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Budget 2018-19: Govt slashes PSDP, raises defence spending to Rs1.1 trillion
Budget 18-19
The outgoing PML-N government's newly appointed Finance Minister Miftah Ismail presented a sixth full-term budget in the National Assembly on Friday amid a raucous protest staged by opposition leaders calling for a budget covering only the remaining three months of the incumbent government's tenure.
"This is a historic moment for the parliament that the 6th budget is being presented. A government cannot run for a day without the budget. The provincial governments cannot decide their budgets without approval of the federal budget," Ismail explained.
"We cannot interrupt the 5.8 per cent GDP growth. However the next government will have the right to make changes to the budget," he assured the opposition.
Salient features of Budget 18-19
- The budget hikes current expenditures and cuts development
- Bank borrowing estimated at Rs1,015.3bn, roughly 2.6 times the borrowing last year
- Defence budget experienced a 19.5pc increase from last year
"Today's budget is a reflection of Nawaz Sharif's vision. We are missing him here today."
"In 2013 the PML-N government came to power and set up a programme for the economy. We faced certain challenges under the leadership of Nawaz Sharif. Serving the public was our only motivation," he added.
During Ismail's address, members of the opposition continued their protests through uninterrupted chanting. They surrounded his dais and threw papers in the air. Opposition members ripped apart copies of the budget while PML-N members encircled Ismail's dais to keep the protesters at a distance.
The budget speech began with the finance minister recounting the government's new tax package, through which it has lowered tax rates considerably.
Ismail said the government is using data mining and other technologies to catch tax thieves.
"We have given people one last chance to declare their domestic assets. We will catch them and prosecute them if they do not avail our tax amnesty package," he asserted.
"Due to high economic growth in the last five years, the size of the economy has increased unusually. It has risen from Rs22,385 billion in 2013 to Rs34,396 billion in 2018. The per capita income during this time has risen from Rs129,005 to Rs180,204," Ismail announced.
In the aftermath of the 7th NFC, the provinces have been issued an extra Rs2,500bn in eight years, and the federal government will have a reduced share in the NFC, he said.
Budget strategy 18-19
Expenditure for the government in FY18-19 has been set at Rs5.246 trillion.
The target GDP growth rate for the upcoming fiscal year has been set at 6.2pc against FY17-18's target of 6pc.
The government intends to keep inflation to below 6pc.
The intended tax to GDP ratio is 13.8pc, while net public debt is targeted to be contained at 63.2pc of the GDP. The budget deficit is also targeted to be contained at 4.9pc of GDP.
A $15bn target for forex reserves has been set in FY18-19.
As part of the budget strategy, social protection programmes will be continued in the upcoming fiscal year.
"Our macroeconomic policy aims to address the imbalances of the external account, while protecting economic growth," the finance minister said.
"Over the medium-term we propose to continue reduction of fiscal deficit, maintain a cautious monetary stance, and embark upon next generation of reforms for strengthening investment climate, export promotion, and energy sector. Priority should be accorded to reducing losses in the public-sector enterprises and expanding tax base."
Explore the complete Budget in Brief 18-19 document here.
Revenue
The total tax revenue target is Rs4,888.6bn, of which the FBR taxes comprise Rs4,435bn.
"This target will be achieved through improved tax steps and improved tax administration. The tax base is being expanded and the per cent of tax is being reduced," the finance minister said.
With the tax rates reduced for all tax brackets, the government expects the tax net will see a considerable increase as it estimates the revenues from direct taxes to increase next year, Ismail said.It also expects indirect taxes to increase by about Rs280bn, he added.
The non-tax revenue target has been set at Rs1,246bn, according to a copy of the budget 18-19.
The provincial share in tax revenue will be increased from Rs2,316bn to Rs2,590bn, Ismail added.
Expenditure
As expected, the budget hikes current expenditures and cuts development. This is the first PML-N budget to do so. The hike in current expenditures is roughly 20pc, while development expenditure has been cut 20pc.
The share of current and development expenditure respectively in the total budgetary outlay is 80.6pc and 19.4pc. Current expenditure has been estimated at Rs4,780.4bn, while development expenditure is set at Rs1,152.1bn.
Interest payments are expected to rise 18.9pc to Rs1,620.2bn. The government has also tried to keep everyone happy, jacking up the budget for defence expenditures by 19.6pc to Rs1,100bn; pensions by 37.9pc to Rs342bn; and the civil government’s operational budget by 23pc to Rs463.4bn.
Salaries and pensions
A 10pc ad-hoc relief allowance will be provided to civil and armed forces employees with effect from July 1, 2018, according to the budget speech 18-19.
A 10pc increase across-the-board is also being proposed for pensioners, Ismail said.
Considering the difficulties of low-paid pensioners, the minimum pension is being increased to Rs10,000 from the current Rs6,000.
