Federal Budget FY22
Reformist measures could unlock growth potential
Pakistan has revealed a “Budget For The Masses”, intending to drive growth of 4.8% under an outlay of PKR 8.49tn (+19%). The government aims to push for inclusive and sustainable growth by enhancing measures towards the social safety net for the poor, increasing development spending, restructuring circular debt along with power subsidies, rationalizing taxes, and implementing a carrot & a stick approach to document the economy. As the economy recovers from the pandemic, the Budget FY22 envisages a progressive spending to vaccinate nearly half (100mn people) of its population.
The government is targeting a fiscal deficit of 6.3% with revenue collection of PKR 5.83tn (+18%), primarily from Sales Tax, while non-tax revenue is estimated at PKR 2.08tn (+30%), primarily from dividends (OGDC and PPL) and petroleum levy. Despite the history of fiscal slippages, Pakistan can broadly achieve the fiscal target as more efforts are garnered in putting an end to informal economy whilst taxing the e-commerce and other digital platforms.
Budget also aims to address the perennial problem of enhancing the tax net for Pakistan, introducing nominal tax measures towards Small and Medium Enterprises (SMEs) and special tax measures for Information Technology (IT) and IT services. Moreover, tax incentives for using Point Of Sale (POS) devices are targeting 0.5mn retailers/wholesalers against c.11,000 retailers with POS.
National PSDP target of PKR 2.14tn entails a Federal PSDP target of PKR 900bn (+43%) and Provincial contribution of PKR 1.24tn (+83%). Enhanced focus on housing and construction activity along with dam construction and CPEC projects bodes well for overall growth in the economy.
In order to keep inflation within the budget target of 8.2%, the government has also introduced power sector subsidies which point towards efforts to keep energy tariffs constant for the most part of FY22. While talks with the IMF continue to progress, the budgeted subsidies point towards moderate discussions with the Fund’s staff as Pakistan treads along the EFF program during FY22.
Alongside actions to mitigate inflationary pressures, there is enhanced focus on the population at the bottom of the pyramid. The government is targeting interest-free loans for business up to PKR 0.5mn each for 4-6mn families. Such families will also be offered a low-cost housing loan up to PKR 2.0mn and free technical training to one individual. This is besides the PKR 260bn allocation for Ehsaas program which serves impoverished people of the nation.
After ages, Pakistan’s government has taken pro-stock market investor measures by reducing the CGT to 12.5% (down 2.5ppts), reducing turnover tax to 1.25% (down 0.25ppts) and removal of WHT on margin financing.
Despite the 40% rebound during FY21TD, the valuation discount is astonishing, where KSE-100 is trading at a FY22E PE of 6.7x, nearly 32% discount to its mean. We remain Overweight on Cyclical stocks including, Cement, Steel, Textile and Autos.