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Business Recorder
16-06-2025
- Business
- Business Recorder
The assumptions in FY26 budget
The budget 2025-26 makes one implicit and three explicit assumptions that enable its architects to present a set of expenditure and revenue targets in support of Finance Minister Muhammad Aurangzeb's claim that it would fundamentally change the DNA of the economy through the creation of a competitive economy on the back of a rise in productivity that, in turn, would increase exports. The question is if these assumptions are realistic. The implicit assumption is a further reduction in the discount rate after the meeting of the Monetary Policy Committee scheduled today (16 June 2025) to justify the 739 billion rupees budgeted reduction under the head of mark-up next fiscal year. This reduction is notwithstanding the government's intent gleaned from the budget documents to: (i) increase non-bank borrowing from the budgeted 2.662 trillion rupees in 2024-25 to 2.874 trillion rupees next year though the budget acknowledges a reduction of 23.658 billion rupees on account of National Savings Schemes – from 164,994 million rupees in 2024-25 to a projection of 141,288 million rupees next year; and (ii) bank borrowing (T-bills, Pakistan Investment Bonds, sukuk) or debt equity budgeted to generate 3.435 trillion rupees in 2025-26 against 5.142 trillion rupees budgeted for 2024-25 – a claim that is not in synch with the details provided for capital receipts budgeted to rise to 2663.9 billion rupees in 2025-26 against only 326 billion rupees in the current year with floating debt budgeted to rise to 1.409 trillion rupees in 2025-26 against 1.121 trillion rupees in the current year. In this context, it is relevant to note that the Finance Minister on several private television channels post the budget speech expressed a pledge to raise debt equity (which remains stymied due to the country's low rating by the three international agencies) and the issuance of a Panda bond at however low the total, or so he stated. Needless to add, any reduction in the discount rate would require International Monetary Fund (IMF) concurrence given that its appraisal in the first review documents uploaded on its website on 17 May 2025 stated that 'monetary policy should remain appropriately tight and data dependent,' which would make any further reduction during the year a challenge. In addition, the Fund's staff level agreement on the ongoing programme in October 2024 referred to the Fund providing technical assistance to support Pakistan's efforts to overcome 'shortcomings in the source data available', which would imply that the GDP projection of 4.2 percent next year may not be achieved. An explicit assumption was the rupee-dollar parity at 290. This rate assumes external receipts of 19.99 billion dollars with 16 billion-dollar rollovers by the three friendly countries. Repayments are budgeted at 18.869 billion dollars, with repayment of short-term credit projected at 689 billion rupees. It stands to reason that debt equity, if procured, would generate a higher repayment of short term credit. Last fiscal year's revised estimates revealed that net external resource inflows were 2583.8 billion rupees against 106.5 billion rupees projected in the current year. This is in spite of external receipts next fiscal year are comparable to the outgoing year – 5.777 trillion rupees in 2025-26, with revised estimates giving a total of 5.833 trillion rupees. The IMF first review report urged the government to 'monitor the recent Real Effective Exchange Rate (REER) appreciation to avoid eroding competitiveness,' while the SBP website notes the REER at negative 2.10 with the base year inexplicably given as 2010 – a year that many analysts argue reflects tacit assistance in reaching a desired parity with REER positive till January this year. In addition, it is relevant to note that SBP committed to the Fund in the Memorandum of Economic and Finance Policies, to maintain a flexible exchange rate by allowing banks to act freely without restrictions, including removal of import payment restrictions (though this pledge is unlikely to be kept in the event of the reemergence of an unsustainable trade imbalance) and 'limiting foreign exchange sales to banks to at most balancing foreign exchange purchases within each quarter and consult with the Fund if gross sales exceed 200 million dollars in any rolling 30-day period.' In addition, the government has pledged that given that 'limited reserve buffers are a key constraint to external stability the SBP will continue its efforts to build stronger foreign exchange buffers ….and FX sales will be limited to