Medium Term Budget Strategy Paper 2022-23 to 2024-25
The Medium Term Budget Strategy Paper 2022-23 to 2024-25 is part of the federal budget for FY 2022-23. This page reproduces the text of its 24 PDF pages, extracted automatically from the official PDF published by the Finance Division, Government of Pakistan.
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Medium Term
Budget Strategy Paper
2022-23 - 2024-25
June, 2022
Government of Pakistan
Finance DivisionPage 2
Foreword Budget Strategy Paper is a tool to state Government’s strategic priorities and medium term objectives. Public Finance Management Act2019 requires presentation of a Medium-Term Budget Strategy Paper for consideration and approval of the Cabinet. The Medium-Term Budget Strategy Paper for FY 2022- 23 to FY 2024-25 has been formulated with a focus on economic stabilization, lowering inflation, increasing revenue, resolving of energy issues, enhancing exports and protecting vulnerable segments of society. The Paper provides a two-pronged budget strategy. On the one hand, it encompasses optimal mobilization of revenue through broadening and deepening of tax base and increase in the tax net, removal of irrational exemptions, simplification of procedures, and augmentation of the capacity of revenue administration, especially through IT-enabled services such as track and trace system. On the other hand, it is based on reduction in non-development expenditure without compromising social and development priorities of the government. The new government under the leadership of Mian Muhammad Shahbaz Shareef, the Prime Minister of Pakistan shall endeavour to steer the country out of the prevailing economic crisis. In the coming weeks, the government will seek input from all stakeholders on its proposed taxation and expenditure policies to align them further with the imperatives of equitable, inclusive and sustainable economic growth. I would like to avail this opportunity to commend the efforts of Dr. Aisha Ghaus Pasha, Minister of State for Finance & Revenue and Mr. HamedYaqoob Sheikh, Finance Secretary and his team at the Finance Division and Mr. Asim Ahmad, Chairman, Federal Board of Revenue and his team for their hard work in the preparation of this Paper which sets the strategic direction of Budget 2022-23. Dr. Miftah Ismail Minister for Finance and Revenue
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Preface The approval of Medium-Term Budget Strategy Paper containing quantified macroeconomic and fiscal projections by Federal Government is a legal requirement under section 3 of the Public Finance Management Act, 2019. The Paper presents strategic priorities of the government’s revenue and spending policies and specifies indicative spending levels for various Divisions and Offices of Federal Government. The medium-term projections have been prepared on a three-year rolling basis. The Budget for FY 2022-23 will form basis of the first year of the medium term, whereas the projections for the remaining two years have been worked out on the basis of forecast of resources and expenditure, aligned with the policy objectives and priorities of the new government. The Budget Strategy Paper also reflects the strong emphasis of the government for efficiency in fiscal management, responsive budgeting, transparency and accountability. I would like to acknowledge the commendable work done by the staff of Finance Division, Federal Board of Revenue and Planning, Development and Special Initiatives Division of the Federal Government in the preparation of this Paper. In particular, I would like to express my deepest appreciation of Mr. Muhammad Tanvir Butt, Additional Finance Secretary (Budget) for leading the development of this important document. Finally, I would like to express my gratitude to Dr.Miftah Ismail, Minister for Finance and Revenue and Dr. Aisha Ghaus Pasha, Minister of State for Finance and Revenue for their insightful guidance in the preparation of this Paper. Hamed Yaqoob Sheikh Secretary Finance Division
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Table of Contents
I. Medium-Term Macroeconomic Framework ................................................................. 9
A. CURRENT ECONOMIC SITUATION ............................................................................ 9
B. MEDIUM-TERM MACROECONOMIC PROJECTIONS ................................................ 10
C. PROJECTIONS OF DEVELOPMENT PARTNERS AND OTHERS ................................ 11
II. Medium-Term Fiscal Framework ................................................................................ 13
III. Strategic Priorities of Governmentfor Revenue Mobilization .................................. 15
(A) FBR REVENUE ...................................................................................................... 15
(B) NON TAX REVENUE ............................................................................................... 18
(C) TRANSFERS TO PROVINCES .................................................................................. 20
IV. Spending Policies and IndicativeLevels of Spending .............................................. 21
V. Budgetary Spending Levels ......................................................................................... 23
VI. Public Debt ...................................................................................................................... 24
VII. Fiscal Risks Scenario Analysis .................................................................................... 25
VIII. Conclusion ...................................................................................................................... 27Page 5
I. MEDIUM-TERM MACROECONOMIC FRAMEWORK
A. CURRENT ECONOMIC SITUATION
Pakistan’s economy had shown periodic ‘boom-bust’ growth cycles. There
always existed wide-ranging economic challenges like shrinking fiscal space,
exchange rate pressure, mounting current account deficit, inflation, energy sector
crisis, and lack of conducive investment environment for the private sector. The
instability on the political front also posed significant threats to economic
performance by creating uncertainty among investors and the business
community.
2. These challenges have been compounded by the complex policy
environment surrounding the country. Internal security, geopolitical conditions,
and regional and global challenges are hindering investors to make timely
investment decisions. The economic situation has suffered three major external
shocks. First, a once-in-a-lifetime pandemic Covid-19 (December 2019 onwards).
