The coalition government is all set to present its first budget for FY25 tomorrow in parliament.
Earlier, it was mentioned that the Staff Level Agreement (SLA) may be announced formally by the end of June 2024 or early July 2024, after assuring satisfactory compliance with prior actions and amendments in some tax laws through Finance Bill 2024-25.
The Budget FY25 is likely to be the prior action of the IMF, and this will be key in taking Pakistan near to the SLA.
The budget will aim at targeting a primary surplus of Rs. 500-700 billion or 0.4-0.5 percent of the GDP along with an FBR revenue target of Rs. 12.9 trillion compared to this year’s estimated numbers of Rs. 9.2-9.4 trillion.
The government may propose revenue measures like:
Revenue measures taken by other countries in IMF programs are
The mix of FBR collection is expected to increase from Direct tax (38% in FY25 from 35% in FY24) with 25% YoY growth expected in absolute target in the same. This could be from a mix of increases in existing tax rates and bringing untapped segments into the tax net.
The non-tax revenue target is expected to be a notable support once again with Rs. 2.1 trillion target. This is 28 percent YoY lower than Rs. 2.9 trillion target for FY24, but has the potential to outpace its target as seen in FY24. To recall, non-tax revenue collected so far in 9MFY24 has reached Rs. 2.5 trillion – 85 percent of FY24 budgeted figures and higher than the FY25 budget.
On the economic indicators side, the government is setting up a GDP growth target of 3.6 percent alongside an inflation target of 12.5-12.7 percent.
For FY25, the major driver for the KSE 100 will be PE re-rating led by approval of the new IMF financing facility. It is expected that the current forward PE of the market 3.8x will revert to its historical mean of 6.93x linearly subject to the successful commencement and completion of the new IMF program.
On the expenses front, with an outlay of Rs. 16.7 trillion (+15% YoY), debt servicing is estimated at Rs. 9.7 trillion, almost 33 percent YoY higher compared to FY24 Budgeted levels.
The ballooning expense may indicate either
Having said that, controlled expansion in the debt and initiation of monetary easing could be a massive savings window for the country’s fiscal account.
The development expense budget is expected to cross Rs. 1 trillion, closer to last year’s budgeted levels. The Public Sector Development Program (PSDP) is expected at Rs. 1 trillion.
Subsidy and Pension expenses are likely to be budgeted 42%/20% YoY higher respectively, both increasing as a percentage of GDP in the budget outlay. On the other hand, the Defence Affairs budget is likely to be limited to Rs. 2 trillion, +11 percent YoY.
With FY24 poised for its first primary surplus (fiscal deficit excluding debt servicing) since FY04, Budget FY25 is likely to target another achievable surplus. However, the massive Rs. 10 trillion in interest payments for FY25 will likely lead to an overall 6.8% fiscal deficit (% of GDP), potentially hindering growth for another year.
The budget will be neutral to negative for the stock market in the short term, however, if the government drafts realistic revenue measures to achieve targeted tax collection as desired by the IMF, the market will take it positively in the medium term. and will ignore any negative impact on corporate earnings, if any. This budget will pave the way for a new IMF program which will help in PE re-rating.
To meet the high tax target, the government may increase taxes on dividends, capital gain, and interest income. This, along with any change in the status of these taxes from full and final to normal tax will affect the net returns of the stock market investors.
The Index could reach 87,000 pts by December 2024 and 106,000 by June 2025, subject to the successful commencement and completion of the review of the IMF program.
In anticipation of the ‘reform dividend,’ the equity markets will likely swallow any negative impacts of higher taxes on listed companies, given the urgent need to secure a larger IMF program to address Pakistan’s ~US$25 billion annual external financing needs.
The National Economic Council (NEC) on Monday approved Rs. 1.4 trillion worth of federal Public Sector Development Programme (PSDP) along with a national development budget outlay of Rs. 3.5 trillion (Rs. 2.1 trillion provincial annual development plans).
The federal government plans to borrow Rs. 932 billion to finance development projects next fiscal year.
The federal government will borrow Rs. 316 billion while the four provincial governments will collectively borrow Rs. 616 billion for working on development projects next fiscal year.
The federal government is considering a proposal to impose sales tax on petroleum products (POL) and hike the petroleum levy by up to Rs. 20 per liter.
A proposal to charge a 5 percent sales tax on POL products is also on the table.
The prices of imported mobile phones are expected to be raised from July 1, 2024, as duties and taxes on the commercial import of mobile phones will be increased in the coming budget (FY2024-25).
Currently, imported mobile phones are subject to a General Sales Tax (GST) rate of up to 25 percent, but the upcoming Finance Bill proposes to increase this rate even further. This proposal is also aimed at supporting the overall effort of the federal government to enhance its tax revenue by at least Rs. 2 trillion next fiscal year.
The federal government will likely approve a higher budget ceiling of Rs. 15.87 billion for the Ministry of Climate Change in the upcoming budget.
The federal government has proposed a Rs. 27.43 billion development budget for the Ministry of Information Technology and Telecommunication (MoITT) in the upcoming federal budget.
Key allocations include Rs. 6.28 billion for 15 new IT projects, while Rs. 21.15 billion has been suggested for 15 ongoing projects in the same field.
| Total expenditures | Rs. 18,900 billion |
| Tax collection target | Rs13,000 billion |
| Loan to borrow | Rs. 932 billion |
| IT Park in Karachi | Rs6.78 billion |
| IT and Telecom | Rs27 billion |
| Islamabad Technology Park | Rs9.92 billion |
| Infrastructure | Rs877 billion |
| Import target | $68.1 billion |
| Export target | $40.5 billion |
| Energy projects | Rs378 billion |
| Education | Rs93 billion |
| Earstwhile FATA districts | Rs64 billion |
| Digital Economy Project | Rs3.5 billion |
| Development budget | Rs 3792 billion |
| Deficit | Rs. 9,800 billion |
| Communication | Rs279 billion |
| Annual Income Tax exemption | Rs6m toi Rs 9m |
| AJK and Gilgit Baltistan | Rs75 billion |