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Default Overview Of The Economy

source: (Ministry of Finance Government of pakistan)

OVERVIEW OF THE ECONOMY:


Pakistan's economic recovery has gained further traction during the fiscal year 2004-05, with the economy expanding at its fastest clip in two decades. The exceptionally strong growth was underpinned by accommodative macroeconomic policies, growing domestic demand, renewed confidence of private sector, fiscal discipline and competitive exchange rates.

The outgoing fiscal year has indeed been an eventful year for Pakistan's economy. The year has posted several multiyear “firsts”. Pakistan's real GDP growth of 8.4 percent in 2004-05 is the fastest pace in two decades; the fifth time in the country's history that it exceeded 8 percent growth mark; Pakistan positioned itself as the second fastest growing economy after China in 2004-05; its per capita income crossed $ 700 mark; Pakistan achieved highest ever production of cotton (14.6 million bales) and wheat (21.1 millio n tons) in 2004-05; it has seen the largest ever expansion of private sector credit in 2004-05; exit from the IMF Programme marks an important milestone; Pakistan became the fourth sovereign to issue an Islamic Bond (Sukuk), following Malaysia, Qatar and Bahrain; the country's public and external debt burden declined to their lowest in decades; current account balance slipped into the red after posting surpluses for three consecutive years; and inflation at 9.3 percent is the highest in 8 years.

Pakistan is in the midst of an economic upturn. Since 2002-03, the economy has mounted a strong recovery with a sustained improvement in prospects. During the fiscal year 2004-05, many of its macroeconomic indicators show marked improvement over last year. The most important achievements of the year include: the fastest pace in real GDP growth, powered by stellar growth in large-scale manufacturing, a sharp pick up in agriculture, a continuing robust performance in services, and an extra-ordinary strengthening of consumer demand; a double-digit growth in per capita income in dollar term, reaching $ 736; investment upturn gaining a stronger footing, particularly private sector investment which remained buoyant owing to a rare confluence of various positive developments; an unprecedented increase in credit to private sector for second year in a row; sharp increases in the consumption of oil,
gas, electricity and coal reflecting rising level of economic activity; fiscal deficit remaining on target despite Rs. 50 billion shortfall in revenue on account of lower collection of petroleum development levy (PDL); higher than targeted collection of taxes; a high double-digit growth in exports and imports; workers' remittances maintaining their momentum; a continued accumulation of foreign exchange reserves and stability in the exchange rate; a sharp decline in the public and external debt burden; privatization programme continued to maintain its robust momentum; launching of first ever Islamic Bond (Sukuk) in international capital markets; and the performance of Eurobond remained in line with the markets with the spread over US Treasury undergoing further compression.

It is not uncommon to see pressures building up on prices, trade and current account balances when economic activity accelerates. Pakistan's economy is undergoing structural shifts that are fueling rapid changes in consumer spending patterns. Three years of strong economic growth complemented by record – low interest rates and the ongoing structural shift of many households in Pakistan toward higher consumption have injected new life into domestic spending. The extra-ordinary surge in domestic demand in conjunction with unprecedented rise in oil prices fueled import demand which more than offset the improved outcome for exports. Accordingly, this year has witnessed widening of trade deficit more than what was envisaged at the beginning of the year. With trade gap widening, the current account balance slipped into the red after posting surpluses for three consecutive years. This year has also seen inflation rising to 8 years high, hurting the poor and fixed income groups the most. In particular, food inflation at high double-digit has put extra-ordinary burden on poor segment of the society as they spend bulk of their income on food items. A surge in domestic demand on the one hand and supply side shocks emanating from rising commodity and oil prices on the other, have been responsible for the sharp pick up in inflation this year.

This year has seen improvements in many macroeconomic indicators along with improvements in social and living conditions indicators. Results from the recently concluded Pakistan Social and Living Standards Measurement (PSLM) Survey show a marked improvement in social and living conditions indicators. Key indicators such as literacy rate, gross and net enrolment in primary, middle and matric levels; access to sanitation and safe drinking water; use of electricity and gas as source of lighting and cooking fuel, respectively; various health indicators such as child immunization and treatment of Diarrhea, have all shown marked improvements over the last 4 – 7 years. While socioeconomic and macroeconomic polices pursued during the year have had a strong influence on across-the-board improvement, an increasingly broad and dynamic global recovery has aided Pakistan in this endeavor.

Global Economic Environment From the developing countries' perspective, the global economic environment this year has been relatively less benign than last year. In terms of economic recovery, the world economy enjoyed one of its strongest years of growth (5.1%) in 2004 and this momentum is expected to continue this year, albeit at a more moderate pace (4.3%), owing to higher and volatile oil prices and rising interest rates. Although the global economy posted strong growth in 2004, the overall picture, however, hides growing divergence across regions. Growth in the United States was stronger than expected on the back of strong domestic demand but it was disappointing in Europe and Japan – the two major growth poles of the world economy,reflecting weak domestic demand and equally weaker export performance.

The story of emerging markets is altogether different. Real GDP growth in 2004 exceeded expectations in almost all regions. In emerging Asia, China's growth momentum remained very strong while growth in India also remained robust. Pakistan's growth performance in emerging Asia has also been extra-ordinarily strong on the back of strengthening domestic demand and robust global economic expansion. In ASEAN region, Indonesia, Malaysia, Thailand and Philippines posted growth in the range of 5-6 percent. While South Asia remained a strong performer on account of sharp pick up in growth in Pakistan and India, Sri Lanka and Bangladesh also experienced growth of over 5 percent. Robust global growth of last two years has strengthened the external demand environment, which contributed to the sharp pick up in growth in developing countries via strong increases in exports. Pakistan also benefited from healthy external demand environment as its exports continued to grow at high double-digit during the last two years.

Notwithstanding strong global economic expansion supporting growth in developing countries, several other factors have impacted these countries adversely to varying degrees. These factors include: rising oil prices, sliding dollar, rising inflation and interest rates. This year has seen unprecedented rise in oil prices on the back of rising demand and a series of supply disruption including capacity constraints in raising supply. Although the main consumers of oil continue to be the industrialized world (US, OECD Europe, and Japan together consume about half of annual oil output) they have at the same time prepared themselves to face oil price volatility. Over the last 30 years, they have succeeded in reducing oil intensify or use of oil per unit of output by one-half. It is the oil-importing countries who are severely affected by the unprecedented rise in oil prices in several ways. Firstly, these countries are less oil efficient despite the fact that their oil intensity, on average, has declined by one-third; secondly, their foreign exchange reserves are relatively low and their balance of payments are fragile. Even a temporary period of higher oil prices can force substantial adjustment in domestic consumption at a considerable cost to growth and poverty reduction. The fiscal impact can also be significant when domestic petroleum products prices are not adjusted accordingly. During the current fiscal year, Pakistan had to face serious difficulties in managing the cost of unprecedented rise in oil prices. In order to shield its domestic consumers and industries from higher oil prices, it absorbed a fiscal cost of Rs.50 billion in fiscal year 2004-05. Furthermore, it had to pay additional $ 700 – 800 million in oil import bills.

The sliding dollar as a result of widening US current account deficit, raised the debt burden of developing countries on account of valuation effect. During the first nine months of the current fiscal year, Pakistan's external debt increased by $628 million due to valuation effect alone. However, given the present outlook of exchange rate movements, particularly weakening of Euro after France's rejection of the European Union constitution, a further decline in valuation effect is expected in the fourth quarter of the current fiscal year. In fact, after the French rejection, Euro was trading at a 7-month low of $ 1.23; and Japanese Yen at 108.4. These are good signs for Pakistan as its external debt would decline further during the fourth quarter of the year if the decline in non-US dollar currencies continues.

The surge in international oil prices coupled with an unprecedented rise in world price of commodities combined to spark inflationary pressure not just in Pakistan, but in the global economy. Rising interest rate, reflecting a gradual tightening of monetary cycle to counter inflationary expectations, raised the cost of borrowing for developing countries. This cost is likely to adversely affect the balance of payments of developing countries, their fiscal position as well as prospects for growth.

GDP Growth Real GDP grew by 8.4 percent in 2004-05 as against 6.4 percent last year and surpassed the target (6.6%) by a wide margin. This is the third year in a row when Pakistan overshoot its growth target by a wide margin. The sharp pick up in growth this year is aided by a stellar performance in large-scale manufacturing, impressive recovery in agriculture and a strong growth in services sector. This year's growth is truly broad-based as each subsector has recorded strong growth. Large-scale manufacturing grew by 15.4 percent against the target of 12.2 percent and last year's achievement of 18.2 percent. Growth in large-scale manufacturing is also broad-based as many sub-sectors registered a high double-digit growth. Agriculture posted a growth of 7.5 percent against the target of 4.0 percent and last year's achievement of 2.2 percent. The services sectors registered an equally strong growth of 7.9 percent, aided by remarkable growth in finance and banking sector (21.8%), wholesale and retail trade (12.0%); and a modest growth in transport and communication (5.6%). With 8.4 percent growth, Pakistan has joined Singapore to emerge as the second fastest growing economy of Asia after China in 2004-05 – an achievement for which every Pakistani should feel elated. This does not mean that Pakistan has joined the East Asian league, including China, in terms of prosperity and living standards. To join the league, it would require a rapid growth over a prolonged period for which, much more efforts would be required. This year's growth is however, underpinned by supportive macroeconomic polices and benign financial market conditions.

Agriculture After four years of weak and fragile growth, this year has seen agriculture staging a smart recovery by posting a growth of 7.5 percent on the back of an unprecedented rise in the production of cotton (14.6 million bales) and wheat (21.1 million tons) crops. These two crops account for over 24 percent of the value added in agriculture. Stellar performance of these two crops helped agriculture staging an impressive recovery in 2004-05. A 7.8 percent rise in area under the crop, higher ball bearing, use of improved quality of pesticide resulting in low pest pressures, and favourable weather condition for growth and development of the crop are responsible for the unprecedented rise in cotton production. The rise in support price, adequate and timely supply of inputs including fertilizer, availability of certified seed and above all, the widespread and timely winter rains have helped in achieving higher than targeted wheat production. Sugarcane production was down by 15.2 percent on the back of severe water shortage during Kharif season. Rice, another water intensive crop, grew by 2.9 percent over last year. Major crops, accounting for 37.1 percent of agricultural value added, registered highest growth (17.3%) in decades as against 1.8 percent last year. Minor crops, contributing 12.2 percent to overall agriculture, grew by 3.1 percent as against 2.6 percent last year. The performance of livestock – the single largest contributor to overall agriculture (46.8%) – has remained lackluster at best on account of total neglect by every government all along.

Water situation improved considerably with the passage of time during the current fiscal year. The water availability for Kharif season (for crops such as rice, sugarcane and cotton) has been 12 percent less than the normal supplies. The water availability for Rabi season (for crops such as wheat) as of end March 2005 was 36.5 percent less than the normal availability. Water situation, however, improved after the widespread winter rain of January – March 2005. A higher than expected snowfall on the mountains during the same period is going to help fill the reservoirs during the summer time. This will further improve the water situation for Rabi and Kharif 2005-06.

Manufacturing

Manufacturing sector in general and large scale manufacturing in particular, continued to maintain their impressive performance for the second year in a row. Overall manufacturing, accounting for 18.3 percent of GDP, registered an impressive growth of 12.5 percent against the target of 10.2 percent and last year's achievement of 14.1 percent. Large-scale manufacturing, accounting for 69.5 percent of overall manufacturing and 12.7 percent of GDP, registered a sharp pick up of 15.4 percent as against the target of 12.2 percent and last year's achievement of 18.2 percent. A 15.4 percent growth in large-scale manufacturing over a very high base of last year, is one of the important developments of fiscal year 2004-05. Various factors including accommodative monetary policy, financial discipline, consistency and continuity in policies, strengthening domestic demand, continuously improving macroeconomic environment, a stable exchange rate, continued global economic expansion fueling exports growth and a general “feel good” environment have been responsible for sustained high growth in large-scale manufacturing. Growth in this sector has been broad-based as many sub-sectors registered a high double-digit growth.

Construction

Construction sector has been one of the star performers of the fiscal year 2004-05. As against a sharp down turn of 6.9 percent last year, this sector has recorded equally sharp upturn of 6.2 percent this year. Last year's decline was mainly caused by a massive global increase in the prices of iron and steel because of the ‘China factor'. Implicit deflator for construction increased by 28.2 percent last year, resulting in decline of 6.9 percent in value added of construction at constant price of 1999-2000, despite the fact that this sector grew by 19.4 percent at current price that year. During the last two years, the government has taken various budgetary and non-budgetary measures which are now yielding positive results. Construction activity in Pakistan has gathered momentum; the demand for construction-related materials has surged. Many national and international real estate developers have launched or are launching construction projects in Pakistan.

Per Capita Income

Per capita income is one of the main indicators of development. It simply indicates the average level of prosperity in the country or average standard of living of the people in a country. Per capita income defined as Gross National Product at market price in dollar term divided by the country's population, grew by an average rate of 13.5 percent per annum during the last three years – rising from $579 in 2002-03 to $736 in 2004-05. Per capita income in dollar term registered an increase of 12 percent over last year – rising from $ 657 to $ 736. The main factor responsible for the sharp rise in per capita income include: a sharp pick up in real GDP growth, stable exchange rate, and rise in inflow of workers' remittances.

Pakistan's economy is undergoing structural shifts that are fueling rapid changes in consumer spending patterns. In particular, the middle classes are becoming an increasingly dominant force. Pakistan's per capita real GDP has risen at a faster pace during the last two years (4.4% in 2003-04 and 6.5% in 2004-05), leading to a rise in average income of the people. Such increases in real per capita income have led to a sharp increase in consumer spending during the last two years. As opposed to an average annual increase of 1.4 percent during 2000-2003, real private consumption expenditure grew by 8.2 percent in 2003-04 and further by 16.8 percent in 2004-05. The extra-ordinary strengthening of domestic demand during the last two years points to the following facts. First, the higher consumer spending feeding back into economic activity is likely to support the on-going growth momentum. Second, it suggests the emergence of a strong middle class with buying powers – good for business expansion. Third, extra-ordinary rise in consumer spending over the last two years appears to have contributed, in part to building inflationary expectations in Pakistan.

Investment

Investment is a key determinant of growth.During the fiscal year 2004-05, gross fixed capital formation or domestic fixed investment grew by 15.6 percent as against a sharp rise of 17.4 percent last year. Although the growth in domestic investment was marginally slower than last year, the composition of investment between private and public has changed considerably. Private sector investment grew by 19.3 percent this year as against a growth of 9.6 percent last year. Public sector investment on the other hand registered marginal decline of 0.4 percent as against a hefty 36.8 percent increase last year. In other words, the growth in domestic investment was largely a public sector phenomenon last year but this year, it was entirely private sector driven.

As percentage of GDP, total investment is provisionally estimated at 16.9 percent - slightly lower than last year (17.3%). Fixed investment is estimated at 15.3 percent of GDP this year versus 15.6 percent last year. A marginal decline in the rate of fixed investment on the one hand and a sharp pick up in economic growth on the other, simply indicates the rise in efficiency of capital. In other words, it simply suggests an increase in capacity utilization or gains in productivity.

Inflation

Inflation, as measured by the changes in the Consumer Price Index (CPI), averaged 9.3 percent during the first ten months (July – April) of the current fiscal year as against 3.9 percent in the same period last year. At 9.3 percent, inflation is at 8 year high in 2004-05. Food inflation recorded at 12.8 percent compared with 4.9 percent for the same period last year. Non-food inflation rose to 6.9 percent as against 3.3 percent in the same period last year. Core inflation, arrived at by excluding food and energy inflation, also indicated a rising trend for the period under review, increasing from 3.3 percent to 7.4 percent.

The sharp upturn in inflationary trend is caused by demand pressures on the one hand and supply shocks on the other. Three years of strong economic growth in succession have given rise to the income levels of various segments of society. The rising levels of income have strengthened domestic demand which contributed to the rise in inflationary pressure. Supply side pressures emanated from a combination of factors. Successive increases in the support price of wheat in the last two years (Rs.100 per 40 kg), shortage of wheat owing to less than the targeted production (in 2003/04); and the mismanagement of wheat operation by two provinces, resulted in sharp increases in the prices of wheat and wheat-flour. The price of other food items registered sharp increases owing to ‘sympathy effect' on the one hand and demand pressure on the other. The pass-through impact on CPI-based inflation of an increase in wheat support price is both significant as well as empirically well established. In addition, a surge in international oil prices coupled with an unprecedented rise in world prices of commodities have combined to spark inflationary pressure.

House rent index also played an important role in building inflationary pressure this year. With second largest weight in the CPI (23.4%) after food (40.3%), the persistent rise in this index has contributed substantially to the increase in CPI – inflation. From a level of 3.8 percent last year, the index recorded an increase of 11.1 percent.

Cognizant of the impact of inflation on the economy, most importantly its adverse and disproportionate effect on the poor and vulnerable segments of society as well as its deleterious effect on purchasing power of the fixed-income group, the government responded in a multi-pronged manner to the rise in the price level. A strategy of regular monitoring of domestic stocks of key commodities and their prices was adopted, by which the government was able to respond in a timely manner to shortages by importing substantial quantities of wheat and other essential commodities to augment supplies. To ease off the demand pressures generated by the rising level of economic activity, the State Bank of Pakistan began to tighten monetary cycle rather aggressively of late. The easing of demand pressure through monetary policy and improving the supply situation of food items, either through raising their production (for example, wheat this year) or through imports, are likely to put downward pressure on general price level in coming months.