Second, a commodity ‘super-cycle’ (since January 2021).Third, the deteriorating
regional situation in Afghanistan and the Russia-Ukraine conflict. The
Government of Pakistan has to deal with these unprecedented challenges having
grave socio-economic repercussions.
3. Pakistan’s economy posted growth of 5.97 percent in FY 2022. It
rebounded from the pandemic (0.9 percent contraction in FY2020) and continued
to post a V-Shaped economic recovery which is higher than 5.74 percent
recorded in last year (FY2021). Within Agriculture, the production estimates of
important crops for FY 2022 are encouraging e.g: Cotton 8.3 million bales,
Sugarcane 88.7 million tons, Rice 9.3 million tons, Maize 10.6 million tons. While
Wheat production stood at 26.4 million tons.
4. Within the industrial sector, LSM posted a growth of 10.4 percent during
Jul-Mar FY2022. The CPI inflation was recorded at 11.3 percent during Jul-May
FY2022 against 8.8 percent in the same period last year. Pakistan being a net
importer of food and oil items was adversely effected by the upsurge in
international food & fuel prices. This upsurge occurred due to supply chain
disruptions.
5. To counter inflationary pressure and for sustainable economic recovery,
SBP has moved to monetary policy tightening at the end of the first quarter of
FY2022 which was kept unchanged since June 2020. The policy rate has been
increased by cumulative 675 basis points till May 2022. The decisions werePage 6
adopted on account of significant uncertainty around the outlook for international commodity prices and global financial conditions. 6. Within the external sector, exports during Jul-May FY2022 grew by 27.8 percent to $ 28.8 billion against $ 22.6 billion last year. Imports during the said period grew by 44.3 percent to $ 72.2 billion against $ 50.0 billion last year. Remittances during Jul-Apr FY2022 increased by 7.6 percent to $26.1 billion against $24.3 billion last year. Thus, the current account deficit reached $13.8 billion during Jul-Apr FY2022 against a deficit of $0.5 billion last year. FDI decreased by 1.6 percent to $ 1,455.6 million in Jul-Apr FY2022 against $1,480.0 million last year. Total liquid foreign exchange reserves held by the country stood at US$ 15.2 billion (SBP: $9.3 billion, Commercial banks: $5.9 billion) as of 2nd June 2022. KSE-100 index recorded at 41315 points (as of 3rd June 2022). B. MEDIUM-TERM MACROECONOMIC PROJECTIONS 7. It is the prime aim of the Government to steer the economy onto a higher, sustainable, and inclusive growth path. The present government believes that this will be achieved by stimulating the drivers of economic growth. Pakistan’s economy underwent significant adjustments like an increase in the policy rate, moving toward a flexible exchange rate in an favourable global environment. The consequences of these factors for growth and stability in the medium-term are likely to be significant. Furthermore, the corrective measures will help in reducing the macroeconomic imbalances in the medium term. 8. In order to address the macroeconomic imbalances, for FY 2023, real GDP growth is expected to slow down, however, afterwards, strong recovery of the economy is expected. Thus, Over the medium-term, growth is expected to return to levels even higher than historical trends with average rates of 6.0 percent in FY24-25. For FY 2023, inflation is expected to be 11.5 percent on account of increase in international commodities prices. Figure. 1A | Real GDP growth rate (%) Figure.1B | Inflation average (YoY). Source: Economic Adviser Wing, Ministry of Finance
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9. Medium-Term Macroeconomic Projections have been developed which
are given in Table -1:
Table 1: Medium Term Macroeconomic Framework*
Actual B.E R.E Projections
2020-21 2021-22 2022-23 2023-24 2024-25
Economic Growth - % 5.7% 4.8% 5.97% 5.0% 5.8% 6.2%
Inflation - % 8.9% 8.0% 11.7% 11.5% 8.6% 7.4%
FBR Revenue - % GDP 8.5% 10.8% 8.9% 9% 9.4% 10%
Overall Budget Deficit - %GDP -6.1% -6.3% -7.1% -4.9% -4% -2.9%
Primary Balance - %GDP -1.2% -0.7% -2.4% 0.2% 0.9% 1.8%
Public Debt- %GDP 71.8% 71.5% 72.4% 69.1% 68.0% 66.0%
Imports-$bn 54.3 55.3 72.8 69.2 69.5 71.8
Exports-$bn 25.6 26.8 31.3 32.8 35.3 38.1
Current A/c Deficit- $bn 2.8 2.3 15.6 9.0 6.4 4.6
Reserves- months of import 2.7 3.5 1.7 2.1 2.5 2.8
GDP - (Rs Billion) 55,796 53,867 66,950 78,197 90,801 102,152
* Projections are provisional and based on available data.
