The Federal government is all set to announce the Fiscal Year (FY) budget 2020-2021 on 12th June, 2020. According to government sources, the main focus of overall budget remains relief measures for general masses and businesses as everything is greatly affected by COVID-19 lock down and its aftermath of slow economy.
The Fiscal deficit is expected to be around 8.5% to 9% including expenses of COVID-19 that constitute around 2% of deficit. The economic stimulus announced twice by Prime Minister Imran Khan for reviving economic activities in country and provide cash relief to poor families is expected to affect government’s deficit.
COVID-19 Relief expected in the budget
Federal government is expected to allocate more than Rs. 1 trillion as stimulus package for business community and relief activities in the country.
Budget Implications for FBR
Pakistan in FY 2019-2020 failed to achieve IMF set target for revenue collection. The revenue collection during the year remained well below Rs. 5.5 trillion due to which IMF revised the target for the year to Rs. 3.9 trillion. This year’s budget is expected to set similar unrealistic FBR target of around Rs. 5 trillion in hope of expanding tax net.
Read More: IMF revises FBR targets for FY 2020
The government will also announce several revenue generation strategies for next year. This includes raising Rs. 300 billion from Petroleum Levy as oil prices reduced internationally. The government is also planning on increasing taxes on cigarettes and beverages as well as luxury cars, farmhouse, and passenger cars.
FBR is also expected to relax rules on cash sales by increasing the limit for showing CNIC to Rs. 100,000 from Rs. 50,000.
Budget Implications for Stock Market
The budget 2020-21 is expected to be neutral to positive for the stock market with government announcing relief for several industries. Tractor manufacturers, Fertilizers, Cement, and Chemicals and Pharmaceuticals are expected to gain from the current budget. On the other hand, Banks, E&P, Car Assemblers, Steel, textile, Oil & Gas Marketing Companies and IPPs are expected to have neutral impact of budget.
Budget Suggestions for Agriculture and Construction Sector
The federal government is expected to give special relief to agriculture and construction sector in hope to uplift daily workers’ life. The budget will explain allocation of Rs. 50 billion from economic stimulus to agriculture sector. New subsidies will be announced for fertilizer and tractors with around Rs. 2.5 billion subsidies on sale of locally manufactured tractors. Rs. 8.8 billion subsidies are proposed for mark-up on loans.
A special package for farmers to combat locust attack is also expected in the budget. Provision of new agricultural loans for this purpose is expected.
As for construction industry, the budget session will clarify increased subsidies on material and related industries to construction sector. A reduction in Federal Excise Duty (FED) is expected for cement sector along with reduction in import duties on related items to the industry. The Federal government has already announced a huge relief to construction industry during the lockdown phase.
Reduced Government Expenditure in FY 2020-2021
The government is expected to announce reduction in several expenditures to make up for fiscal deficit and slowed down economy. The Public Sector Development Program (PSDP) has already witnessed a reduced in allocation by the government in light of stimulus packages. The PSDP amount for FY 2021 is expected to be around Rs. 500-600 billion compared to Rs. 701 billion in previous year.
A reduction of around Rs. 50 billion is expected in subsidy of power sector in light of current reduction in oil prices. Another reduction in expenditure will be in form of lowered interest rates that will save the government around Rs. 600 billion to Rs. 700 billion during the year.
Economic Snapshot for FY 21 in Budget 2020-21
The finance ministry has estimated this year’s GDP to be around -0.4% while next year’s GDP is predicted to be around 2.8%. The GDP growth in agricultural sector is estimated to increase from 0.6% in 2019 to 2.7% in 2020. The exports for FY 2020 are expected to be around $23,000 million compared to $24,000 million in 2019 and is projected to be $22.6 million for 2021. Imports are expected to reduce to $42,000 million in 2020 from $52,000 million in 2019.
The Trade deficit is expected to reduce to -$19,500 million in 2020 from -$28,500 million in 2019 and is projected to reduce to further -$16,000 million in 2021. The current account deficit (CAD) is impressively down to -$3990 from -$13,800 in 2019 and is projected to be around -$2181 in 2021.
The remittances are expected to remain stable despite global crisis with slight downward amount in 2020 and is predicted to improve in 2021. FDI improved in 2020 with $2,550 million compared to $1658 million in 2019. The inflation is expected to remain on average around 11% in 2020 while is projected to remain around 8% in 2021.
Corporate taxes, super taxes, Capital Gain tax (CGT), Tax Credit, General Sales Tax (GST) are expected to remain untouched in the budget 2020-21 as clarified by Finance Minister Hafeez Sheikh. However, FED on cement, imports, coal are expected to be reduced. Moreover, sales tax on DAP is also expected to be reduced by 3%.
In view of zero sales for automotive industry, the FED is expected to be reduced for automotive sector. Circular Debt flow is also expected to decline if government decides to not pass further benefit of reduced oil prices to consumers.
On tobacco, an increased FED is expected on tier-1 of Rs. 5600/ 1000 cigarettes and tier 2 of Rs. 1250/ 1000 cigarettes. Special action on controlling smuggling are also expected to be announced.