Truth about population growth
 

[B]Truth about population growth[/B]


THE government has been painting a rosy picture of the population scene in Pakistan. But a document prepared by some donor agencies has exploded the myth propagated by the prime minister that the population growth rate has come down to 1.8 per cent and will be further reduced to 1.3 per cent by 2020. The document obtained by this newspaper says that the population is growing at the rate of two per cent per annum. The Unicef puts it at 2.2 per cent. Not much will be gained by juggling with figures to deceive people since erroneous calculations will only result in lopsided planning. Besides, it lulls the population policymakers into a false sense of complacency with no effort being made to analyse the factors that are contributing to such a high population growth rate in Pakistan and rectify these.

There are basically two reasons which have pushed up the demographic growth rate. One is the usual story of failures in the delivery of contraceptive services. As has been the practice in other areas of the social sector, the government has been disengaging itself from the population welfare programme leaving it to the NGOs — 264 of them have been registered with the National Trust for Population Welfare — to attend to this sector. Although many of the NGOs are doing excellent work, their reach is limited. They have 479 outlets when the government has nearly 2,500 centres. Again, as is the case with the health and education departments, the performance of the family welfare centres is below par and they have failed to make the impact they were expected to make. There has been talk of an appropriate strategy for the future with special emphasis on advocacy programmes, participation of communities in service delivery, and reducing unmet need for contraceptives. All this sounds impressive, but without efficient monitoring, it is unlikely that these family welfare centres will be activated and mobilised.

There is something more that needs to be looked into. This is the issue of gender equality which is directly linked to the success of a programme seeking to regulate the family size. Surveys have now clearly established that the key factor in determining people’s choice of the number of children they want to have is not so much religious beliefs as was the case once, but their expectations from their offspring. Considering the low status of women in Pakistan, the preference for the male offspring is usually pronounced. Their birth is seen to be an insurance policy for the parents for their future and a factor of social standing for the family. Therefore, the gender of the children and the order of their birth generally determine the family size. A country, where male prejudices are strong and women constitute the neglected section of the community, cannot succeed in curbing the galloping population growth rate. Now is the time to address the male biases in our society to change the attitudes of the people. This must be done at every level — in education, through the media, through political reforms, as has been done to some extent, by empowering women economically and socially, legislating pro-women laws and making the legal system women-friendly. If undertaken in earnest, such measures can bring about changes in the national status of women and thereby have an impact on the demographic factor.

[B]Direct tax policy principles: a review-III [/B] MOHAMMED ASHRAF

ARTICLE (May 24 2007): Donation out of Penalty: A heavy non-performing portfolio and default on part of the clients is a serious problem confronted by the Shariah compliant financial product provider. This problem could threaten the success of the Shariah compliant financial products service provider.

If clients do not honour their commitment in respect of timely payment in respect of a Shariah compliant financial product, it could cause irreparable loss to the system. In Islam, it is permissible to penalise a financial debtor, who delays payment of debt without any genuine reason.

The Holy Prophet (PBUH) said, "A rich debtor who delays payment of debt commits zulm". Hence, jurists allow the punishment (Taazir) to such a borrower in the form of a fine. In the opinion of some Maliki jurists, a delaying borrower would be obliged to pay for charitable activities.

In view of the severity of the problem, all Shariah bodies including the Shariah bench of the Supreme Court of Pakistan, have approved the provision of a penalty clause in contractual agreements that keep a balance between the requirements in view of the severity of the problem and that of the Shariah conditions/principles, to maintain the fine difference between interest and profit on Shariah compliant financial products intact.

However, the penalty proceeds would be used for charity because penalty on default in repayment cannot become an automatic source of income for the creditor. Hence, it is imperative that a new sub-section needs to be introduced in section 20, whereby all such penalties are donated, and amounts are reflected, in the tax returns of such 'not for profit making organisations,' having NTN.

GROUP RELIEF:

THESE POINTS ALSO NEED CONSIDERATION

LOCAL CONSOLIDATION:

1. How will the territorial boundary of a multinational group be defined

2. Will the controlled foreign companies be included in a group

3. The term 'group' is not defined in the Companies' Ordinance, 1984, hence, will any new framework have its own definition?

4. Should groups be given the option to be taxed on the basis of a group consolidated account or should the consolidated basis be mandatory - and what about groups, which are not required to produce consolidated accounts under the Companies' Ordinance, 1984

5. How will associated companies and minority interests be dealt with?

6. How will losses be dealt with?

7. Will the elimination, on consolidation, of profits on intra group sales of trading stocks and other intra group trading transactions be followed for tax purposes

8. How will consolidation adjustments be dealt with?

9. To the extent that group member companies outside the national territory are included, how will the limitation on national taxing right afforded under bilateral tax treaties be identified

INTERNATIONAL CONSOLIDATION:

1. It will be necessary to harmonise the basis of computation of similar profit and gains, especially trading profit. 2. It will be necessary to harmonise the basis of taxation of intra-group dividends.

3. It will be necessary to determine some method of apportioning consolidated profits and losses between countries having DTT and dealing with effects of cross-border set-off of losses against profits.

TAX RETURN:

It is requested that the tax return dates should be extended from September 30 to October 31 and from December 31 to January 31, as this will provide an ease to taxpayers. However, this needs to be coupled with obligation over Withholding Tax agents to send Withholding Tax deduction certificate and tax payment receipts to the person from whom tax was collected or deducted till September 30 or December 31. This may also be coupled with rigorous penalties.

It is also suggested that persons, from whom Withholding Tax was deducted or collected, need to file tax returns, however, the literacy rate may become an impediment in this.

TAX REFUND, ADJUSTMENT AND VERIFICATION:

Central Board of Revenue's recent refund adjustment circular is highly applauded, however, the point is to verify the refund. Refund was verified at the time of assessment and then again at the time of refund. The problem is coupled when the tax payment receipt are from all over Pakistan. This needs to be resolved.

ROOT CAUSES OF TAX EVASION - PERCEPTION:

Firstly, this Income Tax was introduced in 1860 after the Ghadar or Battle of Freedom for five years, and then there was a three years gap in order to subsidise the loss of this battle. It was again imposed in 1868 till 1873, and then again imposed in 1886 for around 30 years. Then in 1918 a new enactment was enacted, which was renamed as 1922 after some amendments, which was then changed into Income Tax Ordinance, 1979 and currently available in the shape of the Income Tax Ordinance, 2001.

However, in Pakistan, there were and are, many perceptions regarding the applicability of Income Tax being Un-Islamic, as people believe that zakat, khiraj, fai and Jazia are the only prescribed taxes. However, taxes are not limited to that, but one may consider the import tax - chungi that was first imposed during the period of first four Caliphs, as this was a need of society at that time.

However, the wrong perception about taxes has still not been corrected, although corrective measure have been taken by reducing the tax rate, etc.

OWING TO THE FOLLOWING REASONS THEY REMAIN INTACT:

1. Name-based exemptions, instead of industry or principle based exemptions

2. Social welfare schemes are not normally undertaken owing to non-availability of principle-based exemptions for donations and deductions for the taxpayer

3. In Islam, there is a concept of donation, the left hand should not know when the right hand donates and one must help their poor relative, however, no such concept is recognised in the Income Tax Ordinance, 2001

4. Zakat is a deductible allowance but it is not allowed to be deducted from tax payable - this strengthens the concept that Income Tax is Un-Islamic.

5. A person earning 200K required to feed a family of three member, while another person earning the same income are required to feed not only his family but parents and small sister and brother. Both are taxed in the same way!

6. The concept of one's deduction and other's income is absent, as this may bring new taxpayers on verification.

POINT FOR CONSIDERATION CENTRAL BOARD OF REVENUE:

1. Consider tax reforms which take into account all taxes borne and collected by businesses, as well as the cost of tax compliance - Total Tax Contribution

2. Increase governments accountability and communicate with taxpayers as to how taxes are spent

3. Consider clear tax education campaigns to explain the taxes, how to pay them and the benefits to all stakeholders

4. Consider how simplification of tax legislation, the ease of compliance burden, and the consolidation of taxes might generate benefits for both governments and taxpayers.

5. Consider consultation with taxpayers when developing ideas for tax changes

TAXPAYERS:

1. Gather information on the total tax contribution, including all taxes borne and collected, as well as the cost of tax compliance.

2. Ensure that information around the total tax contribution is made accessible to governments and tax authorities to help inform their decisions over reform.

3. Communicate the total tax contribution to the wider stakeholder groups to demonstrate the extent to which they are supporting public finances through taxes.

4. Engage in regular dialogue with the Central Board of Revenue over the need for reform and specific areas of concern.

I personally appreciate the efforts of the CBR who is trying to provide developed countries facilities in a developing country, however, they are in a room full of age-old garbage with a vision of a clean room. The Central Board of Revenue is moving in the right direction, but when things move in the right direction then expectation grows! As stated earlier, taxpayer's need to know how their taxes are spent and I would like to end on a small part of history.

"At times, Syria (Sham) was attacked by the Tatars, the King decided to take judicial decree from Islamic Scholars for imposing a tax to meet the expenses. When the issue came before Imam Noovi [Rahmat ullah Alah], he opined

The King lives a lavish life and has a lot of wealth, he also spends a lot of money but his wealth, income and perquisites are not taxable, let him start first by donating his wealth, and then the treasury has the right to tax over the common people."

(Concluded)

[B]The cost of rising prices[/B]

PRICE is the end product of all economic activities. It is therefore a complex issue to be tackled. The current upsurge in prices can be attributed to failures of the market as well as of official policies. The worst hit is the 74 per cent of the population which lives below two dollars a day or less than the officially fixed minimum wage of Rs 4,000 per month. In view of the rising cost of living, the industrial workers find that they are unable to make both ends meet. Countrywide people are living under the worst kind of poverty. The purchasing power of the poor is being eroded by food price inflation, now at an abnormally high rate of 10.2 per cent. A report carried in this newspaper on Friday says that the speculators and hoarders, active as usual on the eve of the budget, have raised the prices of many kitchen items. The price of wheat, a staple diet of the poor, also shot up because the government chose to allow exports without first building strategic stocks required to keep market volatility under check. Nor was there much wisdom in allowing exports in the early stages of crop harvesting when the initial and final crop estimates always vary because of the inability of food departments to accurately assess the crop size. On Thursday, the government had to suspend exports to prevent speculators from exploiting the market but flour mills representatives claim that the raised prices of atta would not come down.

A day later, export of gram was also suspended but that of rice continues with its price soaring

With the overseas sales of manufactured goods falling, the government appears to be focusing on the export of food grains at the cost of the poor consumers. The inconstancy in policies — allowing and then suspending exports — is not in the best interest of the market. The government’s intervention in the event of market failure should not create market distortions. What the government needs to do is to actively help people with excess money to find productive avenues rather than create artificial shortages for profiteering especially when the country has production and trade surpluses as in the case of wheat and gram. One gets the impression that whether it is the government, the market or the State Bank, the commitment to price stability is weak. All business ethics are set aside by the renter class to make a quick buck.

Apart from the fiscal expansion that contributes to high inflation, the government is dragging its feet on updating the competition law to curb unfair trade practices. The State Bank has yet to start inflation targeting while keeping the food prices outside the ambit of its monetary policy. While the major economic agents have easy access to corridors of power, the poor have no voice in policy-making that can only be ensured by periodical elections and democratic accountability. The principal issue in combating high inflation and poverty is the quality of economic growth. Despite robust growth averaging seven per cent for the past four years, unemployment is on the rise again. In the absence of a growth strategy anchored in equity, price stability will remain elusive and economic progress would have no meaning for the vast majority. Only a few will continue to benefit at the expense of many; a perilous course indeed.

IMF surveillance: review
 

[B]IMF surveillance: review[/B] By Aftab Ahmad Khan

The International Monetary Fund (IMF) administers the international monetary system and operates as a central bank to central banks. This institution was established on December 27, 1945 when 20 countries signed the Articles of Bretton Woods Agreement (charter). Financial operations of the Fund began on March 1, 1947.

The celebrated economist Lord Keynes and the American diplomat H.D. White played a leading role in the creation of the Fund.

The purposes of the Fund are to encourage international monetary cooperation, facilitate the expansion and balanced growth of international trade and thereby contribute to he promotion and maintenance of high levels of employment and real income and to the development of productive resources of its members and help member countries in correcting balance of payments deficit, promote exchange stability and assist in the establishment of a multilateral system of payments in respect of current transactions between members and the elimination of foreign exchange restrictions which hamper the growth of world trade.

Central to the purposes and operations of the Fund is its mandate under the Article of Agreement to “exercise firm surveillance over exchange rate policies of members” and to adopt “special principles for the guidance of all members with respect to their policies.”

The IMF carries out this mandate by examining international monetary issues and by examining all aspects of member countries macro-economic and related structural policies, since these policies taken together have important implications for the exchange rate system.

The IMF surveillance is designed to encourage members to adopt appropriate policies and to help them in identifying issues and problems in a timely manner so that members can adopt corrective measures more quickly.

In recent years fundamental shifts in the global economy such as rapid growth of private capital markets, increased regional monetary integration, the implementation of current account convertibility and market oriented reforms in a large number of countries have greatly increased the importance of effective and timely surveillance.

These transformations are being mirrored in increased responsibilities for the IMF. Its membership has grown rapidly, so has its policy advice, financing and technical assistance and training to a record number of countries.

Prior to the collapse of the par value system in 1971, the implicit surveillance under the Bretton Woods system focused only on the obligations a member had to maintain the par value of the currency. After 1971, international financial arrangements became more complex as countries were free to adopt any type of exchange arrangements ranging from “continuing to peg their currencies rates to the US dollar, to allowing the rate to be freely determined by private exchange markets without official intervention.” The concept of explicit surveillance introduced in the 1978 amendment to the IMF’s Articles of Agreement was based on the idea that good international behaviour depended not on whether a country maintained a fixed rate or a float or a peg to another currency, but rather on the policies that the country actually followed.

The principles and procedures that guide Fund surveillance over exchange rate were established by the amendments to Article IV and by a 1977 decision of the IMF Executive Board. These guidelines specify that the IMF shall monitor whether members are abiding by a “code of conduct” in their external monetary relations or pursuing unwarranted monetary or fiscal policies for balance of payments purposes. The guidelines also specify that the IMF shall monitor whether changes in a country’s exchange rate system seem to be warranted by underlying economic and financial conditions. Such appraisals are to be made against the backdrop of the general economic circumstances facing the country. Surveillance thus has come to require a broad and detailed economic review of member countries.

A crucial instrument of IMF surveillance is the Article IV consultation, which focuses on a systematic review of economic developments and policies in the member country and how these policies have affected the exchange rates and balance of payments with other countries. Relevant structural policies are also examined if these are germane to macro-economic developments and policies. In recent years surveillance has also taken into account such topics as poverty, industrial, market and environmental issues. As financial markets around the world have become more integrated, IMF surveillance has become more focused on capital account, and financial and banking issues.

Aside from country surveillance, IMF also conducts surveillance at the global and regional levels. So far as global surveillance is concerned, the IMF’s World Economic Outlook prepared twice a year and the International Capital Markets Report provide opportunities to assess global implications of members’ policies and give an excellent analytical account of key developments in the international monetary system and its prospects.

While conducting regional surveillance, the IMF examines the policies pursued at regional levels. The IMF has also increased its participation in member countries regional initiatives.

The financial crises in Mexico in late 1994, East Asia in 1997-98, Russia and Brazil in 1998 and Turkey and Argentina in 2001 have demonstrated the spill-over effects of these on other emerging economies and have further strengthened the case for effective surveillance by IMF. It has become all too clear that in this new environment stricter policy discipline is needed to guard against adverse and rapid market reactions, including those that originate elsewhere. Experience indicates that delayed adjustment forced by markets can be more costly and disruptive than measures promptly taken. There is, therefore, a greater need for continuous policy review by all countries and for the Fund to participate more fully in the process.

In the interest of stabilising the international economic situation, the IMF should strengthen its surveillance over industrial countries. Financial policies of the major industrial countries determine to a large extent the stability of the international capital markets and a lack of balance in their macroeconomic policies and insufficient policy coordination can result in sharp fluctuations in interest rates and exchange rates. When interest rates in major industrial countries rise, capital flows to developing countries tend to decline, and might even be reversed, resulting in disruptions for developing countries. Moreover, instability in interest rates and exchange rates among industrial countries impose costs on developing countries, owing to their limited opportunities to hedge against movements in these rates.

Recent events have also clearly demonstrated that effectiveness of Fund surveillance is predicated on the timely provision of data. In this behalf, it is heartening to learn that the Fund has helped to develop and disseminate a set of standards regarding the coverage, frequency and timelines of data; their quality and integrity, and their availability to the public.Countries subscribing to this Special Data Dissemination Standard agree to adhere to these sound practices and to provide information to the public via an electronic bulletin board on the Internet maintained by the Fund.

This transparency provides market participants the information needed to form judgments on the policies and performance of subscribing countries and thereby contributes to more informed investment decisions.

In recent years, the Fund has adopted several measures to make surveillance more effective with closer policy dialogue with counties and increased focus on counties that were seen to be at risk and where financial tensions were likely to spill-over to other counties. Furthermore, Bi-annual IMF Board discussions of members’ policies in the context of surveillance have been instituted to review principal issues repeatedly surfacing in consultation with members; a report on these discussions is transmitted to the Interim committee, thus providing a bridge between the Board’s work on surveillance and the committee’s oversight role.

It is generally recognised that the sound evolution of the world economy calls for greater attention to new issues and risks. At the same time, the traditional areas of surveillance should not be neglected. To make these competitive objectives compatible, the following principles have been agreed upon by the Fund:

(a) Article IV consultations will concentrate on core topics directly linked to the Fund’s statutory mandate to exercise “surveillance over exchange rate policies of members.”

(b) Greater attention will be paid to capital account developments.

(c) Counties where developments have potential spill-over effects on others will be more closely examined.

(d) Where important economic policies are formulated at supra-national level, with potential impact on several economies, the Fund will continue to strengthen its focus on regional surveillance.

[B]For a fair tax system[/B]

[I]Pakistan can reduce its fiscal deficit if a comprehensive programme, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation [/I]
By Huzaima Bukhari and Dr Ikramul Haq

According to a latest report by the US Central Intelligence Agency (CIA), Pakistan under the rule of General Pervez Musharraf is still a very 'high risk country' on a number of accounts. It notes with concern the ever-increasing military expenditure (4.5 per cent of GDP) and huge fiscal deficit (against revenue of $20.55 billion, expenditure is $25.65 billion and public debt is alarming high at 55 per cent of GDP).

The poor segments of society, since the takeover by General Musharraf in 1999, have been subjected to a number of taxes, whereas the rich still enjoy tax exemptions. What makes the situation more painful and shocking are the unprecedented non-development expenditures. In Budget 2006, the current expenditure demand for Prime Minister Secretariat alone was 538.751 million rupees, and that of its Inspection Commission 20.250 million rupees; Staff Household and Allowances of the President 290.244 million rupees; for NAB alone 797 million rupees and National Assembly 1005.933 million rupees, just to mention a few.

It is deplorable to note that for servicing domestic debts, the government requires 190.78 billion rupees, for the servicing of foreign debt 48.72 billion rupees, and for foreign loan repayment 56.35 billion rupees.

Do we still need any further proof to show that our rulers wasting national revenues and resources on non-development expenditures? They have yet to learn to live within means, the figures relating to domestic debt, its servicing and new loans of billions of dollars are simply horrifying. Due to wasteful expenditure on current account and deficit financing, there emerges an artificial lack of funds for investing in social projects benefiting the poor.

The Central Board of Revenue (CBR), through oppressive tax measures, managed to collect a record revenue of 713.4 billion rupees during the fiscal year 2005-06. There is every likelihood of collecting 900 billion rupees during the current year. However, these big figures fail to improve the burgeoning fiscal deficit which is still over 200 billion rupees.

During the fiscal year 2005-2006, the budgetary gap was 610 billion rupees and the revenue deficit was 175 billion rupees. Tragically, CBR has remained unsuccessful in improving tax-to-GDP ratio which is just 9.2 per cent. Twenty years back it was 18 per cent! Indirect taxes still account for 69 per cent of total tax collection. Tax-to-GDP ratio for direct taxes is hardly 3 per cent which is a disgrace for the policy makers and tax collectors. The most lamentable aspect of prevalent tax structure gives a free-hand to industrialists, importers, contractors and traders to charge the people an amount that is far more than what they pay as taxes. They are even passing on their income tax liability (personal tax) to clients/buyers, courtesy presumptive tax regime imprudently resorted to by CBR merely to show boastful collection. Incidentally, the high level of tax collection by CBR is mainly attributable to heavy taxes on imports and export.

It is a shocking fact that even under income tax, imports and exports are subjected to presumptive tax levy, though exporters may not have taxable income due to huge depreciation allowance after massive investment in plant and machinery. The State Bank of Pakistan has given a free hand to banks to exploit account holders and borrowers. Now these exploitative money lenders are showing extraordinary profits by denying due share to deposit-holders and are paying taxes in billions to CBR instead of distributing profits to deposit-holders with whom they, under the law are maintaining accounts on 'profit and loss sharing basis'. At present, importers, contractors, retailers and even service providers (except companies) are, in fact, passing on their tax burden to consumers and clients. This erratic taxation is at the expense of equity and those poor people who are the actual victims of tax highhandedness.

