Federal Budget FY21: A Barrier Eclipsing Relief

Table of Contents
Federal Budget FY21: A Barrier Eclipsing Relief
Pakistan Economy – Inverse Impact on GDP is Right Here
Budget FY21- Taxation Initiatives
Snapshot- Fiscal Budget FY20-21
Lower Inflation in FY21, More Room for a Rate Cut
Economy - No Taxation & No Relief!
Budget FY21 - Limited Incentives despite Challenges
Disclaimer
3
4
5
7
9
10
15
24
Budget Estimates 2020-218
Federal Budget FY21

Budget Overview
Federal Budget FY21: A Barrier Eclipsing Relief
The challenges for giving a relief budget was clearly witnessed as the government has no fiscal space to
fulfill the demands of industries, corporates, and general public as the COVID-19 scenario poses serious
threat to the revenue generation in the upcoming period. The budget prepared under the surveillance of
IMF who demand no increase in Salaries, Defense spending rather than focus on collecting an ambitious
revenue target of PKR4.7trn through Non Tax measures.
The Budget FY21, failed to impress the large audience as no significant measure was taken to address the
consequences faced by the industries due to the 2-Months lock-down and the prevailing economic crisis
due to negative GDP growth.
However, it is pertinent to mention that the duration of Corona virus and the cost of economic shocks it
will make is still unclear. We believe that the govt. would revisit its current stance and would take more
steps to provide relief to everyone if the duration of COVID-19 increases and may give another Mid-term
Budget later in the 1HFY21.
FY21 : Key Budgetary Targets
 GDP is expected to grow 2.2% vs. -0.4% in FY20e
 Inflation to clock in at 6.5% as compared to 10.9% in FY20e
 PSDP allocation of 1.3trn (up 13% YoY)
 Tax revenue targeted at PKR4.7trn (up ~1trn YoY)
 Fiscal Deficit to stand at 7% vs. 9.1% in FY21
Federal Budget FY21

Budget Overview
Pakistan Economy – Inverse Impact on GDP is Right Here
The government expect GDP to grow 2.1% in FY21 vs. a negative 0.38% expected in the outgoing year. We expect
the GDP to grow 0.8% in FY21 primarily driven by improvement in industrial activities and support from the
Agriculture. Similarly, Fiscal deficit would be in the range of 8.5-9.5% in FY21 as compared to the govt. target of
7%. We estimate inflation to be 5.5% in the upcoming year due to lower commodity prices.
Key Economic Indicator FY16 FY17 FY18 FY19 FY20E FY21F
Nominal GDP (PKRbn) PKRbn 277,540 304,736 283,004 240,992 240,076 241,997
GDP Growth Rate % 4.56 5.37 5.79 3.29 -0.38 0.80
Inflation % 2.86 4.15 3.93 7.33 10.90 5.50
Policy Rate % 5.75 5.75 7.50 13.25 8.00 6.00
Imports USDmn 41,255 48,683 55,846 52,436 44,128 46,014
Exports USDmn 21,972 22,003 24,772 24,217 26,639 25,500
Trade Balance USDmn -19,283 -26,680 -31,074 -28,219 -17,489 -20,514
Remittances USDmn 19,917 19,351 19,623 21,842 22,200 19,700
Current Account Balance USDmn 634 -7,329 -11,451 -13,587 -6,190 -7,500
PKR-USD Rupee 105 105 122 145 160 170
FX Reserves USDmn 23,099 21,403 16,407 14,477 16,920 14,800
SBP Reserves USDmn 18,143 16,145 9,789 7,863 10,095 98,900
Bank Reserves USDmn 4,956 5,258 6,618 7,196 6,609 6,898
Source: SBP,PBS,Bloomberg,Shajar Research
Federal Budget FY21

Budget Overview
Budget FY21- Taxation Initiatives
 Continuation of capital gain tax and super tax has been extend for one year.
 With Holding Tax (WHT) has been increased for double cabin pickups. Meanwhile, Advance tax of
PKR5,000/10,000 for filer/non-filer on 850CC or below has been removed on two wheelers and three
wheelers below 200CC.
 WHT on profit from Banks has been rationalized at 15%.
 No profit tax is applicable if REIT is developed till June’21.
 Profit on debt from government securities will be 10% of the gross amount.
 Exempting WHT tax on Cash Withdrawal to the extent of Foreign Remittances.
 WHT rate on toll manufacturing has been reduced to 4% from 8%.
 Return on investment in Sukuks and alignment of WHT rates.
Federal Budget FY21