episodes of disorderly market conditions and not used to prevent a trend depreciation of the rupee driven by fundamentals.' In other words, the IMF is likely to forestall any move to intervene in the foreign exchange market. The second explicit assumption is the generation of provincial surplus of 1464 billion rupees in 2025-26 against 1009 billion rupees in the revised estimates of the current year which, as per the budget documents, fell short of the federal budgeted 1217 billion rupees – a shortfall of 17 percent. One would be well advised to wait for provincial budgets prior to taking the revised estimates as attainable. And the final explicit assumption is privatisation proceeds of 87 billion rupees which at the rate of 290 rupees to the dollar is a mere 3 billion dollars which does not gel with the pledged objective of not only privatising PIA but also Roosevelt Hotel and distribution companies. This mirrors the approach taken by the IMF in the first review documents wherein it notes the ironing out of all impediments to PIA sale after the fiasco last year and yet it projects privatisation proceeds at zero till 2030. Federal Board of Revenue (FBR) collections are budgeted at 14.13 trillion rupees next year against 11.9 trillion rupees in the revised estimates of 2024-25, a shortfall of one trillion and 70 billion rupees which the Chairman FBR maintains will narrow by the end of the current month. The Finance Minister praised the 390 billion rupees generated from enforcement measures in the outgoing year and a similar amount budgeted to be generated from this source in 2025-26 (accepted by the IMF he informed the country gleefully) with the warning that if FBR fails (the finger pointed at failure to legislate the necessary laws and/or delays associated with challenges in courts) additional taxes of the amount will have to be imposed; it is however relevant to note that these enforcement measures were targeted not at direct but indirect taxes (much was made of revenue collected as excise duty on sugar and tobacco), which are not only passed on to the consumers but whose incidence is greater on the poor than on the rich. Non-tax revenue will be mainly sourced to petroleum levy (apart from SBP profits budgeted at 2.4 trillion rupees next year which are being challenged by economists) with a budgeted rise from 1.162 trillion rupees in the revised estimates to 1.468 trillion rupees next year though this amount too presupposes lower international price of oil which has risen by 5 percent a few hours after Israeli attack on Iran. Tax revenue is dependent on the accuracy of the growth rate estimated at 2.7 percent for the outgoing year as it is almost entirely attributed to the rise in services sector (difficult to quantify with many operating in the informal sector) with large scale manufacturing sector registering negative growth and major crop growth downgraded from the target. If the 2.7 percent is downgraded later, a ploy that was used in 2013 by the then finance minister who inexplicably downgraded the growth rate from two years previous, then the projected 4.2 percent for 2025-26 would be more realistic though the gains would be considerably more limited as the bar would be low. Copyright Business Recorder, 2025
Express Tribune
11-06-2025
- Business
- Express Tribune
Status quo maintained on equity taxes
Listen to article The Federal Budget FY26 has been largely welcomed by market participants, particularly equity investors, as it avoids raising capital gains or dividend taxes while introducing policies favouring equities over fixed income. While some sectors stand to benefit, others face selective pressures, resulting in a broadly balanced economic impact. For the Pakistan Stock Exchange (PSX), the budget brought relief as the Capital Gains Tax (CGT) on equities remains unchanged at 15%, dispelling fears of a potential hike, said Ali Najib, Deputy Head of Research at AHL. The government also raised the tax on interest income to 20% (from 15%), though National Savings Schemes (NSS) are exempt. This shift is seen as favourable for equities, encouraging investors to move from fixed income to stocks and mutual funds. Waqas Ghani Kukaswadia, Research Head at JS Global, noted that income from loans will now be taxed at 25%, further discouraging debt-oriented funds. Additionally, a 7% excise duty on commercial construction has been removed, and federal stamp duty on real estate transfers has been reduced from 4% to 1%, likely encouraging real estate transactions and indirectly supporting the construction sector. On the banking front, the impact is neutral. The government proposed raising the withholding tax (WHT) on cash withdrawals from 