Fiscal policy in Pakistan has become a tool of oppression and the poor people are the real victims. Direct tax revenues have increased from Rs 40 billion in 1990-91 to over 270 billion this year, whereas in reality they have been turned into indirect tax through presumptive tax regime. In a federation like Pakistan, levying of taxes on goods and services within respective territories should lie exclusively with the provinces. Our federal government has even violated the constitutional command by levying taxes on services and property under the garb of Income Tax. This is the worst example of 'federal highhandedness' where the victims are the poor people of the less privileged provinces. The constitutional responsibility of distributive justice and social equality has been altered, only to show higher collection of tax in pursuit of fixed targets by the federation. The provinces have been made dependent by not extending due taxes rights and also being deprived of correct net tax proceeds in utter violation of formula given in the supreme law of the land. Resource mobilisation at federal and provincial levels should have been priority number one, but our rulers are looking towards foreign donors to construct big dams and are selling profitable national assets at throwaway prices to earn hefty commissions.

If we want to dismantle the present exploitative tax system and remove economic inequalities, the main strategy in the forthcoming budget must be to achieve the goal of reducing/eliminating the fiscal deficit to a level of 2 per cent to 1.5 per cent of the GDP, at any cost. Our revenue collection should not be less than 2 trillion rupees in the next financial year. There is no justification whatsoever to reduce development expenditure, which is already dismally low. Fiscal adjustment through reduction in development expenditure will not solve our problems. There is a dire need to reduce non-developmental, wasteful expenditure, but the real salvation lies in resource mobilisation. Broadening of tax net is the need of the hour without forgetting that those who enjoy exemptions and concessions should be brought into net. Existing taxpayers are grossly under-reporting their incomes, should be tackled with skillful policies (carrot and stick!) by gradually making them pay taxes correctly.

The rich and mighty who do not pay taxes are the real culprits. Exemptions and concessions that are prevalent in our tax laws (the whole of Second Schedule in the Income Tax Ordinance, 2001, most of the items of Sixth Schedule of Sales Tax Act, 1990, and innumerable SROs relating to Customs and Excise) should be done away with. There should be a level playing field for everybody. A wise step will therefore be to immediately abolish these exemptions and concessions instead of increasing incidence of taxes on the common people of Pakistan. The process of industrialisation, which alone can provide more jobs and sustainable growth, investment in unproductive sector like real estate and capital market should be heavily taxed and funds should be diverted to meaningful sectors by lowering corporate tax rates.

If the government removes all these exemptions and concessions, provides proper incentives for industrial investment, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential ones and succeeds in imposing GST across the board (preferably with a low rate of 2 per cent at one single point), there will be no budget deficit, rather we will have surplus in three years. This goal can only be achieved if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery (by not just dismissal from service but rather by making the system workable and just).

The present tax machinery is not only corrupt (part of the blame goes to the State as no reforms have been made to improve their economic lot and working conditions) but is also inefficient, incompetent and ill-equipped to increase the revenue. Radical changes are needed to:

(a) Revamp the entire tax apparatus.

(b) Improve both structural and financial conditions of tax machinery.

(c) Make CBR and independent Board answerable to Parliament. It should be an efficient, people-friendly and service-oriented organisation aimed at solving taxpayers' problems by giving them proper guidance and counseling and not harassing them for self-aggrandisement. There should be a complete change in the image of tax machinery, which is presently considered as corrupt, inefficient, exploitative, oppressive and a callous apparatus.

(d) It should be remembered that introducing irrational, harsh and unjust tax measures cannot broaden the tax base. Justice, fairness and equity, instead of fixing unreasonable budgetary targets should be the main concerns of our tax policy.

Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit within a short span of time provided that a comprehensive programme, well-designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation. We need a fair and equitable tax system which should be managed by honest professionals, who are accountable by a select committee of Parliament, and are free from governmental controls.



The writers ([url]www.huzaimaikram.com[/url]) are leading tax advisers and authors of many books and articles on taxes in Pakistan.

[B]Rentier elite [/B]
[I]The authoritarian and rentier nature of Pakistan's ruling elite has been both the cause and effect of the political conditions in which the state finds itself[/I]

By Dr Ayesha Siddiqa

The other day someone asked me why there was such a difference in the political conditions of India and Pakistan. India with its established democratic norms is on the opposite end of the political spectrum to Pakistan. Again, while India had managed to get its first constitution within four years of its independence, it took Pakistan about nine years to achieve the same objective and even that was scraped within two years of its making. Is it because the Indian leadership is more sagacious than Pakistan's or is it that the people there are better than what we have in this country?

The difference becomes glaring particularly when we realise that the basic chemistry of the people is similar. The common man of the two countries is almost similar or at least they started out from the same starting line. So, what went wrong with Pakistan that it never managed to establish democratic norms or strengthen civilian institutions?

The answer lies in the nature of the ruling elite which in Pakistan's case was always authoritarian and rentier in nature. The nature of the elite was both the cause and effect of the political conditions in which the state found itself.

The fact is that authoritarianism has always flown in the veins of the country's leadership. Although it is considered sacrilege to question the country's leadership, especially those who established the state, the fact is that none of the decisions taken in the early years reflected any sensitivity for democratic norms. The decisions to annex Kalat or to dismiss the provincial government in the frontier province or engaging the military in a conflict with India are highly questionable. According to the famous Pakistani historian, Ayesha Jalal, such decisions were necessitated by the need to consolidate a fragile country. However, the fact of the matter is that these were precisely the decisions which embarked the polity on its peculiar course from which it could never extricate itself.

The leadership, which followed, was no different. The first popularly elected government that followed after thirteen years of military rule was not inclined to follow democratic principles. In fact, as soon as the 1973 Constitution was made Bhutto started introducing amendments to the constitution. Moreover, he erred by involving the military in political issues thus giving the armed forces the confidence to take over the reigns of the government again.

Such authoritarianism of the ruling elite got a fillip during the early years due to the formulation of a patron-client relationship. The hostility with India required strengthening of defenses and forging alignments which could then be used to keep a belligerent bigger neighbour at bay. Perhaps, it could be argued that Mohammad Ali Jinnah did not envision hostile relations with India. He had, as sources suggest, retained his house in Bombay where he planned to return and settle down after partition. In his imagination, life would return to normal after the two countries were made. Such a plan did not reflect an appreciation of realpolitik or realities of partition. Jinnah was certainly not prepared for the carnage or for getting a Pakistan truncated due to the absence of Kashmir.

The war of 1947, which was meant to complete Pakistan, had far reaching implications for the country. It not only created a festering wound for both countries, but it also created conditions which pushed Pakistan into a system of global patronage.

This system refers to the patron-client relationship developed with the West. The earlier leadership including Jinnah was keen to woo the US as a balancer of power. A patron-client relationship was finally established during the end of the 1950s when Pakistan joined two US-sponsored military alliances, SEATO and CENTO. Pakistan's military had agreed to fight the Communist threat on Washington's behalf in return for money, weapons and political patronage. Issues such as the Rawalpindi Conspiracy were flagged to get American attention and to justify an alignment with the West. People were told that there was a real threat of Communism to Pakistan.

Twenty three years later, a similar argument was made by Zia-ul-Haq while re-establishing a strategic alignment with Washington. In a mercenary fashion, the military and the ruling elite agreed to serve American interests as long as Washington could guarantee relatively free flow of financial and material resources.

The same equation was struck by General Musharraf after 2001. There are many who argue that Pervez Musharraf should have evaluated the situation and behaved in a more constrained manner than what he eventually did. There are others who argue that a political government might have behaved a bit differently. However, both these arguments miss out on a fundamental reality that nothing would have changed the situation. Being rentier in nature, the elite has always jumped at opportunities to offer its services in return for American patronage. Of course, with international crises, which have implications for American security, the rent of Pakistan's rulers and its military always goes up. The military, in particular, is a direct beneficiary of the patron-client relationship because it is the only institution which can contribute the maximum to fulfilling American security objectives. Whether it is fighting Communism or Jihadis, or providing bases to American forces against the Soviet Union, Iran and others, Pakistan's military has always been the best option. Therefore, it is not surprising that the US has been more forthcoming in rendering support to the military and military regimes in Pakistan.

The above argument raises a vital question regarding issues on which the rulers have not delivered such as rolling back the nuclear programme or handing over AQ Khan to the US. These tricky issues do not necessarily denote divergence of views, but the domestic compulsions of the rentier elite. The arrangement between the patron and the client requires for the latter to have sufficient domestic control besides having the ability to deliver according to American strategic objectives. A restless mass of people can become problematic in delivering to the external patron. The issue with domestic control, however, is that it can be ensured through a combination of coercive tactics and acquiring some political legitimacy. The latter is achieved through creating an impression that the elite can deliver certain goods and services which are fundamental to the survival of the people and the state. This means propagating military security as essential for the survival of the state or to propagate that the state and its ideology is under great threat.

Pakistan's nuclear programme, its India policy or the Islamic agenda are essential ploys for gaining legitimacy at home. In the absence of commitment to socioeconomic development, such policies or popular agendas are critical in getting public support. The elite make people believe that they are getting their money's worth. Hence, these are the very issues on which a blatant comprise cannot be done.

The external patrons understand the compulsions of their clients and do not push them beyond a certain point. The upshot of my argument is that the patron-client system is designed to ensure greater accountability to the external patrons instead of the domestic audience. Devoid of any sense of responsibility to the people, the ruling elite is under no pressure to introduce political accountability or ensure socioeconomic development. Consequently, domestic politics in Pakistan has become nothing but an immoral game of realpolitik which lacks the capacity of bringing substantive changes within.

Budget
 

[B]Here and now[/B]
[I]As the current wave of politicisation happens to be coinciding with the upcoming announcement of the budget, there could be no better time than now to bring the defence budget into the spotlight[/I]

By Aasim Sajjad Akhtar

The political space that exists during a period of popular uprising demands the raising of radical demands and political programmes that stretch the imagination of the mass of people yearning for change. Working people across the country, particularly in urban areas, are waiting in earnest for a clear alternative to status quo. In spite of the fact that the overall political environment has become considerably more charged over the past two months, many people still wonder whether anything substantive will really change when Musharraf & co. finally abdicate.

The chances of substantive change in the short-term are admittedly limited. But this of course does not mean that the political discourse cannot be radicalised so that the objective of substantive change itself dominates the longer-term agenda. And arguably the most important aspect of this process will be challenging the national security paradigm that remains the most crucial pillar of the military's political project.

The current wave of politicisation happens to be coinciding with the upcoming announcement of the budget, and thus an opportunity presents itself to address several outstanding structural features of the official cost-accounting exercise. Even if we cannot address all of the closely interrelated aspects of our public income-generating and expenditure exercises, there could be no better time than now to bring the defence budget into the spotlight.

One of the reasons why so much resentment has built up against this present government is the extensive -- and somewhat undisguised -- nature of the military's independent corporate activities. Ordinary working people have now come into direct conflict with the military over arbitrary land grabbing, and many other such intrusions of the men in uniform into the public sphere. Civilian bureaucrats -- including those in the upper echelons of the administrative apparatus -- despise those serving and retired military officers who have displaced them. The whole country is painfully aware of the manner in which this government has reinforced the military's growing economic power, and penetration of social life more generally (importantly an exhaustively researched book on the military's corporate empire by Dr Ayesha Siddiqa has just been released, which proves beyond a shadow of a doubt just how deeply entrenched an economic force the wardi walas actually are).

However, there was a time before the creation of this vast empire when the military relied almost exclusively on the official defence budget to meet its corporate needs. And till this day, the defence budget remains a symbol of the military's domination over the economic, political and ideational structures of the polity. Much hay has been made of the fact that the share of the budget dedicated to military expenditures has decreased in recent years, but this is a function of number-fudging and other technical shenanigans rather than a reflection of a genuine reconfiguration of our allocative priorities. Much of what is spent on defence is hidden from public view (read: not reflected in the official budget) in any case, and over the past few years, pensions to military men have been shifted to the civilian pension head in the budget (it was recently reported that 80 per cent of the expenditure under this head goes to military men).

Thus this is the time and place to raise again what has been a long-standing demand of many principled political and social activists in this country, namely that details of the defence budget should be presented to the general public in broad daylight and that this budget should be subject to open debate (to the extent the last few budget debates have actually been anything more than a tokenism).

Perhaps more importantly there should be a clear demand for the defence budget to be slashed in accordance with the government's supposed commitment to establishing peace in the region. Indeed, a detailed investigation into what constitutes the defence budget will reveal such a significant portion of it being channeled to meet 'non-combat expenditures' that the demand for a substantive reduction in the defence budget will be stating the obvious.

Even beyond this there is a need to revisit the logic of national security and the obsession that many of us continue to have with the imperative of guarding our frontiers. There is no immediate threat to our territorial sovereignty, and, as a matter of fact, there rarely has been at any stage over the past 60 years. Instead, under the guise of establishing military parity with India (which is impossible in any case given how much bigger that country is), we have totally surrendered our political and economic sovereignty by becoming economic dependencies of the US and more recently of the international financial institutions.

These are all clear assertions of our political reality that need to take centrestage now. They have a direct bearing on the longer-term struggle for an end to oligarchic rule. And they do strike a chord with working people who are less and less tolerant of hyper-nationalist invocations of the 'greater national interest'. Since the 18th of May, in the middle of the working class area of the federal capital, Aab Para Chowk, a 65-year old political worker has set out his stall pledging to hunger strike till death, vowing that he will keep at it until mainstream opposition parties vow to slash the defence budget if and when they come to power. Every evening hundreds of people gather around and listen intently to the very compelling logic of this man with a cause.

There are undoubtedly many more such acts of individual and collective defiance that can and will continue to come to the fore so long as the current wave of politicisation persists. It is in such an environment that the mainstream parties have been compelled to radicalise their public utterings and demonstrations of power. Things will not remain this charged indefinitely but for as long as they do, it is crucial that no opportunity to dissent against the established order is lost. The budget in particularly presents a heaven-sent opportunity to expand the base of a movement that has predominantly been viewed as a battle over the meaning of rule of law.

The generals will sooner or later need to part company with Musharraf, making him the fall guy so that the military as an institution can be protected from as much of the public glare as it possibly can. But more and more people are becoming aware of the fact that the problem is not with Musharraf's person as much as it is with the military's domination of political and economic life. This needs to be said as openly as possible, in as many different ways as possible, and with as much fearlessness as has been exhibited by the thousands who have already emphatically said no to dictatorship. What better place than here, what better time than now?

Pakistan's Public Debt
 

[B]Pakistan's Public Debt: A brief overview-I[/B]

EMMA XIAOQIN FAN

ARTICLE (May 29 2007): Public debt is an important means of bridging government financing gaps. Effective and efficient utilisation of public debt can increase economic growth and help a government to achieve its development and social objectives. However, public debt is also a doubled-edged sword.

Excessive reliance on public debt and inappropriate public debt management raise macroeconomic risks, impede economic growth, and hinder economic development. For example, high public debt demand can increase the domestic interest rate thereby crowding out private investment.

An escalating external public debt stock increases the probability of default, raising the interest risk premium charged by creditors. High interest payments further enlarge a country's public debt obligations, accelerate budget outlays, and squeeze capital investment and social expenditure.

In extreme cases, governments can be forced into defaulting on public debt, which tarnishes a country's international reputation and makes further borrowing difficult, whereas magnetisation of public debt generates high inflation. Both of these actions are likely to precipitate capital flight and spark financial crisis.

This note briefly examines the public debt situation in Pakistan. The objective is to understand the assistance from multilateral sources, especially from the Asian Development Bank (ADB), in a broader context. The note pays particular attention to external public debt in the country.

2. PUBLIC DEBT SOME CONCEPTUAL CONSIDERATIONS: Public debt can be examined from the sources, the uses, and debt management perspectives. In debt financing, government can borrow from a number of sources, including the central bank, domestic commercial banks, domestic non-bank sectors, and external sources.

Government usually utilises a number of options at the same time. Public debt raised through different sources has different macroeconomic implications. Borrowing directly from central banks is equivalent to printing money. It increases the high power money which in turn translates into monetary expansion.

This approach is thus highly inflationary and generally discouraged. Borrowing from domestic commercial banks is less inflationary, although it may crowd out private investment. Government borrowing from the non-bank private sector has no effect on the money supply and hence no implications for interest rates and inflation from the supply side. However, the debt held by people can exert an upward pressure on interest rates from the demand side. Borrowing from abroad has become a major feature of developing countries. Foreign borrowing allows a country to invest and consume beyond the limit of current domestic production, and can be conducive to economic growth. However, excessive reliance on foreign borrowing exposes a country to numerous risks (Hanif 2002).

THE USE OF PUBLIC DEBT ALSO HAS ECONOMIC IMPLICATIONS: Generally speaking, financing capital and development related projects can help a country to build its production capacity and facilitate economic growth. In particular, borrowing from external sources enables a country to finance capital formation not only by mobilising domestic savings but also by tapping into foreign capital surplus.

Foreign borrowing can thus lead to more rapid growth. For example, Siddiqui and Malik (2002) found that foreign borrowing increased resource availability and contributed to economic growth in South Asia. However, excessive foreign borrowing and its improper use generate severe debt service obligations and can constrain economic policies and growth.

A country's debt management program needs to take into consideration both the source and use of loans so as to raise and utilise the debt in ways that benefit a country's long-term development. Debt management is the process by which the government aims to acquire and utilise the debt efficiently and effectively. Debt management strategies not only need to explore new and cheap sources of finance, but also to consider the proper use of borrowed funds.

The technical aspects of debt management focus on the need to determine the level of financing requirements and to ensure that the terms and conditions placed on borrowers are commensurate with their future debt servicing capacity. The institutional aspects of debt management deal with organisational, legislative, accounting, and monitoring aspects of new borrowing as well as the total stock of debt. The availability of funds and the market conditions are important for the choice and design of borrowing instruments (Hanif 2002).

A key to external debt management is debt sustainability. This term refers to the level and combination of debt which allows a country to meet its current and future debt service obligations in full, without recourse to debt relief and rescheduling, and avoiding accumulation of arrears. Sustainability of debt is a situation where the debt-to-income ratio declines, or at least, remains constant over years.

A general consideration is that for the debt ratio to remain unchanged, the budget deficit does not have to be zero, but it must not push the debt to increase faster than GDP. Thus, the conventional wisdom does not consider public debt per se as a major problem. Rather, the core problems are the mismanagement and/or unsustainable nature of public debt (Hanif 2002).

There are various indicators for determining a sustainable level of external debt. Broadly, there are two types of debt indicators that assess the country's debt sustainability position: solvency and liquidity indicators. The solvency indicators include ratios such as debt to GDP, debt to foreign exchange earnings, debt servicing to foreign exchange earnings, and the public debt service to current fiscal revenue ratio.

These measures reflect the country's ability to service its external obligation on a continuing basis. The liquidity indicators include ratios such as reserves to short-term debt and reserves to total debt. They reflect a country's liquid assets that affect the ability to service its immediate external liabilities.

(To be continued)

(Emma Xiaoqin Fan is a Senior Public Resource Management Specialist in the Pakistan Resident Mission of the Asian Development Bank.)

[B]Pakistan's Public Debt: A brief overview-II [/B]

EMMA XIAOQIN FAN

ARTICLE (May 30 2007): Public Debt in Pakistan: Pakistan entered the 21st Century with serious financial problems. Public debt exceeded 90% of its GDP, over 600% of its annual revenues, and debt servicing accounted for over half of current revenues. In 2001, Pakistan was the only country in South Asia to be classified as a severely indebted country by the World Bank.

Due to the inability to service external debt, there were two consecutive rounds of debt rescheduling by Paris Club members and one from the quasi-London Club between 1998 and 2001. Pakistan had to seek exceptional financing arrangements from the International Monetary Fund in January 1999, after facing a severe balance of payments' crisis. This outcome was the result of persistent and rising fiscal deficits, stagnant export receipts, declining worker remittances, and large current account deficits.

The Pakistan economy has experienced a turnaround since 2000. Growth has accelerated, and most macroeconomic indicators have improved. Public debt indicators have also shown significant improvement.

Modest growth in public debt, coupled with the strong growth in nominal GDP, led to a significant fall in public debt to GDP ratio, from 81.4% in 2001/02 to 56.1% in FY 2006 (Table 1). Over the same period, domestic public debt to GDP ratio fell from 40.4% to 29.9%, while the external public debt to GDP ratio fell from 41.0% to 26.2%. In fact, FY2005/06 is the fifth successive year that the public debt to GDP ratio has improved. This is also the first time in more than two decades that the ratio has fallen below 60%. The Fiscal Responsibility and Debt Limitation Act, 2005 envisaged a debt to GDP ratio of 60% by FY13. The actual achievement has thus exceeded the target in the Act (IMF 2006).

The improvement in the public debt to GDP ratio in FY06 was due to the fact that both domestic and external debt grew slower than GDP. The growth in domestic debt has been slightly faster than that of external debt. It rose by about 5.9% while external public debt grew by about 5.0% relative to the previous year. Total public debt stock stood at around $72 billion, about 5.5%, higher than the previous year, of which domestic public debt consists of about $38 billion. As a result of a stronger rise in domestic debt, the share of external public debt in total public debt decreased from 50.4% in FY2002/03 to 46.7% in 2005/06.

The debt servicing capacity of Pakistan has also improved over the past few years. As growth in foreign exchange earnings in Pakistan outpaced the growth in debt servicing payments, external public debt servicing as a share of exports of goods and non-factor services declined from 35.8% in 2001/02 to 14.1% in 2005/06. The external debt service to gross reserves ratio has declined from about 70% in 2001/02 to over 20% in 2005/06. International reserves act as a cushion against fluctuations in foreign exchange earnings.

Pakistan's external debt is predominately long and medium term debt. Over 99% of public and publicly guaranteed debt is over one year. Pakistan acquired about US $3.3 billion long-term loans in FY 2005/06, of which about $1.7 billion reflects the long-term flows from ADB and the World Bank.

