Annual Budget Statement 2020-21

FEDERAL BUDGET 2020-2021

ANNUAL BUDGET STATEMENT

Government of Pakistan Finance Division Islamabad

Preface

The Annual Budget Statement containing estimated receipts and expenditure in terms of Article 80(1) of the Constitution of the Islamic Republic of Pakistan 1973 is being laid before the National Assembly of Pakistan forFY 2020-21 which will also be transmitted to the Senate of Pakistan as required under Article 73(1) of the Constitution.

The statement also meets the requirements contained in Article 80(2) of the Constitution showing separately charged expenditures and other expenditures to be made from Federal Consolidated Fund and distinguishes expenditures on revenue account from other expenditures.

The section 4 of the Public Finance Management Act, 2019 provides that the Federal Government shall lay before National Assembly, Annual Budget Statement including a Statement of the Purpose and estimates for each demand for grant. The Statement shall also contain Statement of Contingent Liabilities of the Federal Government and Statement of Fiscal Risk.

Furthermore, under sections 5 and 10 of the Fiscal Responsibility and Debt Limitation Act 2005, a Medium Term Budgetary Statement and Statements of Responsibility are also required to be laid before National Assembly. In addition, a statement of estimated tax expenditure has also been added in the Annual Budget Statement.

Naveed Kamran Baloch Secretary to Government of Pakistan

Finance Division Islamabad, the 12^th June, 2020.

CONTENTS

PAGE

RECEIPTS - SUMMARY

(Rs in million)

REVENUE RECEIPTS

Tax Revenue

REVENUE RECEIPTS Non-Tax Revenue

(Rs in million)

CAPITAL RECEIPTS

(Rs in million)

EXTERNAL RECEIPTS

PUBLIC ACCOUNT RECEIPTS

National Savings Schemes

Contd…..

PUBLIC ACCOUNT RECEIPTS Deposits and Reserves

PUBLIC ACCOUNT RECEIPTS Deposits and Reserves

(Rs in million)

EXPENDITURE - SUMMARY

Current Expenditure on Revenue Account

Contd…..

Current Expenditure on Revenue Account

(Rs in million)

Contd…..

Current Expenditure on Revenue Account

(Rs in million)

Current Expenditure on Capital Account

(Rs in million)

Development Expenditure on Revenue Account

Contd…..

Development Expenditure on Revenue Account

Development Expenditure on Capital Account

(Rs in million)

CAPITAL EXPENDITURE

(Rs in million)

PUBLIC ACCOUNT EXPENDITURE

National Savings Schemes

(Rs in million)

Contd….

PUBLIC ACCOUNT EXPENDITURE

Deposits and Reserves

PUBLIC ACCOUNT EXPENDITURE Deposits and Reserves

STATEMENT OF ESTIMATED CHARGED AND VOTED EXPENDITURE MET FROM THE FEDERAL CONSOLIDATED FUND

Statement of Purpose - Demand for Grants

This statement is being provided to comply with section 4 of the Public Finance Management Act, 2019. The purposes of demands for grants, keeping in view policy priorities of the Federal Government, are to provide for debt servicing on domestic and foreign loans and advances, for expenditures to be incurred on defense, civil administration and pensions, development expenditure for human and infrastructure development, to vitalize economic growth and provide jobs through various programs including Naya Pakistan Housing scheme, interest free loan scheme, schemes for youth, etc.

Furthermore, in wake of the Covid-19 effects on the economy the government’s policy priority is to cater for the needs arisen including relief to people and businesses and ensure that low-income individuals receive cash and other types of assistance (through Ehsaas Program), to keep a disaster management and contingency reserve, provide targeted subsidies on essential food items, energy bills and agriculture inputs, and to provide grants, loans and equity investments to Public Sector Enterprises for socio-economic development.

SCHEDULE-I

DEMAND FOR GRANTS AND APPROPRIATION FOR EXPENDITURE MET FROM THE FEDERAL CONSOLIDATED FUND FOR THE FINANCIAL YEAR COMMENCING ON IST JULY, 2020 AND ENDING ON 30TH JUNE, 2021

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2020-21

Contd………..

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2020-21

(Rs. in million)

Contd………..

