Annual Budget Statement 2021-22

FEDERAL BUDGET 2021-22 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 Islamic Republic of Pakistan 1973 is being laid before the National Assembly of Pakistan for financial year 2021-22, which will also be transmitted to the Senate of Pakistan as required under Article 73(1).

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

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, statement of contingent liabilities of the Federal Government and statement of fiscal risk. Moreover, as per Section 8 of the Act, a statement of estimated tax expenditure of the Federal Government shall be laid before the National Assembly. All these statements have been made part of Annual Budget Statement.

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, which have also been made part of the Annual Budget Statement.

Revised Estimates for FY 2020-21 included in Demands for Grants and Appropriations (Part-I) were based on the data extracted from the SAP System as on 5^th May, 2021, whereas the revised estimates included in this 'Annual Budget Statement' have been prepared on the basis of information collected as on 7th June, 2021. The actual reconciled data will be finalized and made available on the web site of Finance Division by September, 2021.

Yusuf Khan

Secretary to the Government of Pakistan

Finance Division Islamabad, the 11^th June, 2021

CONTENTS

PAGE

SUMMARY OF RECEIPTS

Federal receipts are categorized as Revenue Receipts, Capital Receipts, Public Account Receipts and External Receipts. All these receipts, except Public Account Receipts become part of the the Federal Consolidated Fund.

As per Section 22 of the Public Finance Mangement Act, 2019, the operation of the Federal Consolidated Fund and the Public Account of the Federation vests in the Finance Division

(Rs in million)

REVENUE RECEIPTS

Revenue Receipts constitute major component of total Federal resources. Revenue Receipts may be categorized as Tax Revenue Receipts and Non-Tax Revenue receipts, which are largely derived from the following sources:-

Tax Revenue

Tax Revenue is administered by the Federal Board of Revenue (FBR), which comprises Customs Duty and Inland Revenue i.e Direct Taxes, Sales Tax and Federal Excise Duty. FBR taxes may also be categorized as Direct Taxes and Indirect Taxes. Direct Taxes comprise Income Tax, Workers Welfare Fund and Capital Value Tax. Indirect Taxes include Sales Tax, Federal Excise Duty and Customs Duty. A snapshot of Budget Estimates is as under;

REVENUE RECEIPTS

Non-Tax Revenue

As per Section 2(ma) of the Public Finance Management Act, 2019 (amended), Non-Tax Revenue means revenues received by the Government in terms of clause (1) of Article 78 of the Constitution and the recurring income of the Government from investments and provision of services but does not include those mentioned in clause (3) of Article 160 of the Constitution. Non-Tax Revenue of the federal government is administered by various Ministries / Divisions/ Departments. Budget Estimates are as under;

Contd…..

(Rs in million)

CAPITAL RECEIPTS

Capital receipts comprise Recoveries of Loans and Advances from Provinces and other entities and Public Debt which includes Permanent Debt and Floating Debt. The net capital receipts so realized by the federal government generally constitute the available resources for the financing of its Public Sector Development Programme. Budget Estimates are as under;

EXTERNAL RECEIPTS

External Resources comprise loans and grants received from multilateral, bilateral and other sources for approved projects, programmes and other initiatives. Budget Estimates are as under;

(Rs in million)

PUBLIC ACCOUNT RECEIPTS

Article 78(1) of the Constitution of Islamic Republic of Pakistan provides that all revenues received by the Federal Government, all loans raised by that Government and all moneys received by it in repayment of loan, shall form part of the Federal Consolidated Fund. Article 78(2) provides that all other monies received by or on behalf of the Federal Government shall be credited into the Public Account of the Federation. Therefore, all the monies received by or on behalf of the Federal Government in terms of Article 78(2) are Public Account receipts which are not revenues in terms of Article 78(1) of the Constitution. However, such Public Account receipts cannot be operated without establishment of Special Purpose Funds, deposits, reserves etc under the authority of an act of the Parliament or with the approval of the Federal Government. Moreover, as per Section 32 of the Public Finance Management Act, 2019, special purpose funds, in which monies have been appropriated by the National Assembly shall be established under any law or with the approval of the Federal Government. There are two sources of Public Account Receipts as under;

National Savings Schemes

National Savings Schemes include Savings bank accounts, Defence Savings Certificates, Special Savings Certificates, Pension Benefit Accounts, Behbood Savings Certificates etc. Budget Estimates are as under;

Contd…..

