Subchapters:

• Basic data
• Public finances and the state budget
• Banking system
• Tax system

Basic data

According to cheeroutdoor.com, Pakistan’s economy grew by 3% of GDP in real terms in fiscal year 2021/22 (July-June), following negative growth during the pandemic. The expected engine of growth of 4% in the coming year should primarily be strong exports. Nominal GDP reached 299 billion USD and in terms of GDP per person, Pakistanis should improve to 6,100 USD per inhabitant (according to purchasing power parity). Total public debt at the start of the 21/22 financial year was 83.5% of GDP, of which domestic debt covered 55% and external debt 28.5%. During the first nine months of the current fiscal year 2021/22, the fiscal deficit was 4% of the country’s GDP, which equates to just under $12 billion, up from $7.4 billion last year. The country’s budget focused primarily on increasing capital spending, which had stagnated in previous years. The government compensated for the revenue losses by raising taxes on petroleum products and other imported items. However, a high deficit will ensure that the public debt-to-GDP ratio continues to rise, increasing the risk of a sovereign debt crisis and leaving the country reeling from the risk of default. The current account posted a deficit of $1 billion in the current financial year to March 2022, up from $275 million last year, due to higher oil prices, higher import duties and normalization of import demand. The current account deficit is expected to widen to 5.8% of GDP. As in the past, Pakistan will continue to be supported by multilateral and bilateral lenders. Inflation is estimated to be stable at an average of 9%.

Pakistan is heavily dependent on imports, making it vulnerable to global changes. Agriculture and the textile industry, which account for more than 60% of Pakistan’s exports, have suffered heavy losses during the pandemic. The country is struggling with fluctuating inflation and a chronic trade deficit, but has received an unprecedented record number of remittances during the pandemic (mainly from the Pakistani diaspora in the Middle East, UK and US) – in the current fiscal year to March 2022, remittances from overseas workers reached $23 bn (2 billion USD last year); an increase of 7.1%. Remittances above USD 2 billion per month have continued to grow at an unprecedented rate since June 2020. The country has enjoyed many benefits from the GSP+ system, but may soon lose them due to ongoing human rights issues. In case of loss of GSP+ benefits, the local economy is unable to successfully diversify export flows. The largest employer in the country is the agricultural sector with 42% of the population contributing 19% to the country’s GDP. This ratio is decreasing every year, while the contribution of industry (20%) and services (62%) to GDP is increasing. Pakistan exports low value added products and necessarily imports consumer goods, heavy machinery and technology. The main exports are clothing, textiles, cotton, footwear, surgical instruments, sports equipment, gems, rice, sugar, and fruit. Imports are dominated by, for example, mechanical, electrical and optical devices, machinery, iron, steel, construction materials, palm oil, LNG, medical products, chemical products, and plastics.

Pointer	2019	2020	2021	2022	2023
GDP growth (%)	1	-2.8	4	3	4.1
GDP/population (USD/PPP)	4,898.00	5,503.80	5,790.00	6,100.00	6,390.0
Inflation (%)	9.4	9.5	9.5	8	5.9
Unemployment (%)	6.9	12.4	11	10.3	8.7
Export of goods (billion USD)	23.5	22	28.3	33.5	37
Import of goods (billion USD)	49.7	45.8	72.6	82.5	88.6
Trade Balance (Billion USD)	-21.7	-21.6	-38	-41.9	-43.9
Industrial production (% change)	-2.8	-6.2	12.4	3.5	4.9
Population (millions)	216.6	220.9	225.2	229.5	233.8
Competitiveness	ON	ON	ON	ON	ON
OECD export risk	07.VII	07.VII	07.VII	ON	ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance	2021
State budget balance (% of GDP)	-7.8
Public debt (% of GDP)	64
Current account balance (billion USD)	-12.3

Taxes	2022
AFTER	29%
F.O	0-35%
VAT	17%

The fiscal year in Pakistan runs from 01/07 of the current year to 30/06 of the future year. The fiscal deficit is likely to narrow to around 6.6% of GDP in 2021/22 from 7.8% last year. It is expected that the deficit will be around 7% of GDP in the coming years. The corporate income tax rate remains at 29%, which is high by regional standards. Previously granted exemptions from corporate income tax are cancelled. Indirect taxes on fuel and utilities are being increased to boost central government revenue. The tax system remains complex and inefficient. Most citizens remain outside the tax net.

The current government budget was 8.5 billion. PKR ($46 billion) and is focused on inclusive and sustainable growth and investment and has set a growth target of 4.8% of GDP. The fiscal deficit was budgeted at PKR billion, representing approximately 6.3% of GDP, down from 7% the previous year. Planning for the next budget (June 2022) is constrained and affected by increased inflation and weak economic growth.