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2020-21

(Rs. in million)

Contd………..

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2020-21

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2020-21

(Rs. in million)

Contd………..

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2020-21

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2020-21

( Rs. in million)

SCHEDULE -II OBJECT CLASSIFICATION WISE EXPENDITURE

Rs. In million

Statement of Contingent Liabilities

This statement is prepared to comply with section 4, sub-section 3 (a) of Public Finance Management Act, 2019, which states that Annual Budget Statement shall also contain statement of contingent liabilities of the Federal Government. As per section 2(h) of the Act, ‘contingent liability’ is defined as ‘a financial liability that may arise or come into being if one or more events occur’.

2. Contingent liabilities are generally off-budget transactions. Quantification and disclosure of such liabilities is important to present a holistic view of government’s fiscal position. Such liabilities unveil the hidden risks associated with obligations that the government has made outside the budget.

3. Federal Government’s contingent liabilities are primarily guarantees issued on behalf of loss-making Public Sector Enterprises (PSEs). The sovereign guarantees are normally extended to improve financial viability of new projects or activities undertaken by PSEs for social and economic benefits. Through government sovereign guarantees, PSEs are able to borrow finances at lower costs or on more favourable terms. In some cases, issuance of sovereign guarantees is a precondition for concessional loans from bilateral and multi-lateral.

4. The volume of new government guarantees issued during a financial year is limited under Fiscal Responsibility and Debt Limitation Act which stipulates that the government shall not give guarantees aggregating to an amount exceeding two percent of the GDP in any financial year including those for rupee lending, rate of return, outright purchase agreements and other claims and commitments provided the renewal of existing guarantees shall be considered as issuing a new guarantee.

5. During July-March 2019-20, the government issued fresh/rollover guarantees aggregating to Rs 115 billion or 0.3 percent of GDP. Outstanding stock of guarantees as at end of March 2020 amounted to Rs 1,890 billion, details of which are as follows:

Table 1: Sovereign Guarantees extended by Federal Government by end March ‘20

Memo: External (US$ in Million): 2,868 and Exchange Rate on 31^st March: 167

6. Sector-wise share of the above guarantees is as follows:

Table 2: Sector-wise share of guarantees - Rs billion

7. Guarantees issued against commodity operations are not included in the stipulated limit of two percent of GDP as the loans are secured against the underlying commodity and are essentially self-liquidating. Thus, these should not create a longterm liability for the government. The quantum of these guarantees depends on the supply-demand gap of various commodities, their price stabilisation objectives, volume procured, and domestic and international prices.

8. The guarantees were issued against the commodity financing operations undertaken by Trading Corporation of Pakistan (TCP), Pakistan Agricultural Storage and Services Corporation (PASSCO), and provincial governments. The outstanding stock of commodity operations amounted to Rs 649.3 billion as at end March 2020.

Fiscal Risk Statement

This statement is prepared to comply with Section 4, Sub-Section 3 (b) of Public Finance Management Act, 2019, which states that Annual Budget Statement shall also contain statement of fiscal risks.

Fiscal risks are risks that may lead to deviations in fiscal forecasts presented in Medium-Term Budgetary Statement laid under section 5 of Fiscal Responsibility and Debt Limitations Act 2005. Principle of „reasonableness‟ is followed which means that only those fiscal risks are presented that have a reasonable chance of materialising in the Budget Year 2020-21 and the medium-term.

Economic risks: Corona has had profound impact on Pakistan‟s economy. For the first time in many decades, Pakistan‟s economy has entered into recession as GDP contracted by 0.4% in 2019-20. As per the current estimates, economic growth is projected at 2.1 percent in 2020-21. However, there are downward risks to target growth emanating from two uncertainties: 1) worsening global economic situation, and 2) prolonged recovery in domestic markets. If these risks materialise, then tax revenue collection target is likely to be impacted. However, these risks are categorised as short-term riskspredominantlyaffecting 2020-21 forecasts. The mediumterm outlook remains positive and economic growth is projected to see sustained recovery.