C. PROJECTIONS OF DEVELOPMENT PARTNERS AND OTHERS
10 A. IMF World Economic Outlook 2022
In its World Economic Outlook Report, April 2022, IMF has projected Pakistan’s
GDP growth rate of 4% for FY 2021-22. It has further projected an 11.2 percent
average rate of inflation for the current year against 8.9 percent last year. It has
estimated Pakistan’s current account deficit at 5.3 percent of GDP (up from just
0.6 percent last fiscal year) and 7 percent unemployment rate, slightly lower than
7.4 percent of last year. Going forward, the IMF has projected that the economic
growth rate will recover to 4.2 percent of GDP during FY 2022-23. Further, the
inflation would come down to 10.5 percent and current account deficit to 4.1
percent of GDP.
10 B. Pakistan Development Update, 2022 (World Bank)
According to the World Bank’s Pakistan Development Update 2022, economic
activity in Pakistan maintained its momentum during July-December 2021, high
demand pressures and rising global commodity prices led to double-digit inflation
and a sharp rise in the import bill during this period. These developments have
had an adverse impact on the rupee. Moreover, long-standing structural
weaknesses of the economy including low investment, low exports, and lowPage 8
productivity growth pose risks to a sustained recovery. Rising food and energy prices are expected to decrease the purchasing power of households, disproportionally affecting poor and vulnerable households. On the back of high base affects and recent monetary tightening, real GDP growth is expected to moderate to 4.3 and 4.0 percent in FY22 and FY23, respectively. Thereafter, economic growth is projected to slightly recover to 4.2 percent in FY24, provided that structural reforms to support fiscal sustainability and macroeconomic stability are implemented rapidly, and that global inflationary pressures dissipate. 10 C. Asian Development Bank Outlook 2022 According to Asian Development Bank Outlook Report issued in April 2022, Pakistan’s GDP growth is projected to slow to 4 percent in FY 2022 from 5.6 percent as government applies measures to reduce the current account deficit, raises international reserves and cut inflation. Growth is expected to accelerate to 4.5 percent in FY 2023 due to stronger private consumption and investment. 10 D. State Bank of Pakistan Monetary Policy Statement The State Bank of Pakistan in its monetary policy statement dated 23rdMay, 2022 has stated that the current account deficit continues to be moderate. In April, it fell to $623 million, from $ 1,015 million in March, on the back of lower imports and record remittances. Based on PBS data, the trade deficit shrank by 24 percent relative to its peak last November. These developments are in line with SBP’s projected current account deficit of around 4 percent of GDP this year. Headline inflation rose from 12.7 percent (y/y) in March to 13.4 percent in April, driven by perishable food items and core inflation. The rise in core inflation reflects strong domestic demand and second-round effects of supply shocks. SBP has increased the policy rate by 150 bps to 13.75 percent. 10 E. Fitch Rating (Feb 2022) Fitch Ratings affirmed Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-' with a Stable Outlook. Pakistan's rating reflects external vulnerabilities, a narrow fiscal revenue base and low governance indicator scores, with GDP growth and most public finance metrics largely in line with
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peers following a rebasing of GDP. Fitch has forecast the general government
fiscal deficit will fall further to 5.6 percent in FY22 and 4.7 percent in FY23, from
6.1 percent in FY21, on the back of revenue reforms passed in the recent
supplementary budget and planned for the FY23 budget. These measures could
put public finances on a more sustainable footing. However, high interest
payments, which we forecast at 35.6 percent of revenue in FY22 ('B' median:
11.5 percent), constrain fiscal flexibility.
II. MEDIUM-TERM FISCAL FRAMEWORK
15. Amongst the primary objectives of the Medium-Term Fiscal Framework is
to facilitate medium term policy-formulation based on reliable projections of
revenue and expenditure. It reflects various sources of revenues and heads of
expenditures, in view of the historical trends as well as new measures, specific
needs, and the government’s strategic priorities in the medium term. The
framework also highlights the fiscal balance and primary balance of the federal
and general government. In order to project overall fiscal balance, estimated
levels of provincial surpluses have also been worked out.
16. Pakistan’s gross federal revenues are expected to be at 11% of GDP in
FY22 and stabilize at around 12 percent of GDP in the medium term. Transfers
to provinces are expected to follow the same dynamics assumed in the gross
federal revenues.