Monetary Policy A gradual shift in monetary policy stance has been observed for the last 15 -16 months as inflationary pressure kept on mounting. The State Bank of Pakistan changed its monetary policy stance from easy to ‘measured' tightening and of late, it moved rather aggressively to tame inflation. Notwithstanding gradual tightening of monetary cycle, monetary policy has been largely supportive to growth momentum. The State Bank of Pakistan avoided a ‘sledgehammer' policy to ensure that the current economic upturn is not derailed. As a result, the interest rate environment remained relatively investment-friendly for most part of the year under review as weighted average lending rate remained negative in real terms and private sector credit rose to a record Rs.370 billion during the period under review. The benchmark 6-months T-bill rate was hiked by 500 basis points since June 2004 to 7.08 percent by April 2005. Of late, the State Bank of Pakistan raised the discount rate by 150 basis points (bps) to 9.0 percent in April 2005 from 7.5 percent in November 2002, strongly signaling the increase in the lending rates.

It was not surprising to see credit plan undergoing revision on the back of exceptionally strong growth this year. Broad money (M2) was originally targeted to grow by 11.3 percent on the basis of a 6.6 percent growth and 5 percent inflation for the year. Private sector credit was targeted to rise by Rs.200 billion. The monetary developments during the first half of the fiscal year as well as upward revision of both the real GDP growth and inflation targets, suggested higher monetary expansion. The Credit Plan was, therefore, revised with broad money growing by 14.5 percent (Rs.306 billion) during the fiscal year 2004-05. The target for private sector credit expansion was raised to Rs.350 billion and government borrowing for budgetary support was fixed at Rs.60 billion.

During the first nine months (July – March) of the fiscal year, broad money has registered a growth of 13.1 percent as against the full-year target of 14.5 percent and last year's growth of 12.3 percent in the same period. The growth of broad money is largely driven (84%) by expansion in net domestic assets (NDA) which was itself triggered by unprecedented rise in the credit to private sector (Rs.370 billion). The net foreign assets (NFA) contributed only 16 percent to monetary expansion.

The extremely buoyant attitude of the private sector can be viewed by the fact that the cumulative borrowing of this sector during the last three years amounted to Rs.863 billion as against the cumulative borrowing of Rs.580 billion in the previous ten years (1992-2002). More importantly, credit to private sector as percentage of GDP surged from almost 20 percent in 1999-2000 to over 25 percent in 2004-05 – almost 5 percentage point's increase in the last six years.

The distribution of credit to private sector was highly broad-based as almost all sectors of the economy availed substantial credit. Of course, manufacturing sector claimed 41 percent in the net credit expansion to private sector. Within manufacturing, textile sector received the lion share (62.8%). The commerce sector was another important sector which availed Rs.38.6 billion or 11.5 percent of the total private sector. Consumer loans consisting of auto finance (Rs.32.6 billion), personal loans (Rs.27.4 billion), housing finance (Rs.14 billion) and credit cards (Rs.3.2 billion), amounted to Rs.77.2 billion or 23 percent to total private sector credit expansion.

The gradual tightening of monetary policy is also reflected in the rise of the weighted average (WA) lending rate. The WA lending rate was 4.63 percent at the beginning of the current fiscal year and by end-March 2005, it moved to 6.57 percent – 194 basis points increase in the lending rate. The WA deposit rate, however, increased only by 23 basis points during the same period. This simply suggests that the spread has gone up from 3.43 percent to 5.14 percent. The rise in spread indicates an increase in the profit of the banking system but at the same time, it is an indicator of inefficiency. The yield on 6-month treasury bills moved upward rather sharply – increasing from 2.52 percent in July 2004 to 7.08 percent in April 2005 – an increase of 456 basis points in 10 months. The export refinance rate which is linked with 6-month treasury bills rate, was adjusted upward by 150bps to 6.5 percent in May 2005. The State Bank of Pakistan will continue to monitor very closely the inflationary trend and its monetary policy stance will be influenced by the development on inflationary front.

Stock Market

Stock market in Pakistan has witnessed extra-ordinary volatility during the year. The Karachi Stock Exchange (KSE) witnessed an accelerated rise during the year until March 15, 2005. The KSE-100 index rose from 5210 in July 2004 to peak at 10,303 on March 15, 2005 – an increase of 5093 points or 98 percent. More importantly, market moved in a normal way until December 2004. The accelerated rise was witnessed since January 2005 and until March 15, 2005 when index rose by 65 percent in a short period of 2.5 months. Most of these increases were contributed by OGDC, PTCL, PSO, POL and NBP, of which three are on privatization list (OGDC, PTCL and PSO) and their share prices jumped upward mainly on report of good buying interest from foreign strategic buyers. There has been a buying interest in NBP on account of good profitability.

The stock market turned bearish since March 16, 2005 as the KSE 100 index dropped to as low as 6939 on April 12, 2005 from its peak of 10303 – showing a decline of 3364 points or 32.7 percent. Such a sharp rise in index and a subsequent steep decline represented abnormal and unhealthy movements in the equity market. While the five scrips listed above caused unprecedented boom, the same scrips largely became the cause for the sharp down turn. There are divergent views of the market players and outsiders on what caused abnormal behaviour of the equity market. The reasons that need to be fully investigated include: (i) delay in the privatization of government owned companies; (ii) withdrawal of funds by financiers; (iii) excessive buy positions by several brokers in the future market who were not able to get an exit opportunity due to the continuous decline in the market; (iv) sellers in the March future contract were carrying hedged position from ready market; (v) seller decided not to square up their positions in the March futures contract; and (vi) downward circuit breakers blocked the opportunity of exit from the market.

Fiscal Policy

A sound fiscal management is essential for a stable macroeconomic environment. Weak fiscal balance has been the major source of macroeconomic difficulties in the 1990s. After six years of extensive efforts through the reform of the tax system and tax administration, Pakistan has succeeded in attaining fiscal stability. The overall fiscal deficit that averaged nearly 7.0 percent of the GDP in the 1990s has been reduced to 2.3 percent in 2003-04 but increased to 3.2 percent on account of substantial loss in revenue under Petroleum Development Levy (PDL). The revenue deficit (total revenue minus current expenditure) has been narrowed from 3.0 percent of GDP in the late 1990s to 0.2 percent or Rs.13.9 billion in 2004-05. The primary balance (total revenue minus total non-interest expenditure) has remained in surplus for the last many years. Public debt burden has also registered a sharp decline in recent years and is fast moving towards a sustainable level.

Pakistan continued to make gains on fiscal front during 2004-05. The overall fiscal deficit remained on the target (3.2 % of GDP) despite Rs.50 billion loss in Petroleum Development Levy (PDL) for not passing fully the rising cost of petroleum products to the domestic consumers. The Central Board of Revenue (CBR) is targeted to collect Rs.580 billion but it is most likely to collect Rs.590 billion – Rs.10 billion more than the target and 13.7 percent more than last year. Total revenue is targeted to increase by 7.6 percent while total expenditure is projected to grow by 9.9 percent, but most of the increase is coming from the Public Sector Development Programme (PSDP) – up by 17.1 percent. Current expenditure is targeted to increase by 11.8 percent, of which, interest payment and defense – the two largest
components of it, is projected to grow by 8.5 percent and 7.5 percent respectively. As a result of prudent fiscal management, the share of interest payment in total outlay has declined from almost 30 percent in 2001-02 to 20.2 percent in 2004-05 – almost 10 percentage points decline in just four years.While the share of defense stagnated at around 18 percent during the last four years, the share of PSDP increased from 15.3 percent to 19.2 percent during the same period. Thus, the saving from interest payments has been diverted towards the PSDP.

Another important development on the fiscal side has been the near elimination of the revenue deficit in the last two years. Revenue deficit stood at Rs.71 billion or 1.5 percent of GDP in 2002-03 but declined sharply to Rs.14.6 billion or 0.2 percent of GDP in 2004-05. The Fiscal Responsibility and Debt Limitation Law require this deficit to be eliminated by 2007-08. Pakistan has almost reached there to achieve the target much in advance. Most importantly, Pakistan continues to maintain a primary surplus for the last several years – so vital for the reduction of public debt burden.

Public debt burden continues to decline rather sharply over the last five years with significant improvement in fiscal situation. The public debt to GDP ratio, which stood at 85 percent in 1999-2000, has declined sharply to 59.4 percent in 2004-05 – almost 26 percentage points reduction in debt burden in just five years is one of the significant achievements of the government. During the year, public debt as percentage of GDP declined from 67.7 percent to 59.4 percent – an 8.3 percentage decline in one year is other stellar occurrences of the current year. Since public debt is a charge on the budget, its burden must be viewed in relation to government revenue. Public debt was 473.4 percent of total revenue last year but declined to 457 percent this year – a decline of 16 percentage points is not a mean achievement.

External Sector Pakistan's external sector is being affected both by structural and cyclical factors. Three years of strong economic growth, complemented by record low interest rate and the ongoing structural shift of many household in Pakistan towards higher consumption have injected new life into domestic spending. The strengthening of domestic demand triggering a pick up in investment spending after a multi-year lull has fueled Pakistan's importgrowth. Higher global oil prices further added to a massive surge in imports which more than offset the improved outcome from exports and accordingly emerged as a key factor in widening the trade gap this year. With trade gap widening, the current account balance slipped into the red after posting surpluses for three consecutive years.

Exports

Exports were targeted to grow by 11.3 percent in 2004-05 — rising from $12.3 billion last year to $ 13.7 billion this year. During the first nine months of the current fiscal year exports were up by 14.6 percent, rising to $ 10.2 billion from $ 8.9 billion in the same period last year, thereby registering an increase of $ 1.3 billion in absolute terms. One-half of the net increase in exports amounting to $ 651 million has come from the non-traditional exports items, followed by 27 percent from other manufactures and 13.4 percent from primary commodities; exports. The textile manufactures contributed 9.4 percent towards additional export earnings. Sustaining a high double-digit growth in exports for three consecutive years is one of the major achievements of the outgoing fiscal year. Given the performance of the first nine months, exports are likely to touch $ 14 billion mark by the end of this fiscal year. Unlike last year when exports growth was largely on account of higher unit values, this year's exports are driven mainly by substantial rise in volume. In other words, quantity effect has dominated the price effect for the surge in exports this year. With firming up of prices in the international market, exports are likely to rise further. The surge in exports is underpinned by a strong growth in primary commodities and other manufactures and a stellar growth in nontraditional items. Textile manufacturers, accounting for 58.5 percent of total exports registered a modest growth of 2.1 percent. However, within textile manufactures, knitwear, towels and made-up articles have registered an impressive growth of over 20 percent each. Their exports in quantity term also registered a sharp increase, ranging between 10 – 32 percent. Although bases were low, exports of engineering goods, petroleum products and chemicals and pharmaceutical products have exhibited impressive performance.

Notwithstanding impressive export performance, Pakistan's exports are still highly concentrated in few items. Five categories of exports namely, cotton, leather, rice, synthetic textiles and sports goods account for over 79 percent of total exports. Such a high degree of concentration of exports in a few items can serve as a major cause for instability in export earnings. Similarly Pakistan's exports are highly concentrated in few countries. About one-half of Pakistan's exports went to seven countries only. Such concentration in few markets can also become a source for instability in export earnings.

Imports

Imports were targeted to grow by 7.1 percent in the current fiscal year — rising from $ 15.6 billion to $ 16.7 billion. Pakistan's imports are up by 37.8 percent in the first nine months of the current fiscal year — rising from $ 10.5 billion to $ 14.5 billion, showing an increase of almost $ 4.0 billion this year. Major contributions to this year's additional import bill have come from machinery, chemical and petroleum groups. Over one-half of the increases have come from machinery and chemicals and over 16 percent has come from petroleum group. The extra-ordinary increase in imports owes mainly to strengthening domestic demand and higher prices of crude and petroleum products. The surge in domestic demand has fueled an exceptional 41.5 percent increase in non-food non-oil imports. In particular, import of machinery, chemicals and metal groups are up by 55 percent, 33 percent and 80 percent, respectively as domestic investment has come back to life owing to stronger domestic and external demand. These three groups combined accounted for over one-half of total imports, clearly reflecting the growing level of domestic investment. Rising prices of international oil are a major negative for Pakistan.

The unprecedented rise in oil prices has struck the economy at a time when domestic demand is showing signs of acceleration as imports of both crude and petroleum products are up by 18.8 percent and 8.4 percent, respectively in quantity terms pushing total oil import bill up 31 percent. Both quantity and prices are responsible for the surge in imports this year as quantity accounted for 69 percent and the remaining 31 percent to the rise in prices of major import items.

Like exports, Pakistan's imports are also highly concentrated in few items. Machinery, petroleum and petroleum products, chemicals, transport equipments, edible oil, iron and steel, fertilizer and tea account for over 70 percent of Pakistan's total imports. Within these few items, machinery, chemicals and metal group account for 68 percent of total imports. Considerable structural changes have taken place in the composition of imports during the last 6 years in general and last three years in particular. The share of machinery, chemicals and metal group has increased from 36 percent in 1999-2000 to 39 percent in 2002-03. Thereafter, the composition of imports has undergone sharp changes, mirroring the rising level of investment and economic activity in the country. The share of these three items jumped from 39 percent to 68 percent in a short period of three years.

Trade Balance Pakistan's trade deficit has widened beyond target for the current fiscal year owing to a much faster increase in imports compared with exports. Given the stronger-than-anticipated surge in domestic economic activity, the widening of trade gap in the short-run is quite normal. The widening of trade gap is not worrisome as long as it is caused by rising import which is enhancing the production base of the economy. It should be a matter of concern if it is caused by rising imports of consumer durables and faltering exports. In the case of Pakistan, the trade gap has widened because of the extra-ordinary surge in investment driven imports, which is enhancing the production base of the economy. Workers

Remittances

Workers remittances, the second largest source of foreign exchange inflow after exports, continue to maintain a rising trend. Against the full year target of $ 3.8 billion, workers remittances totaled $ 3.45 billion during the first ten months (July – April) of the current fiscal year, as against $ 3.2 billion in the same period last year, showing an increase of 7.5 percent. The United States continues to be the single largest source of cash workers remittances accounting for 31 percent, followed by UAE (16.9%), Saudi Arabia (14.7%), UK (9.0%) and Kuwait (5.2%). Given the trend so far, it is likely that workers remittances may touch $ 4.2 billion in 2004-05. Remittances have so far proved remarkably resilient and have hovered around $ 4.0 billion since 2002-03. According to the recent World Economic Outlook, published by the IMF, remittances can help improve the country's development prospects, maintain macroeconomic stability, mitigate the impact of adverse shock and reduce poverty. The Outlook further states that remittances allow families to maintain or increase expenditure on basic consumption, housing, education, and small-businesses formation. To the extent, the poorer section of the society depend on remittances for their basic consumption needs, increase remittances could be associated with reduction in poverty and possibly inequality. The Outlook also finds strong empirical evidence that suggest that construction activity is highly correlated with remittances inflow. Pakistan has been receiving, on average, $ 4.0 billion or 4.0 percent of GDP per annum during the last three years. Such a massive inflow of remittances has helped Pakistan building its foreign exchange reserves which, in turn, has provided stability in exchange rate. For the families, the massive flow of remittances helped increase their consumption spending, helped improve the housing facility and improve their overall hiring conditions.

Current Account Balance

Pakistan's current account balance has slipped into red in 2004-05 after posting surpluses for three consecutive years. The deterioration in the current account is driven by substantially wider trade deficit owing to higher oil import bill and hefty rise in non-oil non-food imports, fueled by strong domestic demand. The current account deficit, excluding official transfers, stood at $ 1358 million (1.2% of GDP) during July - March, 2004-05 as against a surplus of $ 1505 million in the same period last year. Besides widening trade gap underpinned by a surge in investment-driven imports, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost and growth in personal travel due to the rising level of income of middle and high income groups, have also contributed in taking current account balance in deficit for the first time in three years. A deficit of this magnitude (1.2 – 1.5 % of GDP) is quite consistent with the growth target that Pakistan has set for itself in the next five years. If Pakistan succeeds in attracting foreign direct investment in the range of 1.2 – 1.5% of GDP, it can finance the gap in current account without adding to the country's debt burden, as FDI is a non-debt creating inflow

Foreign Direct Investment

Pakistan has succeeded in attracting $ 891.5 million in FDI during July – April, 2004-05 as against $ 760 million in the same period last year, showing an increase of 17.2 percent. By the end of the current fiscal year, FDI is expected to cross $ 1.0 billion mark. Over 70 percent of FDI has come into power sector; telecom sector; chemicals, pharmaceutical and fertilizer; oil and gas; and banking and finance. Almost 70 percent of FDI has come from USA, UK, Switzerland, Japan, UAE and Netherlands. Significant improvement in the country's overall macroeconomic environment, performance of Euro and Islamic bond (Sukuk) and up-gradation of Pakistan's credit rating have helped attract relatively large inflows of foreign direct investment.