While approximately $1.7 billion in loans were committed by international donors for the earthquake fund in 2006, the actual disbursement was limited to US $768 million, of which $673 million of the disbursement came from the ADB and World Bank. The remaining multilateral loans disbursed in FY06 were mainly to support poverty reduction and economic reforms.

The ADB disbursements in FY06 included $60 million and 70 million for social services programs to the Punjab and Sindh Governments respectively to improve the quality of human capital, specifically in education and health. Another ADB loan of $80 million was disbursed under the financial markets and governance program. Punjab received $199 million from the World Bank for education sector reform. The World Bank also disbursed a loan of $102 million for Punjab irrigation/policy-II and $69.5 million for NWFP (SBP 2005).

Clearly, the loans from the ADB and the World Bank play an important role in the government's external debt financing. The relatively high share of the multilateral loans calls for sound program/project design and implementation in order to yield the maximum benefits to the country. Indeed, the multilateral development banks are the largest creditors for Pakistan's external public debt, totalling about 51% of total public external debt in FY2005/06.

This is followed by the Paris club which accounts for about 39%. In recent years, the outstanding stock of Paris club debt declined, partly due to debt write off. Debt from other sources has been relatively small. Despite this, activities from bilateral agencies have also increased.

Pakistan also accessed the international capital market to raise funds through the issuance of Euro Bonds in FY 2006. This raised $800 million which consists of 10-year bonds of $500 million and US $300 million in 30-year bonds. The issuance of the Euro bond not only addresses the government's finance needs, but also helps to establish a long-term sovereign benchmark that would help local corporate enterprises access global markets.

4. FACTORS UNDERLINING THE IMPROVED DEBT INDICATORS IN PAKISTAN AND ISSUES The improvement in the debt indicators reflect acceleration in economic growth, improvement in fiscal conditions, increases in export earnings, and higher capital inflows. In particular, external conditions have become more favourable to Pakistan since September 2001. This has enabled relief of public debt amounting to about $3.7 billion between 2001 and 2003.

Coupled with debt rescheduling, this has significantly reduced Pakistan's debt servicing burden. There have been increased official transfers, especially between 2001 and 2004. Total official transfers amounted to about $4.5 billion from 2001 to 2006. Workers' remittances have also increased significantly, averaging around $4 billion a year during 2003-2006 compared to about $1.5 billion in the 1990s. These factors have reduced the need for external borrowing.

There has been a particularly noticeable increase in foreign direct investment (FDI) in Pakistan in recent years, reflecting the country's privatisation programs and increased investor confidence. FDI rose from $483 million in FY2002 to $3.5 billion in FY2006. The first half of FY2007 saw a further 64.6% increase to $1.9 billion.

The sale of the Karachi Electric Supply Company and the partial sale and transfer of management control of Pakistan Telecommunication Company Limited revitalised the privatisation process in 2006. FDI inflows, excluding privatisation, also rose by 70% in 2006. Strong foreign demand for Pakistani assets (including from oil-exporting countries in the Gulf region) was also reflected in the favourable terms for new bond placements in international capital markets. The FDI and other capital inflow have more than offset the current account deficit, and resulted in payments surplus of over $1 billion in 2006.

While Pakistan has significantly improved its economic performance and the debt situation, strong efforts must be made to guard against potential risks. First, the improved debt indicators in Pakistan are closely linked with favourable external conditions. To sustain sound economic performance over the long term, Pakistan must maintain political and economic stability.

Economic reforms must go on apace to sustain and improve domestic and foreign investors' confidence. A sound policy environment that attracts sustained FDI inflow is particularly important given that FDI involves long term financing and is not susceptible to sudden withdrawals. Creating a conducive policy environment for increased domestic investment is also a key.

Second, coupled with strong capital inflow, the current account deficit has increased since 2005. In FY2006, the current account deficit, excluding official transfers, more than tripled to $5.7 billion, or 4.4% of GDP as import growth outstripped export growth because of higher oil prices and strong domestic demand.

Privatisation proceeds, official grants, and portfolio investment together financed 45.3% of the current account deficit. The rising current account deficit per se is not necessarily a problem. For example, strong domestic capita formation can lead to increased demand for capital goods financed by capital inflow.

Singapore had run current account deficit for more than 10 years during its rapid industrialisation period. To a certain degree, a current account deficit and balance of payments surplus indicate the strengths of the domestic economy and the confidence of foreign investors in the domestic economy.

However, increased current account deficits raise concerns about the sustainability of financing large deficits in the medium and long term if the capital inflow is not significantly contributing to the increased productive capacity and efficiency of a country.

Third, the large inflow of official assistance and workers' remittance also poses the risks of Dutch Disease in that high capital inflow can lead to real exchange appreciation, rendering domestic tradable sectors, especially the manufacturing sectors, less competitive. The utilisation of foreign aid thus must be geared towards spending on increased productivity and to provide a conducive environment for private sector development while avoiding the fostering of a bloated public sector.

5. CONCLUSIONS: This note briefly reviewed public debt information for Pakistan. It reveals a number of important features. First, the public debt situation is closely related to broader economic performance. Accelerating economic growth, improving fiscal conditions, increasing export earnings, and increased foreign direct investment have provided the foundation for improved debt management in Pakistan.

Second, the improved debt situation is also attributable to more favourable external conditions for Pakistan since September 2001. This has led to debt relief and rescheduling, and increased official inflow and workers remittances.

While it has helped the country to achieve a significant improvement in debt indictors in the short run, it also exposes Pakistan to risks relating to the sustainability of both economic performance and debt management.

Third, in order to sustain and build on its existing achievements, Pakistan needs to deepen its structural reforms to improve the domestic investment environment, external competitiveness, sustain macroeconomic stability, and maintain political stability.

Reforms that improve a country's creditworthiness and investment climate are important for improving domestic savings and investment, attracting FDI, and diversifying the financing sources.

FDI is especially important because it not only brings in finance, but also contributes to technology transfer and improved management know-how. Pakistan has had considerable success in attracting FDI in FY06. However, much can be done to improve on this performance in the years ahead.

Fourth, sound public debt management supports macroeconomic stability and economic growth. Debt management should take advantage of favourable economic conditions to strengthen the technical and institutional capacity in managing public debt.

Fifth, multilateral development banks play an important role in lending to the Government. This calls for sound project and program designs and implementation to enhance the effectiveness of development assistance. Introducing innovative and efficient assistance approaches and practices in response to the changing context of economic development is especially important.

The recent economic development and developments in external debt show that Pakistan is at a cross road. The strong economic performance, including the improvement of the public debt situation over the past few years, if sustained, can put Pakistan on a sustained growth path. But there are real challenges and risks that need to be managed carefully. Maintaining political stability, sound macroeconomic management, and structural reforms are key for Pakistan to move forward.

[B]Alarming rise in food inflation [/B]

EDITORIAL (May 31 2007): The SBP inflation monitor for April, 2007, released the other day, has recorded 9.4 percent food inflation, as against 3.6 percent in April last year, representing an alarming almost three-fold rise in food prices.

Of the total 124 commodities included in the food group, the prices of 47 items such as eggs, some fruits, cooking oil, different types of rice, chicken and some vegetables registered an increase, ranging from 10 to 100 percent. However, the non-food inflation declined to 5.2 percent during the month from 8 percent in April last year.

According to the SBP monitor, the general CPI inflation rose to 6.9 percent in April 2007 on year-on-year (YoY) basis from 6.2 percent, as registered in the corresponding month of the last year. The higher CPI inflation is due to strong food inflation that has muted the impact of declining non-food inflation, says the SBP report.

The bottom line is that the declining trend in non-food inflation this year has been offset by a galloping rise in food inflation, with the result that CPI inflation has remained at a higher level than the FY2007 target. The worst hit segment is 74 percent of the population, which lives on two dollars a day. The purchasing power of the low-income groups has been further curtailed by the food price inflation.

Meanwhile, speculators and hoarders, ever vigilant to exploit the negative market trends, have been creating artificial shortages to cash in on the self-created crisis by pushing up prices of kitchen items. By the way, food inflation is probably considered the worst form of inflation as it unsparingly targets the poorest and most vulnerable sections of society by eroding their household budgets.

Viewed in the overall perspective, inflation can have a number of adverse consequences for the economy. First, it erodes the purchasing power of the population and hence leads to a contraction in economic growth. Linked to it is the increase in macroeconomic instability as an inflationary environment generates many uncertainties. Secondly, inflation has a regressive impact on the poverty profile of a country.

Frequent increases in overall prices hurt the poor more as the size of their consumption basket is significantly reduced due to every inflationary bout. Thirdly, inflation can damage a country's competitiveness by leading to an appreciation of the local currency, and a consequent overvalued exchange rate, which will have a negative effect on exports. According to available data, Pakistan's annual average inflation rate (using the GDP indicator) from 1980 to 1993 was 7.4 percent.

However, the acceleration in inflation in the mid-1990s reversed this trend. With the overseas sale of manufactured goods falling, the government seems to be focusing on export of foodgrains at the cost of the poor. Incidentally, the recent ECC decision to suspend wheat export was taken only after firm representations were made by Sindh government and the flourmill owners over a spurt in wheat and flour prices in the local market.

A distribution of price change meanwhile suggests that 15 out of 43 food items witnessed a rise of over 10 percent in inflation during the month under review. While six items recorded moderate inflation of five to 10 percent, other 11 items demonstrated subdued inflation of up to five percent. According to one analyst, the combined weight of commodities with double-digit inflation was about 42 percent of the food group. There is a widely held perception that after securing reasonable quantum of exportable surpluses in agriculture, the government is contemplating earning additional foreign exchange, wheat export ban or no ban.

We believe that the problem in fact lies with a distorted supply chain, and not with the inadequate or insufficient availability of essential food items in the market. Price manipulation through hoarding and use of other illegal practices is mainly to blame for the high inflationary trends in the country. Not only is the government required to help people with surplus money to find productive avenues for their capital rather than create artificial shortages through hoarding and black-marketing, it should address the problem of supply chain distortions. Only then can it help solve the problem on a permanent basis.

[B]A semi-failed state [/B]

By Mir Adnan Aziz

When called a failed state we are irked and cry hoarse that we are not one. One step down follows the semi failed state defined as a country whose government maintains all the trappings and appearances of power, legitimacy, and control. Its army and police are integral and operative (not so in Karachi on that fateful and tragic May 12). Its institutions function. Its government and parliament promulgate laws and its courts enforce them. It is not challenged by any competing military structures within its recognised borders (unfortunately we are).

Yet, the semi--failed state -- while going through the motions -- is dead on its feet. It is a political and societal zombie. It doesn't function mainly due to inertia and lack of better or clear alternatives. Its population is disgruntled, hostile, and suspicious. Other countries regard it with derision, fear, and abhorrence. It is rotting from the inside and doomed to implode. In a semi--failed state, high crime rates and rampant venality, nepotism, and cronyism affect the government's ability to enforce laws and implement programmes. It reacts by adding layers of intransigent and opaque bureaucracy to an already unwieldy mammoth. The institutions of the semi--failed state are hopelessly politicised and, thus, biased, distrusted, and compromised. Its judiciary is in a state of decrepit decline.

The utter and insidious institutional failure that typifies the semi--failed state is usually exposed with the total disarray that follows, the latest being the quixotic foray against the judiciary and the tragic blood spattered May 12 in Karachi, conveniently forgetting what Augustine said: "Take away justice, and what are governments but great confederacies of robbers?" To deflect criticism and in a vain attempt to reunite its fracturing populace, the semi--failed state often embarks on grandiose claims and adventures cloaked as geopolitical necessities. In all honesty does all this not hold true of the imbroglio that Pakistan is in today?

We should look at different facets of this paradox that we have made Pakistan into, review noteworthy incidents and cases, and critique the apparent lack of effort to develop and strengthen national state institutions and responsibilities. Without being unduly pessimistic, we are foolishly heading towards a needless and serious risk of extinction as a country and nation. Social justice prevails when government acts and legislates in accordance with what people are and what they should be able to do, but all we see today is the powers to be renouncing all the principles of authority, and bent upon the destruction of all the securities of our lives and liberties.

The most important aspect of any government effort should be institution building, not just nation--building. This is where our ruling behemoths have failed so utterly in just about everything they have done. To build a nation without transfusing vital institutions is to build a house of cards ready to collapse. What we have today is gloom amongst the masses but trumpeting of utopian heroic optimism by the rulers. What stands in the way of most utopias is not pestilence and drought but human behaviour. So utopians have to think of ways to control behaviour, and when propaganda doesn't do the trick, more emphatic techniques as in vogue today are tried. Flashing a military salute generally doesn't work.

In Pakistan what we have today is a self appointed "enlightened" and so called "benevolent dictator", a more modern version of the classical "authoritarian despot". One who legitimised himself through an utterly dubious referendum and is "benevolent" enough to allow for some democratic decision making (of his liking) to exist. The democratic creed has become so universal that no dictator wishes to be seen as violating it. What typically happens is that a strong man gets into power. Sometimes or quite often as in Pakistan this is by an overt coup d'etat, but many times they are "elected". Once in office they use the legal trappings to cement their power. Frequent steps are, changing the laws on term limits, outlawing rival parties, or arresting opponents using newly crafted laws and when necessary, election fraud. Whatever techniques are used they go to great lengths to proclaim that their state is still democratic because it holds "free and fair elections".

Modern dictators always attempt to disguise their actions within a "democratic" framework. Voting is the backbone of this effort or rewriting the laws so that they can stay in office beyond their present term. The threat is not from an individual, but from a permanent shadow government which has arisen over the past sixty years. The names of the players change, but those pulling the strings continue to come from the same group. What we have now is the predominant assumption that with the opening of the economy to international investors and businesses, Pakistan as a whole will prosper. As such, the democratic opposition movement as well as its "exiled" leaders will be marginalised.

This role is also in conflict with the military's primary role, namely, professionalism. The greatest danger is that the self--seeking role could sow dissensions within the rank and file of the military establishment itself. The conflict of interests among themselves could lead to rift and instability. This discord could grow as the democratic opposition weakens or the threat of the contending forces subsides. Under the arrangement in which the military maintains total control over almost all spheres of state power it will and has participated or influenced all three branches of government. The decisive power resting with the military may provide "stability" and continuity but its side--effects will be, as is so obviously evident, disastrous.

Within this overall context, Pakistan has to carve out its distinctive economic role and national existence for the future. It will have to hitch on to the rising tide of growth in the region and make the best out of its comparative advantage based on its natural wealth, human resources and capabilities and its own unique geographic position.

In this new mission, national consensus, reconciliation, and an early agreement among all contending forces for the future course of action is a must for both national survival and renewal. All parties must be convinced that their interests can be served by working together, not against each other. Just as there is a need for a national leader who can marshal overwhelming support to carry out national reforms in a non--contentious way. Our military should strive to be professionally capable of defending our vital interests in the twenty--first century. What the ordinary Pakistani, tired of armed conflict, uncertain status, and impoverished conditions wants is the rule of law and a genuinely representative government with ultimate authority descending from the people and a dignified and definite place within this homeland of ours. This is the most opportune moment for national reconciliation and reconstruction and hence giving to the people the most elaborate social edifice ever. It is our duty to demand and work toward the restoration of a government: of, by, and for the people.



The writer is a freelance columnist. Email: [email]mir_adnan_aziz@hotmail.com[/email]

India's new robber-baron capitalists

By Praful Bidwai (The writer, a former newspaper editor, is a researcher and peace and human-rights activist based in Delhi )

If growing income and regional disparities are one characteristic of the rapid economic growth that South Asia has recently seen, another is sleaze, especially in the corporate world. Both features are particularly pronounced in India, as are rising shares of salaries of directors' remuneration in corporate incomes and profits .

Thus, Prime Minister Manmohan Singh's admonition to the Confederation of Indian Industry against sky-high corporate salaries and the need to keep "profit maximisation within the bounds of decency" didn't come a day too soon. Nor did his warning that "vulgar display (of wealth) insults the less privileged" and causes despair and unrest.

Eleven Vidarbha farmers committed suicide the very week Singh said this, taking the number of suicides this year to an astounding 400. This sadly underscored the extreme polarity between the world of CEOs, with their multi-crore rupee incomes and glitzy lifestyles, and the peasant-farmer's grim debt-laden reality. This polarity is a terrible fact of India's post-1991 growth. It should shame the government into corrective action.

Singh told CII industrialists that the growing number of Indian billionaires, Indian companies buying multinationals, and soaring CEO compensation, all mean "you have benefited from growth…" But he exhorted them to "work in a harmonious environment." He quoted Keynes to extol austerity and thrift, and said the "better-off" must make growth "more inclusive".

This advice was based on a frank acknowledgement of the skewed nature of India's growth. Singh proposed a "Ten-Point Social Charter". He exhorted industry to develop "healthy respect for your workers", go beyond "tax planning" in defining "corporate social responsibility", "discourage conspicuous consumption", invest in R&D, employ the underprivileged, and adopt environment-friendly technologies, etc.

Some of the exhortations might sound naïve or "goody-goody". They ignore the Indian corporate sector's less-than-enlightened notion of self-interest. But the emphasis on obscenely high salaries is necessary in a country where 40 per cent of people survive on less than $ one a day. Today, there are some 1 lakh super-rich Indians with wealth of $1 million-plus (not counting immovable property). Some 100 corporate CEOs earn Rs 1 crore-plus. Several take away more than $1 million (Rs4 crores). CEO salaries have been annually growing at 30 to 40 per cent--as against 9 per cent GDP growth.

At least 194 Indian corporate employees are sitting on stock options of Rs1 crore-plus. Some have options worth Rs100 crore--Tech Mahindra's Vineet Nayyar (Rs216 crores), L&T's A M Naik (Rs165 crores), and Infosys' Mohandas Pai (Rs134 crores). There's a gross disproportion between these figures and the subsistence-level incomes of most Indians. But Singh's ideas have been savaged by India's mainstream media. Many editorials have treated his warnings against growing inequalities as economic heresy. He's going "back to the past", and endangering "prosperity", they said. Capping CEO salaries will "shackle private enterprise" and kill the goose that lays the golden egg.

Some commentators trivialise Singh's warning about inequalities by saying that buying Mercedes-Benz cars doesn't cause backwardness in Bihar! Yet others say his concern about "conspicuous consumption" is a new-fangled obsession which sits ill with his earlier emphasis on "growth", "individual initiative and enterprise" which "will enable us to eradicate the ancient scourges of mass poverty, ignorance and disease."

Another writer tendentiously claims, with supreme arrogance, that the poor just "don't have the mind-space" to bother about how much the "haves" get. Such media reactions are inspired by a standpoint that's worse than ultra-conservative. It's explicitly, vulgarly libertarian: it holds that it's wrong in principle to limit the freedom of enterprise; it's absolute; the market is fundamentally democratic and must never be curbed.

Libertarianism celebrates greed and castigates all concerns with equity and justice as "the politics of material want, where poverty is ascribed a moral glow". Let's leave aside for a moment the unbridgeable moral chasm between this, and the Gandhian view of the poor as Daridra Narayan, or the respect many fine economists have for the ecologically sound, community-based "moral economy of the poor".

The point is, libertarianism totally misrepresents the market. The market equates unequal agents (e.g. starving workers and rich employers) despite their vastly asymmetrical bargaining power. Markets don't work spontaneously. They have to be organised and made to follow certain ground-rules. In classical capitalism, the state and society laid these down. They legislated the minimum wage and length of the working day, set taxation levels, regulated profits, and encouraged or banned certain activities. In neoliberal capitalism, that role is appropriated by private corporations. This undermines democratic decision-making and triggers a "race to the bottom" in working conditions.

Libertarians take a morally monstrous position by contending that those with vastly different starting-points (e.g. in access to property) will end up in equal places because the market is "free". This is complete nonsense. Markets are normally unfree, and competition is often imperfect. Unequal information is available to different actors, there's unfair pricing, poor demand-supply adjustment, and other distortions.

In India (and Pakistan), the argument for changing the direction of growth is overwhelmingly persuasive. India's post-1991 growth has produced disparities worse that those during the Victorian period of mass impoverishment that Charles Dickens so movingly described. Economists quantify inequality by a measure devised by Corrado Gini. If the Gini coefficient is 0, it means a society is totally equal. If it 1, it's completely unequal. India's Gini coefficient is estimated at between 0.32 and 0.48, but there is unanimity that it has sharply risen over the past decade. In China, an even smaller rise set off an alarm. India should be even more alert to distress signals: the suicide of 100,000 farmers in a decade, declining organised-sector employment, unbalanced growth, and growing social disaffection, public anger and restlessness.

There are three strong reasons for correction. First, regional disparities are becoming explosive. We have not one but at least three Indias: prosperous, rapidly growing pockets in the South and West; stagnation in much of the Centre, North and East; and regression in the BIMARU states (with Assam added to them). This will have disastrous political consequences.

Second, growing crime and lawlessness have come back to haunt the elite which alone benefits from neoliberalism. Crime is rooted in rising inequalities, absence of social opportunity, and collapse of the credibility of the powerful. High walls and barbed wire won't protect the rich against crime beyond a limit. The only long-term solution is justice and social cohesion.

Third, the disproportionate power wielded by the corporate elite has permeated politics, government and the media. It's distorting democracy. Democracy, India's greatest achievement, can only be rescued if the elite's power is tamed. This can only happen if the rich, especially corporate CEOs, are heavily taxed, and there is serious redistribution of the fruits of growth.

