Annual Budget Statement

FEDERAL BUDGET 202 2 -2 3 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 2022-23, which will also be transmitted to the Senate of Pakistan as required under Article 73(1).

The statement fulfils 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.

The actual reconciled data will be finalized and made available on the web site of Finance Division by September, 2022.

Hamed Yaqoob Sheikh Secretary to the Government of Pakistan

Finance Division Islamabad, the 10^th June, 2022

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.

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, Capital Value Tax, WWF (Ordinary Collection) and WPPF (Contribution under Companies Profit). Indirect Taxes include Sales Tax, Federal Excise Duty and Customs Duty. A snapshot of Budget Estimates is as under;

(Rs in million)

REVENUE RECEIPTS

Non-Tax Revenue

As per Section 2(a) 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;

(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;

(Rs in million)

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;

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.

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)

PUBLIC ACCOUNT RECEIPTS Deposits and Reserves

(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.

Current Expenditure on Revenue Account

Contd…..

Current Expenditure on Revenue Account

Current Expenditure on Revenue Account

(Rs in million)

Current Expenditure on Capital Account

(Rs in million)

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 is termed as Capital Expenditure.

PUBLIC ACCOUNT EXPENDITURE

National Savings Schemes

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

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. (iii) There shall be no authority of directed access to Central Account No.1 (Non Food) in SBP.(iv) 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.

(Rs in million)

Contd…..

PUBLIC ACCOUNT EXPENDITURE Deposits and Reserves

Contd…..

PUBLIC ACCOUNT EXPENDITURE Deposits and Reserves

STATEMENT OF ESTIMATED CHARGED AND VOTED EXPENDITURE

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

Statement of Purpose - Demands for Grants

This statement is being provided in compliance with section 4 of the Public Finance Management Act, 2019. Based on the policy priorities of the Federal Government, the “Demands for Grants” cater towards debt servicing of domestic and foreign loans and advances, for expenditures to be incurred on re-current and development activities, re-vitalize sustainable economic growth, focus on health, education and provide jobs through various programs.

With the continued challenges being faced by the Country to balance sustainability of economic growth during the post COVID-19 pandemic period and other difficulties because of Ukraine war, the government’s policy priority is focusing on providing relief to people and ensuring that low income segment of society are affected through various interventions. Such interventions include Benazir Income Support Program, targeted subsidies on essential food items, cash assistance, electricity subsidies etc.

To generate economic activity and to provide employment and business activities, government will provide loans to youth on favorable terms.

Hamed Yaqoob Sheikh Secretary to the Government of Pakistan

Finance Division Islamabad, the 10^th June, 2022

STATEMENT OF DEMANDS FOR GRANTS AND APPROPRIATIONS FOR EXPENDITURE MET FROM THE FEDERAL CONSOLIDATED FUND FOR THE FINANCIAL YEAR COMMENCING ON IST JULY, 2022 AND ENDING ON 30TH JUNE, 2023

Demand-Wise Expenditure for Budget Estimates 2022-23

(Rs. in million)

Demand-Wise Expenditure for Budget Estimates 2022-23

Demand-Wise Expenditure for Budget Estimates 2022-23

Demand-Wise Expenditure for Budget Estimates 2022-23

Demand-Wise Expenditure for Budget Estimates 2022-23

(Rs. in million)

STATEMENT OF OBJECT CLASSIFICATION WISE EXPENDITURE Rs. In million

STATEMENT OF CONTINGENT LIABILITIES

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 favorable 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.

2. The volume of new government guarantees issued during a financial year is limited under Fiscal Responsibility and Debt Limitation Act, 2005 (as amended from time to time) which stipulates that the government shall give guarantees aggregating to an amount not 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.

3. During July to March FY 2022, the government issued fresh/rollover guarantees/Letter of Comforts (LoCs) aggregating to Rs 344 billion or 0.5 percent of GDP. Total executed guarantees were Rs 3,039 billion while outstanding stock was Rs 2,700 billion at end March 2022 as per the following details:

Table-1: Summary of Outstanding Government Guarantees

(All figures are Rs in billion unless otherwise stated)

4. Sector-Wise, Entity Wise and interest rate wise share of the guarantees at end March 2022 are as follows:

Table 2: Outstanding Position of GoP Guarantees

120 4%

- Others

Note: The original maturities of major portion of Guaranteed Debt Stock were 5 years and above

5. 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 845 billion at end March 2022.