Foreign Exchange Reserves

Pakistan's total liquid foreign exchange reserves, with some fluctuations, maintained an upward trend during the current fiscal year. By end April 2005, reserves touched all time high at $ 13.0 billion — up from $ 12.5 billion in the same period last year. Of which, reserves held by the State Bank of Pakistan amounted to $ 10.23 billion and by bank stood at $ 2.8 billion. Many factors contributed toward this comfortable position of reserves. The most important among those are private transfers that include remittances, higher export proceeds, floatation of Islamic bond (Sukuk) and higher FDI flows. With this build up in reserves Pakistan is in a position to meet any abnormal shock on external front. The continued build up in foreign exchange reserves has provided strength to the Pakistani rupee vis--vis US dollar. The inter bank exchange rate per US dollar averaged rupees 59.4 per US dollar on end - April 2005 as against Rs.57.5 averaging on the same period last year, reflecting a depreciation of 3.2 percent. In general, Pakistan's exchange rate vis--vis US dollar has remained stable during the period under review.

Privatization

The privatization program has progressed at a much faster pace this year. Since 1990 and until mid- April 2005, Pakistan has completed or approved 146 transactions with gross proceeds of Rs.148.4 billion. Of this, a sum of Rs.13.6 billion was received during the first nine and a half months (July – mid April) of the current fiscal year. In addition, bidding for Karachi Electric Supply Corporation was held on February 4, 2005 the proceeds of which amounted to Rs.20.24 billion are still awaited. A new feature of the privatization program has been the offering of the shares to the general public through the stock market, which was well received.

External Debt

Until a few years ago, Pakistan was facing serious difficulties in meeting its external debt obligations. Not only was the stock of external debt and foreign exchange liabilities growing at a breakneck pace, but the debt carrying capacity remained stagnant. Consequently, the debt burden (external debt and foreign exchange liabilities as percentage of foreign exchange earnings) reached an unsustainable level of 335 percent by 1998-99. Following a credible strategy of debt reduction, Pakistan has succeeded in reducing the rising trend in external debt and foreign exchange liabilities. Pakistan's external debt and liabilities have declined by $ 1.24 billion — down from $37.9 billion at the end of the 1990s to $36.62 billion by end-March, 2005. The surplus in current account coupled with continued build up in foreign exchange reserves and the higher foreign exchange earnings, pre-payment of expensive debt and debt write-off are the major factors responsible for the reduction in the total stock of debt. The country's debt burden has also declined at a much faster pace than anticipated. The country's debt burden defined as a ratio of external debt and liabilities to GDP stood at around 52 percent in end-June 2000, declined to 36.7 percent in end-June 2004 and further to 33.1 percent by end-March 2005. Similarly, the country's debt burden defined in a different way, that is, external debt and liabilities as percentage of foreign exchange earnings was 297 percent in 1999-2000, declined to 164.6 percent in 2003-04 and further to 145.9 percent by end-March 2005. It may also be pointed out that Pakistan's external debt and liabilities were 22 times of its foreign exchange reserves in 1998-99 but declined sharply to 2.8 times in just six years. These statistics suggest that Pakistan's external debt burden has declined at a much faster pace than anticipated and that it is now on a solid downward footing.

Euro Bond

On February 12, 2004 Pakistan made a successful return to the international capital market for the first time in more than five years. Pakistan issued $ 500 million five years Regulation-S Euro bond due 2009, lead managed by J.P.Morgan, Deutsche Bank and ABN Amro Bank. This transaction attracted strong demand from high quality and diversified international investors resulting in four times over subscription and consequent tightest possible pricing of the bond in comparison to similar or better rated sovereign offering for five years new issues. The success of this transaction reflected a vote of confidence by the international investor's community on Pakistan's economic policies and reform agenda. Pakistan's Euro bond was priced at 370bps above U.S. Treasury (3.046%) to yield 6.75 percent which looked very tight when compared with emerging market peers. Since the issue of Pakistan's Eurobond, due 2009, it has performed in line with the market with the spread over U.S. Treasury under going compression by about 100 basis points as on May 19, 2005. As compared to the issue a spread of UST + 370bps, the bond is currently trading at a spread of UST + 279bps.

SWAP Deal for Euro Bond As part of a dynamic debt management process, Pakistan transacted an interest rate swap to lower the interest cost of its Euro bond. The deal was done with Standard Chartered Bank at a rate of 3.2275 percent over 6 – month LIBOR with protection against a sharp unexpected rise in interest rate. This transaction has yielded a positive carry of about $ 8 million so far. In other words, Pakistan saved debt service payments to that extent. For the first time in the country's history, the government has undertaken such an exercise to reduce the country's debt burden and as such is building an in-house capacity to monitor global markets.

Islamic Bond (Sukuk) On January 18, 2005, Pakistan successfully closed its debt Sukuk transaction in the international capital markets. Following on from its highly successful US$500m Eurobond issue in February 2004, Pakistan issued a five-year floating rate note Sukuk Al-Ijara. The issue conformed to Regulation S Eurobond standards and was lead managed by Citigroup and HSBC. The order book was twice oversubscribed and in the light of such strong demand, Pakistan increased the issue size from US$500 million to US$600 million. The deal was also particularly successful from a pricing perspective; the transaction was priced at 220bps over 6 months US$ LIBOR, which was at the tightest end of the revised price guidance, on the back of the continuing strengthening of the underlying economic fundamentals.

The development of the local Islamic banking market was also another strategic imperative for Pakistan. Last year, the State Bank of Pakistan commenced the issuing of new Islamic banking licenses, which paved the way for the establishment of several new Islamic banks as well as permitting conventional banks to open full-fledged Islamic branches. The Sukuk issue would provide the spur for the creation of both the domestic Islamic capital and money markets. It was for this reason that Meezan Bank Limited was brought in as the local structuring advisor for the Sukuk issue.

The unique transaction appealed to both conventional as well as Islamic institutions, and attracted demand from both pools of liquidity in a wide geographic base. Pakistan was extremely encouraged by the quality of the order book. Central bank / Government Agencies accounted for 25 percent of the transaction, Asset managers 23 percent, Islamic Institutions 20 percent, banks 18 percent, Private Banks/ Retail intermediaries 11 percent and Insurance Companies/ Corporates approximately 2 percent. In the secondary market, the Sukuk has performed extremely well, underpinned by the strong demand and the robust performance of the Pakistan economy, consequently the yield has tightened by over 30bps and is currently trading at the LIBOR + 185bps range.

Social Sector and Living Conditions

The discussion so far points to the fact that Pakistan's economy has gained more strength during the outgoing fiscal year. All its macroeconomic indicators with a few exceptions show marked improvements over last year. The macroeconomic-policies and reform programmes pursued over the last six years have not only transformed Pakistan into a stable and resurgent economy, but have set the stage for the economy to grow more vigorously in the next five years. Have such policies and programmes improved the social indicators and living conditions of the people? These are valid and frequently asked questions. The government believes that the efforts to strengthen the economy will not be completed unless macroeconomic gains trickle-down to masses in terms of improved living conditions. The Federal Bureau of Statistics has recently completed the Pakistan Social and Living Standards Measurement (PSLM) Survey, designed to provide social and economic (poverty) indicators in the alternate year at provincial and district level for the assessment of development programme initiated by the government under Poverty Reduction Strategy Paper (PRSP). The first district level Survey, following the Core Welfare Indicators Questionnaire (CWIQ) approach, with a sample size of 76520 households (27144 urban and 49376 rural) from 5348 sample area, covering both urban and rural areas, has been conducted during the year 2004- 05. The Survey was started in September 2004 and the entire field operations were completed in March 2005. The first report of the Survey covering national/provincial level indicators has been finalized and will be released shortly by the FBS. The remaining reports covering district level information will also be released soon by the FBS. The provincial level Survey of the PSLM, focusing on household consumption and expenditure will be completed by June 2005 and its report will be available in December 2005. The estimate of poverty for 2004-05 would be available to all of us.

This year's Economic Survey has reported result pertaining to some of the key indicators representing living conditions and social sector, obtained from the PSLM Survey. The detailed results will be released by the FBS. Social indicators and the indicators representing the living conditions of the people have exhibited marked improvement over 2000-01 as well as over 1998 census results. For example, the number of household living in one room homes decline from 38.1 percent according to 1998 census to 24.2 percent in 2004-05. Similarly, percentage of households living in 2 – 4 rooms homes increased from 55 percent to 68.7 percent during the same period. Number of household living in 5 and more rooms also show improvement from 6.9 percent to 7.1 percent. This trend simply reflects the improvement in the living conditions of the people. Another important finding is the percentage of households using electricity as a source of lighting and gas as cooking fuel has also registered sharp improvement. Several other indicators such as major source of drinking water and type of toilets used by household also show significant improvement in the last four years. The percentage of household using Tap water as major source of drinking water increased from 25 percent to 39 percent in the last four years. Gross enrolment at primary level, after stagnating at around 71 – 72 percent during 1998-99 and 2000-01, increased substantially to 86 percent in 2004-05. Net enrolment at primary level increased by 10 percentage points (from 42% to 52%) in four years. This simply suggests that the drop out rate has declined and cost effectiveness of educational expenditure has improved somewhat. Gross and net enrolment in middle and matric level also shows improvement during the last four years as against a total stagnation during 1998-99 and 2000-01. Most importantly literacy rate has increased from 45 percent to 53 percent during the last four years with male literacy rate rising from 58 to 65 percent in female literacy rate rising from 32 to 40 percent. Adult literacy rate has also increased from 43 to 50 percent — seven percentage points increases across urban and rural areas in four years.

Health conditions of the population have also improved significantly during the last four years. The proportion of children immunized in the 12 – 23 months bracket at national level has risen from 53 to 77 percent while in rural areas it has shown an even faster increase from 46 to 72 percent. The practice and source of treatment of diarrhea in children under five year shows improvement. The percentage of cases where practitioners were consulted went up from 81 to 90 percent, while the percentage of cases where ORS was administered went up from 52 to 78 percent in rural areas. The wide spread use of ORS both in urban and rural areas suggest that media campaign by the relevant ministries are paying healthy returns in the form of increased awareness and timely action at the household level. This will directly contribute in reducing the under-five mortality rate in the country.

Notwithstanding significant improvements in the social and living conditions indicators, much more effort will be required to improve the country's overall social indicators. Improvements thus so far show that the direction is right but the pace of improvement needs to be accelerated.

Concluding Remarks

This is no time for complacency. Pakistan is in the midst of an economic upturn. To sustain the momentum is indeed a major challenge for the policy-makers. Linked with this are the challenges of job creation, poverty alleviation, improving social indicators and most importantly, strengthening the country physical infrastructure to support 7 – 8 percent growth in the medium-term. Against the backdrop of the improved economic outlook, the focus of policy efforts should be on medium-term measures that would underpin the sustainability of the recovery while rebuilding room for maneuver to respond to possible future shocks.

An impressive recovery from an economic downturn is a good time to start implementing second generation reforms. Many economic problems are due to shortcomings in the markets, rather than to resource shortages or an excess or deficiency of overall demand. There is a broad consensus that where there are such problems, structural reforms — policy measures that change the institutional and regulatory frameworks governing market behaviour — can lead to greater efficiency in the allocation of resources. Structural reforms can also boost growth in the short-run by increasing returns to investment and by providing scope for macroeconomic policies to allow the economy to run at higher levels of capacity utilization without inflationary pressures.

While the outcomes of the outgoing fiscal year have given sources of optimism some lessons from this year should form the guiding principles for going forward. First and foremost is that we should rely least on the support price mechanism and rely more on the non-price mechanism to enhance agricultural output. Second, livestock sector accounts for almost one-half of the agricultural value added — much more than major crops — therefore, proportionate attention must be given to this sector which has remained neglected for many decades. The policy of concentrating on four major crops is a self-defeating policy as far as overall agriculture is concerned. Livestock, minor crops, fishing and forestry need equal attention – they together account for 70 percent of agriculture.

Third, credit booms are difficult to foresee, therefore, we need to remain vigilant, especially in situations where rapid credit growth is accompanied by current account deficit and higher inflation. Containment of credit booms usually requires strengthened surveillance of the banking system and close scrutiny of corporate borrowing during periods of rapid economic growth.

Pakistan's economy is no longer fragile and its balance of payments is no more vulnerable to external shocks. Wideranging structural reforms, prudent macroeconomic policies, financial discipline, and consistency and continuity in policies have transformed Pakistan into a stable and resurgent economy. Going forward, sound macroeconomic policies, financial discipline, continuity of policies, political and regional stability will be the key to sustain growth momentum.

GROWTH AND INVESTMENT

Pakistan's economy extended its impressive expansion for the third year in a row in 2004-05 with economic growth reaching its highest annual rate of 8.4 percent in two decades, the fifth time in the country's history that it exceeded 8 percent growth mark. Economic recovery has raised the perceived wealth of households and thus boosted confidence, leading to higher consumption. The ensuing lifting of aggregate demand in turn has spurred credit demand. With increased lending, it has stimulated more demand, in turn feeding back into economic activity and thus, reflecting a broader virtuous circle. This positive prospect for consumer demand, if sustained, will be a crucial support for the government's major macroeconomic policy target for 2005-06.

Real GDP grew by 8.4 percent in 2004-05 as against 6.4 percent last year and surpassed the target (6.6%) for the year by a wide margin. The sharp pick up in growth this year is ably supported by a stellar performance in large-scale manufacturing (15.4%), impressive recovery in agriculture (7.5%) and a strong growth in services sector (7.9%).

The agriculture sector grew by 7.5 percent in 2004-05, which is higher than actual growth of 2.2 percent last year and a target of 4.0 percent. Major crops, accounting for 37 percent of agricultural value added, grew by 17.3 percent as against a mere 1.9 percent last year. Minor crops, which contribute 12 percent of value addition in agriculture, grew by 3.1 percent in 2004-05 over last year's 2.6 percent.

The overall manufacturing, accounting for 18.3 percent of GDP repeated stellar performance by registering a growth of 12.5 percent in 2004-05 as against 14.1 percent last year and surpassing its target by 2.3 percentage points. Accordingly, its share in GDP also increased by 0.7 percentage point over last year. The large scale manufacturing, accounting for 69.5 percent of overall manufacturing and 12.7 percent of GDP, recorded an impressive and broad – based growth of 15.4 percent in 2004-05 as against 18.2 percent last year and against the target of 12.2 percent – the second highest growth achieved in three decades. Small-scale manufacturing continued to grow at an estimated 6.3 percent rate in 2004-05. The Construction sector is provisionally estimated to grow by 6.2 percent in 2004-05 as against a decline of 6.9 percent last year. Services sector has registered an impressive growth of 7.9 percent in 2004-05 as against an equally robust growth of 6.0 percent last year and against the target of 6.2 percent for this year. The wholesale & retail trade, finance & insurance sub-sectors grew by 12.0 and 21.8 percent, respectively against 8.1 percent and 4.5 percent last year.

The commodity producing sectors (agriculture and industry) and service sector contributed equally to the real GDP growth of 8.4 percent. The commodity producing sector contributed 50 percent or 4.2 percentage point to this year's growth while the remaining 50 percent or 4.2 percentage points contribution came from services sector. Within the CPS, agriculture contributed 1.74 percentage points or 20.7 percent to overall growth while industry contributed 2.46 percentage points or 29.3 percent.

The per capita income in dollar term has grown at an average rate of 13.5 percent per annum during the last three years rising from $ 579 in 2002-03 to $ 657 in 2003-04 and further to $ 736 in 2004-05. The main factor responsible for the sharp rise in per capita income include acceleration in real GDP growth, stable or even appreciation in exchange rate and four fold increase in the inflows of workers' remittances.

Total investment provisionally estimated at 16.9 percent – slightly lower than last year (17.3 %). Fixed investment as percentage of GDP is estimated at 15.3 percent as against 15.6 percent last year. A 0.3 percentage point decline is mainly attributed to public sector investment, which declined from 4.8 percent to 4.4 percent. However, private sector investment as percentage of GDP rose marginally to 10.9 percent. Major growth in investment by private sector is witnessed in agriculture (10.2%), manufacturing (23.9%), mining and quarrying (15.2%), construction (79.9%), transport and communication (42.2%), and wholesale and retail trade (27.4%). Public sector investment registered a marginal decline of 0.4 percent. A major decline (26.6%) has taken place in manufacturing, mining and quarrying (5.0%) and transport and communication (3.3%).

AGRICULTURE

Agriculture accounts for nearly 23 percent of Pakistan's national income (GDP) and employs 42 percent of its workforce. Agriculture also supplies raw material to Pakistan's Industries, notably textile industry, the largest industrial sub-sector of the economy. Most importantly, 67.5 percent of country's population living in rural areas are directly or indirectly dependent on agriculture for their livelihood. Given its importance to national economy, the Government attaches high priority to raising agricultural productivity with a view to promoting faster agricultural growth and hence, raising farmers income.