This can be best achieved through a comprehensive incomes policy, which doubles or triples minimum wages and imposes the same level of taxes (e.g. 80 per cent-plus) on the rich which they pay in Scandinavia or Japan (and until recently paid in most western countries.)

Singh said many sensible things. Will he now muster the courage to legislate them? He unleashed the neoliberal genie. He must put it back into the bottle--for democracy's sake.



Email: [email]prafulbidwai1@yahoo.co.in[/email]

[B]Macroeconomic and financial policy framework: budget formulation for 2007/2008 [/B]

DR SHAMSHAD AKHTAR

ARTICLE (June 02 2007): Being the text of key note address of the Governor, State Bank of Pakistan, Dr Shamshad Akhtar, delivered at a seminar on "Budget 2007-08 - A Milestone in continuation of Economic Reforms" organised by the Press Information Department, Government of Pakistan in Karachi on Friday.

Budget for this fiscal year is being crafted under a new economic paradigm. Pakistan has now for some years achieved:

(i) Sustained economic growth path as confirmed by the recently released National Income Accounts Committee results with FY05 being a record year where real GDP grew by 9% and FY07 will surpass the growth target of 7% as the numbers firm up.

(ii) A fair degree of macroeconomic stability and the emerging fiscal and external imbalances while higher than FY03-04 have been well contained with appropriate policy responses.

(iii) Both public and private sector have now managed to jolt the stagnating investment levels which have now risen over FY05-07 by an average of 30.0% which has helped to finally raise the investment/GDP ratios by few percentages points of GDP.

(iv) Gradual building up of investor confidence which has yielded positive outcomes both in terms of higher remittances and foreign inflows. The greater non-debt creating inflows have, for the fist time, helped finance our external account deficit while meeting our corporate and development requirements.

(v) Higher levels of employment generation and poverty alleviation programmes coupled with social spending of higher magnitudes is helping broadly improve the population welfare.

Building incrementally on a strong base and performance is always harder than lifting the economy from distressed strait. This challenge is further compounded by some of the other emerging economic and political realities which underscore the need for the budget to be well conceptualised and well balanced.

-- First, budget is being formulated in a way that it reinforces the macroeconomic stability which is critical to maintain economic growth track record.

-- Second, there is a recognition that public expectations are rising from the government both in terms of its leadership to rationalise the resource and incentives allocation mechanism while offering the right transfer of resources and blend of services.

-- Third, public resources constraints are a reality and will serve as an eventual binding constraint - ultimately budget making process is all about achieving the desired balance between the resources available and resources allocated.

-- Fourth, there is a continuity, consistency and coherency in economic and financial policies which have to be further broadened and deepened to allow for foreign and domestic private sector to further thrive in Pakistan while playing a yet more distinct role in diversifying Pakistan's industrial base and in delivering public services.

-- Finally, there is a recognition that public aspirations are rising partly because government has set a strong track record of economic performance in preceding years and partly because gaps in social and economic services continue to exist.

MACROECONOMIC POLICY FRAMEWORK AND ENVIRONMENT The National Economic Council in its meeting on 31 May 2006 has now approved the macroeconomic framework for FY08 while also in principle approving a long term Vision for 2030. Given the track record in recent years, the government is confident that the growth momentum will be maintained for FY08 and real GDP is projected to grow by 7.2%.

Growth is likely to be again broad based and will be stimulated by a further rise in both consumption and investment levels. While consumption expenditures have been undoubtedly a driver of economic growth in Pakistan as in a lot of other countries, growth in investment/GDP will also contribute significantly to economic growth.

This is largely because we expect investment to rise from 21.9% of GDP in FY06 to about 23.8% in FY08 supported by a rise in national savings and more significantly a rise in domestic savings which are expected to increase from 15.4% in FY06 to about 17% in FY08.

Underlying this growth scenario, we need to recognise that Pakistan has and will continue to seek for a quantum jump in investments. On one hand, the government plans to further go for a substantially large Public Sector Development Program to the tune of Rs 724 billion - which includes budget supported development program of Rs 485 billion and another Rs 204 billion being financed outside budget by a number of public entities.

The development program is quite strategic and fast tracks the projects under implementation as well as launching the mega infrastructure projects, while allowing for adequate growth in social investments.

Concurrent to this, Pakistan has now for some years succeeded in starting to unleash potential of private sector. It is important to recognise that private investment in Pakistan has now for some years been very buoyant and robust. In FY05-07 private investment grew by more than 30 % and has accounted for almost three fourths of the overall investment levels.

At current market prices, private investment levels for FY08 are assumed to grow to Rs 1651 billion which translates into $27 billion and 16.5% as a proportion to GDP (one percent of GDP above FY05 level), 2.8 times of the level of public investment and once again three fourths the level of total investment.

While achieving public investment levels would require a more distinct growth in revenue/GDP ratio, growth in private investment will need to be supported by improved financial intermediation and continued reliance on foreign direct investments.

I will revert to these aspects later but would like to first highlight that FY08 will be another year where maintaining fiscal and external current account deficit will be critical. On fiscal side, the government has reiterated its resolve to hold fiscal deficit/GDP to 4% of GDP and balance of payment projections consistent with the growth scenario outlined above will be in the range of 5% of GDP close to FY07 level.

As in FY07 there will be need for the government to adhere to Fiscal Responsibility and Debt Limitation Act, 2005 to reduce its revenue deficit and debt/GDP ratios and for central bank to continue to strengthen monetary management to keep a check on the demand pressures stemming from fiscal and external accounts deficits.

On the former, the government expects to reduce total debt/GDP ratio to 51.1 % by end FY07 and to use the proceeds of privatisation for poverty reduction programmes.

The monetary policy framework, like in the past years will be forthcoming as a part of the Monetary Policy Statement released end July, which is worked out after the budget for FY08 has been finalised. However, there has been intensive consultation between SBP and the government regarding the need for more consistency between the budget and monetary policy framework.

In line with the SBP Act Section 9(A), central bank has now institutionalised the process of determination of level of government's recourse to bank borrowing and its approval by the Central Board of SBP. This is the first time that as a part of the budget making process, SBP worked out different scenario's to assess the monetary implications of budget's financing requirements. There is a good recognition that upfront fiscal and monetary coordination will augur well for managing the inflationary pressures for next year.

A few important understandings are being reached in this arena to introduce fiscal discipline in borrowings:

-- One, there is recognition of the need for formally imposing a ceiling on government's recourse to SBP borrowings.

-- Two, there is need to manage better the monthly and quarterly recourse to bank borrowings.

-- Three, the government and SBP will work towards reducing its stock of bank borrowing.

-- Four, the government will continue to change its mix of domestic borrowing by relying on public and commercial bank borrowings rather than SBP borrowing.

Finally, there will be better planning for resource raising from the market to sequence the domestic and foreign borrowings more effectively. While levels and degree of dependence on SBP borrowings will be reduced most likely in a phased manner, in FY08 we will be striving to set on course a better institutional framework and process for fiscal and monetary coordination.

These and other qualitative improvements in monetary management being brought out in-house by SBP will help it to work with the government to achieve inflation rate target of 6.5% contemplated in the macroeconomic policy framework.

Progress in reduction of inflation rate has been steady, albeit slower than original targets, but the decline in core inflation which is hovering below 6% is lending confidence that monetary policy will have the desired impact in bringing inflation down subject to, off course, improved supply management of food products as these items have contributed more significantly to inflationary pressures in FY07.

FINANCIAL MARKET'S STRATEGY Pakistan's financial markets have undergone a substantive transformation. Within financial sector, banking sector performance has been outstanding. Banking profitability now is likely to exceed $1 billion mark and the sector over the last few years has cumulatively attracted $2 billion with $1 billion raised in 2007. The ratio of NPLs to net loans is at all time low at below 2% and capital adequacy is on average around 13.5%.

Since a lot has been said earlier on this, in today's remarks I am going to confine myself to forward looking direction of financial markets. First and foremost, it is critical for Pakistan to further augment and diversify financial system.

Currently, while there is active secondary trading in stock markets, it is confined largely to fewer equity scrips and is supported in the last couple of years by exclusively banking companies and by the government privatisation program.

On debt market side, the government securities primary and secondary issuance of different tenors have helped evolve a yield curve but this has, as yet, not catalysed robust corporate debt market. Primary market both of equity and debt markets is still small and boosting this is essential to diversify the financial system risks.

The anticipated insurance sector and pension reforms, which would involve restructuring and strengthening state owned companies, enhancing the regulatory and risk management frameworks and move towards voluntary and contributory retirement schemes, would help enhance market liquidity.

Robust performance of the financial markets is essential to meet the growing requirements of private investment. Over the past few years banking sector has financed well the requirements of the corporate sector, households and economy at large.

However, there is a substantial growth envisaged in infrastructure financing requirements which over the medium term could be anywhere in the range of $40 billion and long term requirements could be close to $150 billion.

For the banking system to respond effectively it is critical that financial markets are diversified faster. Assuming 7% real GDP growth and the private sector credit/GDP ratio of 50%, banking sector would be at best be able to offer $100 billion credit to the system which, alone, would not be able to meet the overall infrastructure financing requirements of next five years.

To further augment banking sector roles and responsibility in economic development process, SBP has been working on multiple fronts:

Strengthening the banking sector consolidation through a gradual build up of the minimum capital requirements and M&As to further augment its robustness. By end of this year, most banks would have met the Rs 4 billion minimum capital requirements with 8 banks even meeting the December 2009 stipulated requirement of Rs 6 billion. Companies failing to comply with the capital requirements will be stripped off the scheduled banking license. Excluding Islamic and MFBs which have resulted in issuance of 12 new bank licenses; number of banks operating is now 27.

To Improve Financial Intermediation process by enhancing its coverage and lowering cost of intermediation. Holding consultation with the banks to explore how private sector credit/GDP ratio can be enhanced. This ratio currently is quite low in the range of 27% which is only one fourth of the prevailing ratio in regional comparators.

At the same time, there is need for banks to enhance outreach to increase the number of depositors and borrowers. SBP has now operationalized its Development Finance Group and it has developed Microfinance Strategy, SME financing Strategy, Agriculture and Household Credit study and another strategy on Islamic finance is also underway.

All these pieces of work will help strategize banking role in enhancing the coverage of financial services to provide adequate service to the population. With growing competition, it is anticipated that banks will be seeking scale rather than exploiting the existing client base.

This change will help in enhancing profitability by enhancing the coverage and supply of financial services rather than relying on interest rate increases. Strengthening the risk management framework for banks. Pakistani banks are now faced with new and different nature and type of risks - aside from standard corporate assets whose credit risks is changing with the size and complexities of businesses, banks are now engaging in diverse businesses and sectors and are now extending their exposure to household sector and growth in bank trading books has increased exposure to market risk - a recent phenomena in Pakistan.

Concurrently, banks' overall risk profile is also affected by the complex interdependencies now emerging because of cross ownership of financial institutions and corporate sector. By January 2008, commercial banks have been advised to position themselves for adoption of standardised approach to Basel II.

Changed perception and approaches to safety net for depositors and prompt corrective actions. With most banking system now in private hands, the government's implicit guarantee for deposit no longer exists and now the owners and the Board of Directors as wells as top management of a bank are liable for their actions. SBP has recently enhanced its corporate governance framework.

On one hand, recently new instructions have been issued to encourage banks to adopt a more well governed Board structure where there is a balance between family or sponsor members and the independent board members.

On the other hand, Boards have been advised to play a more substantive role in oversight of banks including by way of reviews of bank strategy, risk management and audit etc.

At the same time central banks surveillance system is being enhanced to play a key role in identification of the problems, eg threat to capital, liquidity crisis at the earliest stage, and execution of prompt corrective action - the objective being to curb the problem at the onset, and if required appointing official liquidators for settlement of depositors' claims in a timely manner, in cases where the corrective actions result in liquidation/restructuring of the bank.

SBP is in the process of developing a 'Banking Supervision Risk Assessment Model' (BSRA) which will help SBP to better quantify the credit and market risks of the individual banks in terms of "Value at Risk" and forecast banks' position under various stress scenarios on a quarterly basis.

BSRA model would use information from the Data warehouse (data received through Reporting Chart of Accounts (ROCA)) for market risk and electronic Credit Information Bureau (eCIB) for credit risk. For operational risk, key risk indicators (eg frauds, systems breakdown etc) would be identified and captured and processing would be carried out after a sufficient database is maintained.

Once fully implemented and live, the risk assessment model will help Banking Supervision Department to strengthen its surveillance system through monitoring and measuring the risk profiles of the individual banks, even under stressed scenarios. The model will also help BSD to understand and monitor the credit and market risk appetite of the individual banks and proactively take corrective measures, if required.

The SBP in collaboration with the ICAP and the commercial banks has facilitated adoption of International Accounting standards (IAS) by the banks. In 2006, SBP revised the reporting formats for banks to incorporate the significant regulatory developments as well as modifications in the International Financial Reporting Standards (IFRS). With these changes, the quality of disclosure in the Annual Accounts of Pakistani banks has become at par with international best practices.

Along with this, SBP plans to operationalize Real Time Gross Settlement Systems (RTGS) and to encourage faster connectivity of branches to headquarters and eventual proliferation of e- and mobile banking which will be key to enhancing coverage of financial services.

[B]2006-07: another year of robust growth[/B]

By Aftab Ahmad

Like the three preceding years, the current fiscal (2006-07) also looks poised to be a year of robust growth. The GDP growth is expected to reach 7 per cent during the year, due to impressive performance of agriculture and services sectors. As a result, size of the GDP is expected to move up to $150 billion while the per capita income may go up to $950.

The agriculture sector is expected to grow by about 4.5 per cent during the year, due a record wheat crop of 23-24 million tons and increase in the production of nearly all the remaining crops except cotton. The Livestock sector is also likely to grow handsomely and according to an estimate its share in the agriculture sector is going to double from 25 per cent to 49 per cent. Besides, there has been a tremendous growth in the telecommunications and construction sectors in recent months, due to which the services sector is also expected to contribute significantly to the GDP growth. However, the growth of the manufacturing sector appears to have remained weak (although positive) during the year, which may be attributable to a host of problems such as shortage and higher prices of electricity, increase in the bank mark-up rates and the cost of doing business in general and stiff competition in the international exports markets etc.

Besides a strong GDP growth, fiscal 2006-07 may turn out to be a record-setting year in many other ways. The direct foreign investment (DFI) is expected to reach a record level of $6.00 to 6.5 billion by the end of the fiscal year. Home remittances may also go up to an all time high level of $5.25 billion by June 30, while the KSE 100 index had already touched the 12,500 mark – a level never reached before.

Revenue collection target of Rs835 billion is also likely to be achieved during the current fiscal year. During the last 7-8 years, tax collection by the CBR had gone up from Rs300 billion to above Rs800 billion, which is commendable. This fiscal it is expected to achieve the target set earlier. But, the World Bank and the Asian Development Bank have expressed the view that the tax collection has not gone up as a percentage of GDP. In Pakistan, the tax collection is presently 10.5 per cent of the GDP only, which is considerably lower than the average of about 14 per cent for all developing countries. However, the CBR is of the view that sectors like agriculture and services have significant contribution to economic growth but their contribution to tax revenue is relatively small. Therefore, in order to increase tax collection as a percentage of GDP, various sectors of the economy will have to share the tax burden in an equitable manner.

In some other areas, performance remained rather weak. For instance, exports lagged far behind the target of $18.6 billion fixed for fiscal 2006-07. On the other hand, imports were rising much faster and were sure to cross the target of $28 billion fixed for 2006-07. During July-April, 2006-07, exports and imports stood at $13.9 billion and $24.99 billion respectively, resulting in a trade deficit of over $11 billion in 10 months. On the basis of the aforesaid 10 months figures, the trade deficit should go up to more than $13 billion by the end of the fiscal year. Consequently, the current account deficit may also go up to $6 to 6.5 billion.

Independent analysts have been of the view that it may not be difficult to reduce the import bill by $2 to 3 billion without touching sensitive items such as oil, machinery and raw material and food products.

At the same time, instead of focusing all its attention on textile exports, the Government should try to resolve the problems facing the small and medium enterprises (SME’S) in order to promote their exports. In addition, now that foreign investment has started picking up, Government may try to attract foreign investment to export-related sectors, in order to provide a boost to exports. Over and above all that, Government may examine if the public sector can also enter the export market in a more meaningful way. The public sector has already been exporting defence material, training aircrafts etc, but its exports have remained limited so far.

Another grey area of the economy during the year was inflation. The target of 6.5 per cent fixed for 2006-07 is not likely to be achieved. There is no doubt that by tightening its monetary policy, the State Bank of Pakistan (SBP) was able to reduce the non-oil/non-food inflation to 5-6 per cent. However, the policy had little impact on food inflation because of the highly inelastic nature of demand for food items. Since food inflation is the main culprit behind the higher overall inflation, prompt and effective action needs to be taken to deal with speculative hoarding and profiteering which have been pushing up the prices of food items. The objective can be achieved inter-alia by substantially increasing the number of utility stores and improving supervision and governance at the federal, provincial and district levels.

The Government had succeeded in bringing down fiscal deficit from 6 per cent to 3.5 per cent a couple of years ago. However, last year, the fiscal deficit once again went up to 4.2 per cent. During the current year, the fiscal deficit is expected to go up to 4.5 per cent. The country’s estimated GDP being $150 billion, the 4.5 per cent fiscal deficit works out to over Rs400 billion. Government borrowing of such a massive amount, besides being inflationary, will reduce the availability of credit for the agriculture, SME and large-scale manufacturing sectors. In addition, higher fiscal deficit also increases the country’s dependence on internal and external debt. The Government should, therefore, make all possible efforts to keep its fiscal deficit at the minimum possible level.

Other problems facing the economy during the year were electricity shortage leading to country-wide load-shedding, widening gap between the rich and the poor, increase in terrorist activities and bomb blasts in the country and an upsurge in political activities due to 2007 being an election year.

However, it must be appreciated that the economy showed remarkable resilience and continued to grow during the year in spite of the aforesaid problems.

[B]Strengths of the economy and some of its weaknesses[/B]

By M. Sharif

Third quarterly report of the SBP was issued on 26th May 2007. Contents of the report focus on strengths of the economy and some of its weak areas that need attention during the next financial year. Will the budget, to be presented in a week’s time, address them or not; we have to wait and see.

Highlights of the report

The report confirms official viewpoint that the real GDP growth will exceed projected target of 7.0 per cent fixed for current fiscal year. It will be fourth consecutive year of high economic growth that should be satisfying to the government. The target of reducing inflation to 6.5 per cent by the end of current fiscal will not be met. The Report observes that tight monetary policy has maintained intricate balance of containing inflation on one hand and maintaining growth momentum on the other by “removing excessive monetary stimulus from the economy.” But, “unfortunately the impact in reducing inflationary pressures has been offset partially by the rise in food inflation and supply side pressures.” The Bank has revised its earlier forecast of inflation from 6.7-705 per cent to 7.5-7.8 per cent.

Reference to supply side pressures is quite important to understand as to why inflation has persisted despite tight monetary policy that has played important role in curtailing unnecessary imports to some extent during current fiscal year. Supply side pressures are multiple. Consumption of petrol and petroleum products, food items and electric and non-electric durables is on increase because 30 million strong middle class supported by high inflow of remittances by the expatriates is making our society a highly consumer oriented society. In addition to it, high PSDP expenditure, loopholes in country’s tax levying system, non-taxation of money earned in real estate business, agriculture, and practically no tax on windfall profits earned in stocks and high corporate earnings are fuelling inflation. The report does not foresee any immediate relief to the people from the clutches of inflation as the economy is poised to enter in the new fiscal year.

Has tight monetary policy really worked? Perhaps not, to the extent it has been talked about or was desirable and expected by the SBP. Some of the measures taken by the government and the SBP to keep growth momentum going significantly contributed towards making growth of reserve and broad money stronger than anticipated. The contributory factors are concessional credit provided by the Bank to the textile industry, refinancing for exports and substantial increase in government’s borrowings from the banking system. Consequently, because of strong resurgence in broad money its growth is likely to, “exceed the original 13.5 per cent target, to fall in the range of 14.5-15.5 per cent.” The report has termed monetary growth a “key challenge” that the Bank could not meet to its own satisfaction because it struggled “to maintain a balance between sustaining strong economic growth and low stable inflation.”

The Report focuses on growth of fiscal deficit in recent years that has stood in the way of containing inflation and made tight monetary policy less effective. According to it, it is “important that fiscal policy be aligned with the monetary policy in months to come” for effectively containing inflation. The fear expressed by the SBP is not unfounded. In fact, a profound analysis of fiscal and monetary policies explicitly highlights a mismatch between the two moving in different directions.

The government is under pressure to spend more and more funds in public sector to resolve power crisis facing the country, develop badly neglected infrastructure, create employment, strengthen social sector and alleviate poverty. It has to depend on bank and non-bank borrowings, that is, from central bank and scheduled banks, PIB issuances and NSS to meet fiscal needs. The government borrowed Rs195.7 billion from scheduled banks from Feb-Apr 07 and retired Rs58.4 billion of the central bank. The Report has categorised the government’s borrowings “a worrying dependence” on various instruments that adds to fiscal deficit that the government has capped to stay at 4.2 per cent of GDP by the end of current fiscal year. This is happening because of low tax revenue collection that stands around 10.5 per cent of GDP. CBR is confident to over shoot the target of Rs835 billion. It is reported to have collected Rs656.48 during July-April 2006-7 against the target of Rs645.1 billion with a surplus of Rs11.38 billion.