Losses in energy sector: While the government has taken a number of steps to reduce energy sector losses, including increase in prices of energy for high-end consumers, improved management, and resolution of circular debt, there are high offbudget arrears and liabilities. There are two main risks emanating from; 1) nonreduction of flow of energy sector losses, and 2) non-payment of arrears and liabilities. Both of these risks may impact government‟s fiscal position if such arrears and liabilities are required to be paid through the budget.

Losses in Public Sector Enterprises (PSEs): The government provides guarantees, grants, loans and at times equity investments to Public Sector Enterprises. Guarantees are categorized as contingent liabilities, however, the grants, loans and equity investments directly impact the budget as they increase the Government‟s expenditure. While the government intends to structurally reform PSEs there is a risk that such reforms take more time than envisaged which will negatively impact government finances. To mitigate these risks, the Government is committed to develop a new State-Owned Enterprise Law in the latter half of 2020 that will provide a stronger governance and performance management framework.

The government also intends to adopt a clear policy for establishing PSEs in future, deciding whether to sell, liquidate or retain the existing PSEs. The policy will decide as to which of the PSEs shall be retained or established in future or shall be run on a self-sustainable basis. Similarly the policy will also lay down principles regarding giving subsidies to the SOEs on an ongoing basis.

Natural disasters: Historically, natural disasters included floods, earthquakes, droughts etc. Since 2005, damages and losses resulting from natural disasters in Pakistan have exceeded USD 18 billion¹ . Government has established disaster management functions in shape of disaster management authorities, created a fund (called National Disaster and Risk Management Fund) and formulated various policies, strategies and plans (e.g. National Disaster Management Plan 2013-2022). In addition, the government has also allocated on-budget natural disaster and contingency reserve to deal with natural disasters in 2020-21 budget. However, there is a risk that natural disaster will have negative impact on the medium-term fiscal position.

Budget surpluses of provinces: The need to project/expect large provincial budget surpluses in future points to a broader problem with the fiscal landscape of the country. With the provinces taking a substantial share of national revenues, and federal government being liable for almost the entire national debt, the structural fiscal balance has become lopsided. The situation is unsustainable unless an appropriate adjustment occurs in the structural fiscal balances of federal and provincial governments. The government has formed 10^th National Finance Commission with the view to deliberate on options leading to fiscal harmonisation.

Conclusion: In order to mitigate these risks, continued monitoring and implementation of structural reforms agenda shall be pursued. Reduction of fiscal deficit to make Pakistan‟s debts more sustainable and identification of fiscal space for priority human and infrastructure development will remain the key principles based on which medium-term fiscal policy shall be based.

1 World Bank Estimates: Report No. 94474-PK “Fiscal Disaster Risk Assessment Options for Consideration, PAKISTAN”

Medium Term Budgetary Statement 2020-21 to 2022-23

Government is laying before the National Assembly a Medium Term Budgetary Statement under Section 5 of the Fiscal Responsibility and Debt Limitation Act, 2005. This statement is consistent with the country’s overall macroeconomic framework.

2. The year 2019-20 was projected as a year of positive economic growth caused by target driven policies and goals.In the first half of this fiscal year, the government took an austerity driven, revenue generating and fiscal deficit reduction strategy. This projected the growth of GDP at 3.0percent.During the Mid-Year FY 2019-20, Pakistan’s economy moved progressively along the stabilization and adjustment path. A steady policy mix appeared to adequately address the macroeconomic imbalances. Structural adjustment process picked up momentum with the initiation of the IMF’s Extended Fund Facility program of US $ 6 billion.

3. However, the economic canvas changeddrastically in the latter four to six months with increasing effects of the Covid-19 outbreak on economy.Post Covid19, it is expected that the Budget Deficit will increase to around 9 percent of grossdomestic-product.Projection of economic growth reduced from around 3% to -0.38% of GDP, while over-all budget deficit is revised upwards from 7.1% to 9.1% of GDP, FBR revenue loss projected at Rs 900 billion, exports and remittances were adversely affected, and non-tax revenue was decreased. The growth rate for FY 2020 is estimated at -0.38 percent on account of subdued performance in industry and services sector which stood at -2.64 percent and -0.59 percent, whereas agriculture sector performed relatively better and grew by 2.67 over the previous year. The government’s focus is now aimed at increasing public health spending and strengthening social safety nets for the vulnerable population.