17. The cornerstone of the Government’s plan is to reduce deficits to restore
fiscal sustainability in the medium to long term. Fiscal deficit is the key driver of
macroeconomic instability in Pakistan. During the last three years, fiscal deficit
was Rs.4,000 billion per annum on average. From FY 2014 to 2018, however,
the fiscal deficit was only Rs.1,671 billion per annum. The higher fiscal deficit not
only results in an increase in debt but also puts a strain on the current account
balance. The key reason for a high fiscal deficit in the last 4 years has been the
decrease in tax-to-GDP ratio of the country. In 2017-18, FBR tax-to-GDP ratio
was 11.7 percent which decreased to just 8.5 percent in FY 2020-21. On the
other hand, there were slippages in expenditure which further exacerbated the
fiscal deficit situation in the country.Page 10
18. In view of the foregoing, the key objective of budget for FY 2022-23 is to reduce fiscal deficit. This will be done by increasing tax-to-GDP ratio and curtailing unnecessary expenditure. On the expenditure side, the Government will strive to rationalize untargeted subsidies, reduce the losses of public sector enterprises through improved governance and cut down ostentatious expenditure through an austerity drive. 19. Budget 2022-23 will aim to move away from untargeted subsidies to create fiscal space to protect the poor from inflation. The CPI inflation during July-Mar FY2022 was recorded at 10.8 percent as against 8.3 percent during the same period last year. The government will take all possible measures to contain the current surge of inflation. However, given the worldwide environment, bringing current inflation down will require some time and should not come at the cost of a recession. Therefore, the Government plans to divert resources form un-targeted subsidies towards protection of poor. These subsidies will be tailor- made to provide relief to poor in the difficult time. The Government will continue with the social protection programme through greater funding for BISP. 20. Optimal mobilization of revenue, broadening of tax base, reduction in exemptions, efficiency in revenue administration. Key strategic priorities of the government include optimal revenue mobilization, broadening of tax base and increase of tax net, reduction in tax expenditure, efficiency in revenue administration, increase in ratio of direct taxes and simplification of procedures for facilitation of taxpayers. In view thereof, challenging revenue projections have been worked out for the medium term. 21. The Government will continue the programme for PFM reforms with a view to get better value of its expenditure. The Government will continue its policy of implementation of the Public Finance Management Act, 2019. In this regard, new set of Rules and Regulations are being developed. The expansion of the Treasury Single Account beyond Divisions and Attached Departments will be continued and the effectiveness of result-based budget management will be improved for greater accountability for the public expenditure.
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22. Government will work on the new NFC Award in accordance with the
provisions of Constitution of Pakistan. It is high time to consider sharing of
expenditures on social sector and other subjects including health, education,
agriculture and community development with the provincial governments. Federal
PSDP shall focus on core strategic national level development projects only.
23. Government will also focus on cash forecasting, commitment control and
cash management leading to Treasury Single Account System. The
implementation of efficient cash management system will improve the overall
public finance management system of the country.
24. The projected medium term fiscal framework in Table 2:
(Rs. In billion)
Table - 2: Medium Term Fiscal Framework**
Actual B.E R.E Projections
2020-21 2021-22 2022-23 2023-24 2024-25
FBR Revenue 4,764 5,829 6,000 7,004 8,500 9,800
Non-Tax Revenue 1,506 2,080 1,315 2,000 2,033 2,642
Gross Federal Revenue 6,270 7,909 7,315 9,004 10,533 12,442
Transfer to Provinces 2,742 3,412 3,512 4,100 4,975 5,736
Net Federal Revenue 3,528 4,497 3,803 4,904 5,558 6,706
Total Federal Expenditure 7,245 8,487 9,118 9,502 9,965 10,375
Federal Deficit -3,717 -3,990 -5,315 -4,598 -4,407 -3,670
As % of GDP -6.7% -7.4% -7.9% -5.9% -4.9% -3.6%
Provincial Surplus 314 570 570 800 800 850
Overall Fiscal Deficit -3,403 -3,420 -4,745 -3,798 -3,607 -2,820
As % of GDP -6.1% -6.3% -7.1% -4.9% -4.0% -2.8%
Overall Primary Balance -654 -360 -1,602 152 793 1880
As % of GDP -1.2% -0.7% -2.4% 0.2% 0.9% 1.8%
GDP (Nominal) 55,796 53,867 66,950 78,197 90,801 102,152
** Note: Projections are based on available information
III. STRATEGIC PRIORITIES OF GOVERNMENTFOR REVENUE MOBILIZATION
(a) FBR REVENUE
25. Like most developing countries, Pakistan is plagued with issues of an
undocumented economy the consequence of which is a burgeoning tax gap due
to a narrow base and ineffective enforcement. In order to resolve the problem aPage 12
robust program will be pursued. The main pillars of this approach would be
strengthening enforcement measures for both broadening and deepening of tax
base as well as policy measures aimed at simplifications and harmonization of
tax laws.
