Federal govt likely to restrict fiscal deficit to 8.5-9.0% in budget 2020-21

– Federal Budget 2020-21 is likely to be ‘Neutral to Positive’ for the stock market, where the government is likely to prioritize relief and growth over fiscal discipline to reenergize the economy in the aftermath of losses incurred due to the COVID-19 pandemic

– The government wants to keep Federal Board of Revenue (FBR) revenue collection target at around Rs 4,800-5,100 billion

KARACHI: The federal government will likely to restrict fiscal deficit in the budget to 8.5-9.0 per cent of Gross Domestic Products (GDP) for the fiscal year 2020-21 (6.5-7.0% excluding COVID-19 related expenses), where expenditures relating to COVID-19 are likely to be marked separately.

In an special report on Budget 2020-21 likely to be announced on June 12, the Topline Securities said, “the key challenge for the government will be restricting the fiscal deficit for the upcoming year as not only the government will have to factor in higher expenditures relating to COVID-19 outbreak, but also take hit on revenues because of the slowdown in overall economy.” The budget is likely to take into account the implications of COVID-19, where government will try to ease the pain of the masses due to the pandemic by focusing on job creations and relief for the businesses, it added.

As per news reports, government is likely to earmark Rs 1 trillion for dealing with COVID-19 pandemic and for providing relief to the business community. Considering the recession, the government may try to boost economy through providing incentives to the Agriculture and Construction sectors.

On the revenue front, the federal government is in talks with the IMF to set collection targets for next year. The government wants to keep Federal Board of Revenue (FBR) revenue collection target at around Rs 4,800 billion, whereas IMF wants the same to be close to Rs 5,100 billion.

The report said, “the government will once again set an ambitious FBR revenue collection target of Rs 4.8-5.1 trillion, which we believe will be difficult to achieve.”

The Federal Budget 2020-21 is likely to be ‘Neutral to Positive’ for the stock market, where the government is likely to prioritize relief and growth over fiscal discipline to reenergize the economy in the aftermath of losses incurred due to the COVID-19 pandemic.

Positive budgetary measures are likely for Tractor manufacturers, Fertilizers and Cements, while budget is likely to remain largely Neutral for Banks, IPPs, E&Ps, Steel, Textile, Pharma and Consumers.

The report said that market to gradually improve in the lead up to the Federal Budget announcement, where key focus for investors is likely to be on any potential reliefs in the shape of Capital Gains Tax (CGT), Tax on Dividends, incentives for other listed sectors as discussed further in this note.

It said that local liquidity will improve as flows directed towards Fixed Income (FI) are now likely to be routed towards equity markets as interest rates on FI securities (including NSS) have come down by 400-500bps in the last three months. Over-weight on Oil and Gas Exploration, Cements and Fertilizers; Market-weight on Banks, Power, OMCs, Steel, IPPs, Chemicals and Pharmaceuticals; and Under-weight on Automobiles and Insurance.