Budget Overview
Budget FY21- Taxation Initiatives (Cont)
Custom and Regulatory Duty
Federal Excise Duty
 Custom duties and Additional custom duties on import of raw materials has been reduced for food packaging
industry.
 Regulatory duty has been reduced to 6% and 11% from 12.5% and 17.5% on Hot Rolled Coils of steel and
iron falling under PCT codes 7208, 7225, and 7226.
 Exemption of custom duties and additional custom duties by syringes and sa-line infusion manufacturers sets
and import of raw material by beverages can be manufactured.
 Custom duty reduction on 40 raw materials and exemption of additional CD and RD on import by
manufacturers of Wire rod.
 Tariff rationalization under National tariff policy 2019, CD has been reduced from 11% to 3% and 0% on 90
tariff lines.
 FED on cement bags has been reduced to PKR75/bag from PKR100/bag.
 ACD of 2% on import of edible oils and oil seeds has been removed.
 Rationalizing tax on imports tumbled according to the type of goods, with tax @1% for capital goods, 2% for
raw materials and 5.5% for finished goods.
Federal Budget FY21

Budget Overview
Snapshot- Fiscal Budget FY20-21
2.1%
PKR
1.3
PKR
209
PKR
1.2tr
7.0%
of
GDP
PKR
650
PKR
100
6.5%
GDP Growth Rate PSDP (PKRtrn) Privatization (PKRbn) Subsidies (PKRbn)
Defense Budget Fiscal Deficit Inflation Federal PSDP (PKRbn)
Federal Budget FY21

Budget Overview
Budget Estimates 2020-21
PKR bn Budget 2019-20 Revised 2019-20 Difference Budget 2020-21
A) Total Resources 7,934 6,472 1,462 7,707
Tax Revenue 5,822 4,208 1,614 4,963
FBR Taxes 5,555 3,908 1,647 4,963
Direct Taxes 2,082 1,623 459 2,043
Indirect Taxes 3,473 2,285 1,188 2,920
Other Taxes 267 300 (33) 501
Non-tax Revenue 894 1,296 (402) 1,109
Gross-Revenue Receipts 6,717 5,504 1,213 6,573
Net Revenue Receipts 3,462 3,102 360 3,670
B) Total Expenditure 5,932 6,419 (487) 8,238
1) Current
Interest Payments 2,891 2,709 182 2,946
Defense 1,153 1,227 (74) 1,289
Subsidies 272 350 (78) 209
2) Development 950 759 191 886
PSDP (Federal) 701 564 137 650
Others 85 66 19 70
Development Loans & Grants to Provinces 163 129 34 166
C) Total External Resources 3,032 2,273 759 810
1) External Loans 2,991 2,181 810 2,158
2) External Grants 28 32 (4) 21
Source: Budget inBrief,Shajar Research
Federal Budget FY21

Budget Overview
Lower Inflation in FY21, More Room for a Rate Cut
 Despite aggressive fiscal policy
measures, the government has
projected a fiscal deficit of 7.1% of
the GDP in FY21 as compared to
9.1% expected in FY20.
 Tax to GDP ratio has been
budgeted at 15.9% for FY21
higher than FY20’s revised target
of 14.3%.
 Despite mounting debt pressure,
the government has revised
upwards its Net Public Debt to
GDP ratio to 83% higher than
previous year’s target of 82%.
 The government is expecting
inflation to come down to 6.5% as
compared to 10.9% in FY20.
While we expect it to be in the
range of 5.5-6.5%.
Consolidated Fiscal Budget Revised Budget
Projections 2019-20 2019-20 2020-21 2021-22 2022-23
Real GDP Growth (%) 2.4 (0.4) 2.1 4.0 4.5
Inflation (%) 11-13 11-12 6.5 6.2 6.0
Total Revenue 16.7 14.3 15.9 16.6 17.3
Tax Revenue 14.4 11.0 13.2 13.9 14.5
FBR Tax Revenue 12.6 9.4 10.9 11.8 12.6
Non Tax Revenue 2.3 3.3 2.8 2.8 2.7
Total Expenditure 23.8 23.5 22.9 22.3 22.1
Current 20.2 20.9 20.0 19.4 18.8
Development 3.6 2.6 2.9 2.9 3.3
Fiscal Balance (7.1) (9.1) (7.0) (5.6) (4.8)
Revenue Balance (3.6) (6.6) (4.1) (2.7) (1.5)
Total Public Debt (Gross) 77.6 86.8 87.0 84.2 80.7
Total Public Debt (Net) 73.0 82.5 83.1 80.8 77.8
GDP at market prices (PKR bn) 44,003 41,727 45,567 50,443 55,991
Source: Budget inBrief,Shajar Research
Target for
as a % of GDP
Federal Budget FY21