Trade and current deficit have been on the increase during the current fiscal year compared to their absolute figures in previous years. The report is of the view that current account deficit, “has decelerated sharply as FY07 progressed (mainly because of sharp compression in import growth),” but, “in absolute terms it has grown to $6.0 billion by March 2007.” Nevertheless the Report comforts itself by observing, “while this was comfortably financed by even larger surpluses in the financial and capital account (with substantial non-debt components), the country’s success in attracting international capital has led to a large jump in the NFA of the banking system adding to liquidity in the domestic market,” which is not without adverse effects on economy.

The report also observed that large surpluses were recorded at $373 million during first nine months of current fiscal year in the capital and financial account. They comfortably offset the current account deficit. It is to be appreciated that the large surpluses to which the Report has referred to accrued because of foreign inflows from the US financial assistance under different heads amounting to around $2.0 billion a year, proceeds of privatisation, borrowed money from international financial market and multilateral organisations and remittances. These resources are welcome for any developing economy but it cannot sustain itself on exogenous resources alone.

It has to generate indigenous financial resources through domestic savings, tax revenue generation according to its fiscal needs and trade surplus. Pakistan economy is short on many accounts and nothing substantial has been done to improve upon them during current fiscal year. In fact quite a few fiscal indicators have shown downward trends. The Report has been quite explicit about them. It has not taken into account development of social sector which is of great importance for a country like ours whose economy is sailing into two boats: one of free market economy and the other where state is to play an important role for the well being of a large number of the people who are caught in between the wages of free market economy and a state that is in the process of abandoning its people at the mercy of free market but still claims to be standing with them.

Budget-2008: what should the focus be?

Budget for FY08 is being prepared under quite pressing circumstances conspicuous among them are ongoing judicial and political crisis. It is being anticipated that the former is likely to last at least 3-4 weeks till full Supreme Court bench decides about the CJ of Pakistan case. The case is not without political overtones. It could influence country’s political landscape even after its decision. The political crisis is likely to persist because year 2007 is an election year. Political stakes for contenders of power are so high that they can go to any extent to retain or gain political power. In addition to these subtle factors, ground realities of the economy are hard for the common man despite some green patches like substantial increase in FDI, tremendous increase in capitalisation of stocks, stable dollar-rupee parity, high GDP growth, comfortable foreign flows, quantum increase in foreign exchange reserves and a booming stock market that is attracting portfolio investment from domestic and foreign investors because of high returns.

The government’s posture on budget preparation is upbeat. It is showing no signs of discomfort because of somewhat high inflation in food items like edible oil, rice and wheat at a time when new crop has landed in market and government has stopped its export. The push in price is primarily because of profiteering and hoarding by market manipulators.

The SBP has already indicated that in order to reduce inflation to 6.7 per cent during next fiscal year, it will keep pursuing tight monetary policy but exact contours of the policy would be clear when the SBP will announce monetary policy for July-December 2007 somewhere in July. The government has announced to strengthen supply side of economy to reduce inflationary pressure. Import bill of food items during first ten months of current fiscal year has touched $2.36 billion mark and if demand kept on soaring during next fiscal year also that is quite possible, food import bill could be still higher. The government cannot help it.

Press reports indicate that government is to present a mega budget for forthcoming fiscal year. One of the major reasons is that FY2007-08 is an election year. The other important factor is realisation that it could not take national economy on road to self-reliance for not addressing serious problems of power crisis, infrastructural inadequacies, human resource and social sector development, good governance, higher competitiveness and productivity of industrial and agriculture sector. In fact, it should have started much earlier when it had got enough fiscal space to launch development programme.

Press reports also indicate that volume of forthcoming budget is likely to be around Rs1.5 trillion; up from outgoing fiscal year’s budgetary lay out of Rs1.02 trillion. PSDP is planned at Rs520.0 billion: Rs485 for public sector inclusive of provinces share of Rs115 billion and Rs35 billion for rehabilitation of earthquake hit areas. The allocation is 19.5 per cent higher than current fiscal year’s allocation of Rs435.0 billion. PSDP as percentage of GDP will increase from current fiscal year’s level of 4.2 per cent to 4.8 per cent. The government is confident that by increasing PSDP, it would not only be catering for a number of infrastructural inadequacies that the economy faces. It will be generating more employment, sustaining economic growth and alleviating poverty also. The government has also jacked up revenue collection to more than Rs1.0 trillion for next fiscal year against the target of Rs835.0 billion for current FY that CBR is sure to over shoot.

Conclusion

SBP report is an objective analysis of the economy. It states facts that give quite a clear picture of the economy and its fiscal health. Figures about some of the allocations and targets to be achieved sound quite satisfying but, more important and crucial questions relating to fiscal management will come to limelight when budget proposals will be implemented. Right now, the important question that needs attention is: how would the government bridge huge gap between financial resources and expenditure to meet a number of fiscal commitments? We may have to wait till announcement of the budget to find answers to these questions and many more like them.

[B]Positive economic trends and some concerns[/B]

By Mehmood-ul-hassan Khan

The State Bank of Pakistan has announced its 3rd quarterly report for 2007. It reflects positive trends and potential concerns, and emerging financial problems in the ongoing fiscal year. Main indications: (1) Stable macro-economic growth for the fourth successive year, with real GDP growth now expected to exceed the 7 per cent annual target in FY07.

(2) Strong out turn by agriculture following a record wheat crop and upward revision in key kharif corps means that agricultural growth is forecast to exceed the annual 4.5 per cent growth target.

(3) Industrial growth is also expected to be stronger than that in the previous year, though it may not reach the FY07 target.

(4) Services sector, backbone of our national economy is expected to continue with its growth momentum for yet another year.

(5) Growth in the wholesale and retail trade sub-sector is likely to slow down, reflecting the deceleration in imports; the remaining services sub-sectors are expected to continue to record high growth.

Tight monetary policy

The State Bank of Pakistan has once again, stressed the need for the continuation of tight monetary policy in the country. But thing is that tight monetary policy has not succeeded to curb or control the high levels of inflation ratios in the country. Although non-food inflation weakened, overall CPI inflation declined considerably, falling from 11.1 per cent in April 2005 to 6.9 per cent by April 2007 however, still above the 6.5 per cent target for FY07.

Change in credit growth profile

(i) The credit growth to some sectors remained low in the nine months of 2007. Consumer credit, the business loans (mixed) with many businesses witnessing a strong increase in credit demand (including telecommunications, food processing industries, and apparel industries); (ii) Due to better internal restructuring, risk management, and credit extension services, and above all mergers and acquisitions decelerated the credit growth and (iii) Delay in power projects, low volumes in textile and other sectors were the main factors of slowing of credit growth in the country.

Important suggestions

(a) Not to heavily rely on the inflows of international capital investments because these can be volatile, and are sensitive; (b) Lower sustainable current account deficit; (c) Rise in the domestic savings rate; (d) Gradual reduction in the fiscal deficit; (e) Growth in the tax receipts and base; (f) Geo-political stability; (g) Social justice; (h) Timely completion of mega water reservoirs projects and (i) Managing increasing energy deficits.

Performance of different sectors

Agriculture

The SBP is hopeful that the targets of agriculture would be achieved. The record wheat harvest, and upward revision in the production figures for key kharif FY07 crops has raised the prospects of a strong recovery by the agriculture sector in FY07.

_______________________________________________________________

Agriculture (sub-sector) FY05 FY06 FY07 FY07

Agriculture 6.7 2.5 4.5 5.0

Major corps 17.8 -3.6 4.3 5.8

Livestock 2.3 8.0 5.2 5.2

Fishing 2.2 1.9 4.0 4.0

Minor corps 2.3 1.6 2.3 2.3

Forestry -33.2 -5.7 3.2 3.2

_______________________________________________________________

Estimation

It is estimated that growth for major crops could reach as high as 5.8 per cent in FY07, significantly higher than the target growth of 4.3 per cent for the year. The 23 million tons wheat harvest is not only well above the target of 22.5 million tons, it is the largest ever recorded in Pakistan.

Agriculture loans

According to the SBP 3rd Quarterly Report the banking system provided enough loans to agriculture sector to fulfill its diversified requirements. Agriculture credit disbursement increased to Rs111.2 billion during Jul-Mar FY07, up by 22 per cent relative to the corresponding period of FY06. This growth is well above the 16.4 per cent annual target, though 1.5 percentage points lower than seen in Jul-Mar FY06. The pace of agri-credit disbursement suggests that Rs160 billion annual targets for FY07 would be met comfortably.

Large-scale manufacturing (LSM)

It is estimated that LSM growth may be higher during Jul-Mar FY07 as compared with the corresponding period of FY06, but suggests that the 13.0 per cent growth target of LSM sector for FY07 may not be achieved.

Main reasons

(i) Saga of load-shading especially in the city of lights i.e. Karachi; (ii) Cost of production increased; (iii) Deteriorating law & order situation and (iv) Energy crisis.

Signs of recovery

(i) Textiles (but due to tough regional and global competition and above all higher cost of production the chances of brighter textile exports are weakened); (ii) Suga; (iii) Cement (running at the capacity of 70-80 per cent and brighter chances of exports to Iraq, Afghanistan and Gulf States) and (iv) Basic metals.

Domestic industries

The domestic automobile industry, registered a slowdown in growth during Jul-March FY07 relative to the corresponding period of FY06. Industries such as fertiliser, paper & board and engineering saw a decline in production during this period mainly due to weakness in demand and temporary shut down for maintenance as well as expansion.

Prices

The sector of prices is directly with the general masses and they are the easy prey of the onslaught of high inflationary pressures. Strong increases in food inflation remained in high zones. The influence of food inflation is also evident in the WPI; although the WPI inflation has seen a year-on-year drop this is simply because a surge in its food component was largely offset by a sharper decline in its non-food elements.

Money and banking

The M2 growth which has been showing gradual slowdown relative to the corresponding period till February 2007, enhanced sharply afterwards to reach 12.1 per cent during Jul-Apr FY07 compared to 10.8 per cent rise during Jul-Apr FY06.

Main causes

(i) Strong government borrowings (ii) Rise in net foreign assets

Growth in credit to private sector slowed from 20.2 per cent during Jul-Apr FY06 to 13.0 per cent during Jul-Apr FY07, suggesting that the monetary policy has been

Conclusion

The disparities (income, regional and sectoral) are on the rise mere announcements of Vision 2030 may not be enough to put an end on the widening engulfs of common and poor people. Being the central bank of the country, SBP has once again warned the government on the serious issues of high levels of trade and current account deficits.

[B]The economy Uneasy mix of gains and losses[/B]

By Dr Mushtaq Ahmad

The economy has continued its growth tempo initiated a couple of years ago but it is accompanied by resurgence of macroeconomic instability, posing tough challenges to the economic policy makers. Over the last many years, vast economic policy reforms have been implemented to promote global integration and export led growth strategy. The world economy has expanded smoothly in recent years and many emerging economies have reaped the gains through expansion in their exports and resultant productivity gains, and massive foreign direct investment inflows. In our region China and India have demonstrated around double digit GDP growth, coupled with parallel achievements in exports, foreign exchange reserves, price stability and productivity level. While planning for the current year, not only high GDP growth was envisaged but substantial improvements were targeted in all areas of macroeconomic stability in our plan and budget. At about close of the year, the profile of the prime aggregates now displays many targets have gone astray.

The GDP growth has been estimated at 7 percent and is predicated on record production of wheat and sugarcane, higher estimated growth of livestock and services sector. The growth of the large scale manufactures slipped from the last year level as well as from the target. Many other aggregates like investment, exports, tax revenues, poverty reduction and inflation are mutually interlinked with GDP growth. The developments realized in them are incongruent to their behavioural relationship with GDP.

Giving the growing global economy, the meagre export growth of 3.4 percent, reflecting surplus for sale in the global market lends no support to high growth. While State Bank claims the continuation of a tight monetary policy to stifle excess aggregate demand, the question arises why enhanced domestic production had not tamed inflation. The general public perception is that poverty is on the increase in the country.

Foreign direct investment has substantially increased over the last year. Its credit goes to the government policies. This is in fact coming into rent seeking activities and where the profit and producer prices are guaranteed. It may be having implications in some future years in terms of profit remittance outflow and some time repatriation of the investment as the national policies accommodate it. These days there is excess international liquidity. For example Japan has 0.5 percent interest and such situation fostered ‘carry’ trades. Home remittances have also shown good increase over the last year. This is partly attributed to relatively higher interest rate in Pakistan.

Budgetary deficit has already equalled the annual target during the first nine months of the year, and by the end of the year it is certainly to be breached. There was appreciable growth in tax revenues but it has been outpaced by the government expenditures. The tax policy is totally driven by revenues maximization and this has also been reckoned by the commerce minister who referred to it in explaining the fall in exports. Its obsession with only revenues maximization has made it oblivious to the fallout of the neglect of its other goals e.g. income distributional equity, price stability, investment and export promotion. It is completely devoid of efficiency principle. For example extraordinarily high protection provided to goods like cars inflects loss on the economy of welfare as reduction in consumer surplus. Keeping the budgetary expenditure much above the revenues level while keeping it on increase every once in a while continuously nurtures the aggregate demand. This fosters the inflationary forces. I find this phenomenon holds sway in recent years in our economy.

The government has also been driven to borrowing both from within the country and abroad. Within the country its resort to the State Bank has directly led to creation of money and that is inflationary and alternatively or simultaneously tapping the open financial market has led to the increase in the interest rate through its crowding out. Budgetary borrowings this year are twice that of last year and are far higher than the target. Rising interest rates have prompted cost push inflation. The protracted overall fiscal deficit has increased the debt liabilities.

The fiscal policy domain is intimately interfaced with that of monetary policy. Development on one side instantly permeates into the other. Breaching the budgetary borrowings targets has constrained credit for the private sector and its pace has slowed down from 20 percent to 13 percent during July –April 2007 and is far below the target. External borrowing by the government has increased the net foreign assets. Thus both these are largely factored in augmenting the aggregate money supply (M2) which has so far surpassed the last year level as well as the target. It is likely to touch a mark of 15.5 percent by year end. Given the past monetary over hang this will reinforce the existing strong underlying inflationary forces.

Expansion in net foreign assets is a healthy symbol of balance of payments but it is problematic for central monetary authorities. They often try to sterilize its impact while they are to ‘err on the side of the tight monetary policy’. In Pakistan the authorities have recognized its need but not much to show on the score board. This is indeed a difficult task to achieve, needing great skill and precision. In our case the policy tools like operation market operations, required reserves ratio etc when pressed into operation are likely to further increase interest rate and crowding out of the private sector, a tasteless and counterproductive alternative.

The government had undertaken a massive overhaul of tax and trade policy to foster global integration. The industry has heavily suffered form its fallout. The moral of the story is that the end has failed to justify the means. Our exports could increase only by 3.4 percent, a sharp dip in the trend and far less than the target. The trade deficit has already reached $ 9.5 billion in the first ten months of the year which would further rise by the time the year comes to close. Similarly the current account deficit estimate of 4.8 percent exceeds the last year’s level of 3.9 percent of GDP and 4.3 percent target. The real effective exchange rate has continued to experience creeping appreciation. This coupled with lack of any improvement in productivity has eroded the competitiveness of exports. The foreign exchange reserves at $13.7 billion, better than last year, have lost its relative parity with increased trade deficit, sometimes termed as safe limit.

There is excess liquidity in the global market and interest rates are relatively low in the developed countries. Any developing country disciplined under the World Bank and IMF charter realizes oversubscription of its sovereign bonds. The key thing to ensure is that the borrowing is kept within the some safe limits and does not impair the intergeneration equity.

Inflation has continued as a cause of concern both for the authorities and the consumer alike. Despite all official efforts including tight monetary stance it has not gone down to indicate a definite trend. The food inflation has touched double digit. This aggravates poverty and has also some implications in areas of the economy.

The continuing twin gaps in the budget and balance of payments are the basic reflection of the shortage of national resources. One fourth to one fifth of national investment, already at a low level, is financed through foreign loans. No significant developments in this area have recently been witnessed, and in casually addressing the issue, the foreign exchange reserves are being construed as obverse of the national resources and savings for investment. Progress in human capital development is ‘business as usual’ because of limited resources and long shopping list.

[B]Will it be a businessman or common man budget![/B]

By Javed Mahmood

As the new budget is being unveiled this week for which the preparations are in the full swing, a half-hearted debate is going on in the business circles whether the FY-08 budget would be pro-business or pro-common man. Unlike past this time the debate and discussions concerning the upcoming budget entirely lack the eagerness and gusto as the businessmen and common people are more interested in the political and judicial scenario and very little in the forthcoming budget.
Although various business circles, chambers of commerce and trade associations have forwarded their demands for the new budget, the common man appears perfectly indifferent to the new budget and the promises and rhetoric of relief.
In fact, the present government has reduced the ambit of the budget merely to the fixation of economic targets, revenue mobilisation and detached the key items from the budget like petrol prices, electricity, gas tariffs and essential food items. The tariffs of energy sector are frequently being revised on different pretexts while the prices of essential consumer items have been left at the will of the market forces.
History of budget makings shows that till the regimes of Nawaz Sharif and Benazir Bhutto, the prices of petrol, electricity, gas, cement, cigarettes, sugar and some essential items were adjusted only in the budget. And frequent increase in the prices of key items through budget and mini-budgets often leads to a flurry of criticism against the government that used to be deterrence for the government for further premature change in the budget.
However, modification in the mechanism of budget making by the present regime has not only changed the pattern of mini-budgets, but also made common people indifferent to this annual exercise.
Before this crucial change in the framework of the budget making, the business community and common people used to sit before their TV sets in groups to eagerly listen to the developments in the budget. But this ecstasy has ended from the day the government has cramped the budget making to the fixation of the fiscal targets, including revenue mobilisation.
However, in the new budget the federal government faces the key challenges of containing deficits – fiscal deficit, trade deficit and current account deficit within the prescribed percentage of the GDP. Inflation is another area where the government would have to go extra mile to curb escalation in the food prices in FY08.
In FY07 the current account imbalance, fiscal and trade deficits would set a history by surging to the record high mark and this trend is expected to be noticed in the next financial year. The current account deficit has slightly exceeded $6 billion in 10 months (from July 2006 to April 2007) and it is expected to settle above $7b in this fiscal, as against $5.015b in previous financial year. The budgetary deficit in nine months of this fiscal has reached 272 billion rupees ($4.48b when calculated at Rs 60.71 dollar-rupee parity). The trade deficit in FY07 is also being estimated above $13 billion, from $12.20b in FY06.
It is yet to be seen as to what measures or strategies the federal government puts in place to minimize the burden of the deficits on the country.
Meanwhile, there are moments of rejoicing for the government. Because the inflow of foreign investment and remittances that are beyond the official projection and expectation in the current financial year that have enabled the government to bear the burden of trade deficit and maintain foreign exchange reserves near $14 billion.
In 10 months of FY07 remittances amounted to 4.477 billion dollars (from $3.618b in 10 months of FY06), showing strong signs of reaching close to six billion dollars or above this level that would be the highest-ever in a financial year.
Similarly, the foreign investment inflow has been estimated at 5.98 billion dollars in 10 months, July 2006 to April 2007, from 4.048 billion dollars, while the total inflow of foreign investment might surpass the mark of seven billion dollars for the first time.
It is expected that the government would make efforts to maintain the inflow of a hefty amount of remittances and foreign investment in the new budget.
Meanwhile, as the government officials are claiming relief for the common man in the new budget, one can hope that the three major problems of the people – rising food inflation; the worst-ever load-shedding and non-availability of potable water in big cities like Karachi and Islamabad would be given key attention.
So far despite billions of rupees expenditures, these three areas have badly exposed the competency of the policy makers. It is really pitiable that the countless inhabitants of Pakistan (that has shown impressive economic growth during the past three years) were grumbling about clean water, round-the-clock electricity and essential consumer items at affordable prices.
The shortage of electricity and potable water are two chronic issues being faced by a vast majority of the countrymen because of the poor planning and mishandled of these crucial issues.
In the coming budget the federal government has projected 520 billion rupees outlay for the Public Sector Development Programme. But will this bulky PSDP would resolve the basic problems being faced by the common man in the country is a question that strikes the mind of the common people.
Interestingly, Prime Minister Shaukat Aziz and his team have proudly pointed out repeatedly that per capita income of the country has increased to 845 dollars, but this drastic improvement in the per capita income is yet to change the fate of millions of countrymen who are looking for water, uninterrupted power supply and other social amenities.
Analysts say that instead of focusing mainly on revenue mobilisation the federal government should strive in real manner to bring a real change in the social life of the countrymen, especially those who lack access to basic amenities.

PML-N asks govt how and where $63bn was spent
 

PML-N asks govt how and where $63bn was spent

[url]www.dawn.com[/url]

By Our Reporter


ISLAMABAD, June 3: The Pakistan Muslim League (Nawaz) has sought details about how and where the hefty amount of $63 billion injected into Pakistan’s economy after the 9/11 has been spent.

Speaking at a press conference at the party’s central secretariat, PML-N information secretary and former Planning Commission deputy chairman Ahsan Iqbal challenged government’s claims of improvement in economic sphere and accused the Musharraf-led government of “squandering millions of rupees on publishing misleading advertisements in the media to make false claims of economic performance”.

He said the nation wanted to know where and how over $63 billion had been spent? “Before the 9/11, the average growth rate in the first three years of the Musharraf regime was only 2.5 per cent. The macroeconomic indicators of the country improved because of massive inflow of this money after the 9/11 which had nothing to do with the policies of the government. Any sitting government would have benefited from this change,” he claimed.

