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Pakistan’s Budget Debate

June 11, 2015

By: ASAD RIZVI (KARACHI)   Published on June 11, 2015

Budget is a clear shift in National priority, as it contained nothing that could prop up the artificially inflated debt-ridden economy. Therefore, FM Dar’s insistence that budget strategy is an economic move towards stability is not convincing. Rather, it more sounds like an assumption that if the economy is forcefully pushed higher by making entry adjustments it will magically become real. The economy is unnatural in many ways. No effort has been made to increase the number of taxpayers, which is less than 1/2 percent of the total 200 million population.

No determined attempt is visible to stop SBP’s monetizing of government borrowings via direct/indirect purchase of Treasury bills and Government paper that may once again give a free hand to government for excess spending to meet its inflated growth target of 5.5 percent and annual mark-up payments (debt financing) of Rs 1.3 billion, which could rise again.

This is one of the major factors for interbank market players’ recent reaction, as soon after the budget announcement, bond holders started demanding premium, pushing the cost of federal borrowing higher, which is costing 70 basis points more. 3-10-year PIB coupon ranging between 8.75 percent and 9.75 percent is too attractive for banks to invest in. Whereas, one-year Kibor is 7.24 percent.

Currently, 10-year Pakistan Investment Bond (PIB) when issued is dealt with at a 9.95% yield. In the last auction, 10-year cut-off yield was at 9.25 percent, 5-year cut-off yield was 8.10 percent and 3-year cut-off yield was 7.55 percent. Unless, central bank decides to keep market liquid and PIB coupon rate is slashed at the earliest by another 250-300 points and discount rate is gradually reduced by another 100 basis points (minimum), banks will never lend money to private sector. The government’s growth target of 5.5 percent is a wishful thinking because budget does not contain any growth stimulation recipe, hence liquid market and rate slash are the only choice.

Since budget has nothing notable to offer except for the increase in BISP, which truly speaking was launched by PPP and is so valuable that no government can dare withdraw from its portfolio.

Regrettably, the budget is designed in such a way that it is bound to increase spending and will once again fail to increase tax-to-GDP ratio. This means budget based policy continuation will see an increase in pace of debt and is unavoidable.

Based on budget facts, it is shocking to learn that the Finance Minister has agreed to consider a threshold of Rs 50,000 per transaction for applicability of 0.6 percent withholding tax on all banking instruments in response to a demand by the Senate Standing Committee on Finance, as members of committee think it will be counterproductive. I am not sure about Senator Talha Mehmood’s financial knowledge, as he is of the view that depositors would withdraw money from banks and keep it in lockers. I suggest that he should go to any bank and ask its bank manager to fill the largest size locker and check out how much money a locker can accommodate. The FM should not be misguided by such ideas as he is required to act in a responsible manner in the country’s best interests.

My pick of the decade is Asad Umer’s statement that he made during his speech in National Assembly. He demanded that tax on capital gains and property should be imposed. He also asked the government to impose tax on all agriculture incomes.

Imran Khan is also very vocal on the subject of taxation and therefore, I strongly believe that in the coming Khyber Pakhtunkhwa (KP) budget 2015-16, KP government, without any doubt, will impose taxes on all capital gains and property based on actual transacted amounts and on all agriculture incomes.

Copyright Business Recorder, 2015

Pakistan’s Pre-Budget Preview

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