Economy
No New Taxes & No Relief!
10
Federal Budget FY21

Industry and Service Sector Showing a Bleak Picture in FY20
 The Economic Survey Report however did not leave people with much hope
to cling on, as it painted a dire picture of the state of the economy. The out-
going year FY20 is expected to post a GDP growth rate of 0.4% against a
targeted 2.5% which will be the lowest since the global economic crisis of
2008. The statistics look even worse when compared to the phenomenal
growth of 5.5% in FY19.
1. Agriculture: The agriculture sector recorded strong growth of 2.67%,
considerably higher than 0.58% growth achieved in last year. Regarding
“Kharif” crops, Rice production increased by 2.9 % to 7.4mn tonnes and
Maize production by 6.0% to 7.236mn. while Cotton production declined
by 6.9% to 9.1mn bales and sugarcane production by 0.4 % to 66.8mn
tonnes. Wheat is the most important crop of “Rabi”, which showed growth
of 2.5 % to reach 24.9mn tonnes.
2. Industry: The Large-Scale Manufacturing (LSM) declined by 5.4% during
9MFY20 as compared to 2.34% decline during the SPLY. Automobile sector
alone accounted for major portion of contraction in LSM. Its prices
witnessed multiple upward revisions due to PKR depreciation which held
the potential buyers from making booking and purchases. Upward
adjustment in electricity prices dented domestic steel producers’ margins.
3. Services: The services sector likewise encountered the savior impact of
pandemic and posted a negative impact of 0.59%, the wholesale and retail
sector depleted by 3.42%.
Economic Survey Highlights
GDP Growth (%)
Source: Economic Survey,Shajar Research
4.04%
4.71%
5.30%
5.80%
3.00%
-0.38%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
FY15 FY16 FY17 FY18 FY19 FY20
GDPGrowth (%)
Sector Contributions
Source:EconomicSurvey,ShajarResearch
21% 20% 19% 19% 19% 19%21%
21% 21% 21% 20% 19%
59% 59% 60% 60%
62% 61%
0%
10%
20%
30%
40%
50%
60%
70%
FY15 FY16 FY17 FY18 FY19 FY20
% Agriculture Industrial Sector
Services Sector GDPGrowth (%)
Federal Budget FY21

The Macro Economic Environment remained Challenging
 The macro economic environment has remained quite challenging this out-
going year. However, private sector has managed to sustain the crisis.
1. The State Bank of Pakistan has made considerable adjustments in the
interest and exchange rates which have risen the costs of doing business
substantially
2. Credit to Private sector increase by only PKR260bn as of April 2020 as
compared to an increase of PKR777bn SPLY.
3. CPI witnessed a declining trend during the 2HFY20 to single digit
4. Total Public debt stood at PKR35.2bn at the end of Mar’20 recording an
increase of 2.49bn during the SPLY.
5. Phenomenal growth in FDI as it recorded a 412% increase in July-April
FY20 standing at USD2bn compared to USD0.5bn during SPLY.
6. China continued to dominate as the highest contributor to the FDI as the
share increased from 31.5% in the preceding year to 41% in the current
year.
7. Pakistan enhanced its position in terms of ease of doing business moving
up to 110th from 130th place last year on the WEF index.
8. Power sector was the focal point of FDI attracting USD715mn followed by
Communications, Financial Business, and Oil & Gas.
Investments Trend as a % of GDP
(30.0) (20.0) (10.0) - 10.0 20.0 30.0 40.0
FY17
FY18
FY19
9MFY20
Public Investments PrivateInvestments Total Investments
Trend in FDI Flows
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Inflows Outflows Net FDI
USDbn FY15 FY16 FY17 FY18 FY19 FY20P
Federal Budget FY21

