Pakistan Macro Flash FY12 Budget – Aims to Please, but Appears Ambitious  Citi

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Pakistan Macro Flash
 FY12 Budget – Aims to Please, but Appears Ambitious
 Fiscal Deficit Targeted at 4% in FY12
1
— Given lingering macro and political
challenges, the FY12 Budget presented late last week was a much-awaited event.
The budget targets a deficit of 4% of GDP in FY12 vs. 5.7% in FY11 (the original
FY11 deficit of 4.6% was missed due  to floods and spending on power/oil). The
budget assumptions are optimistic with (1) GDP factored at 4.2% vs. Citi’s estimate
of 3.5% and inflation at 12% vs. our estimate of 13.5%; (2) expenditure overshoot
due to ambitious subsidy targets; and (3) aggressive revenue targets. We thus
expect a slippage of ~150bps.
 Budget Arithmetic: Subsidy Reduction Targets Appear Ambitious  — On the
revenue front, budget assumptions of a 22.2%YoY increase in revenues to 13% of
GDP (vs. 12.4% in FY11) are based on a 23.5% rise in tax revenues and an 18%
rise in non-tax revenues (due to 3G license revenues). Expenditures are expected
to rise by 4.6% YoY. Here, the key concern is lower current spending, which factors
in a  58% reduction in subsidies to Rs166bn, with electricity tariff differentials
budgeted to narrow. Development expenditure is targeted to rise ~60%, with a
thrust on infrastructure (water & power). We think budget performance would hinge
on (1) non-tax revenues; (2) Petroleum Levy collections and (3) achievement of
subsidy targets (see p.  2 for break-up.)
 Measures Aimed at Boosting Consumption, Compliance  — Measures are
largely populist in nature and include (1)  raising govt salaries by 15%; (2) raising
pensions by 15-20%; (3) raising exemption limits for income tax from Rs300,000 to
Rs350,000 which could support consumption. As expected, there are steps to
improve compliance and widen the tax net, including clamping down on 700,000 tax
evaders, abolishing regulatory duties and ending special exemptions and zero-rated
taxes. Encouragingly, the GST was reduced from 17% to 16%; and excise duties
have been rationalized. Tax incentives for companies listing on the bourses and
investments in IPOs could enhance market depth.
 …But Structural Reforms Absent — Whilst aiming to reduce expenditure on
subsidies, the budget has been silent on structural reforms, including reducing
losses of SOEs and power sector reforms.
 Financing — The budget deficit of Rs851bn is based on domestic funding to the
tune of Rs716bn and external funding (incl grants) of Rs135bn. While reliance on
pure external borrowing has reduced, it factors in privatization proceeds of Rs70bn
and grants (on account of the Kerry Lugar Bill and Tokyo Pledges). This may be a
concern in view of recent worries on aid flows.