Pakistan to trim power subsidies, corporate taxes

A Hub Power plant is seen in Balochistan. Pakistan will reduce power subsidies, remove tax breaks and penalise those not declaring income as Prime Minister Nawaz Sharif tries to narrow the budget deficit.

Bloomberg

Karachi

Pakistan will reduce power subsidies, remove tax breaks and penalise those not declaring income as Prime Minister Nawaz Sharif tries to narrow the budget deficit to meet the terms of an International Monetary Fund loan.

The shortfall is forecast to shrink to a seven-year low of 4.9% in the fiscal year starting on July 1, smaller than an estimated 5.8% this year, Finance Minister Ishaq Dar said in his budget speech to parliament in Islamabad on Tuesday. The government aims to narrow the gap to 4% by 2017.

“We have had to fix a broken economy,” Dar said in the televised address. “We have tackled tough challenges. The country is on a path of growth.”

Sharif’s year-old government has to boost tax revenues and revive investment to be eligible for further payouts under a $6.6bn IMF facility approved in September. While the loan staved off a balance-of-payments crisis, South Asia’s second-largest economy faces power shortages, a Taliban insurgency and one of the region’s highest inflation rates.

“The budget seems to be in line with IMF expectations, but implementation of the measures will decide if it really is that or not,” said Khurram Schehzad, chief investment officer at Lakson Investments Ltd in Karachi. The IMF board will review a report on Pakistan’s progress later this month, following which it may release a $550mn loan instalment. The board was “encouraged” by progress, the Washington-based lender said in May. A partially-disbursed $11.3bn facility expired in September 2011 after Pakistan failed to meet conditions.

The budget will lower corporate taxes to spur industry and increase the capital gains tax at 12.5%, less than a jump to 17.5% that had been planned earlier. The rate is still higher than the current 10%. Citizens who hadn’t been declaring income will now have to pay higher advance taxes on income and dividends, cash withdrawals, car registrations and on purchases including property and business class flight tickets. Tax loopholes such as those on bonus shares will be removed and foreign institutional investors will be required to pay withholding tax.

The benchmark KSE-100 stock index rose 0.1% and the Pakistani rupee gained 0.1% as of 11:14 am in Karachi. Textile stocks climbed as the government extended duty-free machinery imports for the sector, while fertiliser stocks fell after levies were raised on gas supplies.

“The stock market’s reaction may be mixed” as the smaller increase in the capital gains tax rate will be countered by the removal of loopholes, said Lakson’s Schehzad. Total outlays for the coming fiscal year will be increased by 7.9% from the current year to Rs4.3tn ($43.6bn). Spending on power subsidies will reduced by 37% to Rs203bn, while defence expenditure will rise 11% to Rs700.1bn as troops fight homegrown Taliban militants on the border with Afghanistan to end a decade of insurgency that has claimed about 50,000 lives.

Pakistan aims to boost growth to an eight-year high of 5.1% in the coming fiscal year from an estimated 4.1% in the current period, as Sharif battles electricity shortages that curbed expansion by as much as 1.75 percentage points. Growth if forecast to rise to 7.1% in 2016-17.

Economic expansion in the 12 months ending June 30 is forecast to be led by industrial growth of 5.84%, Dar said at a news conference on June 2 while releasing the government’s annual Economic Survey. Farm growth is projected at 2.12% compared with 2.88% a year ago because of lower output of cotton, pulses and oilseed.

Sharif’s government plans to invest Rs205bn in the energy sector in the coming fiscal year. It plans to add as much as 16,564 megawatts of electricity to the grid during its five-year term, according to the economic survey.

The government also aims to cut debt by selling state assets, and will boost foreign-exchange reserves to a two-year high of $15bn by July, earlier than an earlier September deadline.