6. The estimates of guarantees to be issued from April 2022 till June 2023 are as follows:

Table 3: Estimated Guarantees Issuance and Position (Q4 FY 22 and FY 23)

(Rs in billion)

Statement of Fiscal Risk

The Statement of Fiscal Risk outlines the Government’s assessment of key risks that can affect the targets as outlined in the Medium-Term Fiscal Framework. Fiscal risks are factors that could cause fiscal outcomes to differ from predictions. Revenues, expenditures, assets, and liabilities may be affected by unexpected events that can have bearing on budget estimates. Additional government commitments can increase public debt, refinancing difficulties, or more significant fiscal events can result if any or all of these threats are realized. Further, fiscal accounts are also vulnerable to changes in international macroeconomic conditions like commodities prices and the exchange rate.

Key Fiscal Risks

Various shocks to macroeconomic variables, revenue & spending risks, and contingent liabilities from State-Owned Enterprises (SOEs) are the primary sources of fiscal risk. Consequently, it is necessary to identify, analyze, and mitigate fiscal risks because they have a significant impact on public debt sustainability and fiscal outcomes.

1. Economic Risks

Despite significant challenges both on the external and domestic side, the economy continues to move on a higher growth trajectory and recorded an estimated growth of 5.97 % against the target of 4.8 %. It is expected that growth will remain 5.0 - 6.2 % in the medium term. However, there are multiple external and domestic factors posing downside risks to the economic outlook:

• The conflict between Russia and Ukraine is a significant risk factor to Pakistan's positive economic outlook. A prolonged conflict may further raise international oil and food prices. Such a situation can impede world trade through additional supply disruptions affecting our imports, exports, and taxes on imports. On the hand, it can put additional inflationary pressures.

• Global financial conditions tightening with an unprecedented speed to reduce the demand pressure

• Internal disturbances, if any can disrupt macro-economic balance.

• Monetary tightening and fiscal consolidation measures to reduce the demand pressures may slow down economic growth in the coming year.

• Exchange rate depreciation has an immediate impact and can be especially severe when a large portion of the debt is in foreign currency.

2. Global Economic Conditions

Pakistan is a net importer of food and oil items.International commodity and oil prices are consistently high, putting significant strain on Pakistan's fiscal account. Although steps were taken to protect the public from price increases through tax relief and subsidies, however, it significantly increased the risk of fiscal slippages. The continuation of such policies in the face of such global economic conditions would come at a high fiscal cost to the country. Most importantly, in Pakistan, the fiscal stance is vulnerable to commodity prices, especially oil prices, which has become uncertain in recent years. Oil price fluctuations affect the fiscal position through their impact on revenues on account of PDL and on the expenditure side through fuel subsidies. As a result, it causes severe macroeconomic imbalances. To deal with such circumstances, fiscal buffers become increasingly important.

3. Growth in Government Revenues

Lower tax revenues lead to greater fiscal deficits and borrowings and reduce the fiscal space for expenditure pertaining to the development and social sectors. Since current expenditures are less flexible and difficult to reduce, thus, any reduction in tax revenue may leave lesser than projected space for development spending.

FBR which collects a substantial amount of revenues mostly relies on indirect taxes which are contributing more than 60 percent of total FBR tax collection. Although, presently, tax collection is growing above 28 percent, the increased collection is largely dependent on import taxes. Currently, more than 46 percent of collection in total tax is coming from imports. Thus, to reduce the pressure from external accounts, measures to curtail imports would affect the FBR tax collection. Considering this, it is critical to increase domestic tax collection through effective and appropriate policy and administrative measures.

4. Higher Expenditure

Higher subsidies, interest payments and grants will be detrimental to fiscal sustainability in the absence of adequate fiscal space. Rising interest rates and energy and food prices will put additional strain on the budget. The government has taken steps to limit the rise in domestic prices, including tax cuts and subsidies. However, such measures can have unintended consequences, such as increased expenditures, lower revenue collection and higher aggregate demand.

5. Losses pertaining to Energy Sector

The main reasons behind the power sector losses include high cost of generation above-average transmission and distribution losses,

and below-average recoveries of electricity bills. Presently, the power sector is the largest beneficiary of government subsidies.

Imports of fuels including oil, gas, and coal constitute a large portion of Pakistan’s import bill. Prices of these fuels affect the prices of a variety of goods and services as these fuels contribute a significance part of production. Volatility in prices of these fuels is a major reason behind the volatility in inflation rates which, in turn, contribute to volatility in interest rates and exchange rates.