Table 3: FBR Collection Trends 2016-17 to 2020-21(Rs. in billions)
2016-17 2017-18 2018-19 2019-20 2020-21
(a) Direct Taxes 1,343 1,537 1,446 1,524 1,732
(b) Indirect Taxes 2,018 2,306 2,384 2,474 3,032
Customs Duties 496 608 685 626 765
Sales Tax 1,323 1,491 1,465 1,597 1,990
Federal Excise 199 206 234 250 277
FBR Taxes (a+b) 3,361 3,842 3,829 3,998 4,764
Growth Rate 14% 0% 4% 19%
Source: FBR
26. The growth in FBR tax Fig-2: FBR Tax-to-GDP Ratio
collection was quite low especially 10.0%
after FY 2017-18. On average 9.8% 9.8% 9.6% 9.5%
during the last four years, the 9.4%
9.2%
growth was about 9 percent. As a 9.0%
8.7% 8.8% 8.6%
result, the tax-to-GDP ratio 8.6%
8.4%
continued to go down. The Covid- 8.2% 8.4%
8.0%19 and other factors mainly
2016-17 2017-18 2018-19 2019-20 2020-21
contributed to it. Source: FBR
26. Due to critical importance of tax collection to reduce fiscal deficit, the
Government aims to undertake major reforms to revive growth of tax collection. A
summary of these measures is explained below:
(i) Revenue Structuring
Direct taxes have more welfare value and help improve equity of the system as
compared to consumption based indirect taxes. However, direct taxes in
Pakistan have come across problems of a narrow base. Efforts are underway to
broaden tax base through field surveys, data analytics and use of third-party
data. Greater effort will be made to document revenue buoyant sectors. For this
purpose, the scope of role of NADRA and SBP will also be enhanced as dataPage 13
source for identifying persons who are outside of tax net. As regards indirect taxes, FBR will also continue to focus on sectoral/ industrial analysis and prioritize sectors with high revenue potential apart from plugging leakages of indirect taxes through creating incentives for taxpayers to help stop leakages. (ii) Use of Technology for Revenue Mobilization The Government will enhance use of IT to boost tax collection and stop leakages. Directorate General of Digital Invoicing and Directorate General of Input-Output Co-efficient will be operationalized at the earliest to promote use of IT in taxation. Further, the coverage of track and trace system will beincreased as the technology has been successfully used for tobacco and sugar industries. Similarly, the coverage of Point of Sale (POS) machines will also be increased to ensure that Government revenues are deposited to the public exchequer. (iii) Reduction in Tax Exemptions In order toeliminate distortions from the tax system, broadening of tax base, filling the gaps in supply-chain, providing a level playing field to all and documentation of the economy, the Government will review exemptions in tax laws. Through recent legislation a large number of tax exemptions (direct and indirect) have been withdrawn. The Government intends to review policy with a view to end all unnecessary and discriminatory exemptions. (iv) Efficient Management of Tax Litigation In the presence of liberal tax regime coupled with independent judiciary the volume of litigation has increased. Resultantly, more than Rs.4 trillion tax revenue is stuck in litigation at various appellate fora. In order to address this problem, Government is considering toengagepanels of professionally sound advocates and ‘Special Prosecutors’ in certain cases with aim to putting maximum efforts to get resolved the pending issues while protecting the revenue. (v) Harmonization of Sales Tax The current lack of harmonization of sales tax caused by a collection of sales tax on goods by the Federal Government and that of The current lack of harmonization of sales tax caused by a collection of sales tax on goods by the
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Federal Government and that of sales tax on services by provincial governments
has resulted in major costs for businesses is the country. Therefore, the
Government plans to work with the provincial governments with the aim to
harmonize scope, rate etc. and bring in a system where a single sales tax return
could be submitted by businesses.
(vi) Efficiency in Revenue Administration
Government has directed FBR to keep a strict check on its administration with
the aim to increase administrative efficiency. For, this FBR is considering
effective tools to create incentives and deterrence for its employees, i.e.
considering various parameters to incentivize the best performers through
special allowances, rewards on achieving targets, etc. FBR also aims to enhance
capacity of the tax machinery through various targeted trainings, workshops, etc.
(vii) Progressivity of taxation
In addition to revenue structure, tax progressivity is one of the most important
elements for effective tax policy. Progressivity will be pursued through reduction
in tax brackets and reviewing tax exemptions under direct taxes and through
withdrawal of exemptions/reduced rates under indirect taxes.
(viii) Simplification of Tax Statues
Presently the taxation structure is complex and increases cost of compliance as
well as cost of implementation. Simplification of tax laws is to be undertaken as
an ongoing process. To this end FBRis in the process of drafting a Unified Inland
Revenue Code wherein which all the federal internal taxes namely income tax,
sales tax, FED and ICT on services are to be combined as one statute.
Provisions relating to common themes such as registration, audit, recovery and
appeal, etc. to be applicable to all the four taxes on the basis of a single statue.
(b) NON TAX REVENUE
28. The revenues collected by the FBR are distributed among the four
Provinces and Federal Government as per the NFC formula under the
Constitution of Pakistan. While Federal as well as Provincial Governments have
their own resources for revenue generations. Federal Government has two mainPage 15
resources including Taxes other than FBR (PDL, GIDC, ICT and others) and Non
tax Revenue receipts including Surplus profits of Regulatory Bodies, Dividends,
Mark-ups and Others. Government has enacted special provisions in the PFM
Act 2019 for collection of these revenue receipts.
29. The Federal Government continues to, with an avowed resolve, to pursue
increase in non-tax revenue through greater cost recovery and rationalizing
regulatory fees where possible to maintain real value of such levies.
