress in the construction sector.

JS Global said the withdrawal would affect cement and steel sectors that are undergoing expansion this year. “Refineries need to incur capital expenditure for hydrocracker units to convert furnace oil.”

Oil refineries are, however, to be exempted from duties on import of plant and machinery for hydrocracker plants. The exemption would be beneficial for upcoming refineries by giving them an edge over existing hydro-skimming refineries.

Likewise, increase in minimum turnover tax to 1.5 from 1.25 percent will be negative for automotive assemblers.

“The corporate sector sees some measures that will result in a cut to earnings estimates,” Intermarket Securities said. “On balance, however, we believe that budgetary measures are less punitive on listed sectors than earlier feared. Instead, the stock market may even see improved local funds flow, particularly if money shifts from the property market.”


Agriculture, which contributes around 19 percent of the GDP, grew just 0.8 percent compared with a 3.8 percent annual target.

“Agriculture sector growth should improve on the back of rebounding cotton prices and recovery in that crop,” InterMarket Securities said.


The growth in the services sector took a reverse gear as it grew 4.7 percent as opposed to 6.5 percent target.

“When you have the most important engine in reverse gear, it spells downside risk to growth, going forward,” Deloitte Yousuf Adil said. “When the sector turns, the economy follows. This essentially makes for significant downside risk to growth in the coming quarters.”

InterMarket Securities said services sector would likely slow down because retail activity will reflect issues in agriculture and large scale manufacturing sectors, “while high fuel prices will depress transport”.


The country needs to encourage foreign investment instead of relying too much on foreign aids to support external account sector. Foreign direct investments averaged 1.5 percent of GDP between 2005 and 2007.


The cash-strapped government levied customs duties on non-essential products to curtail imports.

“Nevertheless, we wish there were more concrete steps to curtail imports,” JS Global said. “Otherwise cutting the current account deficit by half would be a daunting task.”


The country recorded fiscal deficit of 7.2 percent of GDP in the current fiscal year compared to 4.9 percent in the previous fiscal year

“This requires a cut in overall expenditures. For that matter, development budget has kept tight in order to make way for rising debt servicing and defense cost, both of which are expected to take up more than the total revenues in FY20,” IGI Securities said.


Around 32 percent of the total public debt of around Rs29 trillion is denominated in foreign currencies, exposing public debt portfolio to exchange rate risk.

“Within domestic borrowings, there will be more reliance on non-banking sources and the recent uptick in NSS flows is a reflection of the same,” JS Global said.