An increase in the cost of imported fuels, whether due to rising fuel prices in international markets or exchange rate depreciation, or both, has potential adverse effects on the wider economy through higher current account deficit, higher inflation, higher interest rate, lower GDP growth, lower revenue growth, higher interest cost, higher fiscal deficit, and higher public debt levels. Currently, there are little or no fiscal buffers or risk management framework for dealing with adverse shocks in the prices of imported fuels.

6. Provincial budget surplus

The medium-term fiscal framework envisages strict fiscal discipline on part of the provinces as their surpluses remain a vital component in reducing the overall consolidated fiscal deficit of the country whereby large federal deficits are partially offset by significant provincial surplus over the medium-term.

In the absence of legally binding commitments from provinces, the risk remains high that the projected provincial budget surpluses may not materialize. This risk is particularly elevated considering that any shortfalls in FBR’s projected collections may provide the provinces with the justification not to meet the budget surplus targets.

7. State-Owned Enterprises (SOEs)

Over time, the number and aggregate size of SOEs have grown considerably. Many SOEs perform fiscal functions. Certain SOEs have been incurring huge losses in the past. Losses or excessive debt have necessitated costly government bailouts. The Government provides financial support to several SOEs in the form of subsidies, grants, loans, and guarantees. The fiscal cost of running the loss-making SOEs has been quite high and has worsened an already fragile financial position of the government. The approach to keep poorly-performing SOEs afloat by granting loans or issuing guarantees has aggravated the fiscal situation. The privatization process has also been slow in the past.

A rethinking of policy regarding the privatization, ownership, objectives, and modes of financing & governing principles of SOEs is required. Realizing such needs, the Government is committed to provide a policy guidance, stronger governance and performance management framework for the SOEs.

CONCLUSION

Various types of fiscal risks confront Pakistan, and a lot of effort is needed to overcome or mitigate the potential adverse effects of such risks. The silver lining is that the country has already made considerable progress in certain areas, and a number of strategies are available to address the risks that remain. The risk management strategy envisages range of Public Financial

Management (PFM) reforms that bring discipline, transparency, and credibility at all stages of the budget cycle and follows a two-pronged approach i.e.

• preventing the risks from materializing or lowering the exposure in case such risks materialize, and

• creating buffers for the risk exposures that still remain.

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 2022 which involves tax expenditure in sales tax of Rs. 1014.483 billion, a tax expenditure in income tax of Rs.399.662 billion, and tax expenditure in Customs Duty of Rs. 342.890 billion, arriving at a total estimated tax expenditure of Rs.1757.035 billion is being laid before the Parliament.

Asim Ahmad Chairman FBR Dated: 10-06-2022

Medium Term Budgetary Statement

(2022-23 to 2024-25)

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 2021-22 was a year of economic recovery backed by incentives to various quarters of the economy. Pakistan’s economy had shown some signs of revival after being hit by the Covid-19 pandemic. The timely response measures to combat this daunting challenge were about to bear fruits when world faced new economic challenges due to Ukrainian War. The increase in international commodity prices and rupee depreciation played a havoc with the economy. The major challenge for government was to provide relief to the poor and vulnerable segments of society.

3. For the protection of vulnerable segments of the society, the government is committed to implement various components under Benazir Kafalat and other programs under BISP by allocating huge amount for unconditional cash transfers, fuel subsidy, Waseela e Taleem, Nutrition program, etc. 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 will pick up and move 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 2022-23 rests on 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 Wazir e Azam Rozgar Scheme, lending schemes to support various groups include credit guarantee and loan schemes for women entrepreneurs, students, youth and sectors like SMEs, food & agriculture etc.

6. FBR collection however, will increase through improvement in tax system, broadening tax base improvement in tax rates and strengthening of administrative controls through technological interventions. 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 multi-pronged strategy with focus on revenue mobilization, rationalization of recurrent expenditures to provide space for development/ capital expenditure, support for the driver sectors of the economy and increase the foreign exchange earnings for management of current account and easing off pressure on the Rupee (PKR).

Macroeconomic and Fiscal Framework

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 10^th June 2022, 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. Miftah Ismail) 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 10^th June 2022, 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 Statement.

Hamed Yaqoob Sheikh Secretary to Government of Pakistan

Finance Division Islamabad, the10^th June, 2022