Fig 3: Non-Tax Collection FY 2020-21 (Rs. billion)
PDL
226 GIDC
Mark up 39
425
Dividends
SBP Surplus Profit
19 Profit from PTA
101
Other Miscellaneous 651
44
Source: Budget Wing, Ministry of Finance
Table 4: Non-Tax Revenue FY 2016-17 to FY 2020-21 (Rs. in billions)
2016-17 2017-18 2018-19 2019-20 2020-21
PDL 167 179 206 294 425
GIDC 42 15 21 9 19
Mark up 114 104 59 131 101
Dividends 70 57 60 40 44
SBP Surplus Profit 228 233 13 936 651
Profit from PTA 34 16 18 127 39
Other Miscellaneous 533 250 229 247 226
Total 1,188 854 606 1,784 1,505
30. The NTR collection during FY 2021-22 has remained well below the budget
estimates. The major reasons for this shortfall were the lower receipt on account
of SBP profit and Petroleum Development Levy (PDL). As a result of recent
amendments to SBP Act, a portion of profit will be withheld by the central bank to
cover the risk of losses. This provision in the Act has resulted in a reduction of
the profit for the Government.Page 16
31. Due to increase in the international price of Petroleum Products, the
Government decided to bring down the rate of PDL to protect consumers from
high rates. However, due to this, the target of revenue collection under PDL
could not be achieved. In addition, the collection of GIDC has not been possible
even after the decision of the Supreme Court.Another setback to NTR collection
in FY 2020-21 was the non-recovery of outstanding balance of Rs.48.0 billion of
Benazir Employees Stock Options Scheme (BESOS) as the scheme was
declared against the law by the courts.The efforts for improving the collection of
NTR through rationalization as well as the additional imposition of NTR in the
light of PFM Act, 2019 will be geared-up during the next financial year.
(c) TRANSFERS TO PROVINCES
30. The major fiscal challenge being faced by the Federal Government since
the introduction of the 18th constitutional amendment and 7th NFC Award is
transfer of 57.5 percent of divisible pool taxes and the straight transfers to the
provinces, constituting almost 59.7 percent of the gross federal revenues, which
leaves very limited fiscal space for current and development spending for the
Federal Government.
Table 5: Transfers to Provinces from FY 2016-17 to FY 2020-21(Rs. in billions)
2016-17 2017-18 2018-19 2019-20 2020-21
Provincial share in federal taxes 1,966 2,217 2,398 2,504 2,742
Current grants to provinces 22 25 28 76 84
Development grants to provinces 8 85 60 155 226
Grants to AJK 32 41 49 55 58
Grants to GB 25 28 31 34 37
Total transfers to provinces
2,053 2,396 2,566 2,824 3,147
and federal territories
32. In order to attain the projected overall fiscal balance, the provinces will be
required to have the desired levels of provincial surpluses by increasing their own
revenues and rationalizing the expenditures. For the future, the Federal
Government, Provincial Governments and Other Special Areas Governments
have to mutually agree on the revenue distribution and sharing of expenditures
formulas.Page 17
IV. SPENDING POLICIES AND INDICATIVE LEVELS OF SPENDING
Table 6: Expenditure Trends of the Federal Government FY 2016-17 to FY 2020-21
(Rs. In billions)
2016-17 2017-18 2018-19 2019-20 2020-21
(a) Current Expenditure 3,494 3,815 4,804 6,093 6,349
Mark-up Payments 1,348 1,450 2,091 2,620 2,750
Domestic 1,220 1,323 1,821 2,313 2,524
Foreign 128 177 270 307 226
Defense Services 888 1,030 1,147 1,213 1,316
Pension 304 334 393 447 440
Running of Civil Govt. 426 428 508 524 506
Subsidies 154 114 195 360 425
Grants 374 409 470 928 912
(b) PSDP & Net lending 867 890 795 726 789
(c) Statistical Discrepancy 69 17 74 61 107
Total Expenditure (a+b+c) 4,431 4,722 5,673 6,880 7,245
33. On the current side, expenditure trends of the Government during last 5
years have been shown in the above Table. Conspicuous in the trends is the rise
in the level of mark-up payments, increase in pension expenditure and subsidies
and decrease in development expenditure and net lending. The total outlays of
the previous year’s provide that Government has to take concrete measures
control rising expenditures. Government has been facing Fiscal Deficit and in
order to finance the deficit, Government has to borrow on higher rates from
domestic market through government securities (T-bills, PIBs, Sukuk etc.).
withthe increased SBP policy rate and other factors, the borrowing cost of
Federal Government is increasing. The debt raising by CDNS is not showing
positive trends. The non-borrowing from SBP has been effecting the fiscal
position of the Government.
34. Public Sector Development Programme (PSDP) plays an integral role in
the mobilization of indigenous resources to uplift the social-economic conditions
of the people. Development funds under PSDP are allocated and utilized on
development projects and programmes duly approved by the competent fora in
line with sectoral and regional priorities outlined in the Annual Plan /Growth
Strategy.Page 18
35. The provisions contained in the Public Finance Management Act 2019are
being followed while allocating resources under federal PSDP. The focus of the
federal PSDP is on financing and completion of mega /important projects of
national importance particularly relating to infrastructure, being the primary
responsibility of the federal government.
Table 7: PSDP Expenditure Trends 2016-17 to 2020-21 (Rs. In billion)
2016-17 2017-18 2018-19 2019-20 2020-21
PSDP 733 661 562 622 667
36. Within infrastructure, priority is assigned to water sector in line with water
policy 2018 for augmentation and preservation of water resources. Among
others, preference will be given to construction of large dams. For regional
connectivity and smooth logistic movement, priority will also be given to roads,
rails, aviation, and ports projects particularly those under the CPEC initiative.
Substantial funding would be ensured for important projects for timely
completion.