Lower Oil Prices Supporting the Trade Balance
Trade Deficit continued to post low numbers in FY20 in both monetary value at
USD14.7bn as compared to USD 21.3bn SPLY (depletion of 31%) and as a %age of
the GDP at 6.7%. The major factor accounting for the reduction in trade deficit is
impoverishment of aggregate demand in the economy due to global pandemic
leading businesses to produce less and ultimately import less raw materials.
Fiscal Account:
1. The proportion of fiscal deficit in 9MFY20 was reported as 4% of GDP,
second highest in 5 years the country faced. Total Revenue remained below
the target of 16.1% of the GDP to 14.3%. Tax revenues underperformed their
respective targets of 12.6% of the GDP coming down to 9.4% whereas non
tax revenue outperformed to 3.3% as compared to their target of 2.3% of
GDP.
2. While Revenues were recorded below expectation, the current expense
increased by negligible 0.7% to GDP and development expenditure
decreased by 1% accounting for global pandemic.
3. A slow down in expenditure growth came from negative growth in
development expenditures and defense expenditure which was slashed to
2.6% from the last year.
4. Markup payments increased to 6.6% of GDP as compared to 5.5% in FY19.
Trend in Fiscal Deficit(as a % of GDP)
0
5
10
15
20
25
30
FY16 FY17 FY18 FY19 FY20E
% Revenue Expenditure Fiscal Deficit
Trend in monetary variables
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
FY14 FY15 FY16 FY17 FY18 FY19 FY20E
CPI Discount Rate Exchange Rate
Federal Budget FY21

Current Account:
1. The CAD contracted to USD3.3bn (4.5% of GDP) in July-April FY20
compared to USD11.4bn (4.8% of GDP) during SPLY contracting by 250%.
2. The decrease in CAD balance arise mainly due to the economic slowdown
throughout the world due to COVID-19 pandemic causing all time reduction
in oil prices giving an opportunity to Pakistan to reduce its CAD through
less import bills and fall in inflation rates.
3. However, on a MoM basis, the CAD has been accelerating to USD 572mn in
April’20 compared to USD9mn in March’20.
4. Goods trade balance dipped by 31% in July-April FY20 to USD 14.7bn from
USD 21.3bn during SPLY.
5. Workers Remittances rose by 5.5% during July- April FY20 to USD18.8bn
considering the numbers of USD 17.8bn SPLY. Due to global lockdown amid
COVID-19 pandemic causing serious threat to employments of overseas
Pakistanis as countries who are major employers of Pakistanis are facing
savior economic downturn due to all time reduction in all prices. Though the
governments of the concerned countries and health organizations across
the world are taking mitigating measures but still the target of USD22.2bn
for FY20 remains unachievable.
C/A Deficit Reduced in FY20
FX reserves vs Import Cover
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0
5
10
15
20
25
FY15
FY16
FY17
FY18
FY19
FY20TD
monthsUSD bn
FX Reserves Import Cover in Months
Federal Budget FY21

Budget FY21
Limited Incentives despite Challenges
15
Federal Budget FY21

Cements
Neutral to Positive!
Budgetary Measures Impact Comment
Higher allocation of Federal PSDP by 15% at
PKR 650 Bn as compared to FY20 revised
estimate of PKR 564 Bn.
Positive
This may send positive sentiment to the construction and
material industry towards greater development spending.
Reduction in Additional Custom Duties (ACD). Positive
At present ACD on coal is 5% which is proposed to reduce by
2%. This will bode well for the cement companies profitability.
Turnover tax rate maintained at 1.5% and Tax
credit on BMR under section 65B is also not
restored.
Neutral No impact.
Reduction in Federal Excise Duty on Cement by
PKR 0.25/kg.
Positive
FED on per kg of cement has decreased from PKR2.0 to
PKR1.75. This could be positive for cement players in the
current scenario provided entire impact is retained by the
manufacturers.
Subsidy has been proposed for the flagship
project “Naya Pakistan Housing Authority’
while allocation under NHA has been reduced
by 24%.
Neutral
Although the government has allocated PKR 30Bn for low cost
Naya Pakistan Housing Scheme which will likely trigger cement
demand. On the contrary, National Highway Authority allocation
has been reduced by a sizeable PKR 119Bn.
Federal Budget FY21

Engineering
Reduced duties to improve margins
Elimination of ACD on scrap imports Positive This will bode well in profitability of steel manufacturers.
Regulatory Duty (RD) has been slashed by 6.5%
for both hot rolled coils (HRC) and PCT codes of
7208, 7225 & 7226 respectively.
Neutral
This will only help commercial importer as domestic flat steel
manufacturers are exempted from RD on import of HRC. RD is
reduced from 12.5% and 17.5% to 6% and 11% respectively.
Abolition of WHT (section 235B) for steel
melters & composite units
Positive
This will improve margins of Long steel manufacturers.
Custom Duty on raw material of wire rod has
been slashed by 8%
Positive
MUGHAL – manufacturer of wire rod will benefit from reduced
CD from 11% to 3%.
Federal Budget FY21