PUBLIC ACCOUNT RECEIPTS

Deposits and Reserves

Deposits and Reserves represent all monies forming part of the Public Account of the Federation as per Article 78(2) of the Constitution of Islamic Republic of Pakistan. Budget estimates of receipts in the following table are however subject to fulfillment of following stipulations; (i) The funds appropriated by the National Assembly out of Federal Consolidated Funds in terms of Articles 80 to 84 of the Constitution for a particular financial year (being lapsable) shall be utilized as per Cash Management and TSA Rules 2020 and shall not be deposited under these deposits and reserves heads of account (being non-lapsable) under the Public Account.(ii) The maintenance and operation of all these funds, deposits, reserves etc shall be subject to their due establishment either under the authority of an act of Parliament or with the approval of the Federal Government, as the case may be.(iii) Revenues in terms of Article 78(1) of the Constitution shall not be deposited in these deposits and reserves heads of account under the Public Account. The revenues shall only be deposited in the respective heads of account of tax revenue and non tax revenue.(iv) Receipt of funds into these deposits and resreves heads of account shall only be allowed by the Accounting Offices subject to compliance of the stipulations at (i) to (iii) above and to the extent of reconciled available balance under the respective head of account.

(Rs in million)

(Rs in million)

SUMMARY OF EXPENDITURE (Current & Dev)

In this table, the Budget Estimates of current expenditure (on revenue and capital account) and Budget Estimates of Development expenditure (on revenue and capital accounts) have been mentioned as per Article 80(2) of the Constitution of Pakistan.

*An amount of Rs 100 billion has been allocated for COVID related expenditure during FY 2021-22

Current Expenditure on Revenue Account

(Rs in million)

Contd…..

Current Expenditure on Revenue Account

(Rs in million)

Contd…..

Current Expenditure on Revenue Account

Current Expenditure on Capital Account

Development Expenditure on Revenue Account

(Rs in million)

Contd…..

Development Expenditure on Revenue Account

(Rs in million)

Development Expenditure on Capital Account

(Rs in million)

CAPITAL EXPENDITURE

The expenditure incurred on repayment of domestic debt receipts is termed as Capital Expenditure.

(Rs in million)

PUBLIC ACCOUNT EXPENDITURE

National Savings Schemes

The expenditure incurred on repayment of National Savings Schemes is termed as Public Account Expenditure.

(Rs in million)

Contd….

PUBLIC ACCOUNT EXPENDITURE

Deposits and Reserves

Deposits and Reserves represent all monies forming part of the Public Account of the Federation as per Article 78(2) of the Constitution of Islamic Republic of Pakistan. Budget estimates of Expenditure (withdrawal of funds) from the Deposits and Reserves as depicted in the following table are however subject to fulfillment of following stipulations; (i) The maintenance and operation of all these funds, deposits, reserves etc shall be subject to their due establishment either under the authority of an act of Parliament or with the approval of the Federal Government, as the case may be. (ii) Withdrawal of funds from these deposits and resreves heads of account shall only be allowed by the Accounting Offices subject to compliance of the stipulations at (i) above and to the extent of reconciled available balance under the respective head of account. (iv) There shall be no authority of directed access to Central Account No.1 (Non Food) in SBP.(vii) Withdrawal of funds from these Deposits and Reserves head of accounts shall be in accordance with the provisions of Public Finance Management Act, 2019, Cash Management and Treasury Single Account Rules 2020 and the Special Assignment Account Procedure for the Public Account of the Federation 2021. Personal Ledger Accounts shall not be used for withdrawal of funds.

(Rs in million)

(Rs in million)

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

In terms of Article 80(2) of the Constitution of Pakistan, this statement distinguishes charged and voted expenditure. (Rs in million)

Statement of The Purpose - Demands for Grants

This statement is being provided to comply with the provisions of section 4 of the Public Finance Management Act, 2019. Based on the policy priorities of the Federal Government, the demands for grants have been proposed to ensure debt servicing on domestic and foreign loans, social safety cover, housing sector (Naya Pakistan Housing), defence and security related expenditures, pay and pensions, grants, subsidies etc. Moreover, it contains development expenditure to provide impetus for economic growth and job creation.

With the continued challenges being faced by the Federal Government to balance the sustainability of economic activity during the ongoing pandemic, the government’s policy priority is focusing on economic growth, providing relief to people and businesses. It has also been envisaged to provide targeted subsidies on essential food items in order to assist the less well-off strata of society, energy bills and agriculture inputs.