37. The Federal Government also attaches equal importance tothe social
sector including health, higher education etc. In order to foster the culture of
innovation and research, the Federal Government has initiated a number of
programmes/projects in the sector of IT & S&T under knowledge economy
initiative for which substantial funds would be required in next FY 2022-2023.
The private sector will be encouraged to invest in potential disciplines. To ensure
self- sufficiency in food and productivity enhancement in the country, the
programmes like agriculture emergency input, Special Economic Zones have
been initiated for which substantial funding would be required.
38. Public Sector Development Program spending levels are provided in the
table given below:
Table 8: Medium-Term Indicative Budgetary Spending Levels (Rs. In billion)
Actual Projections
2020-21 2021-22 2022-23 2023-24 2024-25
PSDP of which 667 550 727 800 850
Infrastructure 436 324 383 432 436Page 19
Table 8: Medium-Term Indicative Budgetary Spending Levels (Rs. In billion)
Actual Projections
2020-21 2021-22 2022-23 2023-24 2024-25
Social 126 132 155 176 198
Science & IT 12 18 21 24 27
Regional Development 84 66 77 88 99
V. BUDGETARY SPENDING LEVELS
39. Medium-Term Indicative Budgetary Spending Levels are based on policy
priorities of the government. During the upcoming years, government budgeting,
particularly spending shall be performance-based. Indicative spending levels are
provided in the table given below.
Table 9: Medium-Term Indicative Budgetary Spending Levels (Rs. in billion)
2021-22 2022-23 2023-24 2024-25
Interest Payment 3,144 3,950 4400 4,700
Defense Services 1,450 1,523 1,570 1,630
Grants 1,090 1,242 1,200 1,200
Subsidies 1,515 699 600 550
Pension 525 530 546 568
Running of Civil Government 530 550 572 601
PSDP 550 727 800 850
Provisions 232 200 100 100
40. Divisions and Department wise level of current spending would be linked
with the achievement of targets and goals. The Federal Government has been
following the Medium-TermBudgetary Framework for performance-based
budgeting to assure service delivery outcomes. The medium-term spending
levels would be finalized keeping in view the targets achieved as outlined in
“Green Book” as per the PFM Act 2019.
41. Over the years, government spending on running of civil government and
pensionspending has increased. In order to break this trend, the government is
working on reducing non-development expenditures as a proportion of the
budget and bringing reforms in the pension payment system to rationalize
pension cost.Page 20
42. Since the Pension bill is becoming unsustainable, Government has to re
visit the pension policy as a whole particularly the family pension to control the
leakages and misappropriation of the public money. Government has introduced
various reforms including Biometric for proof of life and conversion to Direct
Credit System (DCS) for all the civil and military pensioners. Government has to
finalize the scheme for contributory pension fund for the future.
43. With regard to subsidies particularly power and petroleum sectors,
Government has to review the whole scheme and go for the targeted subsidies
for the vulnerable sectors of the society. The government has to control the
circular debt issues in the power and petroleum sectors. Similarly, regarding
Grants-in-Aid to the various Organizations and Bodies, Government is framing
Rules and Procedures to control and manage the increasing recurring allocation
of funds. These allocations shall be for limited period and specific to achievement
of the laid down targets.
44. Ministries/Division-wise level of development spending will be finalized by
the Ministry of Planning, Development and Special Initiatives.Indicative spending
level for public sector development programme during the medium-term period
would range between Rs. 700 - 900 billion. The provisions of PFM Act 2019
would be followed with regard to approval of the Development Projects.
45. The major expenditure priorities for the Government during the medium
term will be as under:
i. Protection of vulnerable segments through BISP program.
ii. Reduction of inflation and price control mechanism.
iii. Financing of circular debt and energy subsidies.
iv. Harmonization of pay and allowances of Federal Government employees.
v. Allocation for research and development and socio-economic uplift.
VI. PUBLIC DEBT
46. The Debt to GDP ratio will increase and record at around 72.4 percent at
the end of ongoing fiscal year (FY22) primarily due to higher federal fiscal deficit
and depreciation of Pak Rupee against US Dollar. However, Debt-to-GDP ratio isPage 21
expected to reduce to 69.1 percent at the end of the next fiscal year (FY23) on
the back of fiscal consolidation efforts of the government.
47. Over the medium term, the government’s objective is to bring and
maintain its Public Debt-to-GDP ratio to sustainable levels through a combination
of greater revenue mobilization, rationalization of current expenditure, and
efficient/productive utilization of debt.
48. Government also aims to reduce its “Gross Financing Needs (GFN)”
through various measures mainly including (i) better cash flow management
through a treasury single account; (ii) lengthening of maturities in the domestic
market keeping in view cost and risks trade-off; (iii) developing regular Islamic
based lending program and (iv) avail maximum available concessional external
financing from bilateral and multilateral development partners to benefit from
concessional terms and conditions.