Pakistan witnessed unprecedented draught during the first two yeas of the decade of 2000 (2000-01 and 2001-02) which resulted in contraction of agricultural value added. In other words, agriculture registered negative growth in these two years. The next two years (2002-03 and 2003-04) witnessed a modest recovery in agricultural growth at the back of improvement in the availability of water for irrigation purpose. A stronger – than – expected performance of agriculture has been one of the hallmarks of the fiscal year (FY) 2004-05 with growth reaching as high as 7.5 percent on account of unprecedented increase in cotton production (14.6 million bales) and a near bumper wheat crop of the size 21.1 million tons. Major crops, accounting for 37.1 percent of agricultural value added registered stellar growth of 17.3 percent as against 1.8 percent last year. Minor crops, contributing 12.2 percent to overall agriculture grew by 3.1 percent as against 2.6 percent last year. The performance of livestock – the single largest contributor to overall agriculture (46.8%); fisheries and forest – the two minor contributors, have been lackluster at best as they grew by 2.3 percent, 2.1 percent and 0.4 percent respectively.

Pakistan's agriculture has been suffering, off and on, from severe shortage of irrigation water in recent years. During the last five years (2000-01 to 2004-05), against the normal surface water availability at canal heads of 103.5 million acre feet (MAF), the overall (both for Kharif and Rabi) water availability has been less in the range of 5.9 percent (2003-04) to 29.4 percent (2001-02). Relatively speaking, Rabi season faced more shortage of water than Kharif during these periods. During the current fiscal year (2004-05) the availability of water for Kharif season (for crops such as rice, sugarcane and cotton) has been 12 percent less than the normal supplies and 10.3 percent less than last year's Kharif. The water availability during Rabi season (for major crop such as wheat), as of end of March, 2005 was estimated at 23.1 MAF which was 36.5 percent less than the normal availability and 26.7 percent less than last year's Rabi. Water situation for Rabi season, however, improved gradually as initially it was thought that the shortage will be around 60 percent. The wide – spread spring rains of January – March 2005 however improved the water flows for irrigation purpose to a greater extent. Larger - than – expected snowfall on the mountains also helped fill the reservoirs during the summer time and as such water situation would improve further for Rabi and Kharif 2005-06. It is estimated that about 3 million acre feet of water will be carried over for Kharif 2005 (during last four years it was negligible). Hence, there will apparently be no shortage of water and the full indents of all the four provinces will be met for the upcoming Rabi and Kharif crops 2005-06.

Amongst major crops, cotton production is estimated at 14.618 million bales for 2004-05, the highest ever record in the country's history, and up by 45.5 percent over the last year's production of 10.048 million bales. Wheat production is estimated at 21.109 million tons in 2004-05, as against 19.500 million tons last year, showing an increase of 8.2 percent. Rice production has increased by 2.9 percent in 2004-05 from 4.848 million tons last year to 4.991 million tons in 2004-05. Sugarcane production has however, decreased from 53.419 million tons in 2003-04 to 45.316 million tons in 2004-05, showing a decrease of 15.2 percent. As regards the minor crops, the production of chillies and onions increased by 34.7 and 25.4 percent respectively during 2004-05. The production of all the pulses, namely mash, masoor and mung are down by 25.6, 10.0, and 7.7 percent respectively. The production of potato also decreased by 2.7 percent. Lesser production over last year is due to shortfall in area. Excessive rains also damaged some minor crops. Agriculture credit disbursement of Rs.73.811 billion during July-March, 2004-05, is higher by 54 percent, as compared to Rs.47.937 billion over the corresponding period last year. The fertilizer off-take stood at 2811.4 thousand nutrient tons in July-March 2004-05 or higher by 10.2 percent, as compared to 2552 thousand nutrient tons for the corresponding period last year.

MANUFACTURING, MINING AND INVESTMENT POLICIES

Pakistan's economy, which grew at 6.4 percent in fiscal year 2003-04, achieved a broad-based growth of 8.35 percent in 2004-05, ably supported by an impressive growth in manufacturing sector. The overall manufacturing, accounting for 18.3 percent of GDP, registered an impressive growth of 12.5 percent against the target of 10.2 percent and last year's achievement of 14.1 percent. Overall manufacturing is growing at a much faster pace than agriculture and services and if this pace is sustained, its share in GDP is likely to rise even further in the mediumterm.

The main contributors to this impressive growth of 15.4 percent in July-March, 2004-05 over last year are the textile and apparel group (24.5 %), chemicals (14.4%), petroleum group (11.8 %), tyres and tubes group (10.1%), nonmetallic mineral products (15.1%), engineering goods group (11.3%), electrical items group (54.9%), and automobile group (30.1%). The items that registered positive growth are cotton yarn (18.2 %), cotton cloth (28.5 %), nitrogenous fertilizer (3.2 %), phosphatic fertilizer (59.7 %), cooking oil (27.8%), cement (15.3 %), cigarettes (10.5 %), jeeps and cars (26.1%), tractors (24.5 %), L.C.V's (62.3 %), motorcycles/scooters (47.6 %), paper and paper board (4.3 %), T.V sets (5.7 %), motor tyres (18.9 %), refrigerators (19.8 %) and caustic soda (11.1 %). The individual items exhibiting negative growth includes: sugar (21.0 %), vegetable ghee (1.9 %), bicycles (14.8 %) and billets (20.5 %).

The output of the mining and quarrying sector grew by 5.0 percent this year as against the rise of 3.8 percent last year. The principal minerals which have shown positive growth are: baryte (16.6 percent), limestone (19.3 percent), natural gas (19.3 percent), rock salt (2.88 percent), sulphur (11.5 percent) and chromites (183.3 percent). While negative growth was exhibited by dolomite (22.2 percent), gypsum (52.9 percent), and magnetite (12.5 percent).

Foreign direct investment has witnessed an increase of 17.2 percent in the first ten months (July-April, 2004-05), whereas, net foreign private investment stood at US $ 1027 million against US $ 629.1 million last year, thereby, showing increase of $ 397.9 million. The increase in foreign private investment is because of the inflow of portfolio investment of $ 135.5 million as compared to inflow of $ 131.3 million in the comparable period last year.

The privatization program maintained its pace during 2004-05 and succeeded in privatizing some high-ticket items despite an inhospitable global environment. By end April 2005, Pakistan had completed or approved 146 transactions at gross proceeds of Rs 148.3 billion. Of this, an amount of Rs 13.5 billion was received during the period July-April 2004-05 from the sale of the Government's shareholding in PIAC, Felleti's Hotel, Gharibwal cement, KAPCO and KESC.

POVERTY

Although poverty is still pervasive in most developing countries particularly those in Sub-Sahran Africa and South Asian countries, the past century has seen more advances in global prosperity and more people have come out of poverty than in all of human history. Standards of living have also improved. Infant mortality rates globally have been cut in half during 1970-1997, from 107 to 56 per thousand; and life expectancy has risen from 55 years to 67 years.

Like many other developing countries, Pakistan has also made significant efforts to integrate its economy with rest of the world through foreign trade and investment. The Government of Pakistan adopted a strategy for poverty reduction in 2001, focusing on five areas which include i) accelerating economic growth and maintaining macroeconomic stability; ii) investing in human capital; iii) augmenting targeted interventions; iv) expanding social safety nets and v) improving governance. This strategy has already started bearing its fruits. Economic growth has accelerated and the country has achieved macroeconomic stability. The long term growth trajectory of 6 percent per annum achieved during the last fiscal year and a real GDP growth of 8.4 percent during the current fiscal year have improved the living standards of the people and thus, may help reduce poverty among the lowest segment of population.

The first district level Pakistan Social and Living Standards Measurement (PSLM) Survey, with a sample size of 76520 households from 5348 sample area, covering both urban and rural areas, has been conducted during the year 2004-05. The Survey was completed in March 2005. The first report of the Survey has been finalized and will be released shortly by the Federal Bureau of Statistics (FBS). The Survey indicates that most of the indicators like, major source of drinking water, the type of toilet used, and enrolment in various levels in schools show a significant improvement over the last 4 years.

Pakistan's commitment to reducing poverty in the medium term was first reflected in Poverty Reduction Strategy Paper (PRSP) finalized in December 2003. The Medium Term Development Framework 2005-10 (MTDF) carries this assurance forward in more than one way. The MTDF's strategic thrust is for balanced growth that combines economic growth to progressively rise to 8 percent by 2009-10, with substantial rise in allocation to the social sector, so as to achieve the poverty reduction goal by the year 2015. Sound macroeconomic policies and implementation of structural reforms in almost all sectors of the economy have transformed Pakistan into a stable and resurgent economy in recent years. Agriculture, small and medium enterprises (SMEs), and housing & construction have been prioritized in accordance with their potential to provide employment to the poor segments of the society. SMEs are an important conduit for labour absorption and thereby reducing unemployment and poverty.

Poverty and social sector related expenditures under the PRSP are the most important fiscal intervention to target the poor and vulnerable sections of the society; they have increased over 120 percent in the last four years ⎯ from Rs.114 billion in 1999-00 to 254 billion in 2003-04. An amount of Rs. 278 billion, an increase of 9.5 percent over the previous year, is budgeted for the current year. During the first nine months of 2004-05, the PRSP expenditure amounted to Rs.191 billion as against Rs.156 billion in the same period last year, thus registering a growth of 22 percent. This has been possible mainly due to government's medium-term fiscal strategy aiming to create fiscal space for higher levels of social sector and poverty-related spending.

FISCAL DEVELOPMENT

As a result of pursuance of prudent fiscal policy, Pakistan has succeeded in reducing fiscal deficit down from an average of 7 percent of the GDP in the 1990s to 2.3 percent last year and at around 3.0 percent in the current fiscal year. The associated public debt burden also declined sharply from over 100 percent of GDP to less than 60 percent in the current fiscal year. The revenue deficit has been narrowed from 3.0 percent of GDP in the late 1990s to 0.2 percent and the primary balance has remained in surplus for the last many years.

The wide-ranging tax and tariff reforms as well as reforms in the tax administration have started paying dividends. Tax collection by the Central Board of Revenue (CBR) has picked up, the overall budget deficit as percentage of GDP has declined, the revenue deficit has been narrowed, and the primary surplus has increased. Consequently, public debt as a percentage of GDP has declined and Pakistan is now moving towards fiscal consolidation. During the last six years, tax collection has increased by 70 percent and the overall fiscal deficit which averaged almost 7.0 percent of GDP during the 1990s has been reduced to 3.0 percent in 2004-05. The revenue deficit (the difference between total revenue and total current expenditure), has been narrowed from 3.0 percent of GDP to 0.2 percent in 2004-05, which will increase national savings, and thus reduce the country's dependence on foreign savings to finance domestic investment. The primary balance (total revenue minus non-interest total expenditure) remained in surplus for the last four years.

CBR has collected Rs 451.1 billion as net revenue receipts during July-April 2004-05. The target of Rs 444.4 billion set for the first ten months has not only been achieved but also exceeded by around Rs 7 billion. When compared with last year's collection of the corresponding period, this collection indicates a healthy growth of 13.6 percent, whereas the gross collection has increased by 14.5 percent.

Total expenditure is estimated at Rs.1050.4 billion in 2004-05 which is 9.9 percent higher than last year. Of this, current expenditure is estimated at Rs.866.0 billion (82.4 percent of total expenditure) while development expenditure is amounted to Rs.188.0 billion (17.6 percent of total outlay). The current expenditure which was 14.0 percent of GDP last year has declined to 13.2 percent in the current year. However, there was no change in development expenditure as percent of GDP which remained stagnant at 2.9% of GDP in 2003-04 and 2004-05.

The share of interest payments in total expenditure declined from 32.7 percent in 2000-01 to 20.2 percent in 2004-05 while that in current expenditure, dropped from 36.3 percent in 2000-01 to 25.3 percent in 2003-04 and further to 24.6 percent in 2004-05. In line with reduction in debt burden, the interest payments burden dropped from 3.5% last year to 3.3% of GDP in 2004-05.

Defense expenditure in 2004-05, amounting to Rs.194 billion is 7.5 percent higher than last year. However, as percentage of GDP, it has dropped from 3.3 percent last year to 3.0 percent this year. As percentage of the total outlay, defence spending has declined marginally from 18.8 percent last year to 18.5 percent this year. Similarly, as percentage of current expenditure, it has declined from 23.3 percent to 22.4 percent in the same period.

The public debt- to-GDP ratio, which stood at almost 85 percent in end June 2000, declined substantially to 59.4 percent in end March 2005 ⎯ 25 percentage points decline in country's debt burden in 5 years. In absolute terms, public debt grew by 3.8 percent during the first nine months (July-March) of the current fiscal year. The rupee component of the debt hardly registered any increase while the foreign exchange component rose by 7.6 percent. It is important to note that the growth in public debt has slowed considerably in recent years because of the prudent debt management. Public debt was 317 percent of total revenue in end June 1980, increased to 505 percent by the end of the 1980s and further to 627 percent by the end of the 1990s. The public debt burden in relation to total revenue has declined substantially to 457 percent as of end March 2005.

As a percent of GDP, domestic debt is expected to decline sharply from 36.4 percent to 30.8 percent ⎯ a decline of almost 6 percentage points in domestic debt burden. During the last 5 years (2000-05), the real cost of domestic borrowing averaged 4.1 percent, mainly on account of relatively low inflation. The real cost of borrowing for domestic debt declined substantially to 4.1 percent on average against 5.7 percent in the second half of 1990. Accordingly the real cost of borrowing for public debt averaged 2.9 percent during the last five years (2000-05). The combined effect of growth in revenue and debt resulted in a sharp decline (6.4% per annum) in the country's debt burden. During the last five years, the debt servicing liabilities have declined sharply from 64 percent of revenue to 26 percent of revenue and from 54.4 percent to 25.6 percent of current expenditure in 2004-05.

MONEY & CREDIT

The financial services sector in Pakistan has been going through a major reform process for the last several years. The principal focus of such reform initiatives has been the consolidation of the various aspects of the financial services sector which included among others a strong framework for effective risk management. The State Bank of Pakistan (SBP) has also strengthened its regulatory capacity. It is now more proactive in aligning its regulatory profile in a rapidly changing domestic and global financial environment. The banking regulation and supervision are now fully compliant with the international standards and codes. As a consequence of such reforms, Pakistani banks have been strengthened to compete with foreign banks both in the domestic market and internationally. As the first generation of reforms in the financial sector of Pakistan has been completed successfully, the SBP is planning for the second generation of reforms to further deepen the financial sector and integrate it into the global economy. Financial sector reforms has brought marked improvement in the financial health of the commercial banks in terms of capital adequacy, profitability and asset quality and also greater attention to risk management.

The broad-based economic growth experienced in the last couple of years has put the country on the path to greater economic recovery and set the stage for speedy credit and monetary expansion. The broad money, (M2) showed a growth of 13.1 percent (Rs 325.6 billion) during July-March 2004-05 compared with the full year revised target of 14.5 percent (Rs 360 billion) and the actual growth of 12.3 percent (Rs 254.8 billion) in the corresponding period of last year. Massive increase in NDA was mainly triggered by substantial private sector credit off-take (Rs 370.1 billion). NFA of the banking remained smaller as NFA expanded by Rs 51.6 billion during July-March 2004-05 compared with Rs 50.4 billion in the corresponding period of last year. However, the NFA of scheduled banks increased significantly by Rs 68.3 billion against the contraction of Rs 4.9 billion in the same period of last year. Budgetary borrowings of the Government amounted to Rs 5.8 billion during July-March 2004-05 against the annual target of Rs 60 billion and the actual borrowings of Rs 53.6 billion in the same period last year.

The break-up of private sector credit utilization revealed that manufacturing was the major sector, claiming a share of 41 percent (Rs 150.9 billion) in the net credit expansion. Textile sector, the mainstay of the domestic activities, continued to get upgraded through imported machinery, and its credit off-take increased to Rs 94.8 billion; it constituted 25.6 percent of total credit off-take and 62.8 percent of the total credit utilized by the manufacturing sector.

The commercial banks in the private sector have so far given a satisfactory performance since their inception, registering an overall growth in the deposit base and profits and are maintaining healthy credit portfolios. The nonperforming loans (NPLs) of commercial banks, specialized banks, and DFIs have declined during the first nine month of 2004-05 from Rs 220 billion in June 2004 to Rs 203.7 billion in March 2005 - a reduction of 7.4 percent. The process of privatization continued as fast track with the privatization of HBL in 2004. Shares of NBP were also offloaded through local stock exchanges. As a result of the privatization and restructuring, more than 80 percent of the banking assets are now owned and managed by the private sector. The government is also in the process of restructuring of IDBP, ZTBL and SME bank for their ultimate privatization.

Khushhali Bank's efforts over the past four years have been to develop an efficient distribution system capable of handling large volume of business across diverse operating environments while at the same time, developing an insight into the market. Today, Khushhali bank has a network of 130 service outlets across 64 districts of the country; has processed nearly 400,000 loans valuing about Rs 4.0 billion and with a predominantly rural portfolio. For 2005, the Bank plans to expand its network to 75 districts of the country, with projected annual disbursements of nearly Rs 3.0 billion, with a strategic focus on the rural areas of Pakistan. The SME bank continues to strengthen its position as a small but key player in the SME sector. Bank credit to SMEs sector continued to expand considerably as its share in total private sector credit rose from 7.9 percent (Rs 5.2 billion) during July-September 2004 to 18.1 percent (Rs 59.9 billion) during July-February 2004-05.

