omc: no mention; hence safe - BMA Capital Management

ECONOMY
Budget Impact
Positive
Abdul Shakur
Economist
11
BUDGET FY11: A CAUTIONED APPROACH!
June 7, 2010
Considering the political and administrative issues for the implementation of
Value Added Tax (VAT), government postponed VAT implementation till Oct10.
The important factor of the budget announcement is to incentivise the lower
income class by salary enhancement and trimming direct tax for narrow tax
slabs. Although these measures encourage improvement in disposable income
of the masses, revenue generation will also remain a prime objective of the
government to meet the fiscal requirements.
Being a populist, imposition of additional taxes would remain a challenging act
for the incumbent government. However, persistently low tax revenues require
strong footholds to produce resources for welfare and development. To manage
fiscal space for development and sustainable growth, all components of tax
machinery are projected to be channelized with the target of 18% YoY growth in
tax revenue for FY11. Most important revenue measures includes 1) the
increase of 100bps rate for sales tax to 17%, 2) upward revision of 5% income
tax rate for small companies and 3) increased tax slab for high income class
under salaried head.
Budget FY11: Fiscal deficit of PKR685bn (4% to GDP)
The expected budget outlay of PKR3trn against PKR2.4trn of revenues would
translate into a consolidated fiscal deficit of PKR685bn – 4% of GDP.
Budget FY11: Snapshot
(PKR bn) FY08 FY09 FY10B.E FY11FB.E
Total Revenue 1,499 1,851 2,027 2,411
Tax revenues 1,086 1,331 1,513 1,779
Direct 388 440 557 658
Indirect 698 890 956 1,121
Non Tax revenue 414 520 514 632
FBR revenues 1,010 1,160 1,379 1,669
Total expenditures 2,281 2,497 2,749 3,096
Current 1,858 2,042 2,231 2,433
Interest 490 638 647 699
Defence 285 330 343 442
Development 423 456 646 663
Fiscal Deficit
Financing
(782) (646) (723) -685
External 151 150 312 186
Domestic
Key ratios
626 531 410 499
Tax to GDP 10.4% 10.2% 10.2% 10.4%
FBR tax to GDP 9.6% 8.9% 9.3% 9.7%
Development exp. To GDP 4.0% 3.5% 4.4% 3.9%
Current exp. To GDP 17.7% 15.6% 15.1% 14.2%
Debt servicing to GDP 4.7% 4.9% 4.4% 4.1%
Defence exp. To GDP 2.7% 2.5% 2.3% 2.6%
Deficit to GDP -7.5% -4.9% -4.9% -4.0%
External financing to deficit 19.5% 23.2% 27.0% 27.0%
Domestic finan. To deficit 80.5% 78.0% 56.8% 72.9%
Source: MoF, BMA Research