Pakistan Daily Economy Update - 28 April

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1. Apr . 28, 2018 KCCI - eBulletin A candy-coated budget by Miftah Amid ruckus and a walkout by the opposition, newly appointed Finance Minister Dr Miftah Ismail announced a PKR 5.25Tn inflationary budget, as its proposed taxation measures outweigh the relief offered to industrialists, agriculturists and salaried persons ahead of elections. The PKR 5.25Tn budget is PKR 493Bn or 10.3% higher than budget for outgoing FY18. There is a PKR 1.9Tn hole in the budget, equal to 4.9% of GDP and will be filled by taking foreign and domestic loans. The govt. also backtracked from its earlier announcement of increasing income tax exemption threshold from PKR 400,000 to PKR 1.2Mn by levying nominal tax of PKR 1,000 - 2,000 per annum on people earning within the bracket. It was also for the first time that a govt. gave six budgets, while it was also for the first time that an unelected finance minister presented the budget. Tribune. In farewell budget, govt. showers business with incentives The budget presented by the incumbent govt. is the first one in the current setup that shifts gears away from development spending towards current expenditures. For the first time, the development budget has been slashed while large hikes have been given to defence and all other heads under current spending, like subsidies, running of govt. affairs, debt servicing. The budget also showers incentives on business and industry in quantities never seen before, leading many to wonder where the revenues will come from to pay for all these handouts. The new revenue scheme behind these expenditures appears to be based on indirect mode of taxation named “other taxes”. A 76% increase has been estimated to come from petroleum levy (PL) — PKR 300Bn instead of PKR 170Bn this year — through PKR 30 per litre PL on all petroleum products across the board from existing PKR 3-10 per litre presently. On top of that, a steep 786% increase has been proposed in the taxes on IT to generate PKR 37.55Bn. Likewise, GIDC would generate PKR 100Bn compared to PKR 15Bn collected during FY18. As such, total inflows from so-called other taxes would touch PKR 454Bn next year compared to PKR 212Bn in FY18, a jump of almost 114%. FBR taxes have been estimated at PKR 4.435Tn year compared to PKR 4.103Tn budgeted for FY18 and revised to PKR 3.94Tn, showing a nominal 8-12% increase when seen in the context of almost 12.5% automatic growth from inflation and GDP and partly affected by reduction in income tax rates. Dawn. It’s quite enigmatic Finance Minister Miftah Ismail, while presenting the budget, said that those who are not paying taxes will be tracked by data mining, and those having undeclared assets and income are being provided last opportunity to whiten their assets and income by paying 5% tax. Provincial govt.s' share is projected at PKR 2.59Tn for FY19 as opposed to PKR 2.32Tn for FY18, which leaves net revenue of the federal govt. at PKR 3.07Tn. Interest payment has been projected at PKR 1.62Tn and defence budget at PKR 1.1Tn. Provincial surplus is projected at PKR 286Bn for the next fiscal year and fiscal deficit at 4.9%. PSDP is proposed at PKR 1.03Bn with PKR 138Bn investment for power sector, PKR 39Bn for Railways, PKR 33Bn for Higher Education, PKR 10Bn for Prime Minister Package for Youth while PKR 179Bn have been earmarked for subsidies and PKR 125Bn have been set aside for Benazir Income Support Program. The govt. has also proposed PKR 310Bn for transport and communication projects while PKR 137Bn have been proposed for development of Gwadar Port. GDP growth target of 6.2% has been set for FY19, inflation below 6%, tax to GDP ratio at 13.8% and public debt is projected to be brought down to 63.2% of GDP while foreign exchange reserves will be jacked up to $ 15Bn. The govt. also proposed a 10% ad hoc relief allowance to civil and armed forces employees as well as proposed 10% increase for pensioners across the board and 50% increase in house rent/ ceiling. The govt. also proposed increase in minimum pension to PKR 10,000 from the present PKR 6,000, family pension to PKR 7,500 from PKR 4,500 and minimum pension of pensioners above the age of 75 is proposed at PKR 15,000. GST on urea has been proposed to be reduced to 2% while that on agricultural machinery has been proposed to be reduced to 5% from 7%. Zerorating regimes on five export sectors will continue, mark-up on lower rate will continue on long-term finance facility and export refinance facility, and a big package for exports will also be announced. Ismail said the budget deficit would hit 5.5% for FY18, missing the govt.' s target of 4.1%. BR. Business community dubs budget ‘an election campaign’ The business community at KCCI has dubbed budget FY19 as the current govt.’s election campaign, and expressed doubts regarding implementation of announced relief by the next govt. It appreciated the tax cut for salaried persons, reduced corporate tax rate, and bonus shares. BMG Chairman Siraj Kassem Teli said that during the past five budgets, former finance minister Ishaq Dar introduced many discretionary powers of the FBR officials and made those part of the tax laws. Chambers across the country were unanimous on withdrawal of such discretionary powers, which is why the govt. has accepted their demand. He termed the tax reduction from 0.6% to 0.4% for non-filers on online banking transactions a