Budget 2024-25: Strict Measures Needed for IMF Loan’s Approval

Staff Report

The newly PML-N-led coalition government may require strict measures needed for the IMF Loan’s approval in budget 2024-25.

The government is set to present its first budget for FY25 between June 7-10, 2024, in the parliament.

This timeline aligns with reports indicating that a Staff Level Agreement (SLA) may be announced formally by the end of June 2024 or early July 2024, contingent on satisfactory compliance with prior actions and amendments in some tax laws through the finance bill 2024-25.

The Budget FY25 is likely to be a prior action required by the IMF, in our view, and will be crucial for bringing Pakistan closer to the SLA.

The budget aims to target a primary surplus of Rs500-700bn or 0.4-0.5% of the GDP, along with an FBR revenue target of Rs11-11.5tn, up 18-20% from this year’s estimated figures of Rs9.2-9.4tn.IMF Board Approves Release of $1.1b final tranche for Pakistan

Major Revenue Measures

The government may propose revenue measures such as:

1. Increasing GST by 1% to 19%.
2. Introducing a tax on pensioners.
3. Removing exemptions on FATA/PATA.
4. Increasing tax rates on non-tax filers.
5. Implementing a Carbon Tax or increasing the Petroleum Development Levy (PDL).
6. Reforming personal income tax.
7. Taxing retailers and wholesalers.
8. Increasing the FED on cigarettes.
9. Removing exemptions or increasing sales tax on goods listed in Schedules 5, 6, and 8, including pharmaceuticals and food.

Revenue Measures Taken by Other Countries in IMF Programs Include:

1. Introduction of gift tax, wealth transfer tax, and inheritance tax.
2. Removal of sector-specific exemptions and reduced corporate income tax rates.
3. Imposing VAT on non-resident e-commerce.
4. Streamlining VAT laws and removing VAT exemptions.
5. Eliminating tax exemptions for SOEs.
6. Environmental surcharges on multiple car ownerships.
7. Increased tax on land registration and foreign travel.

Economic Indicators

The government is reportedly setting a GDP growth target of 3.6% alongside an inflation target of 12.5-12.7%. The GDP growth target aligns with our estimates; however, we have slightly higher expectations for inflation for FY25 at 13.0-13.5%.

Stock Market Impact

For FY25, the major driver for the KSE 100 will be PE re-rating led by the approval of the new IMF financing facility. We expect the current forward PE of the market, 3.8x, to revert to its historic mean of 6.93x linearly, subject to the successful commencement and completion of the new IMF program.

The budget will likely be neutral to negative for the stock market in the short term.

However, if the government drafts realistic revenue measures to achieve targeted tax collection as desired by the IMF, the market will view it positively in the medium term, ignoring any negative impact on corporate earnings. This budget will pave the way for a new IMF program, which will help in PE re-rating.

To meet the high tax target, the government may increase taxes on dividends, capital gains, and interest income. This, along with any change in the status of these taxes from final to normal, will affect the net returns of stock market investors.

We expect the Index to reach 87,000 points by December 2024 and 106,000 by June 2025, subject to the successful commencement and completion of the IMF program review,” Topline Research said in a report.