CAPITAL MARKET

As a result of successful implementation of the successive reform measures the capital market in Pakistan has been growing by leaps and bounds and has emerged as one of the important pillars of the economy. Under the new privatization strategy, the government is selling off its shares of state controlled enterprises by listing them on the bourses as well with a view to broadening and deepening the capital markets. During July-March 2004-05 the KSE 100-share index rose from 5279 points to 7770.3 points - an increase of 47.2 percent. During this period the AMC rose from Rs 1357.5 billion (or $ 23.4 billion) to Rs 2114.8 billion (or $ 36.6 billion), thus showing a growth of 55.8 percent. The Karachi Stock Market remained as one of the five best performing markets around the world with rate of returns in dollar term of 100 percent.

Total turnover of shares on the KSE was 71.7 billion in the first nine months of 2004-05 as compared to 65.2 billion in the same period last year. During the calendar year 2004, total profit before taxation of the 12 trading groups amounted to Rs 229.5 billion as compared to their before taxation profit of Rs 136.8 billion in 2003. The total funds mobilized during July-March 2004-05 in the three stock exchanges (KSE, LSE & ISE) amounted to Rs 90.1 billion, as compared to Rs 136.5 billion in the last fiscal year. The total turnover of shares in the three stock exchanges during the first three-quarters of the current fiscal year was 88.5 billion, compared to 100.8 billion shares in the same period last year.

In the early part of 2005, the Karachi Stock Exchange (KSE) witnessed an accelerated rise with KSE-100 index rising by 65 percent in a period of only 2.5 months to a record level of 10,303 on 15th March 2005. To add perspective, this increase was on top of the cumulative 388 percent rise in KSE-100 in the preceding three years. The stock market turned bearish since March 16, 2005 and the KSE 100 index dropped to as low as 6939 as on April 12, 2005 from its peak of 10,303 on 15th March 2005 showing a decline of 32.7 percent. Notwithstanding this sharp fall there were no broker defaults in the stock market and also market was not closed or suspended, as had been the case in some previous market falls.

Although market faced extreme volatility in the month of March 2005 however, for the period beginning January to March 2005 the KSE performed better than the other regional markets. The KSE 100-index increased by 24 percent from 1st January 2005 till 28 March 2005 as compared to the other regional markets. The Sensex-Mumbai Index during the same period declined by 2 percent and the Hong Kong Han Seng Index declined by 4 percent. The Thailand SET and the all Singapore SES index during the same period increased by 3 percent and 5 percent respectively.

The Securities and Exchange Commission of Pakistan in consultation with the stock exchanges has introduced significant capital market reforms in the fields of risk management, governance, transparency and investor protection The reform measures provided include the following; (i) measures for strengthening risk management at the exchanges. (ii) amendments in the listing regulations of the exchanges relating to rotation of auditors. (iii) prohibition on use of group account by central depository system participants. (iv) internet trading guidelines, 2005 and (v) demutualization of stock exchanges.

INFLATION

For the first ten months of the current fiscal year (July 2004 to April 2005), inflation as measured by the Consumer Price Index (CPI), averaged 9.3 percent, compared to 3.9 percent for the corresponding period last year. While food price inflation was recorded at 12.8 percent compared to 4.9 percent for the same period last year, non-food inflation increased to 6.9 percent versus 3.3 percent in the comparable period of last year. Core inflation, also indicated a rising trend 7.4 percent for the first ten months of 2004-05. The largest contributions to the acceleration in CPI have come from Food (weight: 40%), and House Rent (weight: 23%), with Fuel & Lighting (weight: 7.3%) and Transport & Communication (weight: 7.3%).Contributing factors to the rise in inflationary pressure in the economy points to the fact that a phenomenal increase in aggregate demand in the economy, on the one hand, was compounded by supply shocks of principal commodities, on the other. The adverse external developments which impacted the domestic price level included a surge in international oil prices coupled with an unprecedented rise in world price of commodities due to demand from China.

The government responded in a multi-pronged manner to the rise in the price level. First a high level committee was constituted to monitor the price situation on daily basis by keeping a close watch on the supply and demand conditions. The government also did not pass on the entire increase in the international price of oil to general consumers. To ease off the demand pressures generated by the rising level of economic activity, the State Bank of Pakistan began to tighten monetary policy rather aggressively. Like in Federal Government where price situation is reviewed weekly, the provincial governments have been asked to do the same in their respective capitals and take necessary measures, if required, to stabilize prices of essential commodities The easing of demand pressure through monetary policy and improving the supply situation of food items either through raising their production or through imports are likely to put downward pressure on general price level in coming months.

TRADE AND PAYMENTS

Pakistan's external sector is being affected both by structural and cyclical factors. Three years of strong economic growth, complemented by record low interest rate and the ongoing structural shift of many household in Pakistan towards higher consumption have injected new life into domestic spending. The strengthening of domestic demand triggering a pickup in investment spending after a multi-year lull, has fueled Pakistani import growth. Higher global oil prices further added to a massive surge in imports which more than offset the improved outcome from exports and accordingly were the key drivers of the widening trade gap.

Exports were up by 14.6 percent during the first nine months of the FY 2004-05 – rising to $ 10206.6 million from $ 8905.2 million in the same period last year. One-half of the net increase in exports amounting to $ 650.7 million has come from the non-traditional export items (other exports). Imports during this period were up by 37.8 percent – rising from $ 10497.4 million to $ 14468.6 million. The extra-ordinary increase in imports owes mainly to strengthening domestic demand and higher prices of crude oil and petroleum products. The surge in domestic demand fueled an exceptional 41.5 percent increase in non-food non-oil imports. In particular imports of machinery, chemicals and metal group were up by 54.9 percent, 32.9 percent and 79.6 percent, respectively. These three groups alone accounted for one-half of total imports, clearly reflecting the growing level of domestic investment. The unprecedented rise in oil prices pushed the oil import bill up by 30.9 percent to $ 2760.5 million – caused a relatively larger increase in overall imports than exports. As a result trade deficit has widened to $ 4262.0 million as against $ 1592.2 million in the same period last year.

Pakistan's current account balance has slipped into red in 2004-05 after posting surpluses for three consecutive years.The current account deficit, excluding official transfers, stood at $ 1358 million during July-March 2004-05 as against a surplus of $ 1505 million in the same period last year. The deterioration in the current account was driven by substantially wider trade deficit owing to higher oil import bill and hefty gains in non-oil imports resulting from strong domestic demand. The net outflows under the services account surged to $ 4238 million, showing an increase of 89.2 percent. Higher freight charges as a result of sharp increase in global trade and higher fuel cost; growth in personal travel; and exchange companies payments were mainly the contributing factors. Nevertheless, the inflows under private transfers depicted a significant increase of 42.6 percent and aggregated at $ 6258 million. Buoyant trend in private transfers was largely attributed to rising workers remittances which during July-April 2004-05 were up by 7.5 percent to $ 3451.5 million. By end April 2005, the foreign exchange reserves touched all time high at $ 13,000.2 million. Since the beginning of the current fiscal year and until April 2005, Pak-rupee versus US dollar depreciated by only 1.8 percent, indicating stability in exchange rate environment.

EXTERNAL DEBT AND LIABILITIES

Over the last five years and in particular with the establishment of the Debt Office in the Ministry of Finance, a concerted effort has been made to achieve debt sustainability in the country. Following a credible strategy of debt reduction, Pakistan has succeeded in reducing the rising trend in external debt and foreign exchange liabilities which has declined by $ 1.24 billion – down from $ 37.86 billion in 1999-00 to $ 36.62 billion by end-March 2005. However, the external debt and liabilities during July-March, 2004-05 amounted to $ 36.62 billion are showing an increase of 3.9 percent over the last year. The rise in absolute amount of the stock of debt ($ 1365 million) during this period is the result of valuation effect and the net inflow effect. About 46 percent or $ 628 million increase in the stock of debt owes to valuation effect (exchange rate movements) and the remaining 54 percent or $ 737 million is on account of higher net inflows. Given the present outlook of the exchange rate movements, we expect a further decline in valuation effect in the fourth quarter of the current fiscal year.

The surplus in current account coupled with a continued build up in foreign exchange reserves and the higher foreign exchange earnings, the pre-payment of expensive debt and debt write-off are the major factors responsible for the reduction in the total stock of debt during the last five years. As percentage of GDP, external debt and liabilities stood at 51.7 percent in end-June 2000, declined to 36.7 percent in end-June 2004 and further to 33.1 percent by end- March 2004-05. Similarly, external debt and liabilities as a percentage of foreign exchange earnings was 297.3 percent in 1999-2000, declined to 164.6 percent in 2003-04 and further to145.9 percent by end-March 2004-05. It may also be pointed out that Pakistan's external debt and liabilities were 22 times of its foreign exchange reserves in 1998-99 but declined sharply to 2.8 times in six years.

The declining trend persisted during the current fiscal year (July-March 2004-05) and both the actual paid amount as well as rolled over amount further declined to $ 2.172 billion and $ 1.100 billion, respectively. The real cost of foreign borrowing which include interest cost as well as the cost emanating from the depreciation of the Pak-rupee (or capital loss on foreign exchange) was on average, 3.4 percent and 2.7 percent per annum in the 1980s and 1990s, respectively. Pendulum swung to other extreme during 2000-05 when real cost of borrowing declined to negative 0.2 percent per annum on average owing to benign interest and inflation rates environment along with the appreciation of exchange rate during this period. During 2000-05, the real growth of external debt burden witnessed massive decline (13.1% per annum) on account of almost 14.7 percent real growth in foreign exchange earnings, decline in real cost of borrowing (-0.2 percent) and marginal (1.6 %) rise in real growth of external debt.

Pakistan maintained a non-interest current account surplus (surplus in primary balance) to an average of 2.9 percent per annum which helped reduce the country's debt burden at a relatively faster pace. These developments helped Pakistan to enter into the capital market by issuing Eurobond as well as Islamic bond (Sukuk) worth $ 500 million and $ 600 million, respectively.

EDUCATION

Education is key to change and progress, therefore, Government of Pakistan has adopted this sector as one of the pillars for poverty reduction and benefit of masses. Government is fully committed to provide best Educational Facilities to its people within the minimum possible time. The reasons for Pakistan's low educational status are varied but one important factor is that Pakistan's educational system has been highly fragmented and segmented. It has, therefore, created some intractable problems in the optimal utilization of human resources under the given labor market condition.

Existing National Education Policy 1998-2010 was formulated keeping in view the prevailing problems in the society. The Government has initiated major administrative reforms, such as Devolution of Power and Education Sector Reforms. Moreover, Millennium Development Goals (MDGs) and Education For All (EFAs) are the International policy concerns announced in 2000, which need to be properly reflected in our Policy. As such, the Ministry of Education has taken in hand an exercise to review the National Education Policy (1998-2010) for its updating to bring it in line the current needs of the country.

Overall literacy rate of 52 percent has increased by about two percentage points compared to that of Labour Force Survey (LFS), 2001-02. This improvement is of one and a half percentage points for males and more than two percentages points for females.

Major progress has been made in the first two years of the Higher Education Commission, with the establishment and execution of transparent system for award of indigenous and foreign Ph.D. Scholarships with the aim of enhancing local research activities and developing future faculty member. Over eleven hundred indigenous Ph.D. Scholarships have been awarded. Furthermore, increased opportunities have been provided for Ph.D. scholars, selected via rigorous testing and screening process, to pursue their studies in industrially advanced nations such as China, France, Germany, UK, USA and Austria. In-service teachers were supported through various teacher training programs training. More than 200 faculty member benefited from these programs.

To bring the formal education and Deeni Madaris close to each other and to facilitate horizontal mobility of students with the ultimate aim of integrating the two systems, Madaris reforms have been initiated with the introduction of formal education in 8000 Madaris, (Primary Education in 4000, Middle and Secondary Education in 3000, and Intermediate Education in 1000 Madaris). Formal subjects of English, Maths, Social/Pak Studies and General Science would be introduced at the Primary; Middle and Secondary levels while English, Economics, Pakistan Studies and Computer Science will be introduced at the intermediate levels.

Federal Government has decided to encourage the private sector to play its due role in the promotion and development of educational opportunities especially in the rural areas. This policy has resulted in the establishment of an estimated 30,000 private educational institutions at all levels with an enrolment of approximately 3 million students. Private schooling has now become important for the country. Enrolment in private primary schools is now in the order of 42 percent of total enrolment (2004). During 2004, at the middle school level, the private sector had a share of 37 percent of total enrolment. At the secondary and higher secondary level in the same year, the private sector share was 30 percent and 64 percent respectively of the total enrolment.

HEALTH AND NUTRITION

The public health sector is a priority area of Government activities. Under the commitment to achieve the goals of “Health for all” the agenda of Millennium Development Goals for health and human development is being implemented and a broad based strategy under the poverty reduction strategy paper (PRSP) to attend the imbalances in health sector has been prepared. The existing network of medical services consists of 916 hospitals, 4582 dispensaries 5301 basic health unit (BHUs), 552 rural health centres (RHCs) 906 Maternity and child health centers (MCHs) and 289 T.B centres (TBCs). In the calendar year 2004, there was one doctor for 1359 persons, one dentist for 25107 persons, one nurse for 3175 persons and one hospital bed for 1540 persons. The total outlay on health sector is budgeted at Rs. 38.0 billion which has increased by 15.8 percent over last year and as “percent of GNP, it is 0.57 percent. The new health facilities added to the overall health services include construction of 45 new facilities (37 BHUs and 8 RHCs) upgrading of 40 existing facilities (27 BHUs of 13 RHCs) and addition of 3500 new doctors 1700 nurses and 17000 lady health workers. To reduce the incidence of diseases and promote the health status of people, various health programmes like Family Planning and Child Immunization Programme, Aids Prevention, Cancer treatment, Drug Abuse, T.B and Malaria Control Programmes had been carried out during the current year.

The caloric intake per person has increased from 2529 calories per day to 2534 calories and protein availability has reached to 65.8 gram in 2004-05.

POPULATION, LABOUR FORCE AND EMPLOYMENT

During the last 50 years, Pakistan's population has increased from 33 million to 152.53 million in 2004-05. Although the current population growth rate slowed to 1.9 percent per annum, overall population has increased by 2.76 million people as compared to last year.

Pakistan is on the favorable end of the demographic transition. In the next few decades there would be a massive influx of people in the working age group (around 60 million people). This trend can already be seen as over the last decade, the proportion of working age cohorts has increased from 53 percent in FY86 to 56 percent in FY03. As total labour force has also increased from 41.38 million in 2001 to 45.76 million in 2004. Of this, 99.25 million of work force is in the rural areas and 51.22 million is in the urban area.

According to the Labour Force Survey 2003-04 the overall labour force participation rate (CAR) is 30.41 percent (48.74 percent of males and 11.16 percent of females). CAR was 28.7 percent in 1996-97 increased to 29.4 percent in 1997-98 but later declined to 29 percent in 1999-00. It has increased to 29.61 percent in 2001-02 and finally to 30.4 percent in 2003-04. Similarly, RAR was 43 percent in 1996-97, increased to 43.3 percent in 1997-98, decreased to 42.8 percent in 1999-00 and has increased to 43.3 percent in 2002-03 and further to 43.7 percent in 2003-04.

The agricultural sector has absorbed 17.97 million of the total employed labour force. On the whole, an increase has been observed in almost all-major industries/sectors gender neutrally. Sector wise break up of employed labour force shows that female labour force participation is on the up for most sectors especially agriculture and fishery workers. It is important to note that the employment of the rural females increased despite a considerable rise in female Labour Force Participation Rate. The increase in rural female employment was mainly in the category of unpaid family helpers, which may be due to enhanced growth rates in agriculture in recent years or due to the combined efforts of various NGO. In addition, about 3.52 million people were estimated to be unemployed in fiscal year 2005 as compared to 3.72 million last year.

TRANSPORT AND COMMUNICATIONS

An efficient transport and communication network plays an important role in the socio-economic development of a country. Better road infrastructure is associated with greater agricultural output, higher income, better indicators of access to health services, and greater income opportunities. The development of rural infrastructure have important implication for the alleviation of poverty. A number of studies point to a significant impact of roads on poverty reduction through economic growth. The length of paved roads is also highly correlated with physical and human capital. Socio-economic benefits provided by roads and highway projects include all-weather reliability, reduced transportation costs and increased access to markets for local produce, access to new employment centers.

Pakistan's achievement in building high and low types of roads have been quite credible. As on March 2005, the total length of roads in the country was 259,758 Km, including 162,879 Km of high type (63 percent) and 96,879 Km of low type roads (37 percent). During 2004-05, the length of high type roads have increased by 2.7 percent. The construction work on Islamabad–Peshawar Moterway (M-1) is in progress.

