Pakistan Cuts Power Subsidies, Corporate Taxes to Woo IMF

Pakistan will reduce power subsidies, remove tax breaks and penalize those not declaring income as Prime Minister Nawaz Sharif tries to narrow the budget deficit to meet the terms of an International Monetary Fund loan.

The shortfall is forecast to shrink to a seven-year low of 4.9 percent in the fiscal year starting July 1, smaller than an estimated 5.8 percent this year, Finance Minister Ishaq Dar said in his budget speech to parliament in Islamabad yesterday. The government aims to narrow the gap to 4 percent by 2017.

“We have had to fix a broken economy,” Dar said in the televised address. “We have tackled tough challenges. The country is on a path of growth.”

Sharif’s year-old government has to boost tax revenues and revive investment to be eligible for further payouts under a $6.6 billion IMF facility approved in September. While the loan staved off a balance-of-payments crisis, South Asia’s second-largest economy faces power shortages, a Taliban insurgency and one of the region’s highest inflation rates.

“The budget seems to be in line with IMF expectations, but implementation of the measures will decide if it really is that or not,” said Khurram Schehzad, chief investment officer at Lakson Investments Ltd. in Karachi.

The IMF board will review a report on Pakistan’s progress later this month, following which it may release a $550 million loan installment. The board was “encouraged” by progress, the Washington-based lender said in May. A partially disbursed $11.3 billion facility expired in September 2011 after Pakistan failed to meet conditions.

Tax Penalties

The budget will lower corporate taxes to spur industry and increase the capital gains tax at 12.5 percent, less than a jump to 17.5 percent that had been planned earlier. The rate is still higher than the current 10 percent.

Citizens who hadn’t been been declaring income will now have to pay higher advance taxes on income and dividends, cash withdrawals, car registrations and on purchases including property and business class flight tickets. Tax loopholes such as those on bonus shares will be removed and foreign institutional investors will be required to pay withholding tax.

The benchmark KSE-100 stock index rose 0.1 percent and the Pakistani rupee gained 0.1 percent as of 11:14 a.m. in Karachi. Textile stocks climbed as the government extended duty-free machinery imports for the sector, while fertilizer stocks fell after levies were raised on gas supplies.

“The stock market’s reaction may be mixed” as the smaller increase in the capital gains tax rate will be countered by the removal of loopholes, said Lakson’s Schehzad.

Defense Spending

Total outlays for the coming fiscal year will be increased by 7.9 percent from the current year to 4.3 trillion rupees ($43.6 billion). Spending on power subsidies will reduced by 37 percent to 203 billion rupees, while defense expenditure will rise 11 percent to 700.1 billion rupees as troops fight homegrown Taliban militants on the border with Afghanistan to end a decade of insurgency that has claimed about 50,000 lives.

Pakistan aims to boost growth to an eight-year high of 5.1 percent in the coming fiscal year from an estimated 4.1 percent in the current period, as Sharif battles electricity shortages that curbed expansion by as much as 1.75 percentage points. Growth if forecast to rise to 7.1 percent in 2016-17.

Economic expansion in the 12 months ending June 30 is forecast to be led by industrial growth of 5.84 percent, Dar said at a news conference June 2 while releasing the government’s annual Economic Survey. Farm growth is projected at 2.12 percent compared with 2.88 percent a year ago because of lower output of cotton, pulses and oilseed.

Stake Sales

Sharif’s government plans to invest 205 billion rupees in the energy sector in the coming fiscal year. It plans to add as much as 16,564 megawatts of electricity to the grid during its five-year term, according to the economic survey.

The government also aims to cut debt by selling state assets, and will boost foreign-exchange reserves to a two-year high of $15 billion by July, earlier than a earlier September deadline.

It will sell stakes in Habib Bank Ltd., United Bank Ltd. and Allied Bank Ltd., Dar said today. This is in addition to plans unveiled in February, when Mohammad Zubair, the nation’s privatization chief, said the government will sell shares in Oil & Gas Development Co. and Pakistan Petroleum Ltd.

Pakistan raised $2 billion in April through its first overseas sovereign bond sale in seven years, another $1.13 billion from the auction of mobile-phone spectrum licenses, and is looking to market more than $1 billion of Islamic bonds by the end of 2014.

“This budget is on the broad guidelines given by the IMF,” said Muhammad Imran, who helps oversee the equivalent of $456 million as portfolio manager at NBP Fullerton Asset Management Ltd. in Karachi. “The IMF will be pretty happy.”

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