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Dismal Reality

Pakistan’s budget for 2022-23 is not good news and could lead the country further down a dark tunnel.

By Syed Zain Abbas Rizvi | July 2022

The budget season has always been the most hyped in Pakistan, probably second only to general elections. However, this year the budget session breezed through with virtually no opposition creating the traditional drama and noise. The bittersweet presentation had a few ups and multiple downs as the blueprint for the next fiscal year was presented in the national assembly. The presentation had nothing one was not already anticipating. Yet, an analytical dissection reveals some quirky details that may make this budget more of an electoral gimmick rather than a plan to salvage the teetering economy.

The parliament was presented an inflationary budget amounting to Rs 9.5 trillion. Average inflation was projected at 11.5% - a utopian purview as far as global data suggests. The main agenda was to derive relief for the salaried class while milking the elite strata of society. For instance, salaries of the government employees were increased by 15%. According to the budget documents, the tax slabs were reduced to 7 - down from the initial 12 slabs. The taxable income limit was raised from Rs 50,000 per month to Rs 100,000 per month. As a resultant, people earning below Rs. 100,000 per month would be exempted from income tax. Moreover, annual income exceeding Rs 1.2 million but less than Rs 2.4 million would be subject to a 7% income tax on excess pay. Thus, the lower class has been shielded from the tax burden while the middle class would face minimal tax.

Comparatively, people earning over Rs 12 million per annum would pay 32.5% income tax in FY22-23. “The salaried class will get a solace of Rs 47 billion in the next fiscal year due to change in their tax rates. While the implication is straightforward in a subjective fashion, the objective reality is slightly different. For example, petroleum prices would increase as the petroleum levy rate has been raised from Rs 30/liter to Rs 50/liter, along with 17% sales tax. Thus, expenditure - from fuel to electricity - is guaranteed to skyrocket, making the revised inflation target and the touted relief to the public superficial.

Admittedly, the rich were targeted by taxing the realty sector and the automobile industry. Pakistanis holding offshore assets would have to pay 1% of the value of their foreign properties in taxes. Furthermore, the advance tax burden on the registration of luxury cars (more than 1600 cc) has been doubled - from an initial 100% to 200% - in the case of non-filers of tax returns. Commercial banks were specifically targeted with increased taxes. “The banking sector has earned windfall gains due to higher interest rates and risk-free investment in government securities,” Finance Minister Miftah Ismail said during his budget presentation in the national assembly. Due to the restriction on borrowing from the State Bank of Pakistan (SBP), the government was forced to auction securities in the secondary market. The markup on domestic debt has been projected to climb up to Rs 3.4 trillion - out of the total budgeted expenditure of Rs 8.69 trillion in FY22-23, chiefly due to the historic high yields on securities - like T-bills and PIBs - of over 15%, despite recurrent directives from the SBP to rationalize the interest rates. Hence, in order to reap the real tax potential of the banking companies, the coalition government has revised tax to 42% - up from 39% in the outgoing fiscal year.


The rising petroleum prices and restrictive taxes on the banking sector aspect that the investments might quench, negatively impacting the budgeted revenue target in the next fiscal year. The government is targeting a gross revenue collection of Rs 9 trillion. The tax target has been set at 7 trillion for the next fiscal year - an increase by 17% from the outgoing fiscal year. While the strategic reasoning is simple - inveigling the IMF by submitting to reforms - the premise is idealistic. The budgetary framework shows no noticeable feature that could incentivize tax return filers or expand the tax base in the foreseeable future. The coalition government also targets a budget deficit of 4.9% of the GDP - almost 3.8 trillion. Currently, the figure stands at roughly Rs 5.6 trillion for the outgoing fiscal year. Budget estimates reveal that about 58% of the budget (almost Rs 5.45 trillion) will be spent under two heads - defence spending and debt servicing. In the outgoing fiscal year, the share of these two categories was almost 50%. By contrast, the new budget has barely budged by 4.6% compared to the preceding fiscal year. It is hard to accept that with virtually no additional avenues for revenue and debt servicing costs projected at the highest-ever level in the history of Pakistan, the government could somehow thaw the budget deficit down by this sharp extent in a single year.

This budget attempts to assuage the IMF by projecting the primary budget deficit (excluding debt servicing costs) at 0.2% of the GDP. Converting the deficit to a surplus was one of the core conditions during the talks in Doha. The desperation is understandable as the government requires almost $41 billion in foreign loans in the next fiscal year to maintain stability, including $21 billion to repay foreign loans and $12 billion to manage the Current Account deficit. Ultimately, the budget framework - unfortunately yet predictably - paves no road to phase away the volatile petroleum imports. In fact, the budget suggests that the government is all set to restore the petroleum levy rates. Thus, inflation would surge while supply-side problems persist. Ultimately, one believes the sad part is that in an economy like Pakistan, the defense budget is hiked by over 11%. Debt servicing costs stand at roughly 45% of the total budget. Yet less than 8% of the budget is allocated to actual “development projects.” That is the dismal reality of Pakistan’s so-called “Developing Economy.”

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