During the first nine months of the current fiscal year, Pakistan Railways carried 61.3 million passengers and 4.9 million tons of freight. Its gross earnings stood at Rs.13.2 billion, against 10.6 billion last year, which was higher by 25 percent. PIA carried 3.828 million passengers during July-March 2004-05 as against 3.692 million in the same period last year. Both passenger capacity and traffic volume increased by 14.5 percent and 9.1 percent, respectively. Its fleet consists of 49 aircrafts of various types. There are presently three air lines operating in the country two of them are providing both domestic and international services. The third one is operating on domestic routes only. Karachi Port has handled 21,845 thousand tons of cargo during July-March, 2004-05, compared to 20,500 thousand tons during the same period last year, showing an increase of 6.6 percent. The Port Qasim has handled 16 million tones of cargo during July-March 2004-05 as against 11.2 million cargo handled during corresponding period last year, registering a growth of 43 percent. The Gwadar Port is being built with Chinese assistance and its first phase has almost completed.

In 1999-2000, there were only 0.3 million cellular mobile subscribers in Pakistan which jumped to 2.4 million by 2002- 03 as a result of introduction of CPP regime and addition of another mobile operator (Ufone). Mobile subscribers continued to rise at an nprecedented pace, reaching 5.0 million by 2003-04. Major turnaround was witnessed when the mobile companies started giving free mobile connections and bearing the cost of government levies themselves. In a short period of 10 months in the outgoing fiscal year, more than 5 million new subscribers have been added to the list, reaching over 10.5 million by end April 2005. In other words more than 100 percent increase in subscriber in just 10 months was unprecedented. Accordingly, the teledensity with respect to cellular mobile has jumped form 0.2 percent in 1999-2000 to 7 percent in 2004-05.

For promotion of Information Technology, 1900 cities/towns/villages have been provided Internet facility, upto March, 2005. Total telephone lines installed by March 2005 were 5.5 million as against 4.4 million up to June 2004 last year.

ENERGY

It is universally recognized that energy is one of the most important inputs to economic growth and development. The consumption of energy is one of the critical indicators of the level of development of any country. Developed countries use more energy per unit of economic output and far more energy per capita than developing countries. At present, over a billion people in the industrialized countries use some 60 percent of the world's commercial energy supply, while 5 billion people living in the developing countries consume the remaining – a large number of them are poor. It is estimated that about two billion people around the world have access to modern energy services.

During July-March, 2004-05, the production of crude oil per day has increased to 66,508 barrels, from 62,122 barrels per day during the same period last year, showing an increase of 7.1 percent. The over all production of crude oil has increased to 18.1 million barrels during July-March, 2004-05, from 17.1 million barrels during the comparable period last year, showing an increase of 5.8 percent. On average the transport sector consumes 48.7 percent of the petroleum products, followed by power sector (31.1 percent) industry (12.1 percent), household (3.8 percent) other government (2.5 percent), and agriculture (1.8 percent) during last 14 years i.e. 1990-91 to 2003-04.

The production of natural gas per day has stood at 3,681 million cubic feet during July-March, 2004-05, as compared to 3,210 million cubic feet in the same period last year, showing an increase of 14.7 percent. Production of gas has increased to 1,003,198 million cubic feet during July-March 2004-05, as compared to 882,684 million cubic feet during the same period last year, showing an increase of 13.6 percent. On average the power sector consumes 35.4 percent of gas, followed by fertilizer (23.4 percent), industrial sector (18.9 percent), household sector (17.6 percent), commercial sector (2.8 percent), and cement (1.5 percent) during the last 14 years from 1990-91 to 2003-04.

The installed capacity of electricity (hydel and thermal) has increased by 0.7 percent during the first nine months of the current fiscal year and stood at 19,389 MW. Total installed capacity of WAPDA stood at 11,298 MW during July- March 2004-05 of which hydel generation was 6,463 MW (57.2 percent) and thermal was 4,835 MW (42.8 percent). During first three quarters of current fiscal year 61,759 GWh electricity has been generated as against 56,145 GWh were produced in the same period last year, showing an increase of 10 percent. The number of villages electrified has increased to 87,698 during July-March, 2004-05, from 78,820 in 2003-04, showing an increase of 11.3 percent.


Presently, some 700 CNG stations are operating in the country while 200 are under construction. By March 2005 about 700,000 vehicles were converted to CNG as compared to 450,000 vehicles during the same period last year, showing an increase of 56 percent. With these developments Pakistan has become the leading country in Asia and the third largest user of CNG in the world after Argentina and Brazil.

ENVIRONMENT AND HOUSING

I. Environment

Pakistan is conscious that pursuit of unbridled growth and development all over the world has laid a heavy burden on sustainability for the present and foreseeable future on the planet Earth. Sustainable development is, therefore, the cornerstone of all considerations by the government. Concern for environment- its protection, renewal and enrichment – has been reckoned as obligation towards the betterment of all the citizens at large. Presently, environmental situation has risen due to a number of factors including high population growth rate, lack of public awareness and education, mismanagement of water and other natural resources as well as unplanned urban and industrial expansion.

Draft of “National Environmental Policy 2005” which has been approved by the Prime Minister in principle and is being circulated to larger stakeholders for comments. Once approved, it would be country's first ever “Environmental Policy”. This policy would compliment the objectives of NEAP-SP and will address the sectoral issues like (a) Water management and conservations, (b) Energy efficiency and renewable, (c) Agriculture and livestock, (d) Forestry and plantation, (e) Biodiversity and protected areas, (f) Climate change, air quality and noise and (g) Pollution and waste management. In addition, the proposed policy aims to address other cross-sectoral issues such as (a) Population and environment, (b) Gender and environment, (c) Health and environment, (d) Trade and environment, (e) Poverty and environment and (f) Environment and local government.

The key factors contributing to air pollution in Pakistan are: a) rapidly growing energy demand; and b) a fast growing transport sector. In the cities, widespread use of low-quality fuel, combined with a dramatic expansion in the number of vehicles on roads, has led to significant air pollution problems. It may be mentioned here that the two-wheeler industry is performing very well in Pakistan. In the year 2003-04 motorcycle industry showed a visible sign of growth when the total market size achieved a figure of around 327446 while during 2004-05 (July-March) it was 342678 units. Rickshaws have grown by more than 59%, while Motorcycles and scooters have almost doubled over the past ten years (This data does not include locally assembled diesel engine turned “auto Carts” used in rural areas). Motorcycles and rickshaws, due to their two-stroke engines, are the most inefficient in burning fuel and contribute most to emissions.

Pakistan is the largest user of CNG in Asia and presently, some 700 CNG stations are operating in the country while 200 are under construction. By March 2005, about 700,000 vehicles were converted to CNG as compared to 450,000 vehicles during same period last year, showing an increase of 56 percent. Use of CNG as fuel in transport sector has observed a quantum leap, replacing traditional fuels and has helped a lot in lowering the pollution load in many urban centers. After the successful CNG programme for petrol replacement, the government is now embarking upon a programme to replace the more polluting diesel fuel in the road transport sector. The government has planned to offer incentives to investors to introduce CNG buses in the major cities of the country. During July-March 2004-05, 3681 million cubic feet of natural gas was supplied per day as against 3210 million cubic feet per day during the same period last year, showing an increase of almost 14.7 percent. For the last five years, the use of coal in the power sector has been decreasing. It may be due to the fact that a number of plants have now been converted to natural gas. Likewise, there has been a considerable reduction in coal usage for domestic purposes.

Per capita water availability in Pakistan has been decreasing at an alarming rate. In 1951, per capita availability was 5300 cubic meters, which has now decreased to 1105 cubic meter just touching water scarcity level of 1000 cubic meter. The productivity of fresh water is also decreasing due to losses in the movement of the water from the canal heads to the croplands. The existing water resources are under threat due to rapid degradation, soil erosion, deforestation and untreated discharge of municipal and industrial wastes to rivers and other water bodies.

Government of Pakistan is committed to supply safe drinking water to its people and many emptive as well as preemptive measures has been proposed in forthcoming national environmental policy to ensure supply of safe drinking water. Various bilateral and multilateral donors/aid/lending agencies have shown their willingness to support government's endeavor in this regard. Plans are underway to extend the coverage of clean drinking water from 63 percent in 2001-02 to 70 percent in 2005-06 and sanitation from 40 percent to 55 percent in the same period. It is targeted to provide 93 percent of population with access to clean drinking water by 2015 and 90 percent of the population with access to sanitation.

The productivity of soil is being lost due to water logging, salinisation and sodicity. It is estimated that about 38 percent of Pakistan's irrigated land is water logged, 14 percent is saline. In the urban areas, less than 60 percent of solid waste is collected. No city in Pakistan has proper waste collection and disposal system for municipal or hazarders wastes. Our Industries use about 525 types of chemicals and dyes/colour in different processing industries. Their processing generates wastes causing contamination of soil and pose potential risk to public health and damage the fertility of cropland.

The National Conservation Strategy (NCS) represents the broad national environment policy of Pakistan, within which a National Environment Action Plan (NEAP) has also been approved. The main objectives of NEAP are to safeguard public health, promote sustainable livelihood and enhance quality of life for the people of Pakistan. It focuses on clean air, clean water, solid waste management and eco-system management. The government has also formulated a comprehensive strategy to develop provincial capacity for implementing environmental protection laws and monitoring their effectiveness.

II. Housing Sector

The housing situation in Pakistan has steadily deteriorated over the past many years for a variety of reasons including ineffective policies, resulting in huge housing backlog. According to 1998 census, the total number of housing units throughout the country was 19.3 million. The housing backlog, as estimated according to the 1998 census, was 4.30 million units, which is now projected to 6.0 million units. The annual additional requirement is estimated around 570,000 housing units whereas the annual production is estimated around 300,000 housing units, resulting in a recurring shortfall of 270,000 housing units annually. It is estimated that in order to address the backlog and to meet the housing shortfall in the next 20 years the overall housing production will have to be increased to 820,000 housing units annually.

Recognizing the gravity of the situation and realizing the potentials of housing and construction as productive sector of the economy, the present Government has declared Housing and Construction as a priority industry and also formulated a pragmatic and workable National Housing Policy with a view to (a) Accelerate housing activity and contribute towards employment generation and economic development, (b) Facilitate provision of housing inputs including land, finance, building materials, institutional and legal framework, (c) Analyse the culture of poverty and the forces generating ever-increasing slums and katchi abadis including political, public, socio-economic, bureaucratic and environmental forces, (d) Promote ways and means for housing development by enhancing affordability, saving capacity, human tendencies and potential, (e) Provide safeguards against malpractices, bureaucratic in-efficiencies, institutional weaknesses and mafia assaults and (f) Particularly for the low income groups.

The Prime Minister has also announced “HOUSING FOR ALL” programme which includes: (a) Housing schemes for Government employees will be launched in all the districts of the country for which provincial governments and ICT will provide (100) acres of State Land immediately at affordable price (b) Housing schemes for Government employees will be developed on public private partnership basis in which Banks will participate through appropriate collaboration with the private sector developers. Such partnership will be secured on competitive basis through a transparent selection process, (c) Federal/Provincial/District Governments should facilitate and provide all necessary support to Banks/developers with a view to creating an enabling environment, (d) Federal Government will ensure provision of trunk infrastructure at project sites from National Utilities regarding electricity, gas and telephone. If required Banks may finance extra cost of such infrastructure, (e) Provincial/Federal Governments will ensure provision of trunk infrastructure for housing schemes, (f) To facilitate this process, Governments of Sindh, NWFP and Balochistan may emulate the housing development model recently formulated and adopted by the Government of Punjab for its employees, (g) Provincial Governments should identify lands, wherever available in their jurisdiction, and make it available for promotion for Government housing sector, (h) Provincial Government will rationalize the rates of Registration Fee, Stamp Duty and Property Tax to promote housing sector, (i) Provincial Governments/ICT Administration will ensure effective implementation of foreclosure laws, (j) Provincial Governments will make necessary legislation, if required, for transfer to state land at realistic/affordable rates for the Government employees housing schemes and (k) Federal/Provincial Governments will submit proposals regarding grant of proprietary rights to dwellers of Kachi Abadis located on the Federal Government land for consideration and decision.

The prime Minister has inaugurated (Phase-V) Housing Scheme for Low Paid F.G. Employees (BPS 1-16) on 11-4- 2005 for construction of 1000 multi-storeyed flats in Sector G-11/4, Islamabad. The cost of the flats ranges from Rs.1.2 – 1.8 million. The allottee will contribute 40% cost in installments and National Bank of Pakistan will provide the remaining 60% as loan. Flats will be handed over to the allottees in two years time. 90% apartments are earmarked for Federal Government employees of the Ministries/Divisions, Attached Departments and Sub-ordinate offices and the remaining 10% apartments for the Employees of Autonomous Bodies/Corporations and other Federal Government Organizations.
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Default Salient features of the Budget 2005-06

Source (Ministry of Finance www.finance.gov.pk)

Salient features of the Budget 2005-06



INCOME TAX

Personal tax rates for salaried persons proposed to be reduced to range between 3.5% to 30%.
Annual statement filed by the employer proposed to be considered as sufficient discharge of liability to file a return on the part of the employee.
Enhancement of exemption limit from Rs. 300,000 to 400,000 proposed for senior citizens.
Tax rebate proposed to be increased from 50% to 75% in the case of teachers and researchers.
Increase in limit from Rs. 100.000 to Rs. 150,000 proposed for investment in TFCs and new shares.
Exemption for employees proposed in respect of perqs carrying zero marginal cost to the employers.
Relaxation proposed in conditions for mandatory filing of return.
Straight deduction proposed for donations made to specified institutions.
Removal of limit proposed on value of motor vehicle for the purpose of claiming depreciation.
Depreciation Schedule proposed to be rationalized.
Provision of deductibility of bad debts proposed to be liberalized.
Reduced rate of 20% proposed for small companies – exemption from turnover tax – no obligation to act as withholding gent.
Reduction of 1% in tax proposed for new enlistment on stock exchanges.
Concept of group relief proposed to be extended to services sector.
Two way set-off losses proposed on amalgamation – amalgamation proposed to be opened up for industrial undertakings.
One time exemption proposed on corporatization of individual stock exchange membership.
Exemption proposed for insurance companies in respect of capital gains derived from sale of shares.
Rationalization of withholding tax on sale of hides and skins proposed.
Income from services rendered abroad proposed to be taxed @ 1%.
Withholding tax on ships imported for dismantling proposed to be reduced from 3% to 1%.
Withholding tax rate proposed to be reduced to 1% on imports of certain types of fabrics.
Withholding tax on telephone subscription proposed to be rationalized.
One time waiver from payment of additional tax proposed for telecom companies.
Exemption from income tax proposed for corporatized entities of WAPDA.
Exemption for Hubco in respect of profit and debts on accounts with financial institutions, proposed to be restored.
Exemption from income tax proposed for M/s Fugro Geodetic Limited from survey of continental shelf.
Exclusion of large corporate trading houses from presumptive tax regime.
Enhancement in tax rates proposed for certain exports.
Tax @ 0.1% on cash withdrawal from banks proposed.
Withholding tax of 6% proposed on purchase of new cars.
1% final tax proposed on retailers of textile goods with turnover of more than of Rs. 5 million.
A uniform rate of 6% of withholding tax proposed on all types of contracts.
Option to be assessed under PTR proposed to be withdrawn in the case of manufacturers cum suppliers.
Enabling provision proposed to be introduced for electronic filing of return.
Direct reference to High Court proposed.
Commissioner (Appeals) proposed to be divested of the power to setaside an assessment.
Definition of public company modified to include companies with foreign government holdings of minimum 50%.
Provisions for Alternate Dispute Resolution proposed to be rationalized.
Measures for implementation of Voluntary Pension System Rule proposed to be introduced.

CAPITAL VALUE TAX

Exemption proposed to be allowed to Kot Addu Power Station on assets purchased in 1996 prior to privatization.

WEALTH TAX

Alternate Dispute Resolution proposed to be introduced for wealth tax cases.
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Default Budget Speech 2005-06

Source (Ministry of Finance www.finance.gov.pk)

Budget Speech 2005-06



Mr. Omar Ayub Khan, Minister of State for Finance Delivered in the National Assembly of Pakistan on 6th June 2005


Mr. Speaker

1 Budget is presented every year and God willing, till such time that this world exits, the budget of Pakistan will continue to be presented.


Mr. Speaker

2 This budget carries a historical significance. It is being presented at a stage when the international community is envisioning a new era of economic wellbeing. The awe inspiring pace at which the Peoples Republic of China has grown and the positive change that has come about in the living standards of its citizens has sent out a message to the rest of the world that economic wellbeing of a few nations and the backwardness of the dominant majority is not a predetermined fate. In future the strength of a nation will be determined by the size of its market, the growth of its GDP and the quality, education, expertise and discipline of its work force.


My Speaker

3 In this newly emerging world there would be no respect for underdeveloped nations and no one will pay any attention to their political voice. Sovereignty of only the well off and developed nations will be protected. Therefore we are today standing at a juncturewhere we must improve the economic development and wellbeing of Pakistan and its citizens. Rather, by developing rapidly in theshortest possible time, we can protect our sovereignty from external interference, domination and dictation. Mr. Speaker

4 The freedom from IMF's dictation and reaching of a growth rate of 8.4% is a part of our decisive struggle whose objective is the welfare of the people of Pakistan and making the sovereignty of Pakistan absolute. In the past due to irresponsible utilization of foreign loans Pakistan faced serious problems. Irresponsible governments borrowed even to meet their administrative expenditure.
Due to the personal interest of the Prime Minister Shaukat Aziz, the Government has recently got the Fiscal Responsibility Law unanimously passed by the Parliament under which the irresponsible use of borrowed money has been stopped. Under this law every government will have to spend at least 4.5% of the GDP on the development of social sectors.