Similarly, family pension will also be increased to Rs7,500 from Rs4,500 previously.
The minimum pension of pensioners above the age of 75 will be Rs15,000.
Defence
The defence budget has been set at Rs1,100bn from a revised budget estimate of Rs999bn in the previous year and a 19.5pc increase over the budgeted amount for last year.
The increase in the defence budget for 18-19 is the highest since the PML-N took over in 2013.
PSDP
The size of the FY18-19 PSDP has been estimated to be Rs1,650bn, of which Rs850bn has been allocated to the provinces, while Rs800bn has been allocated to the federal government.
According to the Budget Speech 18-19 document, "Additional resources of Rs230bn [in the PSDP] will be financed through autonomous organisations, public-private partnerships, and other means. Investments in the water, road infrastructure, electricity sectors and the China-Pakistan Economic Corridor (CPEC) will be protected."
Under the PSDP, Rs47bn has been allocated to the Higher Education Commission, Rs37bn for basic health and Rs10bn for the PM's Youth Programme.
Development expenditure outside the PSDP has been estimated at Rs180.2bn for FY18-19, which is 18.4pc higher than FY17-18 estimates.
Financing the deficit
The government intends to restrict the overall fiscal deficit to Rs1890.2bn or 4.9pc of the GDP, down from the revised estimates for the year 2017-18 which stood at 5.5pc, Ismail said.
While the government expects to raise 33.4pc more in external loans, it also faces a 137.7pc jump in repayments as loans mature. In maturing loans, long-term foreign loan repayments will rise 110pc to Rs601.8bn from last year, while repayments of short-term loans will jump 337.7pc to Rs174.2bn compared to Rs39.8bn a year ago.
To finance its Rs1,890bn deficit, therefore, the government will jack up borrowing from local banks by 160.2pc — from Rs390bn to Rs1,015bn — to finance its expenditures.
The government also plans to float Sukuk bonds. The government additionally expects to generate Rs200bn from the auction of treasury bills over the last year's budgeted figure, according to the Budget 18-19 document.
Special initiatives
Exports
"Going forward, we plan to rationalise subsidies and concurrently reduce cost of production. We are making a beginning through this budget."
Five export sectors namely textiles, leather, sports goods, surgical goods and carpets shall continue to remain in zero-rated sales tax regime.
Reduced mark-up rates shall continue to be available as per SBP policy under Long Term Finance Facility and Export Refinance Facility respectively.
Incentives under various schemes of Textile Policy 2014-19 shall remain available during FY2018-19. Ministry of Commerce is also working on Strategic Trade Policy Framework 2018-23. An amount of Rs.10 billion is being allocated for various schemes under these policies.
Tariffs on various lines, which are mainly industrial raw materials, are proposed to be reduced. Details shall be presented in Part-II of Finance Bill. Tariff Restructuring shall increase competitiveness of exports and help in reducing the current account deficit.
Refunds: We are moving towards zero-rating of import materials for export sector which will significantly reduce creation of new refund claims. Refund claims currently pending will be cleared in a phased manner over the next 12 months starting 1st July 2018. After July 1, 2018 all new refund claims will be paid as per the time stipulated in law and regulations on monthly basis and there will be no delay.
Remittances
To further encourage remittances through formal channels, the government has decided to introduce a prize scheme for overseas Pakistanis. All home remittance transactions sent through commercial banks, exchange companies and other financial institutions will be included in monthly lucky draws. Details of the scheme are being finalized and shall be announced shortly by State Bank of Pakistan.
Social support
"The government will continue investment in social protection and the Benazir Income Support Programme, and will take steps for the underprivileged communities through targeted subsidy schemes. Rs125bn has been allocated to the BISP, while Rs189bn has been set aside for total subsidies. Rs10bn has been proposed for PM's Youth Scheme," the finance minister said said.
The federal government also intends to provide income support to more than 5m families, and has allocated funds to the Baitul Maal and Poverty Alleviation Fund for this purpose.
To further encourage remittances through formal channels, the government has introduced an incentive under which all home remittance transactions sent through commercial banks, exchange companies and other financial institutions will be included in monthly lucky draws, according to the Budget Speech 18-19.
Karachi package
The government announced a Rs25bn special package for development in Karachi.
"Since coming to power, the PML-N government successfully increased businessmen's trust and promoted economic activities in Karachi," the Ismail said.
"So far Rs16bn have been spent on the Green Line project in Karachi, but the Sindh government has been unable to issue contracts for the purchase of buses. Today I propose that if the Sindh government is unable to purchase the buses for Karachi, the federal government is ready to do so," the finance minister said.
"To address Karachi's chronic water shortages, the government is announcing large-scale desalination scheme to make sea water usable. This plant will be constructed through the private sector and will provide 50 million gallons of water a day," according to the budget speech.