Encouraging Measures!
Reduction in CD and exemption from ACD Positive
Duty rationalization will be beneficial for food packaging
industry on import of raw material
Reduced Rate of Custom Duty on glass board
for manufacturing TV panels
Positive Reduction in CD will benefit home appliance manufacturers.
Exemption in CD on skimmed milk powder Positive
Previously a uniform tax rate of 10% was imposed which now
has been exempted.
Exemption from 2% ACD om import of edible
oils and oil seeds under PM’s COVID19 relief
package has been extended.
Positive
Under relief package, 2% ACD is abolished on imports of edible
oil seeds. This will impact positively for the oil extraction
companies.
Consumers, Food & Beverages
Federal Budget FY21

Precarious Prospects!
Super Tax has been maintain for Banks
Increase in FED on Cigarettes, Cigars, Cheroots
and Cigarillos increased from 65% to 100%.
Negative
Market participants were expecting a relief in CGT, absence of
the relaxation would initially dampen the positive sentiment.
Increase in the rate of FED on filter rods from
PKR 0.75 to PKR 1 per filter rod.
Negative Reduction in CD will benefit home appliance manufacturers.
Levy of FED on e-liquids of electric cigarettes at
PKR 10/ml.
Negative
Previously a uniform tax rate of 10% was imposed which now
has been exempted.
WHT on tobacco has abolished which was 5%
earlier.
Negative
Under relief package, 2% ACD is abolished on imports of edible
oil seeds. This will impact positively for the oil extraction
companies.
Capital Market, Banks, Tobacco
There will be no impact of maintaining the Super tax as they
are already adjusted in the future earnings in our models.Neutral
Capital Gain tax extended till 2021
Negative
All these measures will definitely hurt bottom-line of
tobacco companies
Federal Budget FY21

Positive outweigh negative
Imposition of FED on both locally
manufactured (7.5%) and imported Double
cabin (4x4) pick –up vehicles (25%).
Negative
Implementation of FED would lower margins and would also
result in decrease in demand for double cabin Hilux.
Removal of advance tax on vehicles below
2000CC.
Positive This will have positive impact on the bottom-line for motorcycle
and rickshaws assemblers.
Withdrawal of additional custom duty on raw
materials.
Positive LOTCHEM to benefit from this measure as elimination of CD on
Paraxylene and Ethylene to benefit company’s margins.
Gas Infrastructure Development Cess (GIDC) to
continue
Neutral
Neutral event for chemical producing companies.
Sales tax to be reduced by 2% from 14% to
12% for textile retail sector.
Positive
Positive for companies having large retail stores.
Automobile, Chemical & Textile
Federal Budget FY21

Total allocation of PKR 25.5Bn an increase of
131% from estimated budget of FY20.
Positive Increased health spending bodes well for Pharma companies.
Exemption allowed on import of Dietetic foods.
Positive Import of this food supplement will have positive on their profit
margins.
CD exempted on import of raw material for
syringes and saline infusion sets.
Positive This will reduce raw material costs resulting in improved
margins of pharma companies.
Corona relief package of PKR 70 Bn Positive This will bolster demand for pharma products.
Pharmaceuticals
All positives!
Federal Budget FY21

Rationalizing tax on imports by shifting from
person-specific rates to goods specific rates as
per goods type, with tax at 1% for capital
goods, 2% for raw materials and 5.5% for
finished goods regardless of the status of the
importer.
Neutral
This would cause neutral impact on the fertilizer as the duty
structure is maintained.
Allocation of PKR 10 Bn to fight against Locust
attack.
Positive This will bode well for the agriculture sector to help ensure food
security.
Elimination of Advance tax under section 236U
on insurance premiums
Positive
For non-fliers it is 0%-4% for general insurance and 0%-1% for
life insurance if the annual premium exceeds PKR 0.3 Mn. This
will result in improved gross premium earned.
Fertilizer & Insurance
Neutral to Positive
Federal Budget FY21

Middle-of –the-Road
Turnover tax rate is maintained at current level
Neutral Neutral for companies, due to heavy exchange and inventory
losses most of the companies fall under this bracket
PKR 450 Bn is budgeted for Petroleum
Development Levy (PDL) for FY21
Neutral
The increase is noteworthy but this will not likely to have an
impact on sector’s profitability
Reduction in power subsidy to PKR 150 Bn
Negative The subsidy is reduced by 42% reflecting govt. plans to pass-on
the additional burden to the consumers, which may increase
inflationary pressure in the economy.
IPP’s/Power & OMCs
Federal Budget FY21

Disclaimer
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Federal Budget FY21: A Barrier Eclipsing Relief

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