Mr. Speaker

5 There have been ups and downs in the economy of Pakistan. In 1999 there wastalk about Pakistan's default. Questions were raised about the existence of Pakistan. Thecountry was given such names that just remembering them makes the heart bleed.


Mr. Speaker

6 During this phase of pain and sorrow, those who loved Pakistan took an oath thatGod willing that stage of embarrassment and dependence will never return. We will neverallow that period to return to Pakistan. I am confident that every Pakistani will join in thisdetermination. This is an issue in which there is no breach between the Government andthe opposition. When it comes to protecting the honour and strength of Pakistan we areall one.

Mr. Speaker

7 With this resolve that we will never allow the Pakistani nation to be taunted aboutdefault, we, from the end of 1999 initiated a new economic struggle. President GeneralPervez Musharraf and Prime Minister Shaukat Aziz started once again to reassemble thebits and pieces and put Pakistan back on the track of economic restoration anddevelopment.

Mr. Speaker

8 With a solid commitment to the glory of the nation, the government has at everystep demonstrated a sense of realism. During the last year in this very Chamber anannouncement was made that God willing in financial year 2004-05 6.6% growth rate inGDP would be achieved. At that time Mr. Shaukat Aziz in his capacity as the FinanceMinister while referring to the challenges being faced by the nation said that achieving agrowth rate of more than 8% of GDP is a challenge for us. He said that although ourbasic target is 6.6% but we will try our best to meet the challenge of 8% growth in GDP.With the blessings and bounty of Allah, the hard work of the people of Pakistan and theexemplary sincerity of leadership the world is today witnessing a miracle in Pakistan.Allah Almighty has within just one year given us the GDP growth rate of 8.4% on whichthe entire nation needs to be congratulated. With this not only have we become the one ofthe five best performing economies in Asia, rather we have become the second fastestgrowing economy in Asia.

Mr. Speaker,

9 With the blessings and bounty of Allah the international community and theinternational financial institutions are convinced of our economic achievements. It is adifferent matter that this news could not reach some of our friends within the country ormay be they do not have confidence on the abilities of their nation. All we can say about them is‘It is flower who is ignorant, although the entire garden knows about it.'

Mr. Speaker

10 During the first ten months of this year overseas Pakistanis remitted $ 3.45 billionto Pakistan. With the blessings of Allah this government has the honour of restoring theeconomy of this country putting it back on the track of fast growth and winning back the complete confidence of foreign investors and overseas Pakistanis. We are sure that any one who loves the dignity and independence of Pakistan will be all praise for this success.

Mr. Speaker

11 The sector of agriculture sector has been facing a lot of difficulties. But this government, to boost the confidence of the farmers, increased the prices of wheat and cotton. Decisive steps were taken to improve the availability of seeds and fertilizer. Keeping in view the requirements we had to import 238,000 tons of fertilizer which was supplied to the farmers at cheaper rate with the government providing a relief of Rs. 3.8 billion. As a result of steps taken during the last two years, additional income of Rs.147 billion became available to the farmers.

Mr. Speaker

12 The pace of rapid economic growths in agriculture sector can be gauged by the fact that during 2004-05 the sector acquired agriculture loans worth Rs.100 billion. During this year we produced 31,663 tractors but still could not meet the demand for tractors. For meeting the rapidly increasing demand for tractors in the country: • we are allowing those companies who want to set up tractor manufacturing units in Pakistan to immediately import 2,500 tractors free of duty.• In case the new tractor manufacturing countries cannot import 10,000 tractors in this manner, the Ministry of Food and Agriculture will finalize the procedure for making up the shortfall through with permission of the ECC of the Cabinet. This decision will give a substantial relief to the Farmers We are importing and making available 200 bulldozers to Baluchistan and 100 bulldozers to NWFP so that better utilization can be made of the water resources and agricultural land. Keeping these facts in view who can deny that the purchasing power of the farmers and cultivators has increased. These farmers and cultivators are the strength of Pakistan, to increase this strength we will walk hand and hand with the farmers and cultivators.


Mr. Speaker

13 The development funds allocated for water for agriculture have been increased by 64%. During 2004-05 Rs 4 billon rupees were allocated for lining canals and water courses. As a result of lining of the water courses water would be available at the far reaches of the system and 25% additional land would be brought under cultivation. 11,000 people would get direct employment and 400,000 jobs would be created through the project of lining of water courses. Next year 10,000 water courses would be lined. Inshallah we will use each and every drop of the water resources of Pakistan in a productive manner and bring welfare to the farmers. The allocation for agriculture has been increased from Rs.7 billion to Rs.9.1 billion.


Mr. Speaker

14 The Mangla Dam is being raised, Gomal-Zam, Kurram-Tangi, Mirani and Subzkaidams are being constructed. Kachi, Greater Thal, Rainee and Pat Feeder Extension canals are being constructed. We spent Rs.21 billion last year on the water project of WAPDA but this year the allocation on this account has been doubled to Rs.43 billon. Pakistan needs large strategic dams to increase its water resources. Whenever the government announces, the required funds for these dams would be made available. We are proud that through the construction of new canals we will bring hundreds of thousands of acres of land under cultivation which would result in enviable increase in the agriculture production of the country and the income of the farmer. We are trying to settle the unpopulated areas of Pakistan and we are confidant that every Pakistani who loves the development and welfare of Pakistan will stand by our side.

Mr. Speaker

15 The engineers of the Army have performed a feet in the reconstruction of Sukkur Barrage of which they can be proud of. Such a huge work was apparently not possible in such a small time. The engineers of the Army deserve to be congratulated and thanked on this account. The repair and reconstruction of Sukkur Barrage is basically the responsibility of the Sindh Government. However, keeping in view the interests of the farmers of Sindh, President Musharraf and Prime Minister Shaukat Aziz decided to get this work done by the federal government. As a result of the love of federal leadership for Sindh, a very big danger for Sindh and Pakistan was eliminated.

Mr. Speaker

16 The services sector performed an exceedingly satisfactory role in achieving thegrowth of 7.9% of growth. It is not something of the distant past that mobile telephone was a status symbol. In one year the number of mobile phones has increased by 125%. The mobile connections in the country have exceeded 10 million. According to one estimate up to June 2005 $ 3 billion have been invested in the telecom sector. Without doubt the people of Pakistan are for the first time witnessing in the country a revolution in telecommunication. For the facility of the people we are proud of this revolution.

Mr. Speaker

17 The income of the government has increased since the government has got out of business. Only in the telecom sector within one year the income of the government increased from Rs.3.7 billion to Rs.15.6 billion. On the other hand the people shall be benefiting from the reduction of activation charges from Rs.2,000 to Rs.500. The facility which people used to get in years is now available to them within a matter of hours. This is a government which works for the benefit of the people. Those who worked for their loss have left.

Mr. Speaker

18 The services provide 52% of the economy and therefore have become the most important source of jobs and livelihood in the country. This year banking and insurance have grown at the rate of 21.76%. There is no previous example of this level of increase.
By getting itself out of business, the government passed on benefits to itself and the people which could not have been even imaged a few years back. This can be explainedby an example where in 1990 only 8% of the assets of the banks were held by the private sector; now 80% of the assets are with the private sector. The result is that in the first nine months of the financial year there was record increase of credit to the private sector which stood at Rs.348 billon out of which Rs.100 billon were given to the agriculture sector. Our policy is not to impose the economic domination of the government rather it is to increase the welfare of the people. It can be easily understood that the impact of unparalleled growth in banking and insurance sectors is influencing the entire national economy. Economic activities are picking pace in all sectors of the economy and with every passing day new job opportunity are being created.

19 Within the service sector wholesale and retail trade increased by 12%. This year 270 companies related to export and import, 240 companies offering miscellaneous services and 117 telecom companies got themselves registered. A total of 2,697 companies started operating in the country. Out of these 54 companies belong to 20 different countries. The entire world believes in the economic development of Pakistan. We hope that some of our internal friends will also have confidence in the people of their country and will take pride in the success of Pakistan.

Mr. Speaker,

20 A special programme has been developed for 32 less developed districts of the country which will benefit 22,000,000 citizens.
21 During the last four years, micro financing was developed on preferential basis.At this time 500,000 families having availed micro financing for moving towards better days. During the next four years the number of those who availed micro financing will increase to three million. Within one year one million small micro loans will be made available. Khushalli bank will by 2007 make 563,000 micro loans available. We are bringing people with limited income away from jobs towards small businesses so that their economic conditions can be improved and they can fulfill their dreams.

Mr. Speaker,

22 Under the Khushal Pakistan Programme next year Rs. 7.5 billion will be spent. Under this programme clean drinking water, sanitation, electricity and farm to market metal roads will be provided on which in the initial two phases, local development projects totaling Rs.5 billon are under implementation. A substantial increase has been made in the households that use electricity
and gas. People having access to tap water have increased from 25% to 40%. Under Khsushal Pakistan Programme young people will get local jobs. The federal government is also initiating a basic health programme for women in all the provinces. The services
of lady health workers will be provided in each district. The government is establishing an institution in the name of NTEVTA which will provide every year 300000 young people with professional and technical training. For this purpose training institute will operate at the level of district and tehsil and the trainees will receive stipend. Rs. 2.3 billion annually will be spent on NTEVTA and its training programme. Prime Minister's programme of one village one product will be initiated. Through this programme the village products will be given a boost nationally and internationally leading to increase in employment opportunities. Due to the positive polices of the government 5,100,100 people got jobs and further 1,300,000 jobs will be available.

Mr. Speaker

23 For developing the SME sector, the government has established a Business Support Fund through which small business loans will be provided.

Mr. Speaker

24 The government has been constantly trying to provide relief to its employees. In 2001 pay scales and certain allowances wererevised. After that in 2003 and again in 2004 15% provisional relief was provided. You will recall that at the time of the previous budget constitution of a pay and pension committee was announced. Alhamdolillah, the committee was setup and has submitted the draft of its report.

25 In accordance with the recommendations of the Pay and Pension Committee and keeping in view the financial constraints of the government, this relief package is announced: • Increases on different accounts totalling up to 30% • 15% increase in pay scales
• 10% increase in pensions• Government will spend Rs 25.5 billion on the increase in pay and pension• New pay scales and increases in allowances and pensions will be effective from1st July 2005

26 The government has increased the limit of minimum wage from Rs 2,500 to Rs 3,000. This is a 20% increase. Every salaried person will benefit from this relief. Similarly, the government has increased the limit of minimum pension from Rs 700 to Rs1,000. A special scheme is being launched for widows and orphans who borrowed up to Rs.100,000 from HBFC so that their loans can be liquidated. In addition, HBFC is bringing in a new package to ease financial distress of its long standing defaulters. This isa government of the people and it will continue to reduce the difficulties of the people.

Mr. Speaker

27. The changes that are taking place can be gauged from the fact that primary school enrollment of children has increased from 71% to 86%. During the last four years the rate of literacy has increased from 45% to 53% whereas the literate males have now become 65%. Inshallah very soon every child in Pakistan will go to school and our national genius will not be wasted.


Mr. Speaker

28 Next year Rs 12.4 billon will be spent by the federation on education. Theinvestment of the federal government in education sector is constantly increasing. During2004-05 from July to March the federation and the four provinces spent Rs. 74.43 billion on education. As a result of this investment in education the country will benefit from trained manpower which becomes the backbone of its economic growth. The youth is the most valuable asset of Pakistan. We will improve their present and future.


Mr. Speaker

29 With the blessings of Allah the Pakistan Railways now does not need subsidy.There will be a saving of Rs.5 billion in the subsidy allocated for it in the current year. During 2005-06 Railway is being provided Rs. 9.8 billion for 12 development projects. We will restore the traditional and romantic glory of Pakistan Railway and will convert it into an institution of public service.


Mr. Speaker

30 Karachi has been connected with Gawadar Port through the Makran Coastal Highway and now the entire coastal region of Baluchistan is ready for development. Projects are being implemented to connect Gawardar harbor with Quetta and other cities of the country and onwards with peoples Republic of China, Afghanistan and Central Asia. Work is in progress on Peshawar- Islamabad and Faisalabad-Multan Motorways. Work on Lowari tunnel will be started and alternate route will be provided to Gilgit through Jalkad Chilas Road. Indus Highway is being made operational between Karachi and Peshawar. Once this highway is completed the distance will be reduced by 400 kilometers. Rupees 20 billion have been allocated in the ADP for the National Highway Authority so that these important projects are completed well in time. The motorways that we build will not only connect the four provinces, but will also connect Pakistan with Central Asia and Middle East.

Mr. Speaker

31 The construction sector grew at a rate of 6.2%. The construction sector has become the main job provider for the technical and non technical people. During 2004-05 134 construction companies registered themselves with SECP. Once these companies become active, further jobs will be created.

Mr. Speaker

32 The private sector has invested $ 4 billion in textile industry and textile exports are touching the $ 10 billion mark. Karachi Textile City is being established. Garments cities are being set up both at Lahore and Karachi. The growth in the textile sector can be judged from 18% increase in the production of cotton yarn, 28.45% increase in the production of cotton and 45% increase in the production of ginned cotton. We have made a commitment that we will add value to the cotton of Pakistan and Pakistan will become the symbol of the best cloth in the world.

Mr. Speaker

33 The growth in industrial sector is a source of satisfaction for the entire country. During the last one year the production of air conditioners increased by 462%, deep freezers by 55%, refrigerators by19.79%, soaps and detergents by 21.86%. This increase reflects increasing purchasing power of an emerging middle class and its financial strength.

Mr. Speaker

34 I want to tell this honorable house that during 2004-05, 31,663 tractors, 1637 trucks and 1,341 buses 87,992 jeeps and cars and 342,678 motorcycles were produced and offered for sale.

Mr. Speaker

35 Here this fact needs to be highlighted that motorcycles and small wagons are an essential part of the rural economy. A 50 to 61% growth indicates that the agriculture and rural society of Pakistan is gaining in purchasing power. Employment and income are increasing and poverty and unemployment are receding.

Mr. Speaker

36 Even today the government of Pakistan is contributing Rs.7.74 for every liter of diesel to give relief to the people. Similarly, on every liter of Kerosene Oil Rs.8.24 are being contributed by the government. Had the government not given this relief to the people, the price per liter of Kerosene Oil instead of Rs.36.24 would have been Rs.28. To maintain the prices of petroleum products at a lower level, the government had to withstand a loss of Rs.52 billion in its revenue. In our neighbouring country the average price of diesel is Rs.40.12 and of petrol Rs.55.93, which on an average is Rs.10 liter more than the prices in Pakistan.

Mr. Speaker

37 We have within one year given 250,000 new household connection of gas whereas gas has been made available to 270 new towns and villages. 529 kilometers of pipeline were laid to make the gas available. Liquefied petroleum gas is being used in 1.81 million houses and it is expected that next year the households using this gas will increase to 2.1 million. Our Pakistan is a Pakistan on the road to progress.

Mr. Speaker

38 During the current financial year 9,300 villages were provided with electricity which is a record. Next year another 13000 will be provided electricity. Rs.15.58 billion has been allocated for projects of power sector under the National Development Programme. During 2005-06 work would start on Neelum Jhelum Hydro Electric Plant. This plant would produce 969 MW electricity. Through a long term plan, action is being taken so that by 2010, 700MW of electricity should be produced through alternate sources. We are not just looking at tomorrow; we are looking at the next 100 years and planning for it so that Pakistan is always successful. For developing alternate sources of energy the Alternate Energy Board has been tasked.

Mr. Speaker

39 International Economists know that as a result of economic development, some degree of inflation is produced. This year the wide spread growth resulted in some inflation to which was added the inflation caused by the increasing prices of oil in international market from which it was very difficult to protect ourselves However, after taking into account all the factors, the government has initiated affective steps for controlling inflation. Today the Cabinet decided that Atta (wheat flour) will be a vailableat Utility Stores at a lesser price. Stability in prices is a priority policy of the government.

Mr. Speaker

40 NFC Award provides the basis for distribution of national resources. Such distribution cannot be made frequently. Therefore, Prime Minister Shaukat Aziz has taken extreme caution in working out the details of NFC Award. He continued consultations with the Chief Ministers of the four provinces. As a result of which most of issues related to the Award have been agreed. Very soon the President will announce the Award in the light of which an equitable distribution of national resources will be adopted.

Mr. Speaker

41 We have previously achieved a growth level of more than 8% on a few occasions but we could not maintain it. This was because the collective political leadership viewed it as a success of the government and its own failure and they tried to dislodge the effort which resulted in growth of more than 8%.

Mr Speaker

42 Those who understand the subject of economics know that if the GDP of a country grows at the rate of 8% it doubles in 9 years. So if on this occasion we do not display narrow mindedness and blinkered vision and do not view it as a success of the government and failure of the opposition; rather, we demonstrate a selfless consensus on the development process, then during the next ten years we could also become a prosperous and developed country like South Korea or Malaysia. The destination is right in front of us, it is just that for reaching it we need a big heart and love for the people and the nation.