Mr Iqbal said that over $25 billion had been remitted by overseas Pakistanis because of insecurity abroad; over $15 billion had been purchased by State Bank due to weakening of the dollar; $10 billion had been given by the US in aid; over $10 billion came in loans and foreign assistance and more than $3 billion had been earned by privatising national strategic assets.

“The test of any government is how it utilises the funds. Has Pakistani infrastructure improved? Has quality of life for common man improved? Has delivery of education and health services through the public sector improved? Have real productive sectors become more robust and competitive? Have unemployment and inequality come down? Have Pakistani exports grown faster than imports? Unfortunately, the answer to all these questions is a ‘big negative’.

He said the Musharraf government had not introduced a single new economic reform over the last eight years. There are only two economic reforms introduced in Pakistan. The first reform was introduced in 1990-91 by the first Nawaz government which had liberalised and deregulated Pakistani economy. The second reform, he pointed out, was introduced in 19978-98 by the second Nawaz government which had professionalised public sector banks, granted an autonomy to the State Bank and reformed capital markets.

“Democratic governments in the late 90s worked under economic sanctions imposed by the US in 1989. The Musharraf regime has been in the office for eight years but has no single mega project to its credit,” Mr Iqbal said.

He pointed out that two PML-N governments which remained in the office for four and half years had initiated a number of mega projects, including motorways, new Karachi and Lahore airports, highways, modern digital telecommunication infrastructure, Ghazi Bharotha hydel power project, Chashma nuclear power project, Gwadar port, Makran coastal highway and Kohat tunnel.

He said that over the last eight years, the Musharraf government had failed to commission any new power generation projects, and as a result the country was facing severe power shortage.

He said that due to ‘elitist’ economic policies of the Musharraf regime, only defence societies had flourished in the country while the life in poor colonies became miserable. “The government is selling valuable national assets to meet the mounting trade gap caused by the liberal import policy. Now it is eying the PSO, PIA, and OGDCL.”

The PML-N leader sought a national committee to monitor transparency of the privatisation process.

[B]More expenditure on development[/B]

[I]By TANVIR ZAHID[/I]

Wednesday, JUNE 06, 2007

It is indeed heartening to note that considerable allocations have been made towards financing of the Public Sector Development Programme (PSDP) of the Federal government for financial year 2007-08.
Addressing a pre-Budget seminar in Lahore the other day, Advisor to the Prime Minister on Finance, Dr Salman Shah made the total allocations for funding the developmental activities during the next financial year to Rs 724 billion. This included Rs 520 billion for PSDP and another 204 billion, which the public sector corporations would be incurring on their development programmes during the next financial year. It will be in addition to the huge PSDP outlay.
Mega water sector projects including Kalabagh Dam have been allocated Rs 40 billion in the development programme. President/Chief of Army Staff (COAS) General Musharraf has repeatedly stated that five major dams including the much delayed, Kalabagh Dam will be on ground by year 2015, as the country no longer can afford to waste its precious water resources due to absence of the additional water storage facilities.
The Advisor on Finance also gave a happy tiding that funding of the mega water sector projects will be no problem as the donor agencies are quite willing to do so. He said while giving the outlines of the new federal budget that the public-private partnership concept will be further encouraged.
Coming back to PSDP and its allocations, which indicate the good intentions of the government to accelerate the pace of development in all sectors of national economy, the pertinent question which arises in the minds is: how about the utilisation capacity of executing machinery of the Federal government ie ministries, divisions and their attached departments and organisations down the line.
In all fairness, the utilisation capacity of the allocated development funds by the executing machinery leaves much to be desired. The PM’s advisor no doubt gave encouraging figures as regards to the PSDP but what he grossly missed on the occasion was the utilisation of the funds reserved for the PSDP of the outgoing financial year.
The total size for the financial year 2006-07 was placed at Rs 470 billion and additionally organisations/corporations, government managed or private sector managed having more than 51 per cent government share, were expected to spend Rs 145 billion on their development programmes’ implementation.
Such a huge allocation even during outgoing fiscal as compared to Rs 272 billion allocated for PSDP 2005-06 was also quite appreciable and encouraging.
Utilisation of allocated development funds during the outgoing financial year also leaves much to be desired. Though no utilisation figures are available officially but there are reports that hardly about 36 per cent of the Rs 470 billion had been utilised by the executing agencies down the line during first 10 months i.e July 2006 to April 2007 which cannot be termed as appreciable and encouraging at all.
The federal and provincial governments would do well if they make it sure that the executing agencies would timely utilise the development funds. If more than 60 per cent of allocated development funds are reportedly have not been utilised then in actual, little development has taken place. Those responsible for prolonging the utilisation of the PSDP allocated resources should be identified and taken to task quite. The pace of development projects should be accelerated, so that people at large benefit from it at the earliest.
Such lethargic executing agencies’ personnel give way to criticism. Every single penny out of the public exchequer allocated for PSDP should be properly and sincerely utilised, to achieve their purpose. A monitoring system should be devised by the government to check that the allocated funds become a means to an end. Otherwise the government’s development efforts would go down the drain.

[U][url]http://www.nation.com.pk/daily/jun-2007/6/columns2.php[/url][/U]

[B][SIZE="4"][CENTER]New budget, new promises[/CENTER][/SIZE][/B]



[I][LEFT]By Sultan Ahmed[/LEFT][/I] [I][RIGHT]Thursday, JUNE 07, 2007[/RIGHT][/I]


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[U][url]http://www.dawn.com/2007/06/07/op.htm#1[/url][/U]

[B][CENTER][SIZE="4"][COLOR="Blue"]A cruel law and the budget [/COLOR][/SIZE][/CENTER][/B]


[LEFT][I]By Mir Jamilur Rahman[/I][/LEFT][I][RIGHT]satureday, JUNE 09, 2007[/RIGHT][/I]

Laws are made for the general good of the people. And in a democratic society, they are made by public representatives. It is the prerogative of the parliament to make laws according to a procedure that allows maximum debate on the pros and cons of the proposed law. However, in our constitution, there is a provision that allows the executive to make laws when the National Assembly is not in session. This provision in fact makes a mockery of democracy. Whether elected or otherwise, no government has ever contemplated doing away with this provision, because it suits every government to have the power of law-making.

Gagging of the press has always been a preferred game of every government, with one exception. The late Junejo perhaps was the only Prime Minister who never felt scared of free media. He happens to be the only Prime Minister who sent three of his cabinet ministers packing home because they were alleged to have indulged in corrupt practices.

President General Pervez Musharraf is a military dictator, and yet he never made any law to muzzle the press. He understood the value of free press and open debate. He has an open mind and welcomes criticism. He interacts with journalists and engages them in debate on important current issues, domestic and foreign. He remains patient even when provoked with most critical reviews of his policies. He is a good listener; seldom interrupting a question or comment. It was entirely his initiative that gave birth and phenomenal rise to independent television channels.

The sacking of Chief Justice Iftikhar Muhammad Chaudhry on March 9 changed the entire perspective about freedom of expression. It abruptly brought to an end the government-media honeymoon which had withstood testing times without sinking in disharmony. The sacking and the subsequent events which climaxed in Karachi on May 12 became the hottest news the nascent TV channels had encountered in their short life. The sacked CJ was on TV screens round the clock, either in person or being discussed in the talk shows. The people were glued to their TV sets. They ignored their favourite programmes; the CJ show became the most watched programme in Pakistan. The Chief Justice was upsetting the apple cart and something had to be done to get him out off the TV screen. Hence the PEMRA amendment law which is utterly cruel as it aims at discouraging the electronic media industry. It will render many people jobless. To be sure, the entertainment industry is the biggest provider of jobs in the world.

The amended law gives extensive powers to PEMRA to subvert the broadcasts of independent TV channels. PEMRA could order the cable operators, which number 1700 nationwide, to remove a recalcitrant TV channel from their circuits thus imposing an illegal censorship. It could seal the premises of a TV channel and take into custody its broadcasting equipment. It could cancel the licence of a private TV channel and/or fine it up to Rs 10 million for disobeying PEMRA rules. Many viewers must have watched in wonder the comings and goings of their favourite talk shows. One moment they are on the screen going full blast and the next, they disappear without a whimper leaving the screen blank.

The journalist community is strongly protesting the unjust law. At stake are not only freedom of media but jobs of TV journalists and other workers. If the licence of a private TV channel was suspended or cancelled, hundreds would become jobless adding to the number of unemployed in the country. Is it appropriate to reduce job opportunities on the eve of the budget? What would the jobless journalists do? Most probably swell the rallies of protesting lawyers.

Good news: Prime Minister Shaukat Aziz has suspended the application of the new PEMRA Ordinance. A committee has been formed consisting of representatives of broadcasters and the information ministry to negotiate a settlement without compromising freedom of expression and independence of private TV channels.

Today is an important day because this evening, the annual budget will be presented in the National Assembly. The State Minister for Finance in his speech would recount his government's achievements during the current financial year and set out goals for the next financial year. Prime Minister Shaukat Aziz, who also holds the portfolio of Finance, has repeatedly said that the people would vote for the present set up because it has done wonders for the economy. In his opinion, it is the overall performance of the PML-Q particularly in the economic field that would influence the voters' mind.

Undoubtedly, the GDP has gone up. Pakistan is maintaining a reasonable rate of growth. The per capita income has increased appreciably. Forex reserves are stable. Direct foreign investment is trickling in. In short, all the economic indicators are encouraging and the government has met its economic targets set in the last budget.

Unfortunately, the common man does not understand GDP growth and thinks that if it is such a good thing then why prices of kitchen items are going up, up and up. He feels a distant satisfaction that forex reserves are stable as he is unable to make out what benefits that stability would give him. The residents of Karachi know that the quality of life would remain poor for many years to come because the government has failed to plan ahead for electricity and clean drinking water. The urban citizens, especially those living in Karachi, Lahore and Islamabad/Rawalpindi live dangerously, chasing public transport which mostly consists of wagons. Several governments one after the other have thought loud for providing mass transit facility to the dwellers of big cities but no serious attempt has been made to provide this most essential facility to the people. Today's budget would be silent on this important issue.

When people go to vote in a few months, economic progress would not be on their minds, because our economic progress is not tangible enough to be felt by all and sundry. They will cast their votes on political grounds. While voting, their minds will go back to March 9, reliving the sacking and manhandling of the CJP. They will relive the events of that day and the days that followed, especially the Karachi bloodshed of May 12 that took away over 40 lives while the administration looked the other way. They would not forget the government's attempt to silence the private TV channels.

There is no chance that by the time elections are held, the people would have forgotten about March 9 and May 12. The opposition would not let the people forget the indignities perpetrated against the CJ, lawyers and journalists.



The writer is a freelance columnist. Email: [email]mirjrahman@yahoo.com[/email]



[U][url]http://www.thenews.com.pk/daily_detail.asp?id=59794[/url][/U]

[B][SIZE="4"][COLOR="Blue"][U][CENTER]Budget claims: how true?[/CENTER][/U][/COLOR][/SIZE][/B]


[LEFT][I]Haseeb Ahmed Bhatti[/I][/LEFT][RIGHT][I]Satureday,JUNE 09,2007[/I][/RIGHT]


The most high-profile economic document, the federal budget will be presented in the National Assembly today. The government has revised many of its claimed targets of the last budget. The target for growth in industrial production has been reduced to half. Large-scale manufacturing has also been accepted formally as being not able to achieve its officially claimed target. The same sorry state of affairs exists in the export and import targets. Agriculture, like many previous years, has again failed to meet its growth target. Whether it is the issue of the Chief Justice, May 12 massacre in Karachi, the media or the economy, nothing is working in favour of the government presently. As the stage is set to present another federal budget in the most critical phase of the government, on one side there exist extreme sentiments, opposition and questions against their credibility and on the other, it is going to be the last federal budget of the present government. How the coming budget is going to be accepted by the people we will have to wait and see.

The federal budget of any country is normally a routine document not as much awaited by people as in Pakistan. The fundamental reason for great expectations arises when the priorities of any government are not pro-people and in the vain hope of betterment, people attach expectations with every coming budget. Historically, it has gained importance as governments fix their targets in different sectors of the economy and new economic initiatives are normally announced which get approval from parliament. In democratic societies, due consideration is given to the opposition’s concerns and ideas about the federal budget. Unfortunately, the last seven years’ budgets remained one-sided affairs, and even a single suggestion of the opposition or independent economists was never given due consideration. The government’s priorities and development agenda, if they remain rational and aims toward the genuine improvement in the welfare of a majority of the population, then federal budgets become only an announcement for a new year’s expenditures.

Where are the present government’s priorities wrong? These are in the agriculture sector where irrational prices of diesel and removal of subsidies from various inputs has made different crops for farmers no more profitable. Shortage of water is hurting them badly and poor road infrastructure is a major obstacle in getting good prices from better markets. Take trade relations, where it is in unnecessary haste to sign free trade agreements in every corner of the world. It has utterly failed to increase human development indicators and reduce of extreme poverty. The present government has failed to solve the energy and water crisis of the country. It is highly unsuccessful in attracting Foreign Direct Investment (FDI). Selling public assets at throw-away prices cannot be at all called Foreign Direct Investment. Citing an example about priorities, the total outlay of the last budget was Rs. 1,315 billion; 19.02 percent was allocated to defence while a meagre 1.17 percent to health and population combined, and 1.74 percent to education that also included the controversial allocation of a hefty amount for the Higher Education Commission (HEC).

The top-most objective of the last budget was, ‘to provide relief to the fixed income group and to the common man’. Who is this common man? We are in dire need to define this common man who is supposed to be benefited in the successive budget speeches and economic policy documents. To provide relief is of course a very general and vague statement. Let us suppose relief means making life better for the poor people. It is to provide them better chances of income, health facilities, better water sources and education for their children. Not only education, but a guarantee that this education will result in making their lives better through employment opportunities. Almost a whole year has gone after the announcement of this top-most objective of the last federal budget. How successfully it has been achieved or steps to achieve it have been taken by the government does not need a microscopic analysis but is quite visible to everyone. It is visible in the highest possible food inflation and in the basic utilities like the prices of sugar, vegetables and cooking oil and in prices of pulses and rice. The price of milk is at a historic high. This is to name a few. Ask anyone who is running a household and they would tell their long ordeal of this price-hike and its negative effects on household budgets. Recently at a seminar Dr. Salman Shah, the Adviser to the Prime Minister for Finance, declared Pakistan as Asia’s fastest-growing economy. How true is that claim needs a separate scrutiny from this topic, but he must be aware that in developed economies or in economies where people’s problems are taken care of, even a 0.5 percent increase in food items prices is taken very seriously. Policy planning there aims at keeping these prices at the level of negative growth rate. The same is true of unemployment figures; a single digit rise is dealt with extreme sensitivity. Unfortunately, things which matter most are neglected most by the economic managers of this country.

The government takes great pride in indicating the increase in automobiles and air conditioners’ sale as symbols of the prosperity of people. Pakistan thus becomes the only country in the world using such indicators of prosperity and emergence of the middle class. All other internationally accepted indicators like purchasing power parity, Gini index of inequality, inflation, increase in real income, unemployment rate and human development related indexes do not remain concerns to be worried about. The government plans to privatise assets worth $ 2.5 billion every year and in its present routine will claim it as increased foreign direct investment in the country. The coming budget is different from the previous ones; it is going to be presented in a charged national environment where many steps of the government are being questioned seriously. How the independent economists and other concerned businessmen and traders react to the budget is going to seen soon. But one thing is evidently clear. Tides are high and the boat is going to face a tough ride. Not words, but correct actions are the need of the hour.

The writer is a faculty member, Department of Business Studies, University of Sargodha


[U][url]http://www.thepost.com.pk/OpinionNews.aspx?dtlid=101454&catid=11[/url][/U]

[B][SIZE="4"][CENTER][COLOR="Blue"]An election-focused budget[/COLOR][/CENTER][/SIZE][/B]


[I][RIGHT][COLOR="Blue"]Monday,JUNE 11,2007[/COLOR][/RIGHT][/I]

THAT it would be an election-centric budget was never in doubt. The proposals for income and expenditure for 2007-08 announced by the minister of state for finance Omar Ayub Khan in the National Assembly on Saturday more than confirmed the expectations. Still, compared to the official buildup and Mr Khan’s hyperbole in his budget speech, relief offered to the common citizen does not appear all broad-based and lasting. Some of the proposals do try to address the concerns found among vulnerable pockets, but that is all. At Rs1.874 trillion the total outlay of the budget is awe-inspiring when compared with previous budgets. If as much as Rs1.025 trillion is being projected by way of resources to cater to the financial needs of the nation over the next 12 months, with a deficit financing of just 4 per cent of the GDP, at Rs398 billion, one must praise the effort of the official economic managers at resource mobilisation. This is amazing, because there are no more than about 1.2 million tax payers in a country of 160 million. The agriculture sector, a major contributor to the GDP, as well as real estate and capital gains continue to stay out of the tax net. With so much available for spending it was only expected that there would be massive increases in the allocations for important economic and social sectors, and enough left for providing financial relief to low-income groups. This is to be done through increase in income, salaries and subsidies offered on the poor man’s essential kitchen items to save him from the hardship of food price inflation. Sizeable allocations have been made for the provinces and districts as well; the latter ostensibly for furthering the ruling coalition’s election bid in that offering no break from the past.

During the outgoing year, food price inflation of over 10 per cent left many a kitchen cold, even in households estimated to be living a little above the poverty line. Combined with an overall Consumer Price Index of nearly 8 per cent it was but expected that the consumption of the poorest 20 per cent of Pakistanis remained below 10 per cent in the outgoing year, while the richest 20 per cent enjoyed a consumption rate of nearly 50 per cent. The gap between the poor and the rich continues to widen. There are no open or hidden measures in the new proposals that one could say with a degree of certainty would attempt to bridge this gap. The promises to create thousands of jobs and build thousands of low cost houses for the poor are just that at this stage. Last year, while announcing the budget, the government had promised to send out magistrates for checking the prices of essential kitchen items, but no magistrates were seen in the field in the course of the year.

Every time the government is faced with tackling high food price inflation, which has been there now for three years running, it has taken shelter in Utility stores. In the first place there are just not enough Utility stores (about 1,000 or so) in the country to take care of the needs of the teeming millions. Secondly, when you are practising market economy how is it possible for you to intervene efficiently with public sector instruments to control prices even if you succeed in setting up 5,000 such stores, say, within a year? Last year an announcement to the effect was made, but with a difference. The government had promised to help set up such stores under a public-private partnership. Nothing has come of it so far. Of the total subsidy outlay of Rs113.9 billion, only Rs2.45 billion are proposed to be used for keeping the prices of pulses, sugar and ghee within the reach of the buyers shopping at Utility stores. A major portion of the subsidy, Rs98 billion, is being kept to help out Wapda, the KESC, the petroleum companies, refineries and the textile sector. This bares all as to the state of governance in public sector corporations, and the government’s urge to stay on the right side of big businesses while making claims to alleviate poverty.

In this year of record wheat production, atta prices have escalated sharply just before the unveiling of the budget, forcing the government to impose a ban on flour export. Perhaps exports contributed to the shortage seen in the market to an extent, but major reasons for short supplies and high prices were hoarding, black marketing and an inefficient distribution network. The overall inflation rate, much like in the outgoing year, is not going to slow down over the next 12 months. There is nothing in the new budgetary proposals that has the ability to tackle the menace at its root. The production sectors continue to stagnate. No real investment is coming their way. Agriculture remains at the mercy of the weather, and the availability of water; a bumper crop one year is no guarantee that bulls would rule the coming years as well. The manufacturing sector is one that needs badly to be geared up and diversified. An overwhelming dependence on cotton textile will not help the country in the longer run. There will very likely be shortages all around. One says this because cotton production has seen a decrease in actual terms in the outgoing year. The trend is not likely to reverse anytime soon, given the shrinking crop on account of water shortage and ineffective pest control.

There is an expected inflow of nearly $5 billion in remittances, coupled with substantial income in foreign exchange from privatisation. These inflows will partly take care of the current account deficit, which is widening mostly due to stagnant exports and a rise in imports. The additional income is not due to a significantly greater domestic economic activity. As such rupees generated against incoming dollars add to the M2 aggregate, which creates the unwanted condition of more rupees chasing fewer goods, causing in turn the prices to go up. Attempts at cooling this hyper circulation of currency by the State Bank of Pakistan only end up raising the interest rate, thus escalating the cost of production which already has become prohibitive because of shortages of infrastructure, especially of power. This is causing even textile exports to price themselves out of international markets. That is why perhaps textile tycoons keep demanding subsidies. That is also perhaps why most of the earned foreign exchange by way of remittances and concessional capital coming into the country is going into unproductive sectors like real estate and the stock market.

The proposed share of current expenditure at Rs1.599 trillion in the total budgetary outlay is a worrying 66 per cent. One only hopes that it will not shoot up to over 72 per cent as it did in the outgoing year. Such overshooting of current expenditure eats into the development budget which is estimated at Rs543 billion for the current year. The reference to the defence budget has once again remained a one-liner. Isn’t it time now to discontinue this economically senseless and undemocratic practice? Let us tell the people of Pakistan the real cost of maintaining an effective deterrent and from where the resources are coming to accomplish this. The biggest flaw of the budget seems to be its failure to take serious note of the looming power crisis and depleting water resources. The allocations for these heads are not commensurate with the challenges we will be facing on these fronts within the next couple of years. Housing, too, deserved more than it got.