Yusuf Khan

Secretary to Government of Pakistan

Finance Division Islamabad, the11th June, 2021

SCHEDULE-I DEMAND FOR GRANTS AND APPROPRIATION FOR EXPENDITURE MET FROM THE FEDERAL CONSOLIDATED FUND FOR THE FINANCIAL YEAR COMMENCING ON IST JULY, 2021 AND ENDING ON 30TH JUNE, 2022

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2021-22

(Rs. in million)

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2021-22

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2021-22

(Rs . in million)

Contd............

SCHEDULE - I Demand-Wise Expenditure for Budget Estimates 2021-22

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2021-22 (Rs. in million)

SCHEDULE - I

Demand-Wise Expenditure for Budget Estimates 2021-22 (Rs. in million)

SCHEDULE -II OBJECT CLASSIFICATION WISE EXPENDITURE

STATEMENT OF CONTINGENT LIABILITIES OF THE FEDERAL GOVERNMENT

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 possible obligation that arises from past events and their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the government.

3. Contingent liabilities should be examined in the same manner as a proposal for a loan, taking into account, inter alia, the credit-worthiness of the borrower, the amount and risks sought to be covered by a sovereign guarantee, the terms of the borrowing, justification and public purpose to be served, probabilities that various commitments will become due and possible costs of such liabilities. Hence, such off-balance sheet transactions cannot be overlooked in order to gain a holistic view of a country’s fiscal position and unveil the hidden risks associated with the obligations made by the government outside the budget.

4. Contingent liabilities of Pakistan are primarily guarantees issued on behalf of Public Sector Enterprises (PSEs). The sovereign guarantee is normally extended to improve financial viability of projects or activities undertaken by the government entities with significant social and economic benefits. It allows public sector companies to borrow money at lower costs or on more favourable terms and in some cases allows to fulfil the requirement where sovereign guarantee is a precondition for concessional loans from bilateral/multilateral agencies to sub-sovereign borrowers.

5. 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.

6. During July 2020 to March 2021, the government issued fresh/rollover guarantees/Letter of Comforts (LoCs) aggregating to Rs 83 billion or 0.2 percent of GDP. The total executed guarantees were Rs 2,756 billion while outstanding stock was Rs 2,410 billion at end March 2021 as per the following details:

Table-1: Summary of Outstanding Government Guarantees

7.

Sector-Wise share of the above guarantees is as follows:

Table 2: Sector Wise Government Guarantee Outstanding (PKR in Billion)

8. Guarantees issued against commodity operations are not included in the stipulated limit of 2 percent of GDP as the loans are secured against the underlying commodity and are essentially self-liquidating. These guarantees are issued against the commodity financing operations undertaken by TCP, PASSCO, and provincial governments. The outstanding stock of commodity operations was Rs 701 billion at end March 2021.

9. The existing guarantees constitute around 6 percent of GDP and government is committed to maintain or reduce this exposure in the upcoming fiscal year.

Yusuf Khan

Secretary to Government of Pakistan

Finance Division

Islamabad, the11th June, 2021

Statement of Fiscal Risks

As required under Section 4(3)(b) of the Public Finance Management Act, 2019, the Annual Budget Statement shall also contain a statement of fiscal risks.

It is therefore expedient to highlight risks, which might lead to any revision in fiscal forecasts approved by the Federal Government in Medium Term Budget Strategy Paper under section 3 of the Public Finance Management Act, 2019. Principle of ‘reasonableness’ has been followed depicting only those fiscal risks which might materialize during fiscal year 2021-22 and in the medium-term.

Economic risks: Corona’s third wave has hit Pakistan and if the situation blows out of proportion, the fiscal forecasts may change slightly or substantially depending upon the severity of the pandemic. Resultantly, the economic growth will be impacted with reduction in revenues and increase in Corona-related expenditures. However, the government has taken a number of initiatives to provide stimulus to the economy to off set the impact of Corona.

Losses of power sector: Whereas the government has put in place necessary safeguards to minimize the losses of power sector including reduction in the pace of accumulation of circular debt, there are a couple of risks which may impact the fiscal forecasts 1) continuation of flow of energy sector losses, and 2) non-payment of arrears and liabilities. These risks may impact government’s fiscal position if such arrears and liabilities are required to be paid through the budgetary process.

