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Comprehensive analysis of post budget 2021-22

  • Where is the budget mainly invested?
  • Fighting against the Covid-19 continues

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The epidemic has caused a severe impact on Pakistan’s social and economic development. Economic activities have largely stagnated, and the basic lives of the people have been severely affected. To effectively ease the impact of Covid-19, the budget set up a special response fund for the new crown pneumonia epidemic and other disasters of 70 billion rupees for the first time, accounting for nearly 1% of the total budget; expanded health care expenditure to 25.49 billion rupees, an increase of 130% year-on-year.

Providing support for China-Pakistan Economic Corridor related projects:

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The budget has earmarked 21 billion rupees for the construction of the China-Pakistan Economic Corridor project. Among the sum of money, 10 billion will be used for the N50 highway project (Zhob-Chukla section), 6 billion will be used for the No. 1 railway line upgrade project, 2.5 billion will be used In the Karakoram Highway Phase II upgrade project (Haverian-Takot section), 700 million will be used for the Gwadar desalination plant project, and part of the expenditure will be used for the construction of supporting projects such as security and competence centers.

In addition, the budget has clarified the tax exemption policy of the Gwadar Port Free Trade Zone, officially granting port operators 40 years of tax exemption and 20 years of tax exemption for enterprises in the park.

Developing water conservancy and electricity:

In the field of water conservancy and power, 69 billion rupees are budgeted for the construction of water conservancy and power projects, including the Bazaar, Mohmand and Dasu hydropower stations.

What areas have been neglected in the budget?

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  • Less support on environmental improvement and youth skills training.
  • Weakened support for traditional export industries.
  • Limited support for long-term development issues such as low savings rate, poor business environment, and backward industrial structure.
  • The juice industry is facing an “unfavorable situation” due to the pandemic, and after the levy of the federal excise tax, the price of juice has also risen.
  • For household users who are not on the Active Taxpayer List (ATL), the monthly withholding tax threshold for electricity bills will be reduced from 75,000 rupees to 25,000 rupees, which means that consumers with electricity bills of 25,000 rupees or more will have to pay on ATL Withholding tax.

According to data from the World Bank, Pakistan’s development expenditure as a percentage of GDP is one of the lowest in the world, which has led to a lack of vitality in Pakistan’s social development and lack of stamina for economic recovery.

What problems might the 2021-2022 budget bring?

Attitude of International Monetary Fund

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The International Monetary Fund (IMF) stated that in 2021, Pakistan’s foreign debt repayment will account for 4% of its gross domestic product (GDP). The budget for the new fiscal year has been significantly affected by the International Monetary Fund (IMF), with distinctive features such as reducing fiscal deficits, expanding revenues, and reducing expenditures.

According to the work-level plan reached by the Pakistani government and the IMF on emergency loans, most of the reform measures must be reflected in the budget. This is a prerequisite for the IMF’s executive board to approve the loan plan and release the first loan. Therefore, the budget for the new fiscal year is also regarded as a budget formulated in line with the IMF loan. The main features are as follows:

The first is to prepare a budget around the core requirement of reducing the budget deficit rate. The core requirement of the working-level loan agreement between the Pakistani government and the IMF is that the original central budget deficit rate must not exceed 0.6% of GDP.

In the budget for the new fiscal year, the Pakistani government has tried its best to “source revenue and reduce expenditure”, set aggressive tax targets and non-tax revenue expectations, accelerate the privatization of state-owned enterprises, replenish the national treasury, etc. All are in order to achieve the goal of reducing the budget deficit rate and obtain IMF loan approval.

Inflation problem:

Some experts reminded that despite the encouraging signs of economy recovery, Pakistan still faces numerous challenges on the road to recovery.

For example, inflation is still a big problem. Although the level of local inflation has declined slightly compared with the same period last year, it is still at a high level. At the same time, the unemployment problem is unlikely to be effectively resolved in the short term. Since the beginning of this year, the Pakistani government has announced a number of policies aimed at solving the above-mentioned problems, but the results are not obvious.

Foreign investment and business environment issues:

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Drake, a senior economist at the World Bank who focuses on Pakistan’s economic research, said that many companies’ operating conditions are still fragile and require strong government support. Many economic experts in Pakistan also called on the government to create a good business environment and promote a smooth transition from short-term reform plans to medium- and long-term plans, so that Pakistan can achieve a real recovery as soon as possible.

Although the road ahead is still long, the prospects for Pakistan’s economic development are somewhat clear, which also provides space for Pakistan’s long-term plan in optimizing the domestic business environment and promoting the development of emerging industries. The current key lies in whether the Pakistani government can seize this good opportunity to accelerate the modernization of its economy through reforms.

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In general, the tax reform in the budget for the new fiscal year is in a good direction. Measures such as strengthening direct taxation, strengthening fines and penalties for tax evaders, and plugging loopholes in tax exemption abuse are what the government should have done a long time ago. However, these measures may also bring no small “side effects”, such as increasing inflation, significantly pushing up the cost of living of the people, impairing the international competitiveness of industries and endangering exports in the short term.

The contributor Vaedy Xiao is from  Fote Company

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