New budget, new promises

By Sultan Ahmed

Thursday, JUNE 07, 2007

THE merry ministerial chorus that there will be no new taxes in the coming budget is not something new. The same has been said for several years during the pre-budget season. That does not mean there will be no readjustments in the existing taxes or regularisation of the old taxes for the greater gain of the Central Board of Revenue.

However, as this is the election year, the prime minister who is also the finance minister will be cautious and President Musharraf will be even more alert in this regard following the convulsions caused by the judicial crisis. The fact is that the new budget envisages a total outlay of almost two trillion rupees which marks an enormous increase in the current budgetary outlay. And that will include a part of the development expenditure to be met by the private sector through the public-private partnership which is to make headway in Pakistan now, imitating the European models including that of Britain.

Although Chairman of the Central Board of Revenue Abdullah Yusuf has been stressing at 10.50 per cent of the GDP, the tax-GDP ratio in Pakistan is too low and that is to be raised to 14 to 15 per cent within 5 years.

The World Bank and the Asian Development Bank which have been funding major development projects in Pakistan have also wanted that for long and miss no opportunity to underscore the urgency for such augmentation of the revenues. It is also a fact that despite the expected increase in the tax revenues next year without additional taxes, the financial or revenue deficit will be four per cent of the GDP which is high, though not by earlier standards. The percentage of the deficit is low but the volume of the deficit involved is very large because of the higher economic growth and that will express itself in terms of far larger public debt.

Despite the fact that the public sector development programme next year is to be a high 520 billion, that is only seven per cent of the GDP in a developing country with vast unemployment and under-employment. Anyway it is better than the three per cent PSDP outlay of the 1990s which was much too small.

The need for larger tax collection is too obvious. And its scope is also too evident because of the blooming business all round and the flourishing banking. And yet the government is not opting to collect the easily collectible taxes like the capital gains tax on trading in the stock exchanges and better taxing of the service sector. The zooming Karachi Stock Exchange index has touched its highest point of 13,000 and so the scope for taxing capital gains is plenty.

The hope that the hefty sales tax of 15 per cent may be reduced to 12 per cent if not to 10 per cent is not expected to materialise. That is one of the reasons why many prices are high.

Mr Navaid Ahsan, secretary general, ministry of finance, told journalists and others in Karachi that 40 per cent of the PSDP of rupees 520 billion will be spent on infrastructure and 47 per cent on the social sector. What happened to the early commitment of the government to spend four per cent of the GDP on education from next year along with a substantial increase in the outlay on the health sector?

We have not been given a specific figure of how much will be spent on power development to overcome the current gap of 1.5 million megawatts which may rise to 2.5 million megawatts next year. Currently many homes are facing load-shedding not once or twice but four to six times a day and, as a result, the black-out and the lighted periods are almost equal. We have however been told that Rs40 billion has been earmarked for the mega dams which will be used mostly for preparing feasibility and buying land for the dams. We are also told that Rs200 billion would be spent on subsidies, mostly on power.

The budget makers have two domestic problems and two external problems. The first is inflation rate which is officially at 8 per cent while the food inflation rate is at 10.5 per cent. Even supplies in plenty like that of wheat are a victim of price manipulators who hoard, control the movements and profiteer. Vegetable prices are at their peak. Imported food items like palm oil and milk powder are also high-priced. So are the local eggs. The prime minister promises to make supplies available in plenty but how exactly to do that, he is not sure in such vexing conditions.

The government is trying to solve the problem partly by raising the salaries of the federal employees by 15 per cent and pensions by 10 per cent. The provinces have to look after their own employees but they are in a quandary as they don’t have the money and will ultimately force the central government to pay up. The minimum wages of workers are also to be raised to keep them in good humour in an election year.

The State Bank of Pakistan’s tight monetary policy, which is to continue next year, has its benefits and also its limits in an economy in which the liquidity is very high and easily earned large incomes are in plenty. The government is in a dilemma as it does not know what to do next as traders remain defiant and continue to create shortages and make profits. Prime minister’s solution is to sell more and more essential goods through the utility stores but these are small in number. So, they are to be increased now by 500 and they are to sell medicines as well. Even in spite of the rise in their number, they will remain too small compared to shops which are readily and easily available to the consumers.

Since it is an election year the government is determined to hold down prices of essential items. So, it is subsidising the sale of sugar by a rupee a kilo and lower the prices of various kinds of pulses and rice. But from the indications given that the heavy import duty on palm oil is not being reduced, that would be very disappointing to the consumers. But President Musharraf has said the quality of life of the poor will change after the new budget. But a larger role being given to utility stores alone cannot do the trick.

The second problem is the fiscal deficit which next year will be four per cent of the GDP or about Rs700 million, the same as this year. That will be met through external and domestic borrowing and printing of additional currency notes which will add to the national debt substantially.

Governor of the State Bank Dr Shamshad Akhtar feels disturbed by the heavy bank borrowing by the government and making it print extra currency notes for its needs which has aggravated inflation this year too. Dr Akhtar would want the government to borrow through treasury bills and federal investment bonds and reduce the liquidity in the market instead of adding to the money in circulation and add to the demand pressure, resulting in higher inflation. But the government finds borrowing through the State Bank easier and more convenient.

The National Assembly which is charged with checking excess borrowing by the government should keep a sharp eye on its borrowing keeping in view that the tax revenues are larger than expectations. Otherwise too much of the taxes paid will go towards debt servicing and not development. And that will happen at a time when the assets of the nation are being liquidated through a rapid process of privatisation.

The third problem is the mounting trade deficit which is already 11 billion dollars after the first 10 months of the financial year. The year could end up with a total deficit of 14 or more billion dollars and that is causing a large current account deficit which is expected to be a high five per cent of the GDP and such a large current deficit is occurring despite the home remittances of $5 billion and foreign investment of $6 billion which are record figures. The World Bank and the Asian Development bank have been cautioning Pakistan against such large deficits as Pakistan cannot sustain them and maintain a high growth rate.

The solution has come through larger exports in a world in which many countries have achieved high growth through exports, particularly South-East Asian states. The import bill cannot go down much as next year’s oil import bill is expected to be 8.8 billion dollars. But what we are achieving is high growth with low exports depending primarily on agriculture and the service sector.

Mr Ahsan says the government has sent three reports to the National Assembly. They relate to (1) economic management, (2) debt management and (3) fiscal management. They cover the financial system as a whole. The standing committee of the ministry of finance should study the reports in detail with the help of consultants if necessary. They cover the entire financial and economic sector and the National Assembly can get control over the financial sector.

He has also said that the investment in Pakistan will rise to 23.8 per cent of the GNP next year from 23 per cent in the current year. That is happy news as for long the rate of investment has been as low as 17 and 16 per cent while a 25 per cent investment was held as ideal. Now it has come to 23.8 per cent and the 25 per cent target is not far off.

The textile industry is to be exempt from import duty on its machinery and components. This can be a very welcome development as it will increase investment in textiles and reduce the cost of production and exports. We need a far larger output to increase the exports and the producers should be given all possible incentives.

http://www.dawn.com/2007/06/07/op.htm#1