Mr Speaker

43 We express our humility and helplessness before Allah. What is within our grasp is the effort, which we are making for this country. During the year that is moving towards conclusion Allah blessed us with rains. Our prayer is that during the year that is beginning we are also blessed with rains. However, keeping in view all factors, we have for the main crops set a target of 6.6% and for the agriculture sector as a whole a growth rate of 4.8%. The growth target for manufacturing sector has been set at 11% and for the services sector at 6.8%. After taking into account the targets of the three major sectors we have set a GDP growth target of 7%. Come let us pray together that Allah in his bounty may bless us with still greater achievements and success.

44 May God help us have a much higher production than the high production of this year and next year may His blessings be more bountiful. Amen Mr Speaker


45 Now I will present before this House the Budget Estimates for 2005-06.


46 The budget for the current year was Rs 902.8 billion. After adding an increase of 21.7% the budget for 2005-06 is set at Rs. 1,098.5 billion. The deficit for 2004-05 was estimated at 3.2% and with Allah's blessings there will be no upward revision in the estimate. However, it is our proposal that the development expenditure for the next year may be substantially increased so that the ongoing developmental activities can be given a significant boost. With this objective in view we propose that for the next financial year the deficit level may be set at 3.8%. The salient features of the next financial year's budget are as follows:

Mr. Speaker

47 Let me now have the honour to present to this house the tax proposals for the next fiscal year.

Sir

48 While formulating budgetary proposals, we have endeavoured to simplify our tax system and make it transparent. It is also our
desire that the prices of daily-use commodities remain at a level where standards of living rise.

Sir

49 I would now invite your attention to proposals regarding customs duty.

Mr. Speaker

50 Agriculture Sector enjoys primary importance in our economy. Therefore we have proposed reduction in many tariff lines pertaining to agriculture. At the same time it has been ensured that such reductions do not adversely affect the existing protections available to our developing dairy, poultry and fish farming sectors.

51 The Government has already reduced customs duty on phosphates. With increased demand for urea, it is proposed that 5% customs duty on urea also be withdrawn. It is expected that this would reduce domestic prices of agricultural products and help boost their exports.

52 Expansion in agriculture sector has also increased the demand for tractors which cannot be met through domestic production. It is therefore proposed to reduce duty on tractors from 20% to 15%. This will provide substantive relief to our growers.

53 Ginning industry has a vital role in the textile chain, therefore its machinery isproposed to be exempted from customs duty. Similarly duty on presses for ginning industry is also proposed to be withdrawn.

54 To support development in the agriculture sector it is also proposed that import of agricultural machinery like bulldozers, angle dozers, graders and levelers be exempted from payment of Customs duty.

55 Similarly to assist the poultry industry to offset recent setbacks, it is proposed to reduce customs duty on some raw materials, especially vitamins used in the poultry feed. Similarly poultry feed making and poultry meat processing machinery is also proposed to be exempted, which will not only benefit the poultry industry but also help stabilize prices of poultry products.

56 Owing to persistent shortages in meat and other edibles, customs duty is proposed to be exempted or reduced, which will help bring down inflation.

Mr. Speaker

57 The plastic sector primarily depends upon the petroleum sector. Prices in the international market of petroleum sector have skyrocketed in the past year. As plastic goods come into daily use of the common man therefore it is proposed to reduce the customs
duty on 55 plastic goods items. This measure will bring down prices in this sector and employment opportunities in the sector will not be adversely affected.

Mr. Speaker

58 It is proposed that to increase industrial production the custom duty on basic raw material may be reduced. Hence raw materials for chemical, pharmaceutical, textiles, furniture, confectionary and soap industry are being exempted from duty or is being reduced.

59 Raw material, components, and subcomponents to manufacture home appliances like Air Conditioners, TV, Washing Machines
Refrigerators, Computer Monitors, Circuit Breakers, energy saving lamps, composite doors and windows, are being proposed to be given reduction in Customs Duty.

60 In addition, machinery and equipment for setting up, balancing, modernization or replacement of industry are proposed to be kept at 5% duty, and duty on their parts is being brought to the same rate.

61 To promote investment in production of capital and engineering machinery making industry we are proposing to rationalize their duty structure. For similar reasons, duty on raw material for zinc and chrome coating is proposed to be exempted. This will also provide relief to down-stream agriculture and automobile sector segments.

62 Presently, machinery and equipment used in hotel and tourism industry carries concessionary duty of 5%, while other items used in such industry are not so entitled. It is proposed that 5% customs duty also be allowed to all other items on certification by Ministry of Tourism. Besides, duty on Machinery, equipment and parts used by Aviation Industry is proposed to be exempted. This relief package will promote investment and generate employment opportunities.

Mr. Speaker

63 This year, we propose to rationalize tariff on CBU car imports to reduce duty slabs to only 3 slabs, i.e., 50% duty on cars upto 1500 cc engine capacity, 65 % for 1501 to 1800 cc and 75% for capacity of more than 1800cc.

64 Duty on tyres used in light trucks and in construction vehicles is proposed to be reduced to 20% and 10% respectively.

65 Bicycle is a popular conveyance amongst the population. To reduce its cost, customs duty on all bicycle parts is proposed to be reduced from 35% to 25%. While doing so, care has been taken to ensure that local industry of cycle parts manufacturing is not affected.

66 Pakistan faces increased traffic congestion, and heavy smoke emitting vehicles are adding to our environmental pollution. It is therefore proposed to zero-rate duty on CKD kits of CNG and Euro-II buses. There is already no duty on CNG kits for cars. Duty on CNG dispensers is also proposed to be reduced to 10%. This measure will stabilize fares in the transport sector.

67 Local industry of man made fibres faces numerous difficulties due to smuggling, under invoicing and under declarations. It is therefore, proposed to reduce duty and raw materials used in production of man made fibres. This measure will help in growth of the industry.

Sir

68 Arrears of customs duty have accumulated over past years, and their recovery ishampered by penalties and fines imposed for non payment. It is proposed to amend law so that a tax defaulter who pays the principal amount of arrear adjudged against him before 31st July 2005 would not be required to pay the fine or penalty. This relief measure is likely to collect some of the long outstanding arrears amount.

69 Last year, importers of plant and machinery for export sector were given option to import tax free machinery for which L/Cs were to be opened up to 12th June 2004. It is proposed that arrival of this machinery may be allowed up to 30th June 2005.

70 Last year the condition of pledging indemnity bonds for customs duty concession was discontinued. However, a number of previous cases are pending with the industry.To save the industry from hardship, the pending cases have been proposed to be settled without submission of installation certificates.

71 Our exporters face a tough competition in terms of cost and quality due to lack of conducive environment at home. To facilitate
exporters, we are making suitable changes in the DTRE Scheme. Similarly, it is proposed to extend temporary importation scheme
under SRO 410 up to 30th June 2006.

72 Duty collected on raw materials to manufacture carpets, textile, leather, surgical and sports goods is refunded in the shape of drawback which is a long standing problem. To remedy the situation, it is proposed to zero rate their major raw materials at import stage from Customs duty.

73 In the absence of passage of Gwadar Port Authority Bill, 2004, there is a strong need for granting exemption to infrastructure projects at Gwadar for its early completion. It is therefore, proposed that provisional exemption of customs duty may be extended to the imports meant for projects such as hotels, power generating plants and water treatment plants subject to certain conditions.

74 Importers whose warehoused goods have not been got cleared within the required time and who get them cleared by 30th June
2005 on payment of duty and taxes, the 1% penal surcharge would be waived.

75 As part of its commitment to simplify and modernize the tax statutes, the government is replacing the existing Central Excise Act of 1944 with the new Federal Excise Act, 2005, so that complexities of the archaic legislation may be eradicated. It will also simplify and cut short lengthy procedures.

76 Textile industry is the backbone of our exports sector. This sector also provides wide spread employment to our labour, skilled workers and to our professionals. Important ingredients used in our textile sector, such as cotton, yarn, cloth and garments are exported. To facilitate this sector it is proposed that we may extend GST zero-rating to entire chain of textile sector. Apart from textile sector, similar zero rating scheme is proposed to be allowed for carpet, leather, surgical goods and sports goods industries.

78 Import and supply of plant, machinery and equipment is presently chargeable to sales tax at zero percent whereas parts thereof are chargeable to sales tax at standard rate. It is, therefore, proposed that import and supply of raw materials and parts used in manufacturing of plant and machinery may be zero-rated for sales tax purposes.

79 Certain consumer items of daily use like soap and detergents are chargeable to sales tax as well as excise duty. This raises cost of
these items. It is accordingly proposed to withdraw excise duty on soap and detergents.

80 With a view to liquidate the swollen stock of past adjudged arrears it is proposed to grant a ‘one-time' waiver of additional tax and penalty, if taxpayers voluntarily deposit the amount of principal sales tax. In such case no fine or additional tax shall be charged on such amounts.

81 Environmental pollution is a serious problem. It is Government policy to encourage the use of Compressed Natural Gas (CNG) so
as to reduce environmental pollution. It is accordingly proposed to grant sales tax exemption on import and supply of CNG to Euro 2 equipped buses.

82 With a view to encourage greater penetration of telecommunication services, particularly to our rural areas, it is proposed to reduce activation charges of mobile telephone connections from the present Rs. 1000/- to Rs. 500/- per connection.

83 It is the Government's policy to allow small and medium enterprises to grow without encumbrance of sales tax. It is therefore proposed to withdraw levy of sales tax from services rendered by laundries, drycleaners and marriage halls.

84 In order to promote export sector the Government is introducing zero rate scheme which is also applicable to their inputs of of utilities. However, the Government is aware of the fact that it will thereby lose tax revenue from textile, leather, carpet, surgical goods and sports goods sector on account of local supplies. Therefore, where retail annual sale exceeds rupees fifty lac in case of cloth, garments, leather goods, carpets, sports goods and surgical goods sectors, it is proposed to levy 3% tax inclusive of 1% income tax which will be final tax.

85 As part of the drive to tax the service sector more effectively, it is proposed to charge the existing excise duty of 15% on actual transaction value of payphone cards and prepaid calling cards, instead of the charges billed by PTCL. The proposed measure would not bring additional burden to consumers and call charges would also remain the same, because the price at which such cards are sold to consumers have an in-built component of excise duty.

86 Similarly, Wireless Local Loop (WWL) is also a phone service like Mobile Phones. Therefore it is proposed that WWL be subjected to a 15% excise duty.

87 The cigarette manufacturers from organized sector have proposed an increase in retail prices. Accordingly, excise duty there sholds on cigarettes are being slightly adjusted upwards.

Mr. Speaker

88 Now I take up the proposals relating to income tax. 89 The salaried class needs our special attention. Our present regime is two tiered. The standard tax rates range between 7.5% to 35%. To simplify and rationalize raw, it is proposed that tax rates for salaried
persons may be reduced to lie between 3.5% to 30%.

90 In order to further facilitate salaried taxpayers, it is proposed that if their source of income is only salary, then they need not file income tax return or employer's certificate if their employer has filed mandatory tax deduction statement of his employees.

Sir

91 Teachers and researchers also need special encouragement. Therefore, the existing tax reduction limit of 50% for them is proposed to be enhanced to 75%. We are also mindful of our senior citizens. They are presently allowed tax rebate at 50% subject to upper income limit of Rs. 300,000/- This upper limit of income is proposed to be enhanced to Rs.400,000/-.

92 It is proposed that perks carrying zero marginal cost to the employers be exempted from tax. This will benefit teachers, hospital employees, hotel employees, employees of transport companies and of educational institutions.

93 Limit of contribution towards approved pension fund for claiming tax credit is being enhanced from Rs. 200,000 to Rs.500,000/-.
94 Taxpayers are allowed tax credit on donations made by them to non-profit organizations. In order to encourage philanthropy, it is proposed to convert this credit into straight deduction from income for tax purposes in case of donations made to specific welfare institutions.

95 The profit on investment upto Rs.150,000 in National Saving Schemes is exempt from withholding tax whereas 10% tax is withheld on investments in TFCs. It is proposed to bring the investors in TFCs at par with them, and to allow similar exemption from withholding tax for investments upto Rs.150,000 in TFCs. In order to provide an incentive for investment in IPOs, the limit of investment for claiming tax credit is proposed to be enhanced from Rs.100,000 to Rs.150,000.

Mr. Speaker

96 The corporate sector has prime importance in the Country's economy. The Government aims to strengthen and revitalize this sector. We had announced in 2002 the gradual reduction in corporate tax rates. These rates are therefore proposed to be further reduced for tax year 2006 to the following levels:-

Banking companies

Public Companies

Private Companies
38%
35%
37%

97 Further more, we propose to exempt capital gain of insurance companies.
98To encourage enlistment, a reduction of 1% in tax is proposed for companies enlisted on stock exchange during next year. The concept of Group Relief introduced last year for industrial sector is proposed to be extended to the service sector as well and concessions in case of amalgamations be expanded.

Mr. Speaker

99 Small and Medium Enterprises (SME) entities are an established vehicle to play a major role in creating employment. It is our proposal that those SMEs that transform into companies, a reduced corporate rate of 20% be applied to them, and no turnover tax be payable by them.

100 The maximum value of passenger transport vehicle (not plying for hire) for the purpose of depreciation allowance is Rs. 1 million. It is proposed that this maximum limit be removed.

101 Currently, withholding tax is deducted @ 3% of the value of the condemned ship imported for the purpose of breaking. This industry was once a thriving sector providing livelihood to thousands of people. With passage of time, ship-breaking activity has come to a standstill. In order to revive this industry, it is proposed that rate of withholding tax be reduced to 1%.

102 It is our proposal that large trading companies be exempted from Presumptive Taxation so that more of them are attracted to make investment in Pakistan.

Mr. Speaker

103 It is admitted that our tax to GDP ratio needs to be improved. This can only be possible by expanding the tax net. During the last few years comprehensive initiatives have been launched to broaden the tax network. To further strengthen these initiatives it is proposed that on cash withdrawals from banks of amounts exceeding Rs.25,000, withholding tax at 0.1% be deducted. Mr. Speaker, I would like to assure that the banks will not be asked for transaction details of their clients in this respect. However, the taxpayers will be entitled to adjustment of this tax.

104 Sales Tax regime has been rationalized by zero-rating imports and supplies consumed by textile, carpets, leather, surgical and sports goods' export sectors. As a package deal their tax rate is being revised upward by 0.25%.

Sir

105 The Government is committed to simplify tax laws and procedures and to automate them. It is therefore proposed that taxpayers be allowed to file various returns and statements electronically. It is further proposed to divest first level Appellate Authorities of the power to set aside or remand a case.

106 The Minimum wages in Pakistan are regulated through an Act promulgated in 1969. The minimum wage of un-skilled workers was fixed lastly by the Federal Government in October, 2001. The Labour Policy announced in 2002 envisages revision of minimum wages after every three years in consultation with National Tripartite Minimum Wage Council. This is therefore the appropriate time to revise it from Rs.2500/- per month to Rs.3000/- per month with effect from 1st January, 2005. The same is so being proposed. This increase will be 20% over previous minimum wage levels. 105 Old-Age pension is granted to the insured persons of industrial, commercial and other organizations. The employers as well as employees are contributing to the Fund being managed by the Old-Age Benefit Institution. At present these workers are getting minimum pension of Rs. 700/- per month which was increased in November, 2001. The President of Pakistan while addressing the First Convention of Workers, Employers Bilateral Council of Pakistan, also announced to increase the minimum old age pension, which is therefore being proposed to be increased from Rs.700/- to Rs.1000/- per month with effect from 1st January, 2005. This increase is over 40%. In the end,

Mr. Speaker

107 Let me mention that the policy initiatives that we took last year have not only paid rich dividends but also stimulated growth. Our policies have brought about a healthy change in the tax environment and resulted in significantly reducing costs of doing business in terms of time as well as money. I would also like to assure this August House that it is our endeavour to continue to rationalize and simplify our tax structures with the objective of providing relief to the deserving segments and to promote economic activity which will bring us returns in the short as well as the long term.
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Pakistan Economic Overview 2006:

Population:
165,803,560 (July 2006 est.)

GDP (Nominal):
$119.79 billion (2006 est.)

GDP (Per Capita Nominal):
$769 (2006 est.)

Exports:
$14.85 billion f.o.b. (2005 est.)

Imports:
$21.26 billion f.o.b. (2005 est.)

Reserves of foreign exchange and gold:
$11.71 billion (2005 est.)

FDI:
$3 billion (2005 est.)

http://www.cia.gov/cia/publications/...elds/2046.html

Pakistan Economic Overview 2012

Population:
215,103,560 (July 2012 est.)

GDP (Nominal):
$268 billion (2012 est.)

GDP (Per Capita Nominal):
$1250 (2012 est.)

Exports:
$67.85 billion f.o.b. (2012 est.)

Imports:
$51.36 billion f.o.b. (2012 est.)

Reserves of foreign exchange and gold:
$67.71 billion (2012 est.)

FDI:
$5.5 billion (Minimum yearly from 2007-2012 est.)
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Dear,

Its a magnificent effort made,but its a bitter fact to assimilate that the gap between the poorer and the richer has really vastened for the last 4 or 5 years.Although the present Govt. is doing its best to put the country on the prosperity track.


Regards

Aftab Hussain
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