Karachi, August 30, 2021 (PPI-OT): Pakistan Economy: FY21 ends with fiscal deficit at 7.1%

In the latest fiscal accounts, FY21 ended with a fiscal deficit of 7.1% compared to 8.0% in FY20 while primary balance exhibited a larger than expected deficit of 1.4% (Govt. estimated 1.1% primary deficit in budget documents) in contrast to 1.8% in the same period last year.

The larger primary deficit was driven by 4QFY21 deficit of 2.3% was due to, i) fall-through of 40.4% of annual defence spending in the last quarter, ii) Govt. allocating funds for retiring PHPL debt, and other payments to reduce monthly flow of circular debt hence, pushing up subsidies, and iii) larger development related spending.

With IMF review around the corner, we do not see any significant differences emerging over fiscal targets (Govt.’s primary deficit target: 0.7% compared to adjusted IMF’s estimate: 0.4%) while Govt.’s spectacular performance in Jul’21 on tax collection provides confidence on authorities’ ability to achieve full year targets.

The market is currently treading on a narrowband despite cheap valuations (KSE-100 index P/E: 6.0x), and a peaceful transition of power in Afghanistan. Potential positive developments on IMF front could ignite positive sentiments, passing way for market’s strong performance in the med run. We continue advocating to build positions in Cements, Steel, Construction-Allied, Textiles, and Techs.