omc: no mention; hence safe - BMA Capital Management

8%
7%
6%
5%
4%
3%
2%
1%
0%
12
Taxing consumption: Indirect taxes the key
June 7, 2010
Total revenues for the consolidated fiscal operations are expected to grow by
19% to PKR2.4trn. This growth is primarily led by enhanced tax revenue target
for FBR up to PKR1.67trn (21% YoY growth). As the government has increased
the 100bps rate for Sales tax along with number of relaxations for direct taxes,
the revenue generation is more tilted towards indirect taxes. Considering the
number of relief measures under direct taxes, tax revenue target for FY11
seems challenging. Thus imposition of VAT from Oct10 would remain a key
determinant to achieve the revenue targets in this regard.
Expense Rationalization: Seems optimistic
Government has announced to freeze the non development expenditures (excl.
salaries); although appealing considering the fiscal consolidation, the
materialization of these steps is of prime importance. The overall current
expenditure is projected to increase by 9% over last year budget to PKR3trn.
The unavoidable part of the budget including defence (+29% YoY to
PKR442bn) and debt servicing (+8% YoY to PKR699bn) are to consume as
high as 47% of the current expenditures. On the other hand, development
expenditure which remained the key element in terms of investment and
capacity building is projected to increase by 3% YoY. As it remained the key
accused of fiscal constraints, higher allocation of funds for PSDP to provinces
would remain a key element in materializing the projected outlays. During FY10,
actual disbursement of PSDP remained under PKR300bn compared to original
allocation of PKR646bn.
Higher share of provinces in revenues (57.9% YoY) and allocation of
development funds are the prominent features of budget FY11.
Tax to GDP Provinces to enjoy more autonomy
Direct Tax to GDP In direct Tax to GDP FBR tax to GDP
FY07A FY08A FY09A FY10BE FY11BE
Source: MoF, BMA Research Source: MoF, BMA Research
12%
10%
8%
6%
4%
2%
0%
60%
50%
40%
30%
20%
10%
Provincial share in total revenue Provincial share in PSDP
0%
FY08A FY09A FY10BE FY11BE
Subsidy elimination: The other half of the story
Fiscal constraints have left no option but to confine welfare through price pass
on. The government has thus eliminated a number of subsidies through budget
FY11; during FY10, govt. had allocated subsidies of PKR228.9bn (1.5% of
GDP) against initial estimates of PKR119bn (0.9% of GDP). Due to the set plan
of eliminating subsidies on electricity tariffs, the government projects total
subsidies of PKR127bn for FY11 which accounts for 0.7% of GDP and lower by
45% YoY compared to revised budget FY10. Although the electricity related
subsidies are projected to decline by PKR92bn in FY10, it is worth mentioning
that no concrete plan to address the lingering circular debt issue has been