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Old Thursday, June 14, 2007
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A very good budget



By Ikram Sehgal
Thursday,June 13, 2007

Every federal budget is usually better than the previous year, and this year it is even more so. Presented by Minister of State for Finance Omar Ayub on June 9, it had a three-fold purpose: (1) to try and alleviate the poverty of ordinary Pakistanis, (2) provide incentives for greater investment and (3) to provide a favourable environment for general elections at the end of this year. Glaring anomalies exist and bigger incentives should have been given for the agriculture sector, the mainstay of Pakistan's economy.

The significant rise per capita income has largely failed to improve the standard of living of a vast majority of the people, the gains being largely restricted to the already affluent. With greater income disparities, the government has also failed to stop the sharp increase in prices of items of daily use, double-digit rise in food inflation making ordinary people spend a greater part of their income to feed their families. Food inflation is the core inflation for all intents and purposes. Some consumer essentials will be subsidized through the utility stores to soften the impact of inflation on the salaried class. This mechanism cannot fully reach our masses and a vast majority will continue to suffer. More concrete measures should have been taken at the wholesale level to keep prices under control. In the face of subsidies of almost Rs100 billion for WAPDA, KESC and PIA, just to stay afloat, Rs 2.5 billion earmarked for food inflation is not enough.

With inflation and unemployment adversely affecting the lives of ordinary people, other factors contributory to their miseries include electricity shortages, lawlessness scaring away investors and the growing public (and international) perception that the country is drifting in the wrong direction. To compensate for inflation, salaries have been increased, scales of lower grade employees have also been improved but the prices of essential items need to be addressed to focus on alleviating the sufferings of the common people. One good thing has been the 15 per cent increase in pensions, with 20 per cent for those who retired earlier. Even though the much recommended formula for pensions to be equal for all persons equivalent in rank has not been accepted as yet, at least some relief is there.

Business leaders are generally upbeat about 2007-08 budgetary projections, some are wary of the coming elections, wanting a clear demarcation between politics and the economy in order to take Pakistan's economic growth into the consolidation phase. Budgetary re-thinking needs to be done to alleviate the sufferings of the textile sector and revive the chemical and leather sectors. A huge development outlay has been made for education, infrastructure, health, port and shipping, communication, transportation and automobile sector. This is excellent, they needed that monetary infusion. Billions of rupees have also been earmarked for social sector development.

The Planning Commission noted that (1) the existing infrastructure is quite unsuitable even by present standards and will have to be updated to international standards in scale, quality and management efficiencies within the next five to six years so that it can be used optimally, (2) better coordinated use of various modes of transport would include road, rail, ports and air traffic to reduce the cost of doing business for both domestic and foreign traders and (3) one must prepare for energy efficiencies and other nodal changes that will occur in this century.

A comprehensive transport policy will be developed during 2007-08. The Karachi port presently handles about 30 million tons, with Port Qasim handling about 10 million tons, annually. Of 44 airports maintained by the Civil Aviation Authority, only 25 are operational. Development of port infrastructure and rationalization of port charges will cater for trans-shipment through the landlocked port concept with enhanced private sector participation. Rationalization of airport charges and the development of airports through the private sector are also planned. Railways is being transformed it into a corporate entity, the "business plan" envisaging a professional CEO.

The Real Estate Investment Trust (REIT) proposal under the Finance Bill FY08 is an innovative measure. Tax-evaded money invested in land and property can be whitened by selling the assets to REITs, no questions will be asked and there will be no capital gain on the property transaction between a seller and the REIT, with no real cause to hide the difference between the book and the market value.

The actual monetary expansion during FY05 (Rs479.4 billion) was worrying, this decelerated in FY06 amounting to slightly higher than Rs450 billion. With more than a month to go through FY07, incremental money supply during the year has so far risen to Rs480.3 billion or 14.1 per cent higher compared with Rs460 billion or 13.5 per cent provided in the credit plan for FY07 and Rs358 billion or 12.1 per cent in the corresponding period of FY06. Foreign debt servicing is expected to go up by 16 per cent to Rs56.4 billion against Rs48.4 billion this year.

Similarly, foreign loan repayment will increase by 16.5 per cent to Rs62.9 billion next year in contrast to paying back Rs54 billion during the current year. The massive increase in debt servicing is mainly because of the 67 per cent increase in the servicing of domestic debt, which increased from Rs191 billion in budget estimate of 2006-07 to Rs318 billion in budget estimates of Rs 2007-08.

The scope of activities and operations of the Central Board of Revenue have been enhanced by giving appropriate autonomy and re-constituting it as the Federal Board of Revenue. The FBR would implement tax administration reforms; promote voluntary tax compliance; adopt modern tax administration methods, information technology systems and policies in order to consolidate assessments; improve processes, organize registration of taxpayers, widen the tax base, and make departmental remedies more efficient, including enforcement.

The shortfall in customs duty and sales tax collections, over Rs60 billion during the current fiscal, was bridged by the robust growth of 50 per cent plus in income tax collection. The tax collection target of Rs835 billion set for this fiscal year is expected to be achieved by the end of June. The budgetary measure will help enhance the tax-to-GDP ratio, broadening the tax base and improving the documentation of the economy. Budgetary measures relating to sales tax and federal excise aimed at providing relief to the taxpayers by rationalizing tax rates, thereby creating a conducive and business-friendly environment.

The opposition calls it a budget for the rich at the expense of the poor. Other than pointing out shortcomings and contesting the statistics, no concrete remedial measures have been proposed made by the government's detractors. Within its resource constraints the government has done as well as it could.

The writer is a defence and political analyst. Email: isehgal@pathfinder9.com


http://www.thenews.com.pk/daily_detail.asp?id=60472
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