Optimism runs high: Analysts believe budget to entail growth, reform

Optimism runs high: The upcoming Federal Budget 2021/22 is likely to target economic growth and structural reforms, analysts said on Tuesday.

The federal government is scheduled to announce the budget on June 11.

“We expect the budget to remain accommodative and should target economic growth and sound structural reforms side-by-side,” analysts at Insight Securities said.

The budget would remain neutral for most industries but may include a reduction in the capital gains tax; an agriculture package worth Rs110 billion; refinery policy to upgrade the projects and to attract foreign investment; and a reduction in minimum tax under Section 113 of the Income Tax Ordinance, 2001.

They also said other measures to be part of the budget included mechanism of targeted subsidy, expected increase in the defence budget, increase in the salary and pension of the government employees, besides a rise in minimum wage rates.

Analysts at Topline Securities said the induction of Shaukat Tarin as the finance minister would bode well for the country’s economy. They believe the budget may target higher growth next year with an overall focus on increasing development expenditures.

“This, in turn, should be positive for local equities, particularly as expectations a few months ago were more skewed towards consolidation given that Pakistan had just resumed the previously stalled IMF programme.”

However, the government has been negotiating to soften the conditions linked with the programme with the IMF due to the rise in the cases of Covid-19 during the third wave, the analysts added.

Apart from raising the development expenditures to induce growth, the government is likely to provide incentives to the export sector, with a particular focus on information technology.

The government is also likely to target the agriculture sector to increase overall growth, where it may give final shapes to earlier announced subsidies on fertilisers.

In the budget, the government is unlikely to impose any major new taxes or increase taxes, whereas it may reduce/abolish some Customs duties and withholding taxes.

Reduction in the turnover tax, rationalisation of capital gains tax (CGT) regime and/or reinstatement of relief on inter-corporate dividends may provide further legs to the market performance.

Analysts at Arif Habib Limited in their budget preview said the forthcoming budget may depict an expansionary fiscal policy.

The revenue targets for the next fiscal year would be stringent and daunting, as the IMF sword still looms. To meet the revenue targets, the government may target broadening the tax base through augmented documentation as opposed to introducing various new major taxes, they added.

“However, adopting a pro-growth and expansionary fiscal policy the challenges for the government will be maintaining fiscal stability and improving the fiscal health.”

The AHL analysts said the IMF stance would be lenient due to the ongoing third wave of Covid-19. “Tightening of the economy in this backdrop would be harmful to the public welfare, an undesirable outcome during the economic revival phase in the country.”

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