Pakistan has a high proportion of public debt which tends to grow. The country is long-term dependent on imports from abroad, as it is unable to cover the population’s demand from its own production. To finance its current account imbalance, Pakistan is dependent on remittances from the Pakistani diaspora abroad. Despite the pandemic, the current account deficit improved slightly in the 2020-21 fiscal year due to higher inflows of remittances. These remittances cover Pakistan’s consumption, which the state is unable to meet on its own. The current account deficit narrowed to $billion (down 58%) from $ billion. The current account deficit for July-October 2021 was $ billion. The country is indebted both to its partners (China, countries of the Persian Gulf) and also to international organizations (IMF, World Bank, Asian Development Bank).

International rating as of 2021

Fitch rating: B-

Moody’s rating: B3

Standard & Poor’s rating: B-

Banking system

Pakistan has a largely underdeveloped financial sector, with large numbers of residents and small businesses lacking access to basic banking services. Banks have strengthened their capital positions in recent years and increased their risk-weighted capital adequacy ratio to 18.3% in June 2021. An unfavorable indicator remains the high burden of non-performing loans on banks, which stood at 8.6% at the end of June 2021, which is a relatively low level by Pakistani standards, but high by international standards. This is basically due to political interference in credit decisions.

In Pakistan, the banking system is mostly privatized, consisting of commercial, foreign, Islamic banks, development financial institutions and micro-finance institutions. The most important foreign banks are Standard Chartered Bank, Deutsche Bank AG (for corporate clients only), Citibank NA (for corporate clients only). However, the largest in Pakistan is the so-called “Big Five” group, which includes Allied Bank, Habib Bank, MCB Bank, National Bank and United Bank. Banks lend primarily to businesses (almost always in the form of loans) and the government (usually in the form of buying bonds). Loans to businesses in the private sector make up more than three-fifths of the banks’ total loan portfolio.

Recently, Islamic banking is developing the fastest, which is more supported by the State Bank of Pakistan (SBP – Central Bank). By 2025, Islamic banking is expected to account for one-third of total banking, a significant increase from December 2020, when Islamic banks had a share of between 17-18%. Islamic banking in Pakistan works without fixed interest rates for depositors; the same applies to loans. Any loan provided by Islamic banks must be interest-free.

In April 2022, the SBP raised interest rates to 12.25% in an effort to maintain price and foreign exchange stability amid a sharp devaluation of the rupee.

Tax system

Pakistan’s tax system consists of direct taxes (income tax) and indirect taxes (customs duty, central excise duty, sales tax, stamp duty and property tax which relates to commercial transactions). In Pakistan, taxes are considered federal levies. The federal government regulates all direct taxes and indirect taxes like customs duty, central excise duty and sales tax. However, provincial governments also collect taxes – land revenue, agricultural income tax, property tax and other local taxes including local sales tax. Its legislative form is published on the website of the Federal Board of Revenue (FBR). These are two federal laws.

Rates:

• Personal income tax (PIT): basic rate 35%
• Corporate Income Tax (CIT): Basic rate 29% (up to PKR 600,000 0%, above PKR 75 million 35%)
• Value Added Tax: 17%

Direct taxes:

• banking companies: 35%
• public companies: 29%
• private companies: 29%
• small companies: 21%
• foreign companies: 29%

Indirect taxes:

• Withholding taxes (withholding tax – in practice widely applied to foreign companies operating in Pakistan)
• gross royalties: 15%
• dividends: 15%
• interest: 10%

Sales tax:

• deliveries and import of goods: 17%
• services 13-16% (depending on the province)
• Commercial import of goods +3% (over and above standard VAT)

Duties are collected on importation at various rates classified according to the Harmonized System (HS) regulation. Tariff rates range from 0 to 100%. Federal Excise Tax (FED) is levied on certain goods, their importation or provision of services. The service sales tax, which is a substitute for the FED under the Constitution, must be collected by the provinces based on their jurisdiction. The Czech Republic has an agreement with Pakistan on the avoidance of double taxation.

In the expected outlook to 2025, Pakistan ranks 65th out of a total of 82 countries, due to the slow pace of tax reform compared to other countries. In an effort to curb tax evasion, the FBR will continue its efforts to expand its database of potential taxpayers and track comprehensive retail sales. In addition to inefficiency and corruption, it suffers from frequent leadership changes and political interference, which hinders institutional autonomy. Private businesses will continue to be most concerned about Pakistan’s tax policy framework due to lack of policy consistency, patchy application and cumbersome legal procedures.