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Business & Finance

Post-budget press conference: Fiscal tightening on the cards

  • Miftah Ismail says energy sector’s woes have deepened due to mismanagement, unbearably high transmission and distribution losses
  • PM Shehbaz Sharif talked to the Indonesian President about palm oil
  • IMF not happy with the government measure to increase income tax exemption for salaried class
Published June 11, 2022

Addressing a post-budget press conference on Saturday, Federal Minister for Finance and Revenue Miftah Ismail said that the government's top priority is fiscal consolidation, while adding that fiscal tightening is on the cards.

"Our first target is to protect the finance of our country, and the second target is to provide relief to the masses," said Miftah while briefing media persons on the Federal Budget 2022-23 along with Federal Minister for Information and Broadcasting Maryam Aurangzeb and Minister of State for Finance and Revenue Dr Aisha Ghous Pasha.

The federal government on Friday presented a Rs9,502 billion budget for the next fiscal year with an economic growth target set at 5% and a budget deficit of 4.98%. The finance minister said that the real challenge for the government is to achieve growth without the current account deficit.

The budget comes at a time when Pakistan’s economy is facing multiple challenges including historic inflation, and fast depleting foreign exchange reserves. Meanwhile, expensive borrowing and constant power outages are making people’s lives difficult.

Tax on banking sector enhanced to 42% from 39%, says Miftah while announcing budget proposals

"Pakistan is passing through a tough phase, as on one side the international environment is very challenging while on the other side our government administration has deteriorated," said Miftah.

Energy sector woes

Talking about the power sector, Miftah said that despite having some of the most efficient power generation plants in the world, the energy sector's woes deepen.

"This to due to mismanagement, unbearably high transmission and distribution losses, while bill collection rate remains low, leads to losses to the tune of over Rs1,100 billion," he said, adding that the power sector issues need to be resolved.

He said the gas sector was given Rs400 billion in subsidies and the circular debt in the gas sector has ballooned to Rs1,400 billion. "In SSGC, the Unaccounted For Gas (UFG) stands at 20%, this means that gas worth $200 million a month or $1.5 billion annually get lost or leaked.

"We need to improve the administration of the government, otherwise the economy will not improve," he said, adding that the country bears unaffordable expenditures.

The government expenditure has increased by only 3% in the total budget outlay of Rs9.5 trillion. "However, if we deduct the interest payments, then our expenditure has decreased as we have cut subsidies on the power and gas sector," said the minister.

The federal outlay for the next fiscal year is projected at Rs9,502 billion with debt servicing of Rs3,950 billion. Rs1,523 billion have been earmarked for defence, Rs550 billion for running the civil government, Rs530 billion for pension and Rs699 billion for targeted subsidies while Rs1,241 billion have been allocated for grants including the BISP and Bait-ul-Mal.

Making tough decisions

Pasha said the government took "tough decisions" in order to stabilize the economy and put the country on a growth track.

"Despite the present situations, our philosophy in this budget has been to provide relief to the common man," she said.

She added that additional taxes are mostly direct taxes imposed on the wealthy, and on properties and unproductive assets.

Talking about inflation, Pasha said that the world is facing a commodity supercycle, "Pakistan also is facing its effect. However, the government took a number of anti-inflationary measures by not imposing indirect taxes, agriculture package, increasing PSDP and reducing the budget deficit."

Talks with Indonesia on palm oil

The finance minister said Prime Minister Shehbaz Sharif on Friday talked to the Indonesian President about the availability of palm oil. "The price of palm oil has increased to $1,600-1,700 per ton, after Indonesia imposed a ban on palm oil exports, which is unaffordable" he said.

Miftah said that the government has given a lot of subsidies on oil seeds and is working on a package of Rs20 billion in which intervention prices will be given as well.

"Pakistan needs to improve its cultivation area of canola, and targets to increase oil seed production worth $750-1,000 million by next year," he said.

Fiscal tightening on the cards

The finance minister said that fiscal tightening is on its agenda as the government seeks to reduce its deficit.

The government in a bid to improve tax collection levied further taxes including increase in capital gain on all classes of assets.

The advance tax rate on the purchase and sale of property for filers is proposed to be enhanced to two per cent from the current 1%.

Moreover, in order to discourage the undocumented economy, the advance tax rate for buyers of immovable property who are non-filers is proposed to be enhanced to 5%.

All persons inclusive of companies and associations of persons, earning an annual income of Rs300 million or more, are proposed to pay 2% tax. Advance tax on motor vehicles exceeding 1600cc is proposed to be increased.

Advance tax shall also be collected at the rate of 2% of the value in cases of high-value hybrid and electric vehicles. Additionally, the rate of tax for non-filers shall be enhanced to 200% from the current 100%.

IMF not happy with some measures

Miftah said that the International Monetary Fund (IMF) "is not happy" with the government measure to increase income tax exemption for salaried class from Rs0.6million to Rs1.2 million, business individual AOP from Rs0.4 million to Rs0.6 million, but Pakistan remains in talks in this regard.

"We know that inflation will bite as oil prices are not expected to go down," he said.

For the first time, we have tried to bring the income tax and sales tax into fixed tax in order to bring individuals into the tax net, he said, adding that the government will also set up a task force to curb tax evasion.

Miftah said tax measures taken by the government including the increase of income tax and super tax are not an inflationary tax. "However the Petroleum Development Levy (PDL) to be charged is an inflationary tax," he said.

To this, Pasha responded that the government has taken measures to compress the demand for petroleum products, which would curb inflation.

Privatization of SOEs

Miftah said that the government intends to privatize a number of State-Owned Enterprises (SOEs) and would directly offload shares of some companies in the market. "We will also privatize one or two companies as well," he said, without naming the companies.

Miftah stated that the 15% rise in government employee salaries has been imposed at the 2017 pay scale and then merged with Adhoc allowance.

He added that no new tax has been imposed on FATA.

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