Rs5bn will be allocated for the construction of roads, fire brigades and bridges in the coming fiscal year. Rs8bn will be set aside for expansion of the Expo Centre, he added.
'100.100.100' education package for children
A special package called the 100.100.100 programme focusing on children's development was announced by Ismail.
"This is the federal government’s commitment to ensure that 100pc of Pakistani children will be enrolled in schools, 100pc of children will be retained in schools and finally, 100pc will graduate from schools," he said, adding that the government would also pay for the transportation of female students to school.
"Even after 70 years, we the leaders of Pakistan have failed the children of Pakistan. We have denied them the light of education. No more. Even though education is a devolved subject, the federal government will help, both financially and administratively, each and every province to achieve this goal," Ismail asserted.
"This is not about politics and parties. This is a national commitment that I make today to the children of Pakistan. We will educate you. And we will insist on 100 100 100."
PM's Health Programme
The PM's National Health Programme, under which 3,000,000 families across Pakistan are already receiving coverage, will be extended to all districts in the country and will help us achieve the Sustainable Development Goals, Ismail announced.
"A survey will be held every two to three years to provide us better statistics," he added.
Another special package amounting to Rs10bn ─ along with a supplementary grant if necessary─ was announced for children's health.
"Thirty per cent of Pakistani children are stunted due to malnutrition and inadequate food, the finance minister said. "It will be tolerated no more," he said, adding that stunting would end by 2020. "This is the prime minister's promise."
PSDP
Energy
Key budgeted investments in the power sector, amounting to Rs138bn, are proposed as follows:
- Rs27.5bn allocated for installation of two 600MW coal-fired power projects in Jamshoro, Sindh
- Rs76bn have been allocated to the Dasu Hydro Power Project for stage one in Kohistan, KP
- Rs32.5bn have been allocated to the Neelum Jhelum Hydro Power Project
- Rs13.9bn have been allocated to the Tarbela Fourth Extension Hydro Power Project
"The government wants to introduce renewable energy in all sectors," Ismail said. "It is proposed that the 16pc duty on charging stations for electric cars be ended."
The customs duty on the import of electric cars is proposed to be reduced from 50pc to 25pc in addition to exemption from regulatory duty of 15pc, according to the budget speech.
Water
Overall, investment in the water sector will be increased from Rs36.7bn in 2017-18 to Rs79bn in 2018-19.
Rs 23.7bn will be allocated to the Diamer Bhasha dam. The dam will have 6.4 million acre feet live storage capacity and an installed power capacity of 4,500MWs. It will cost Rs474bn in total.
Roads
In the Budget 2018-19, an allocation of Rs310bn is proposed for projects including:
- Khuzdar-Shahdadkot Motorway
- 230km of the Lahore-Multan Motorway
- 62km of the Gojra-Shorkot Motorway
- 64km of the Shorkot-Khanewal Motorway
- 91km of the Sialkot-Lahore Motorway
- 57km of the Hazara Motorway
Rail projects
Under the China-Pakistan Economic Corridor, the government has finalised a plan to increase the speed of trains on the Main Line-I from Peshawar to Karachi by three times, according to the Budget Speech 18-19.
"The project envisages a doubling of the track from Karachi to Peshawar, and from Taxila to Havelian. This requires an investment of more than $8bn. This will enable people to travel from north to south in 12 hours or even less," the speech said.
Development of Gwadar
31 projects for the development of Gwadar are part of the proposed PSDP 2018-19 with an estimated cost of Rs137bn. They include:
- Gwadar airport and its access road network
- Improving port facilities
- Development of a desalination plant for provision of clean drinking water
- Upgradation of existing 50-bed hospital to 300 beds
- Development of infrastructure for Gwadar export processing zone
- Construction of a CPEC Institute
- Construction of dams
Tourism
Highlighting the dismal state of hotel facilities at "excellent tourist spots", Ismail proposed customs duties on "cost-effective" imported pre-fabricated structures (not locally manufactured) be reduced from 20pc to 11pc "for the setting up of new hotels/motels in hill stations including Azad Jammu and Kashmir, Gilgit Baltistan and the coastal areas of Balochistan.
The use of pre-fab structures was suggested by Ismail as an alternative to the construction of hotels, which he said is "time consuming, with greater capital cost."
Agricultural sector
Agricultural production is slated to increase, Ismail said, with the government intending to continue implementing an agricultural policy in FY18-19 "until we end the tradition of subsidies".
Estimated loans to the agriculture sector will increase to Rs1,100bn, he said.
"A second green revolution is needed for advancement in the agriculture sector," the minister explained. "The next federal government will leave all decisions regarding subsidies to the provincial governments while the federal government's focus will be on providing a favourable environment for research and development, an increase in production, access to markets and improvement in technology."
"I am happy to announce that while we had proposed a 3pc sales tax on fertiliser, the PM has approved sales tax of 2pc only on the recommendation of Sikandar Bosan, the food security minister."
