The coalition government is set to present its first budget for the fiscal year 2024-25 (FY25) on June 10, 2024. This timing coincides with the anticipated announcement of the Staff Level Agreement (SLA) by the end of June or early July 2024, contingent upon satisfactory compliance with prior actions and amendments to tax laws through the Finance Bill 2024-25. The budget for FY25 is likely to be a crucial step towards securing the SLA with the IMF.
Key Objectives and Targets
The budget aims to achieve a primary surplus of Rs. 500-700 billion, or 0.4-0.5 percent of the GDP, and sets an ambitious Federal Board of Revenue (FBR) revenue target of Rs. 11.5-12.5 trillion, a significant increase from this year’s estimated Rs. 9.2-9.4 trillion.
Proposed Revenue Measures
The government may propose several revenue measures, including:
- Increasing GST by 1% to 19%
- Introducing a tax on pensioners
- Removing exemptions on FATA/PATA
- Increasing tax rates on non-tax filers
- Implementing a carbon tax or increasing the Petroleum Development Levy (PDL)
- Reforming personal income tax
- Taxing retailers and wholesalers
- Increasing the Federal Excise Duty (FED) on cigarettes
- Removing exemptions or increasing sales tax on goods in Schedules 5, 6, and 8 (including pharmaceuticals and food items)
International Comparisons
Similar measures adopted by other countries under IMF programs include:
- Introducing gift tax, wealth transfer tax, and inheritance tax
- Removing sector-specific exemptions and reducing corporate income tax rates
- Imposing VAT on non-residents’ e-commerce
- Streamlining VAT laws and removing VAT exemptions
- Eliminating tax exemptions for state-owned enterprises (SOEs)
- Implementing environmental surcharges on multiple car ownership
- Increasing taxes on land registration and foreign travel
Revenue Projections
The FBR’s collection from direct taxes is expected to rise to 38% in FY25 from 35% in FY24, with a projected 25% year-on-year (YoY) growth. Non-tax revenue is expected to support the budget with a target of Rs. 2.1 trillion, although this is 28% lower than the FY24 target of Rs. 2.9 trillion. In FY24, non-tax revenue collection reached Rs. 2.5 trillion in the first nine months, surpassing the FY25 target.
Economic Indicators
The government is setting a GDP growth target of 3.6% and an inflation target of 12.5-12.7% for FY25.
Impact on KSE 100 Index
The approval of a new IMF financing facility is expected to drive a price-earnings (PE) re-rating of the KSE 100 index, potentially increasing from the current forward PE of 3.8x to the historical mean of 6.93x. This is subject to the successful commencement and completion of the new IMF program.
Expenses
The budget outlines an expenditure of Rs. 16.7 trillion (+15% YoY), with debt servicing estimated at Rs. 9.7 trillion, a 33% increase from FY24 levels. The development expense budget is expected to exceed Rs. 1 trillion, similar to last year’s budgeted levels. The Public Sector Development Program (PSDP) is also projected at Rs. 1 trillion.
Subsidies and pensions are likely to increase by 42% and 20% YoY, respectively, while the defense budget is expected to be limited to Rs. 2 trillion, an 11% YoY increase. Despite these expenditures, the budget aims for another primary surplus, though overall fiscal deficit is projected at 6.8% of GDP due to Rs. 10 trillion in interest payments.
Impact on the Stock Market
In the short term, the budget is expected to have a neutral to negative impact on the stock market. However, if the government implements realistic revenue measures to achieve the targeted tax collection, the market will respond positively in the medium term. This budget will be pivotal for securing a new IMF program, crucial for addressing Pakistan’s ~$25 billion annual external financing needs.
To meet the high tax target, the government might increase taxes on dividends, capital gains, and interest income, affecting net returns for stock market investors. The KSE 100 index could reach 87,000 points by December 2024 and 106,000 by June 2025, contingent on the successful commencement and review of the IMF program.
In anticipation of the ‘reform dividend,’ equity markets are likely to overlook any negative impacts of higher taxes on listed companies, given the urgent need to secure a larger IMF program.