4. Over the medium-term a number of important policy measures will be taken. These policy measures will broadly include reduction of budget deficit through increase in government revenues, maintaining the policies of; no borrowings from State Bank of Pakistan for budget financing, flexible exchange rate, structural reforms in public entities including where necessary privatisation, reforms in energy sector (electricity and gas), increase in public investments in management ofwater, implementation of projects under China-Pakistan Economic Corridor, strengthening energy transmission and distribution systems, implementation of national tariff policy, implementation of special economic zones, etc.

5. The budget philosophy and strategy for FY 2020-21 year budget by the government includes striking a balance between corona expenditure and fiscal

deficit, keeping primary balance at sustainable level, protection of social spending to support the vulnerable segments of the society, successful continuation of IMF program, keeping development budget at adequate level to inject economic growth and revenue mobilization. Funding for special initiatives led by the Prime Minister like KamyabJawan, Sehat Card, Naya Pakistan Housing scheme etc have also been protected.In wake of Covid-19 and additional measures by the government to improve the economic outlook, no new taxes shall be introduced in 2020-21 budget. FBR collectionhowever, will increase through improvement of tax system, broadening tax base and strengthening of administrative controls. Other measures include withdrawing tax exemptions, rationalizing concessionary regime, simplifying tax rules and ensuring tax compliance.

6. It is imperative that the government adopt a policy for fiscal consolidation for debt reduction over the medium-term. However, social spending shall continue to be focused towards helping the most vulnerable segments of the society. Federal government is accordingly pursuing a multipronged strategy with focus on increasing tax revenues, reducing unnecessary expenditures, spending for the economic growth of the vulnerable sector and increasing the country’s foreign exchange earnings.

Government of Pakistan Finance Division

STATEMENT OF RESPONSIBILITY UNDER SECTION 10(1)(a) OF FISCAL RESPONSIBILITY AND DEBT LIMITATION ACT 2005

Stated that all policy decisions with material economic or fiscal implications that the Federal Government has made before 11^th June 2020, the day on which the contents of the Medium Term Budgetary Statement were finalized and all other circumstances with material economic or fiscal implications of which I was aware before that day, have been communicated to the Secretary, Finance Division.

The statement to the best of my knowledge provides for

• a) the integrity of the disclosures contained in the economic policy statement;

• b) the consistency with requirements of this Act of the information contained in the economic policy statement; and

• c) the omission from the economic policy statement of any decision or circumstance specified in sub-section 3 of section 8 of the Act.

Dr. Abdul Hafeez Shaikh Advisor to PM on Finance and Revenue

Government of Pakistan

Finance Division

STATEMENT OF RESPONSIBILITY UNDER SECTION 10(1)(b) OF FISCAL RESPONSIBILITY AND DEBT LIMITATION ACT 2005

Stated that the Finance Division has supplied to the Adviser to Prime Minister on Finance and Revenue, using its best professional judgment on the basis of economic and fiscal information available to it before 11^th June 2020, the day on which the contents of the Medium Term budgetary Statement were finalized, incorporating the fiscal and economic implications of those decisions and circumstances, but any decisions or circumstances that the Adviser to Prime Minister on Finance and Revenue has determined under Sub-section (3) of Section 8 of the Fiscal Responsibility and Debt Limitation Act 2005 have not been incorporated in the Medium Term Budgetary Statement.

Naveed Kamran Baloch Secretary to Government of Pakistan

Finance Division Islamabad, the12^th June, 2020

STATEMENT OF ESTIMATED TAX EXPENDITURE

Section 8 of the Public Finance Management Act, 2019 provides that the Federal Government shall, in respect of every financial year cause to be laid before the National Assembly, Finance Bill consistent with Article 73 of the Constitution including a statement of estimated tax expenditure of the Federal Government.

2. A Tax Expenditure statement providing the detail of tax expenditure in FY 2020 which involves tax expenditure in sales tax of Rs. 518.8 billion, a tax expenditure in income tax of Rs. 378 billion, and tax expenditure in Customs Duty of Rs. 253.1 billion, arriving at a total estimated tax expenditure of Rs. 1,150 billion is being laid before the Parliament.

Nausheen Javaid Amjad Chairperson FBR Dated: 12-06-2020