surprise. He said the govt. should instead announce relief for return filers to promote documentation of the economy. BMG Vice Chairman Haroon Farooki called the announcement related to the audit policy, where a taxpayer could now be selected for audit once in three years, a major initiative by the current govt. He also appreciated the introduction of the composite audit and said it would reduce the taxpayer’s burden of compliance. KCCI former president Zubair \ Motiwala appreciated the announced reduction in customs duty on various capital goods, which he said would help in reducing the cost of doing business. KCCI former president Anjum Nisar said enhancing exempt income of salaried persons was a major announcement as the chamber had been demanding this for the last five years. KCCI President Mufassir A Malik termed the budget much better than the last five years. He also appreciated the announcement of a desalination water plant in Karachi, which would ensure water availability for the citizens. The News. PKR 93Bn new taxation measures taken The govt. has taken new taxation measures of PKR 93Bn, including an increase in additional customs duty from 1 to 2% on imports across the board, review of regulatory duties on 731 customs tariff lines, raise in further sales tax from 2 to 3%, rationalization of withholding tax for non-filers, and a 1% withholding tax on payments remitted abroad through credit/debit/prepaid cards. The FBR has taken such taxation measures to meet the assigned target of PKR 4.44Tn. Total relief measures stood at PKR 184.49Bn and the net impact of taxation and relief measures comes to PKR 91.18Bn for FY19. The rate of sales tax for steel sector is being increased to PKR 13 per unit of electricity consumed from earlier rate of PKR 10.50 per unit. BR. Tax reliefs likely to take budget deficit beyond target: economists Govt. has set an overambitious budget deficit target of 4.9% for FY19 as the populous tax reliefs it promises would hamstring revenue managers’ ability to introduce fiscal discipline, senior economists opined. They have even expressed concern as to how the deficit would be contained to 5.2% in FY18, as it has already surpassed 4.1% in 9MFY18, indicating that it would reach 6-7% of GDP. The govt., has also not addressed the risk of growing circular debt and increasing losses of state-owned enterprises. The News. No privatization proceeds! No privatization proceeds form part of the revenue for FY19, while PKR 50Bn was budgeted though not realized under this head in the current year. The govt. has failed to privatize any public sector entity (PSE) during the current financial year in spite of appointing a federal Minister for Privatization. No Privatization Commission's board meeting has been held during the last four months and no pre budget meeting of PC board was convened to discuss the budgetary target for financial year FY19. Lamentably, only profitable entities were privatized during the current tenure, including shares of UBL, PPL, ABL, HBL and NPCC. BR. KE seeks modification in generation licence K- Electric (KE) has approached Nepra for modification in its generation license urgently, aimed at using RLNG as alternative fuel instead of RFO in case of shortage in gas supply quota of 170 MMCFD. KE has argued in its petition that considering the current demand-supply situation along and significant curtailment of gas by SSGC, KE is proposing to use RLNG as an optional/backup fuel to ensure availability of plants. Usage of RLNG will result in increase of consumer tariff as RLNG is three times more expensive than natural gas. However, as compared to HSD and Furnace Oil, RLNG is cheaper, hence a more viable option. BR. Economic Indicators List of Indicators Date / Period Unit Value Change Daily 27-Apr 115.62 118.38 0.00% -0.06% Crude (JU'18) 27-Apr 27-Apr 27-Apr 26-Apr PKR PKR Pts. $ Mn $/bbl 45,543 -1.61 68.22 0.18% NM** 0.26% Gold (MY'18) Gold (10g) Local 26-Apr 27-Apr $/oz PKR 1,318.2 50,657 -0.16% -0.08% Silver (MY'18) Cotton(KHI)-40 kg 26-Apr 27-Apr $/oz PKR 16.60 8,145 0.47% 1.33% Kibor-6M 27-Apr % 6.52 $ Bn 17.13 0.01% WoW -2.37% Remittances 20-Apr FY18 Jul-Mar 18 $ Bn 14.61 YoY 3.55% Exports* Imports* Jul-Mar 18 Jul-Mar 18 $ Bn $ Bn 17.08 44.38 13.08% 15.57% USD-Interbank USD-Open MKT KSE-100 index FIPI Forex Reserves Jul-Mar 18 Trade Balance* $ Bn -27.30 Jul-Mar 18 Current Account $ Mn -12,029 Foreign Direct Inv. $ Bn 2.09 Jul-Mar 18 Jul-Feb 18 LSM Growth* % 6.24 % 3.20 Jul-Mar 18 Avg. CPI Discount Rate % 6.00 Mar-18 WoW= Sources: KCCI Research, PMEXweek , NCCPL, KSE, SBP, PBS* ** Not Meaningful on week; -17.18% -50.55% 4.44% Major Currencies 175 GBP, 26-Apr-18, 161.3 165 155 145 EUR, 26-Apr-18, 140.6 135 125 115 USD, 26-Apr-18, 115.7 105 95 Apr-17 USD Jul-17 GBP EUR Oct-17 Jan-18 Source: KCCI Research ; Oanda.com Quote of the Day "A budget is telling your money where to go instead of wonderng where it went" Dave Ramsey Chart of the Day 8,000 Tax Revenue Vs. Expenditure - Consolidated (PKR Bn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Tax Revenue Expenditure Source: KCCI Research; MoF Disclaimer This report has been prepared by KCCI Research & Development Cell. The information contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified. icon represents the sole viewpoint of the KCCI R&D Cell, and is stated to enrich the readers' understanding of the news item. The R&D Dept. bears no responsibility for its correctness or accuracy. Contact: res@kcci.com.pk