The 2pc reduction in GST on agricultural machinery has been proposed from 7pc to 5pc, while a relaxation in dairy and livestock taxes has also been proposed.
"Pakistan is the 5th largest cotton grower in the world but lags behind in exports of cotton products," Ismail observed. "In order to improve the quality and quantity, the subject of cotton has been handed over to the Ministry of Food Security and Research from the Textile Ministry."
"The govt is starting an Agricultural Support Fund with Rs5bn which will support research on new kinds of seeds and plants in order to increase agri output," the minister said, adding that another Rs5bn had been set aside for the promotion of agri technology.
Entertainment
The customs duty on import of drama and film-making equipment is being reduced to 3pc, and sales tax is being brought down to 5pc.
A revolving fund will be set up to financially support the film industry and needy artists, Ismail said.
A 50pc rebate on income tax for five years is being announced for people and companies investing in film projects, and income tax will be rebated at the rate of 50pc on foreign films being produced in Pakistan.
The government has also proposed the construction of 100 sport stadiums all over the country on a cost-sharing basis with provincial governments.
Other proposals
The government has proposed the federal excise duty on locally produced cigarettes "be enhanced in respect of Tier-1, Tier-2 and Tier-3 to Rs3,964, Rs1,770 and Rs848 per thousand cigarettes respectively, according to the budget speech.
PML-N's performance
Review of PML-N's performance
"Today we are the 24th largest economy in the world," Ismail told the lower house, reviewing the government's performance over the last five years.
"The GDP growth rate was 5.4pc last year ─ it has now grown to 5.8pc, the highest in 13 years," he recalled.
Explore: 'GDP to grow 5.8pc in FY17-18': PML-N govt unveils election year report card
"In the last five years, inflation has been kept below 5pc which was up to 12pc when we took over. The budget deficit will remain restricted to 5pc this year," he said.
"The State Bank policy rate was 5.7pc which was the lowest in decades, coming down from over 9pc. The lowest interest rate in history has brought an increase in businesses" he explained.
"Exports have been under pressure... Imports have increased 17pc because of high machinery imports," he said, adding that the current account deficit had increased Rs12bn in the first nine months of FY17-18.
"The government has made all efforts, and I am sure that foreign exchange reserves will be higher in June than they are today. In the ongoing year, foreign investment has risen from $1.9bn to $2.1bn."
Opposition's reservations
Opposition's reservations
The opposition wants the government to present a budget only for one quarter, saying that the rulers cannot snatch the right of deciding a budget from the next government expected to come into power in August, after the general elections.
"I understand the pain for democracy and Constitution," said Prime Minister Shahid Khaqan Abbasi while addressing the Parliament. "We want to present the budget for continuity of the system. Whichever party comes can change the budget."
Addressing the opposition's reservation about Miftah Ismail, the newly appointed finance minister, presenting the budget, he said: "It is the cabinet's decisions and nothing unconstitutional about this."
'No right to present full-term budget'
At the outset of the session, Opposition Leader in the National Assembly Syed Khursheed Shah protested against the outgoing PML-N presenting a full-term budget instead for the remaining three months of its tenure.
"Unfortunately, the government is snatching the right of the next assembly with today's budget," said Shah. "My wish is that whichever party wins the elections, has the right to present the budget."
"This government has no ethical right to present the budget for the entire year."
"This mandate is given when a person comes into Parliament after being elected," he continued. "What pains me is that Nawaz Sharif champions the narrative 'vote ko izzat do' [respect the vote], yet you [PML-N] are destroying the honour of vote."
"You had an elected minister, Rana Afzal, but you brought in a person with no mandate through wrong interpretation of the Constitution," said Shah referring to the appointment of Miftah Ismail as the finance minister on Friday morning.
"I always say respect the Parliament and make it supreme; but once again, you are making decisions outside the Parliament. This is the first time an un-elected person is presenting the budget."
"Could PM Abbasi not have presented the budget? Even the chief minister has presented budget in the past," pointed out Shah.
Shah Mehmood Qureshi of Pakistan Tehreek-i-Insaf (PTI) shared the same sentiments as Shah, saying: "Instead of an elected minister, you [PML-N] are giving the mandate to present the budget to an un-elected person."
"A new tradition is being set," he alleged. "The leader of the opposition has said there is no moral justification for the government to present the full-year budget."
He highlighted that the budget being presented had not been endorsed by the National Economic Council (NEC). "Three CMs — of Sindh, KP and Balochistan — walked out from the meeting. What kind of democracy and government is this where three provinces are strongly expressing their distrust of the Public Sector Development Programme (PSDP), yet you want to endorse it."
Speaker Ayaz Sadiq urged the opposition leaders to keep their statements short so that the "group picture of MNAs" could be taken while there was still light.
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