[U][url]http://www.dawn.com/2007/06/11/ed.htm[/url][/U]

[B][CENTER][SIZE="4"][COLOR="Blue"]‘Tis the season to be merry’ [/COLOR][/SIZE][/CENTER][/B]



[COLOR="blue"][I]Hit and run[/I]

[I][LEFT]By Shakir Husain[/LEFT][/I][I][RIGHT]Monday,JUNE 11,2007[/RIGHT][/I][/COLOR]

Millions of citizens across Pakistan are quivering like little puppies as they anticipate their most favourite time of the year — budget time. For those tens of thousands of tourists who are visiting Pakistan because of the Visit Pakistan 2007 campaign, budget time is when millions of ordinary Pakistanis rejoice as they know that a bag of tasty treats awaits them. Budget time for Pakistanis is like St Patrick’s Day for the Irish or Oktoberfest for the Germans, Mardi Gras for the citizens of New Orleans, or whatever day of festivities drunk Welshmen observe. This is the time of the year when the alchemists at the ministry of finance under the tutelage of the grand wizard of banking himself unveil the eight wonder of the world which will benefit the common man.

At the risk of sounding irreverent, I would like to clarify that while the millions of citizens of Pakistan await the federal budget with great excitement, it should in no way be equated to a circus. I believe after last year’s critique of the great budget bonanza performance, it has been rumoured that the Minister of State for Finance Omar Ayub Khan has decided to go for a makeover at a leading stylist and fashion guru — another sign of a responsive government. No doubt, Mr Khan will entertain millions of Pakistanis as he steps on to the podium to announce the thousands of sacrifices that the state machinery has no doubt made in order to present yet another populist budget for the people. Now that every Pakistani is earning a thousand dollars it is important for all of them to recognise who really made all this prosperity happen to begin with.

While the thousand-dollar crowd will be applauding the honourable person of the finance minister, it will be the million-dollar crowd which will really be partying hard on budget night. Rumour has it that the government is reviewing a very serious bill in the National Assembly which will declare the day after budget day a national holiday. According to press reports future generations of Pakistanis will have a Rs398 billion budget deficit which they will need to pay off in their lifetime — thank God we won’t be around when those poor sods need to pay for all the goodies we’re consuming today. I mean look at those poor, miserable, and repressed Japanese with all their savings? Is that a way to live? I hear sometimes their prime minister even takes the train — what a ridiculous man for not having a motorcade which blocks traffic for a couple of hours.

Friendly tourists, something to really look out for is the pre-budget festivities in Pakistan. And while you won’t find any mention of these in the tourist guides you carry around, they really are an activity not to be missed. This is the part when members of our very efficient and effective 100 man federal cabinet led by none other than the man of deals himself goes around Islamabad buying groceries for their homes. It’s quite sweet to watch this merry procession to something called the Utility Stores buying sugar, lentils, and tea. Unlike your home countries where men in grocery stores don’t look too excited, the budget festival entertainers are grinning from ear to ear like village idiots while being photographed from all angles. It is quite a spectacle and the world council of grocers might be nominating it for the “Happiest Grocery Run” award in their next annual meeting.

Another favourite pre-budget activity is something of a personal favourite, and it’s known as hoarding. This activity occurs when very wealthy traders, based on insider information about the budget, begin to stock up on their favourite goodies in enormous quantities. Nothing is sacred whether it is medicine, rooh afza (what Pakistani diplomats give by the caseload when they’re presented with Bordeaux), or cooking oil, and billions are made by offloading these goods after the budget. This fun activity is open to all who have the right contacts in Islamabad, and if you happen to be a Caucasian you won’t have any problems accessing anyone in government as long as you tell them you’re a foreign investor. Hell, you might even get free room and board in the best hotels along with free transportation.

It’s beyond me why the natives of certain parts of the country refuse to participate in this national festival of the budget. We hear that in Karachi the local power utility is ruining the pre-budget party by not supplying electricity for four hours at a stretch. And while Karachi is now known as the city of harmony, it is having trouble attracting tourists to come for its pre-budget party, I hear that orders have been issued by the powers that be that the party must be a success. The traditional Karachi pre-budget party usually happens outside the Karachi Stock Exchange and goes all the way to I I Chundrigar Road, but this year both brokers and bankers are expressing solidarity with their indicted brothers Hafiz Naseem and Ejaz Rahim and have cancelled the celebrations.

To all the party poopers who are trying to bring up silly issues like inflation, deficit, crushing debt which will be paid back by future generations, spiralling luxuries like German limousines, private jets, massive expense accounts, and crony capitalism I say back off. Back off because our leaders work very hard to bring festivals like budget time to the entertainment starved masses once a year, and if they need a few perks to make the pressure of their excessive workload easier they should be able to indulge themselves once in a while. So what if we have to pay for it — isn’t it really worth it?

The writer is an entrepreneur andbusiness consultant. Email: shakir@ gmail.com


[U][url]http://www.thenews.com.pk/daily_detail.asp?id=60028[/url][/U]

[B][SIZE="4"][COLOR="Blue"][CENTER]A populist budget? [/CENTER][/COLOR][/SIZE][/B]


[I][RIGHT]Monday,JUNE 11, 2007[/RIGHT][/I]


The federal budget for the year 2007-08 presented in the National Assembly on Saturday by the minister of state for finance is ostensibly populist in nature because subsidies on several essential items such as pulses, cooking oil, rice, sugar and tea and basic medicines have been introduced, albeit at the retail level, pensions have been increased as has the minimum wage and salaries of government employees. The consolidated budget of Rs1.874 trillion has an ambitious tax collection target of Rs1.025 trillion and defence expenditures for 2007-08 allocated Rs 275 billion, 10 per cent higher than last year. Incidentally, defence is again a one-line item, over which there is sure to be no debate in parliament ñ and the minister could have done without the needless rhetoric when he announced this figure. However, one striking aspect of the budget is its massive deficit, estimated to be at Rs 398 billion which the government says will be bridged by domestic and external borrowing. This is bound to become controversial because of simple economics: financing a deficit means that the governmentís debt burden will increase and eventually —- in the longer term ñtaxes may have to be raised to finance the increase in the debt. So this seemingly populist measure, presumably to make things easier for the ruling party in an election year, will only have short-term consequences.

It would be fair to assume that the governmentís populist plan to subsidise certain essential food items at the retail level through utility stores is perhaps the major reason for the significant deficit. As pointed out earlier, in addition to these food items, many of whose prices have been beyond any kind of government control in the past (particularly sugar), the plan also includes the subsidized sale of basic medicine. The latter in itself seems quite ambitious because even at government hospitals, where medicines are supposed to be provided free of cost, patients often have to pay market rates. The whole scheme of making available food items at subsided rates merits close examination because it seems to be the centerpiece of the 2007-08 budget.

The subsidized products, it is proposed, will be sold at government-owned utility stores and the plan is to have one such store in every union council within the next four months. Past experience has shown that selling subsidized good at utility stores is riddled with many problems such as pilferage/embezzlement of products by store staff. The network of stores is also not very comprehensive. Even setting all this aside, a target of one store in every union council in the country seems unrealistic to say the least. Apart from that, the whole nature of this subsidy is not sound on purely economic grounds. For instance, the fact that subsidy is being levied at the retail level and not at the production stage means that the whole scheme is to show to the electorate ñ most of whom are obviously not economics-savvy ñ that they will be able to buy some essential food items at controlled rates (with the difference being picked up by the government). However, a far more useful approach to a subsidy package would have been to levy the assistance at the production stage. This would have been better because it would have a potentially longer term positive effect on prices, since production would increase and help reduce chances of any shortages arising in the long term as well, which is the primary reason why food prices have been rising of late.

Furthermore, a subsidy at the retail level does not do anything to generate employment opportunities, something that would happen if it were levied at the production stage. Given all this, the only plausible reason that one can think of why the government would have chosen this particular approach ñ which is nothing really but a cosmetic quick fix to a problem requiring a solution that works through to the long term — is that it may achieve some results in the short term for the ruling party. It also should be noted that the bulk of the subsidies are meant for sectors which seem hardly in need of any assistance ñ such as textiles, oil marketing companies and refineries ñ or are going to white elephants like KESC and WAPDA whose inefficiencies are yet again going to be paid for by taxpayers.

Moving on to revenue collection, the estimate for 2007-08 is almost 22 per cent higher than the estimates for 2006-07 and it remains to be seen to what extent this ambitious target is met given that there has been no significant widening of the tax net. As usual, this will be done by subjecting salaried persons and the corporate sector to more indirect taxes ñ which are regressive especially for those from low- and middle-income backgrounds. In fact, according to the budget figures 60.4 per cent of the total tax revenue will come from indirect taxes. If the poorer sections of the population are to be helped in any significant way, this percentage needs to be reduced, to increase the share of direct taxes since they are more progressive and carry a bigger burden of payment on the rich. On other fronts, there seems to be little initiative to move the inflow of capital and funds into generally non-productive sectors such as real estate (particularly sale and purchase of plots) and stocks and shares. In fact, a proposal to create a trust where small-scale investors may invest to reap profit from investment in real estate seems unjustified given that this non-productive sector has already diverted a lot of funds that could have been better utilized elsewhere, in increasing the economyís productive potential and in generating employment. As far are the proposal to increase the salaries of government servants by 15 per cent is concerned, it may well have just the opposite effect on the majority of Pakistanis who do not have a government job in that their tax rupees will be used to pay for this raise. What ordinary Pakistanis would have wanted is not quick fixes that may or may not offer them the promised benefits but some longer term planning to prices of essential items in check. As for key social sectors such as health and education, the funds allocated to them remain far too little given the amount of work that needs to be still done to raise literacy rates and the quality of healthcare available in the country. One other issue that seems to have escaped policymakers for now ñ and the need for this has never been more acute given the current loadshedding crisis ñ is the matter of increasing the countryís water storage and power-generation capacity with only small amount of funding set aside for this meaning that no significant headway has so far been made in building a dam.

[U][url]http://www.thenews.com.pk/daily_detail.asp?id=60026[/url][/U]

[CENTER][B][COLOR="Blue"][SIZE="4"]Blending expectations and hard realities[/SIZE][/COLOR][/B][/CENTER]


[I][LEFT]By M. Sharif[/LEFT][/I][RIGHT][I]Monday,JUNE 11,2007[/I][/RIGHT]

The budget has been presented amidst hard realities of day-to-day living experiences imposed on a large number of people through free market mechanism. They have been groaning under the weight of inflation, particularly food inflation (registered over 10 per cent during the outgoing fiscal year) during the past four years. The segment of society that suffers the most is low income category, the unemployed and daily wage workers. They have been waiting with the expectations that budget will bring substantial relief to them in hard pressing areas. What does budget really offer to these segments of society and many other smaller segments in between them, is one of the most important questions to be addressed.

The most important issues to be addressed by budget planners were making best use of fiscal space and generating financial resources for development and meeting current expenditure. In addition to these, the government is to provide incentives for various sectors of the economy to sustain high growth and above all demonstrate political will to address social and economic problems confronting people. Together with this, to be able to address critical issues facing the economy, not at their face value but at their core points. Equally important is the fact that budget 2008 has been presented in an election year and under somewhat politically stressful conditions for the government thus some softening by providing some relief to hard pressed segments of society was in order. Also required was some incentives to various sectors of economy to achieve growth target of 7.2 per cent for FY08.

Background

Before looking at the budget proposals, it is essential to look at the performance of the economy during outgoing fiscal year. It did well on a number of accounts despite the fact that the government revised macroeconomic targets for the outgoing fiscal year. The economy achieved growth rate of 7.0 per cent, FDI increased beyond the target of $5.0 billion to $6.0 billion during first 10 months of the out going fiscal year, fiscal and current account deficit despite being high remained manageable, rupee-dollar parity remained stable despite a little pressure of devaluation to boost textile exports, forex reserves increased to more than record $15.0 billion and economy’s rating in international financial market remained more than satisfying to fetch $800million in May2007 for budgetary support. Capital formation in stocks has touched new heights and is considered to reflect strength of the economy.

Somehow these strong macroeconomic indicators do not go along with independent analysts who see the economy beyond fiscal and monetary indicators on certain obvious accounts. Conspicuous among them are high inflation, huge trade deficit, shortfall in exports by around $1.0 billion, dependence of the economy on external inflows of more than $8.0 billion each year and huge inequality that government policies keep creating among different segments of society during each fiscal year. According to independent analysts and quarterly reports of SBP, expansionary fiscal policy that has a direct bearing of fuelling inflation, weak supply side of economy, lack of full utilisation of PSDP expenditure and efforts to correct structural imbalances in the economy particularly with respect to increasing tax revenues are some of the important factors that did not make outgoing fiscal year a good year for the general public.

The budget

The budget, in terms of outlay, is a mega budget with record outlay of public expenditure under various fiscal heads as well as revenue collection. Its outlay is Rs1.847trillion with the largest ever PSDP expenditure of Rs520 billion and subsidies of Rs204 billion. PSDP expenditure is planned to be met through private and public sector partnership. Revenue collection target has been fixed at Rs1.030547 trillion. Further details of the budget outlay, fiscal targets and important budgetary proposals are as follows:

(1) Budget outlay is 35 per cent higher than the outlay for outgoing fiscal year, and projected revenue collection is 22.0 per cent higher than last year target of Rs835 billion that is likely to be achieved comfortably by the end of current fiscal year.

(2) Non-tax revenue is estimated at Rs337.593 billion. In case of adding it to tax revenue collection of Rs1.030547 trillion, total revenue collection is projected at Rs1.369trillion. After disbursing Rs465.964 billion to the provinces the federal government would be left with a net-revenue of Rs902.176 billion as against total fiscal expenditure of Rs1.599611trillion. The budget document shows heavy dependence on external borrowing of Rs258 billion, bank borrowing of Rs130 billion privatisation proceeds of Rs75 billion to meet the fiscal gap.

(3) Current expenditure is projected estimated to be Rs1.353trillion that is 54 per cent of the total budgetary outlay. This includes Rs275 billion for defence, Rs24.5 billion for safety affairs, *** Rs641.875 billion *** for general public expenditure and Rs520 billion for public development expenditure. Out of public development expenditure of Rs520 billion, federal government is to spend Rs370 billion and provinces share is projected at Rs150 billion.

(4) Projected fiscal deficit of Rs398 billion is 21.0 per cent of budgetary outlay. This is quite high percentage and also quite high in absolute terms. It would generate its own inflationary pressure and tight monetary policy likely to be pursued by the SBP during the FY08 which, might prove to be less effective to contain inflation once again.

(5) 25 per cent increase in the PSDP from Rs435 to Rs520 billion is certainly a big increase which will go a long way in creating jobs, reducing unemployment and alleviating poverty. 52 per cent of it is allocated for development of infrastructure and 48.0 per cent is meant for social sector development and welfare of the people. The projected allocation reflects concern of the government in two development areas. One, power sector development has a serious deficit vis-à-vis around 7.0 per cent growth of economy over past four years. Shortage of power has serious implications for mid-term economic growth targets and cost of production of manufactured goods specially meant for exports. Current power crises are quite serious and it is feared that 1200mw deficit might take at least 2-3 years to bridge the supply and demand gap. The budget proposes to spend Rs40.0 billion on construction of dams. Two, social sector development has a direct bearing on poverty alleviation that the government claims to have been reduced to around 24.0 per cent, despite persisting high inflation over past four years.

(6) Provinces share has been increased substantially to Rs497.2 billion that is 46.0 per cent of divisible pool.

(7) Allocation for subsidies has been increased to Rs204 billion. It includes of subsidy on food items, power and fertilisers.

(8) Defence allocation has been increased from Rs250.0 billion to Rs275 billion.

(9) Rs34 billion has been allocated for Khushhal (people’s welfare) Pakistan scheme.

Relief to low-income group

The budget includes quite a few proposals to provide relief to the common people. A few important of them are listed as follows:

(a) Subsidies worth Rs204 billion will be provided including items of daily use to help the common man.

(b) Salaries of the government employees have been increased by 15.0 per cent and the pensions 15.0 and 20 per cent.

(c) The government plans to combat poverty by selling items of daily use such as rice, edible oil, dales, tea, sugar and other items of daily use at comparatively cheaper rates than the market. It intends to commission 5000 more utility stores with at least one at each tehsile (sub district) level. The stores will also sell discounted medicines.

(d) Old age scheme has been increased from Rs1300 to Rs1500 and minimum salary of unskilled labour has been increased from Rs4000 to Rs4600 pm.

(e) Allocation for Baitulmal (public welfare funds) has been increased to Rs7.5 billion.

(f) Rozgar (employment) Scheme has been allocated Rs105 billion over next five years, with around Rs20 billion a year.

(g) Housing problem will be addressed in Islamabad by constructing 5000 apartments and 3 to 5 marla schemes will be launched to help poor segments of the society.

(h) It is planned to open up 5000 utility stores across the country at the grassroots level to combat inflation.

(i) In order to augment existing health facilities, 815 basic health units are planned to be established.

Industrial sector

Industrial sector did not meet its target. Favourable budgetary proposals have been made to boost industrial sector. Some of them are as follows:

(i) Zero-tariff slab has been proposed to reduce the cost of raw material.

(ii) Custom duty has been withdrawn on import of machinery used in horticulture, furniture, surgical and medical instruments.

(iii) Custom duty on generators to be used for domestic and commercial use has respectively been withdrawn and reduced.

Some concerns

Fiscal deficit of Rs359 billion is projected to be met through bank borrowing of Rs130 billion and foreign borrowing of Rs229 billion. It is around 4.0 per cent of GDP. Two important factors need to be highlighted because of high deficit that could affect economy adversely.

One, it will add to the public debt which is already high in absolute terms. Borrowing from foreign resources is intrinsically linked with political stability in the country. One only hopes that the government successfully rides over somewhat disturbed situation in the country.

Two, the government prefers to borrow from the central bank than from commercial banks to have less debt servicing liability. It builds inflationary pressure as has been happening till now.

Thrust towards an expansionary fiscal policy is likely to persist during FY2008 as well despite tight monetary policy that the SBP has vowed to pursue. It might prove to be difficult to bring down inflation from its current level of 7.9 to 6.5 per cent as has happened during the outgoing fiscal year. High inflation and expansionary fiscal policy could discourage some FDIs that is upbeat because of surplus liquidity available in the Gulf States and western countries and their willingness to help the government in Islamabad for political reasons.

Amount of subsidies doubled from Rs109 billion for current fiscal year to Rs204 billion under various heads starting from power, fuel, fertilisers and food to pension. It will certainly provide some relief to common people.

The increase in subsidies despite being a welcome measure has the inherent drawback of not being the right solution of the issues that can be resolved only through correct economic policies that should enhance tax-to-GDP ratio, boost industrial output, change trade deficit into surplus, increase savings and employment and should curb effectively income inequality that is on the increase according to the Economic Survey 2006-07.

No new taxes have been imposed and a few changes have been made in the existing taxes. One per cent surcharge has been imposed on all but some essential imports.

Some of the taxes that should have been imposed have been left aside. They could have generated substantial tax revenue. For example, capital gain tax that could have been imposed on stocks and real estate business - has not been levied. Likewise, it is unlikely if the provincial governments would take the major step of levying agriculture income tax.

Current expenditure is on the increase. It calls for fiscal discipline to have less dependence on borrowed money for fiscal management.

Conclusion

The budget has been termed pro-people, relief and development oriented and perhaps the best one announced by the government during past seven years.


[U][url]http://jang.com.pk/thenews/jun2007-weekly/busrev-11-06-2007/p2.htm[/url][/U]

[CENTER][B][COLOR="Blue"][SIZE="4"]Blending expectations and hard realities[/SIZE][/COLOR][/B][/CENTER]


[I][LEFT]By M. Sharif[/LEFT][/I][RIGHT][I]Monday,JUNE 11,2007[/I][/RIGHT]

The budget has been presented amidst hard realities of day-to-day living experiences imposed on a large number of people through free market mechanism. They have been groaning under the weight of inflation, particularly food inflation (registered over 10 per cent during the outgoing fiscal year) during the past four years. The segment of society that suffers the most is low income category, the unemployed and daily wage workers. They have been waiting with the expectations that budget will bring substantial relief to them in hard pressing areas. What does budget really offer to these segments of society and many other smaller segments in between them, is one of the most important questions to be addressed.

The most important issues to be addressed by budget planners were making best use of fiscal space and generating financial resources for development and meeting current expenditure. In addition to these, the government is to provide incentives for various sectors of the economy to sustain high growth and above all demonstrate political will to address social and economic problems confronting people. Together with this, to be able to address critical issues facing the economy, not at their face value but at their core points. Equally important is the fact that budget 2008 has been presented in an election year and under somewhat politically stressful conditions for the government thus some softening by providing some relief to hard pressed segments of society was in order. Also required was some incentives to various sectors of economy to achieve growth target of 7.2 per cent for FY08.

[B]Background[/B]

Before looking at the budget proposals, it is essential to look at the performance of the economy during outgoing fiscal year. It did well on a number of accounts despite the fact that the government revised macroeconomic targets for the outgoing fiscal year. The economy achieved growth rate of 7.0 per cent, FDI increased beyond the target of $5.0 billion to $6.0 billion during first 10 months of the out going fiscal year, fiscal and current account deficit despite being high remained manageable, rupee-dollar parity remained stable despite a little pressure of devaluation to boost textile exports, forex reserves increased to more than record $15.0 billion and economy’s rating in international financial market remained more than satisfying to fetch $800million in May2007 for budgetary support. Capital formation in stocks has touched new heights and is considered to reflect strength of the economy.

