KARACHI: The key challenge for the government will be restricting the fiscal deficit for the upcoming year as not only the government will have to factor in higher expenditures relating to Covid-19 outbreak, but also take hit on revenues because of the slowdown in overall economy, analysts said.
The government is expected to announce the Federal Budget for FY21 on June 12, 2020. The budget is likely to take into account the implications of Covid-19, where government will try to ease the pain of the masses due to the pandemic by focusing on job creations and relief for the businesses, they added.
"We believe the government will try to restrict the fiscal deficit in the budget to 8.5-9.0 percent of GDP for FY21 (6.5-7.0 percent excluding Covid-19 related expenses), where expenditures relating to Covid-19 are likely to be marked separately," an analyst at Topline Securities said.
The government is likely to earmark Rs01 trillion for dealing with Covid-19 pandemic and for providing relief to the business community, he added.
"Considering the recession, the government may try to boost economy through providing incentives to the Agriculture and Construction sectors."
On the revenue front, government is in talks with the IMF to set collection targets for next year, he said adding that the government wants to keep FBR revenue collection target at around Rs4,800 billion, whereas IMF wants the same to be close to Rs5,100 billion.
He believed the government will once again set an ambitious FBR revenue collection target of Rs4.8-5.1 trillion, which we believe will be difficult to achieve.
"The Federal Budget FY21 is likely to be 'Neutral to Positive' for the stock market, where we believe the government is likely to prioritise relief and growth over fiscal discipline to reenergise the economy in the aftermath of losses incurred due to the Covid-19 pandemic," he said.
He said positive budgetary measures are likely for tractor manufacturers, fertilisers and cements; while budget is likely to remain largely neutral for Banks, IPPs, E&Ps, steel, textile, pharma and consumers.
"We expect market to gradually improve in the lead up to the Federal Budget announcement, where key focus for investors is likely to be on any potential reliefs in the shape of Capital Gains Tax, Tax on Dividends, incentives for other listed sectors as discussed further in this note."
He said local liquidity will improve as flows directed towards Fixed Income (FI) are now likely to be routed towards equity markets as interest rates on FI securities (including NSS) have came down by 400-500bps in the last three months.