Losses of State Owned Entities (SOEs): The government provides financial support to SOEs in the form of guarantees, grants, loans, equity investments etc if the situation so warrants. If the losses of SOEs continue, provision of financial support by the Government may impact the fiscal forecasts. However, the Government has approved a legal framework to improve governance of PSEs and has placed State Owned Enterprises (Governance and Operations) Bill 2021 for approval of the Parliament. Furthermore, the Government has also initiated the requisite work to gauge the performance of PSEs to decide whether to sell, liquidate or retain the existing SOEs.

Budget Surplus of Provinces: The provinces take a substantial share of national revenues however the federal government being liable for the debt servicing, security, Communications, Higher Education etc. Therefore, 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. In the context of this fiscal risk, excessive spending by the Province and low generation of own source incomes and revenue may lead to fiscal adjustment.

Natural disasters: Natural disasters including floods, earthquakes, droughts etc has adversely impacted the fiscal projections in the past. So, such hazards being natural and unpredictable may also affect the fiscal forecasts.

Conclusion: The Government is committed to off-set the impact of these fiscal risks, if occur, with better and efficient public financial management under the PFM reforms already initiated. Moreover, the SOEs Bill 2021 will also set the direction with regard to professional management of the state owned entities. The reforms in power sector have also been started which will improve the governance and management of the Distribution Companies. The agreements with IPPs have also been re-negotiated with a view to decrease the cost of electricity.

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 2021 which involves tax expenditure in sales tax of Rs. 578.456 billion, a tax expenditure in income tax of Rs. 448.046 billion, and tax expenditure in Customs Duty of Rs. 287.771 billion, arriving at a total estimated tax expenditure of Rs. 1314.273 billion is being laid before the Parliament.

Asim Ahmad Chairman FBR Dated: 11-06-2021

Medium Term Budgetary Statement (2021-22 to 2023-24)

Government is laying before the National Assembly a Medium Term Budgetary Statement in pursuance of 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 2020-21 was a year of economic recovery backed by incentives to various quarters of the economy. Pakistan’s economy has shown strong signs of revival after being hit by the Covid-19 pandemic. The Government has taken timely response measures to combat this daunting challenge. These measures have mitigated the socio-economic impacts of the pandemic. Policies introduced during the year like smart lockdowns, stimulus relief package worth Rs. 1.24 trillion and unprecedented concessions granted to the construction and SME sectors have yielded positive results.

3. The major step undertaken on the fiscal front during the Current Financial Year (CFY 2020-21) were to keep an appropriate balance between the Covid-19 related expenditures and fiscal deficit. Furthermore, public finance management reforms continued to increase transparency and accountability of public funds. For the protection of vulnerable segments of the society, the government proactively responded by implementing various components under Ehsaas Program and by combating inflation through price control and monitoring. On the external front, various policy actions were undertaken including bilateral and multilateral arrangements, IMF program continuity and exchange rate stability in the backdrop of strong foreign exchange reserves, as well as reviving export industry. Consequently, the economy picked up and is moving towards sustained economic growth.

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

5. The context and strategy for FY 2021-22 year budget hovers around fostering sustained and inclusive growth, horizontal and vertical expansion of social safety net to support the vulnerable segments of the society and successful continuation of IMF program.

Moreover, providing impetus to the economic activity through higher public development spending and consequently supporting job creation. Funding for special initiatives led by the Prime Minister like Kamyab Jawan, Sehat Sahulat Card, Naya-Pakistan Housing Scheme, House Financing Mark-up, Collateral free lending to SMEs 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 2021-22 budget. FBR collection however, will increase through improvement in tax system, broadening tax base and strengthening of administrative controls through technological inventions. Other measures include withdrawing tax exemptions, rationalizing concessionary regime, simplifying tax rules and ensuring tax compliance. Furthermore, ensuring better financial management and fiscal discipline, by striking a balance between relief measures and fiscal deficit to keep the primary balance at a sustainable level.

6. For sustained economic growth in medium term it is imperative for the Federal government to accordingly pursue a multipronged strategy with focus on revenue mobilization, rationalization of recurrent expenditures to provide space for development/ capital expenditure, support for the driver sectors of the country’s economy and increase the foreign exchange earnings for management of current account and easing off pressure on the Rupee (PKR).

Government of Pakistan Finance Division

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

Stated that all policy decisions with material economic or fiscal implications that the Federal Government has made before 11^th June 2021, 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.

(Shaukat Fayaz Ahmed Tareen) Minister for 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 Minister for Finance and Revenue, using its best professional judgment on the basis of economic and fiscal information available to it before 11^th June 2021, 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 Minister for 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.

Yusuf Khan

Secretary to Government of Pakistan

Finance Division Islamabad, the11th June, 2021