0.6% to 1% for non-filers, while profit on debt will attract a 20% tax. A 5% tax on foreign digital payments has also been introduced, seen as revenue-enhancing without significantly disrupting banking operations. Construction and real estate sectors benefit from multiple relief measures. WHT on property transactions has been reduced significantly – from 4% to 2.5% for higher-value transactions, and from 3.5% to 2% and 3% to 1.5% for others. A tax credit for affordable housing and a Rs5 billion housing subsidy are expected to spur demand, benefiting cement and steel industries. Stamp duty on real estate transfers has been reduced federally from 4% to 1%, with provinces likely to follow. The removal of excise duty on commercial construction projects further incentivises builders and developers. In real estate rentals, a 4% tax on rental income has been introduced, balanced by the abolishment of the Federal Excise Duty (FED) on plot transfers. Overall, these changes are seen as neutral to positive for the sector. The auto sector faces negative adjustments. The concessional 18% GST slab for hybrid vehicles now applies to all cars previously enjoying a lower rate, while incentives for small cars have been withdrawn, potentially raising prices for lower-end vehicles. An EV policy for two- and three-wheelers has been proposed to reduce emissions, alongside a new carbon tax on auto fuels. Over the next five years, additional customs duty and regulatory duty on imported vehicles will be gradually removed, increasing competitive pressure on local automakers. The budget proposes a gradual removal of tax exemptions for the FATA/PATA regions to reduce market distortions and create a level playing field for manufacturers elsewhere, with sales tax exemptions to be phased out by FY29. For the cement sector, the Rs5 billion housing subsidy and tax credits for affordable housing are expected to spur demand. The power sector impact is neutral, though the removal of the cap on the 10% Distribution Surcharge may slightly raise industrial tariffas. In oil and gas, a Rs2.5/litre carbon levy was introduced, with neutral impact on Oil Marketing Companies. Tech sector tax exemptions for SEZ/STZ zones are capped until 2035. Other steps include super tax relief, higher e-commerce WHT, and support for PIA's privatisation.
Express Tribune
21-05-2025
- Business
- Express Tribune
Profit rates revised for National Savings schemes
The Central Directorate of National Savings (CDNS) has reduced rates of return on several National Savings Schemes (NSS), with cuts up to 100 basis points (bps), it was reported on Wednesday The Savings Account (SA) rate dropped by 100bps to 9.50% from 10.50%, according to Topline Securities. Defence Saving Certificates (DSC) returns fell by 21bps to 11.91% from 12.12%, while Bahbood Savings Certificates (BSC) declined by 24bps to 13.44% from 13.68%. Rates for Pensioners Benefit Account (PBA) and Shuhda Family Welfare Account (SFWA) were also lowered by 24bps each, now standing at 13.44%. Similarly, Regular Income Certificates (RIC) returns decreased by 18bps to 11.52% from 11.70%.
Express Tribune
26-02-2025
- Business
- Express Tribune
Govt lowers interest rates on National Savings Schemes
Listen to article The Central Directorate of National Savings (CDNS) has announced a reduction in the return rates on several of its National Savings Schemes (NSS), effective from February 25, 2025. The adjustments, which vary from 1 basis point (bps) to 33bps, will impact various savings certificates and accounts, providing lower returns to investors. Key changes include a decrease of 10bps in the rate for Bahbood Savings Certificates, which will now offer a return of 13.58% down from 13.68%. Similarly, the rate for Pensioners Benefit Accounts (PBA) has also dropped by 10bps, settling at 13.58%. The Defence Saving Certificates (DSC) will provide a return of 12.14%, a reduction of 1bps from 12.15%. The Special Savings Certificates experienced a 20bps reduction, now offering a return of 11%, while Short Term Savings Certificates (STSC) saw a significant drop of 33bps, with the return now at 10.81%. The Special Saving Account's return has also declined by 20bps, now offering a return of 11%. The Sarwa Islamic Savings Account and Sarwa Islamic Term Account both experienced a 16bps decrease, with their return now set at 9.74%. Additionally, the Shuhada Family Welfare Account (SFWA) saw a 10bps reduction to 13.58%. This move comes after the State Bank of Pakistan lowered its key policy rate by 1% last month to 12%, marking the sixth consecutive rate cut since June 2024. The Monetary Policy Committee cited easing inflation but noted that core inflation remains high.