Table 10: Public Debt Amount in PKR Billion (Otherwise Stated)
FY 2020-21 FY2021- 22 FY 2022-23
Stock of Public Debt
Public Debt 39,866 48,477 54,109
External 13,601 18,085 20,561
Domestic 26,265 30,392 33,548
Public Debt (% of GDP)
Public Debt 71.5% 72.4% 69.1%
External 24.4% 27.0% 26.3%
Domestic 47.1% 45.4% 42.8%
Memo
GDP 55,796 66,950 78,331
VII. FISCAL RISKS SCENARIO ANALYSIS
1. Three illustrative scenarios are presented to analyze fiscal risks.
Three scenarios are built upon the forecasts presented earlier to illustrates the fiscal and
debt implications of these options would look like.
2. Alternative scenarios are developed with the following assumptions:
Scenario 1 “Higher cost of funding”: This scenario assumes an increase in
the cost of the new disbursement implying higher expenditures. In particular, the
exercise uses a higher interest rate for each new financing instrument than the baselinePage 22
scenario. This increase gennerates an increment in the fiscal deficit, not affecting the
primary deficit.
Scenario 2 “Externnal shock and non-fiscal adjustment”: ThisT scenario
assumes lower petroleum && gas levies and surcharges and, at the samee time, higher
subsidies. The scenario aassumes half petroleum & gas revenues and double
expenditure in subsidies commpared to baseline.
Scenario 3 “Higheer cost of funding and non-fiscal adjusttment”: This
scenario combines weakeniing revenues due to lower economic growth and growing
expenditures due to higher s ubsidies as calculated in the previous scenarioss.
3. Lower growthh will reduce both tax and non-tax revenue whichw will in
turn reduce Net Federaal Revenues in all Scenarios i.e., Scenario 1,1 2 and 3 as
shown in Figure - 1.
4. Higher subs idies will have more impact on the expennditure side,
Thus, Federal Expenditure as percent of GDP will increase in all scenarios 1, 2, and
3 as shown in Figure - 2.
Figure - 1 | Net Federal Revenues (% of GDP) Figure - 2 | Expenditures (%% of GDP)
5. Correspondingg to above two figures, all the scenarios anaalyzed exhibit
higher fiscal deficit comppared to baseline as shown in Fig - 3. Howeverr, none of the
scenario presents an exxplosive increase in the public debt-to-GDP ratio. All the
estimated scenarios havve federal fiscal deficit-to-GDP ratio higher thaan that in FY
2022 . Further, all three scenarios present a gradual reduction in the public debt-to-
GDP ratio as shown in Fiigure - 4Page 23
Figure - .3 | Federal Fiscal Defficit (% of GDP) Figure - 4 | Public Debt (% of GDP)
VIII. CONCLUSION
49. This Medium-Termm Budget Strategy Paper being presentedd under the
provisions of the Publiic Finance Management Act 2019 reeaffirms the
commitment of the Fedderal Government to implement the principles of
transparency, responsivenness, inclusiveness, and better financial managementm
during the ensuing three years. The continuity of the fiscal policies,, new policy
measures, and well-plaanned government expenditures will faacilitate the
achievement of the target s and objectives announced by the governnment in the
annual budget before the PParliament.Page 24
FISCAL VARIABLES (Rs.Billion)
FY 2021-2022 Projections
FY20/21 FY21/22 FY22/23 FY23/24 FY24/25
Federal Revenues (net) 3,545 3,803 4,114 5,558 6,706
Federal Revenues (Gross ) 6,269 7,315 8,214 10,533 12,442
Tax Revenues 4,764 6,000 7,004 8,500 9,800
FBR revenues 4,764 6,000 7,004 8,500 9,800
Direct Taxes 1,732 2,211 2,594 3,139 3,584
Sales tax/VAT (Goods) 1,990 2,686 2,940 3,562 4,103
Custom duties / taxes on international trade 765 759 1,050 1,285 1,508
Federal Excise duty 277 344 420 514 604
Non-Tax revenues 1,505 1,315 2,000 2,033 2,642
Levies and surchages 470 165 790 795 800
Other Non-Tax revenues 1,035 1,150 1,210 1,238 1,842
Transfers to Provinces 2,724 3,512 4,100 4,975 5,736
Expenditures 7,245 9,086 9,502 9,965 10,376
Current Expenditures 6,349 8,454 8,694 9,088 9,449
Interest Payments 2,750 3,144 3,950 4,400 4,700
Pension 440 525 530 546 568
Defence 1,316 1,450 1,523 1,570 1,630
Grants 912 1,090 1,242 1,200 1,200
Susidies 425 1,515 699 600 550
Running of Civil Government 506 530 550 572 601
Provisions 200 200 200 200
Net Lending 789 82 81 77 77
Federal (PSDP) 667 550 727 800 850
Provincial (Current) 2,844 3,562 3,953 4,471 5,057
Provincial (Development) 770 1,449 1,639 1,854 2,096
Primary Deficit (Federal) -967.0 (2,172) (648) (157) 930
Federal Fiscal Deficit -3,716.9 (5,315) (4,598) (4,407) (3,670)
Provincial Surplus 313.6 570 800 800 850
Overall Fiscal Deficit -3,403.3 -4,745.3 -3,798.0 -3,607.0 -2,820.0
Primary Deficit(consolidated) -653 -1,601 152 793 1,880