Somehow these strong macroeconomic indicators do not go along with independent analysts who see the economy beyond fiscal and monetary indicators on certain obvious accounts. Conspicuous among them are high inflation, huge trade deficit, shortfall in exports by around $1.0 billion, dependence of the economy on external inflows of more than $8.0 billion each year and huge inequality that government policies keep creating among different segments of society during each fiscal year. According to independent analysts and quarterly reports of SBP, expansionary fiscal policy that has a direct bearing of fuelling inflation, weak supply side of economy, lack of full utilisation of PSDP expenditure and efforts to correct structural imbalances in the economy particularly with respect to increasing tax revenues are some of the important factors that did not make outgoing fiscal year a good year for the general public.
[B]
The budget[/B]

The budget, in terms of outlay, is a mega budget with record outlay of public expenditure under various fiscal heads as well as revenue collection. Its outlay is Rs1.847trillion with the largest ever PSDP expenditure of Rs520 billion and subsidies of Rs204 billion. PSDP expenditure is planned to be met through private and public sector partnership. Revenue collection target has been fixed at Rs1.030547 trillion. Further details of the budget outlay, fiscal targets and important budgetary proposals are as follows:

(1) Budget outlay is 35 per cent higher than the outlay for outgoing fiscal year, and projected revenue collection is 22.0 per cent higher than last year target of Rs835 billion that is likely to be achieved comfortably by the end of current fiscal year.

(2) Non-tax revenue is estimated at Rs337.593 billion. In case of adding it to tax revenue collection of Rs1.030547 trillion, total revenue collection is projected at Rs1.369trillion. After disbursing Rs465.964 billion to the provinces the federal government would be left with a net-revenue of Rs902.176 billion as against total fiscal expenditure of Rs1.599611trillion. The budget document shows heavy dependence on external borrowing of Rs258 billion, bank borrowing of Rs130 billion privatisation proceeds of Rs75 billion to meet the fiscal gap.

(3) Current expenditure is projected estimated to be Rs1.353trillion that is 54 per cent of the total budgetary outlay. This includes Rs275 billion for defence, Rs24.5 billion for safety affairs, *** Rs641.875 billion *** for general public expenditure and Rs520 billion for public development expenditure. Out of public development expenditure of Rs520 billion, federal government is to spend Rs370 billion and provinces share is projected at Rs150 billion.

(4) Projected fiscal deficit of Rs398 billion is 21.0 per cent of budgetary outlay. This is quite high percentage and also quite high in absolute terms. It would generate its own inflationary pressure and tight monetary policy likely to be pursued by the SBP during the FY08 which, might prove to be less effective to contain inflation once again.

(5) 25 per cent increase in the PSDP from Rs435 to Rs520 billion is certainly a big increase which will go a long way in creating jobs, reducing unemployment and alleviating poverty. 52 per cent of it is allocated for development of infrastructure and 48.0 per cent is meant for social sector development and welfare of the people. The projected allocation reflects concern of the government in two development areas. One, power sector development has a serious deficit vis-à-vis around 7.0 per cent growth of economy over past four years. Shortage of power has serious implications for mid-term economic growth targets and cost of production of manufactured goods specially meant for exports. Current power crises are quite serious and it is feared that 1200mw deficit might take at least 2-3 years to bridge the supply and demand gap. The budget proposes to spend Rs40.0 billion on construction of dams. Two, social sector development has a direct bearing on poverty alleviation that the government claims to have been reduced to around 24.0 per cent, despite persisting high inflation over past four years.

(6) Provinces share has been increased substantially to Rs497.2 billion that is 46.0 per cent of divisible pool.

(7) Allocation for subsidies has been increased to Rs204 billion. It includes of subsidy on food items, power and fertilisers.

(8) Defence allocation has been increased from Rs250.0 billion to Rs275 billion.

(9) Rs34 billion has been allocated for Khushhal (people’s welfare) Pakistan scheme.

[B]Relief to low-income group[/B]

The budget includes quite a few proposals to provide relief to the common people. A few important of them are listed as follows:

(a) Subsidies worth Rs204 billion will be provided including items of daily use to help the common man.

(b) Salaries of the government employees have been increased by 15.0 per cent and the pensions 15.0 and 20 per cent.

(c) The government plans to combat poverty by selling items of daily use such as rice, edible oil, dales, tea, sugar and other items of daily use at comparatively cheaper rates than the market. It intends to commission 5000 more utility stores with at least one at each tehsile (sub district) level. The stores will also sell discounted medicines.

(d) Old age scheme has been increased from Rs1300 to Rs1500 and minimum salary of unskilled labour has been increased from Rs4000 to Rs4600 pm.

(e) Allocation for Baitulmal (public welfare funds) has been increased to Rs7.5 billion.

(f) Rozgar (employment) Scheme has been allocated Rs105 billion over next five years, with around Rs20 billion a year.

(g) Housing problem will be addressed in Islamabad by constructing 5000 apartments and 3 to 5 marla schemes will be launched to help poor segments of the society.

(h) It is planned to open up 5000 utility stores across the country at the grassroots level to combat inflation.

(i) In order to augment existing health facilities, 815 basic health units are planned to be established.

[B]Industrial sector[/B]

Industrial sector did not meet its target. Favourable budgetary proposals have been made to boost industrial sector. Some of them are as follows:

(i) Zero-tariff slab has been proposed to reduce the cost of raw material.

(ii) Custom duty has been withdrawn on import of machinery used in horticulture, furniture, surgical and medical instruments.

(iii) Custom duty on generators to be used for domestic and commercial use has respectively been withdrawn and reduced.

[B]Some concerns[/B]

Fiscal deficit of Rs359 billion is projected to be met through bank borrowing of Rs130 billion and foreign borrowing of Rs229 billion. It is around 4.0 per cent of GDP. Two important factors need to be highlighted because of high deficit that could affect economy adversely.

One, it will add to the public debt which is already high in absolute terms. Borrowing from foreign resources is intrinsically linked with political stability in the country. One only hopes that the government successfully rides over somewhat disturbed situation in the country.

Two, the government prefers to borrow from the central bank than from commercial banks to have less debt servicing liability. It builds inflationary pressure as has been happening till now.

Thrust towards an expansionary fiscal policy is likely to persist during FY2008 as well despite tight monetary policy that the SBP has vowed to pursue. It might prove to be difficult to bring down inflation from its current level of 7.9 to 6.5 per cent as has happened during the outgoing fiscal year. High inflation and expansionary fiscal policy could discourage some FDIs that is upbeat because of surplus liquidity available in the Gulf States and western countries and their willingness to help the government in Islamabad for political reasons.

Amount of subsidies doubled from Rs109 billion for current fiscal year to Rs204 billion under various heads starting from power, fuel, fertilisers and food to pension. It will certainly provide some relief to common people.

The increase in subsidies despite being a welcome measure has the inherent drawback of not being the right solution of the issues that can be resolved only through correct economic policies that should enhance tax-to-GDP ratio, boost industrial output, change trade deficit into surplus, increase savings and employment and should curb effectively income inequality that is on the increase according to the Economic Survey 2006-07.

No new taxes have been imposed and a few changes have been made in the existing taxes. One per cent surcharge has been imposed on all but some essential imports.

Some of the taxes that should have been imposed have been left aside. They could have generated substantial tax revenue. For example, capital gain tax that could have been imposed on stocks and real estate business - has not been levied. Likewise, it is unlikely if the provincial governments would take the major step of levying agriculture income tax.

Current expenditure is on the increase. It calls for fiscal discipline to have less dependence on borrowed money for fiscal management.

[B]Conclusion[/B]

The budget has been termed pro-people, relief and development oriented and perhaps the best one announced by the government during past seven years.


[U][url]http://jang.com.pk/thenews/jun2007-weekly/busrev-11-06-2007/p2.htm[/url][/U]

[B][SIZE="4"][CENTER]Inflationary responses to productivity shocks[/CENTER][/SIZE][/B]

[I]The growth rate in terms of numbers does not matter to a lay man. He concentrates on the prevailing market prices of ordinary goods (especially food related items) in the light of his limited resources[/I]

[I][LEFT]By Syed Kanwar Abbas[/LEFT][/I][RIGHT][I]Monday, JUNE 11,2007[/I][/RIGHT]

[B]Section I: Preliminary look at GDP growth and inflation[/B]

The current growth scenario of Pakistan’s economy seems to be improving after crisis of late 1990’s when the real GDP growth struck at 3.00 per cent and even reached 2.00 per cent in 2000-01. The commitment of government to boost the economy has resulted into respectable growth of over 8.00 per cent in 2004-05. On the other hand, high inflationary situation has also emerged along with higher growth achievements. The growth rate in terms of numbers does not matter to a lay man. He concentrates on the prevailing market prices of ordinary goods (especially food related items) in the light of his limited resources. The fruits of higher growth should also be realised in the markets. People should enjoy the higher standard of living in the presence of more than 7 per cent GDP growth over span of five years. Inflation should also come down with the State Bank of Pakistan’s effort of tighter monetary policy. However, it does not seem to work in practice at all.

The real GDP growth and inflation are the two variables are the most important macroeconomic indicators of an economy. Figure-1 shows that CPI growth remained higher than the GDP growth for the whole decade of 1990’s. The economy faced higher inflationary pressures in the late nineties. At the beginning of 2000’s there was a downward trend for both Inflation and GDP growth. However, it is observed that GDP growth has remained above the CPI growth for years 2001-04. Afterwards, the CPI growth is again above the GDP growth. This picture shows very interesting pattern and/or behaviour of these two series (GDP and CPI). In table-1, we present a descriptive summary statistics for GDP and CPI growth over period of 1990-2005. This table shows that the real GDP grew at 4.70 per cent and CPI at 8.13 per cent on average over the period of 1990-2005.

The GDP growth is in a nice pace to move ahead while inflation should be checked out. SD measures spread of values from Mean. SD is higher (3.63 per cent) for CPI representing that data points are far from mean (8.13 per cent) compared to the spread of (2.14 per cent) for GDP. CV which is the percentage ratio of SD to mean helps us compare the degree of variation from one data series to another when Means for the data series are different. The CVs are higher for both variables. The CV for GDP growth is higher than that of CPI growth which shows that volatility (risk) in GDP growth is higher than the CPI growth. This means that growth levels are more fluctuating than almost consistent higher levels of inflation. (see table-1)

Our economy is facing higher inflationary pressures and State Bank of Pakistan has projected inflation from 6.7 per cent to 7.5 per cent above the original target of 6.5 per cent for FY2006-07. The Central Bank is continuously working with tighter monetary policy to curb inflationary pressure in the economy. Food inflation is frustrating its efforts in this follow up. Although, the tighter monetary policy operations have successfully worked to reduce Non-Food and Non-Energy inflation from March 2006 level of 6.67 per cent to 5.42 per cent in March 2007, the general CPI has jumped from 6.91 per cent to 7.67 per cent during the same period. The CPI general remained above 8 per cent during August 2006 to December 2006, the period of higher food inflation from the beginning of FY07. The CPI average of general, food and non-food inflation from March 2006 to March 2007 is 7.91 per cent, 9.16 per cent and 7.53 per cent respectively.

Figure-2 shows monthly trend of General, Food and Non-food inflation for the period of December 2005 to March 2007. It is observed that non-food inflation has declining trend since December 2005. General inflation has almost similar trend with variation around its mean about 8.00 per cent. Food inflation remains fluctuating over the period under discussion.

[B]Section II: Targets and achievements of some crops[/B]

Table-2 shows a detailed situation of the yield kilograms per hectares for crops including minor and major crops. The situation of vegetables and pulses seems to be very discouraging than rest of the items including in the table. The yield of Potato and Tomato has decreased about 26 per cent and 2 per cent over the corresponding period of 2005. Although the onion yield has increased over the corresponding year, this minor increase in production can not meet growing demand of the people. The yield of three commonly used pulses namely Mung, Mash and Masoor has decreased from its previous level of 2005. The yield of rice, sugarcane, Maize has increased from the level of 2005. Now let us see the targets of FY2007, Potato yield target of 17437 (Kg/ha) is higher than the yield of 13355 (kg/ha) of FY2006. This yield target is also below even the attained yield of 2003-04 and 2004-05. The achieved potato yield (2004-05) is the highest one (18079.46 (Kg/ha)) during period of 2000-06. The achieved onion yield in FY06 is 13824.48 (Kg/ha) and, it also touched the highest level of 14803.98 (Kg/ha) in 2000-01. The average onion yield is 13728.72 (Kg/ha) from 2000-06. The yield of Mung has been increasing since 2000 but lower in FY2006.

The yield of Masoor has increased till 2004 but after awards it is going down year by year and same is the case with Mash. On the other hand, the FY2007 yield targets of sugarcane, Cotton, Rice, Maize, Wheat, Mung were achieved 106.20 per cent, 99.44 per cent, 95.29 per cent, 85.00 per cent, 102.55 per cent and 103.23 per cent respectively in the current fiscal year.1 The revival of major agricultural crops will help achieve the growth momentum of over 7 per cent for our economy and ease the inflationary situation to some extend. (see table-3)

[B]Section III: Production trend of major and minor crops[/B]

In the previous section II, we observed that the yield (kg/ha) of Potato, Tomato and Onion is not satisfactory. Figure-3 shows production trend of these daily used cooking items for 2000-06. The average production of Onion, Tomato and Potato stands at 1607.42 thousand tons, 364.92 thousands tons and 1810.77 thousand tons respectively. Tomato production exhibits smoother increasing level than rest of two commodities and it has increased about 75 per cent from the level of 2000 to 2006. Also, the tomato production does not suffer down turn over the half decade except it remains same for 2003-05. During 2001-04, Onion production remains below than the achieved production level of 2000. It has increased 32 per cent in FY06 from its level of 2000. On the other hand, Potato is suffering frequent ups and downs in production level. The potato production has not followed consistent pattern and remained almost declining since its level of production in 2000. Its production has decreased almost 6 per cent in FY06 from its level of 2000.

In Figure-4, we also highlight the production trend of some other crops namely Wheat, Rice, Maize, Cotton and Sugarcane. It is observed that all crops except Sugarcane show constant production trend over the period of 2000-06. However, production of Sugarcane almost follows a declining trend.

The production patterns which we have observed in Figure-3 and Figure-4 can also be linked up with Table-3 which categorically distributes crops into food crops, cash crops, pulses and edible oilseeds. Food crops include Wheat, Rice, Jowar, Maize, Bajra and Barley, Cash Crops includes Sugarcane, Cotton, Tobacco, Jute, Sugarbeet & Guar seed. Pulses include Gram, Mung, Masoor, Mash, Mattar, Other Kharif & Other Rabi Pulses while Edible Oilseeds consists of Groundnut, Soybean, Sunflower etc. It is observed that the production of Cash Crops and Pulses is fluctuating over the period of 2000-06 and does not follow a consistent pattern of increasing production level. Moreover, production is decreasing from 2003-06. The production situation of Food Crops and Edible Oilseeds is also looking volatile and worrisome in the presence of growing demand in the market. (see table-3)

All this analysis shows that the production of various crops remains below than the growing demand in the vegetable market over the period of 2000-06. The slow down or even a minor increase in production can not meet consumers demand. All this has led to disturb Demand and Supply mechanism over the last five years and produced inflationary pressure in the economy. There is need to boost production level of crops to cope with the inflationary pressures.

[B]Section IV: Conclusion[/B]

The observed inflation (especially food inflation) in the presence of tighter monetary policy is due to disequilibrium in the demand and supply forces of various crops. We infer that it is decrease in the production of various crops which has resulted into higher inflation. The supply side steps along with tighter monetary policy are important to control inflationary phenomenon. Inflationary trends are more sensitive to the supply side shocks than the impact of monetary policy operations in the short run. Alone, the tighter monetary policy can not overcome inflationary situation and there is need to boost production level of commonly used items like Onion, Potato, Pulses, Tomato etc. as demand side of the economy is growing which calls for adequate supply arrangements in times to come.
[B]
TABLE-1: SUMMARY STATISTICS[/B]

Variable Mean Standard Deviation Coefficient of Variation

(SD) (CV)



GDP Growth (%) 4.70 2.14 45.45

CPI Growth (%) 8.13 3.63 44.71



[B]Table-2: Yield Targets and Achievements[/B]

FY05 FY06 % Change Target Achievement

FY07 FY07

Crops Yield (Kgs/Ha) Yield (Kgs/Ha) Yield Yield (Kgs/Ha) Yield (Kgs/Ha)

Potato 18079 13355 -26.13 17437 —

Onion 13810 13824 0.11 16656 —

Mung 577 546 -5.32 618 638

Mash 491 477 -2.88 526 —

Masoor 597 528 -11.52 592 —

Tomato 10295 10132 -1.58 — —

Wheat 2586 2519 -2.59 2660 2728

Rice 1994 2116 6.12 2211 2107

Maize 2849 2984 4.74 3275 2784

Sugarcane 48887 49229 0.70 50000 53100

Cotton (000 bales) 760 714 -6.05 724 720

Source: Crop Reporting Services of Provinces and Federal Committee on Agriculture, MINFAL, Islamabad.

[B]TABLE-3: PRODUCTION (‘000 ‘TONNES) OF CROPS BY GROUPS[/B]

Year Food Crops Cash Crops Pulses Edible Oilseeds

2000-01 25986 45867 621 4091

2001-02 24311 50400 594 4080

2002-03 25890 54,200 930 3,948

2003-04 26854 63946 871 4155

2004-05 29906 50000 1094 5503

2005-06 30395 47185 685 5063

Source: Agricultural Statistics of Pakistan 2005-2006


[U][url]http://jang.com.pk/thenews/jun2007-weekly/busrev-11-06-2007/p6.htm[/url][/U]

[B][SIZE="4"][COLOR="Blue"][CENTER]The poor have no choices[/CENTER][/COLOR][/SIZE][/B]



[I][LEFT]By Zubeida Mustafa[/LEFT][/I][I][RIGHT]Wednesday,JUNE 13,2007[/RIGHT][/I]


WHILE the Pakistan government goes to extraordinary lengths to laud its economic performance, economists have correctly pointed out the growing inequities that have been spawned by President Musharraf’s policies. (See Akbar Zaidi’s “Eight years of missed opportunities” in Dawn of June 10, 2007.)

It was, therefore, like a bolt from the blue to see the Pakistan Economic Survey 2006-07 attempting to prettify the state of poverty in the country by citing a few statistics to paint a somewhat rosier picture.

Needless to say, such number crunching in no way alleviates the pain of poverty for its victims. Perhaps the worst case scenario is one where the distribution of income is so uneven that it creates pockets of affluence in an ocean of poverty. The presence of this concentration of wealth, especially when it is flaunted unashamedly, is a sure recipe for social discontent and violence.

To get round the arguments of their critics, our economic managers have come out with the claim that “consumption inequality” is what really matters and in Pakistan this has increased only marginally from 2001 to 2005. Using this approach, the government tries to absolve itself of the responsibility of not doing enough for poverty reduction.

The Economic Survey admits that income inequity can be most damaging for a country: “High income inequalities act as a drag on the poverty-reducing impact of growth… the actual impact of growth on poverty cannot be realised if the initial distribution of income is fairly skewed. Countries with more equal incomes tend to reduce poverty faster with a given growth rate than countries with more unequal incomes.”

Seen against this backdrop, is it right to dismiss our economic inequalities as marginal and therefore of not much consequence? Is it correct to assess poverty in terms of consumption levels? Even the revelation that in the year 2001, the richest 20 per cent of Pakistanis spent 3.76 times more than the poorest 20 per cent is shocking. In 2005, this ratio went up to 4.15. In fact, in the urban areas, the richest quintile of Pakistan’s population spent more than 12 times than the poorest quintile.

These figures mask the real problems faced by those mired in poverty. Is it strange that an overwhelming majority of the children who die before they reach the age of five are the children of the poor? Is it just a coincidence that those who suffer from gastroenteritis — losing out on working days — and have to be admitted in hospitals are those classified as “extremely poor”, “ultra poor”, and “poor” in the index prepared by our policymakers? Has it ever struck us that because the poor cannot buy bottled water when the rich feed their pets with imported canned food, the former tend to suffer more from intestinal ailments? It is the poor who crowd our hospitals because they fall ill more frequently and need treatment but fail to get it.

It is time our policymakers realised that it is not simply a matter of generating more income for the poor. Of course, that would help but the spiralling inflation neutralises whatever raise in income the poor manage to get. What is more important is that they are provided the basic facilities that they are entitled to as a matter of birthright. The poor should be provided choices so that they can take decisions about important issues in their lives as they deem fit.

Take the case of Shahid, who works as a driver to earn about Rs8,000 a month. He finds it a challenge to make two ends meet. With a family of five (three children and two adults), he frequently takes loans because his household budget consumes his earnings fully — 25 per cent on house rent, 12.5 per cent on transport, 16.25 per cent on two children’s schooling, 41.25 per cent on food and home expenses like laundry, clothes, routine items, and five per cent on miscellaneous items.

One can, in all fairness, ask if Shahid has any choices. Any major illness in the family is catastrophic for his household budget. Off and on his daughters do not attend school because their father fails to pay their fees and the principal asks him not to send his children to school without their fees. The government school in his neighbourhood is so appalling that he would prefer to keep his daughters home rather than send them there.

What is worse is that poverty not only deprives people of choices, it also creates uncertainty and tensions for the future. What if food inflation continues to rise? What if his wife falls ill and he has no money to take her to a doctor? What if strikes disrupt life for a long period? What will he do when it rains and his house is flooded? What if a pickpocket robs him of his money? What if the bus is late in coming and he is late for work again? The list could go on and on. One has to be poor to understand how demeaning poverty can be.

The poor have no financial cushion to absorb the shocks of contingencies such as illness, emergencies and disasters. This creates mental stress for them that may lead to psychosomatic illnesses and even anxiety and depression. If most of the poor have no dreams and motivation, can one really blame them?

If the government were to actually attend to its responsibilities, many of Shahid’s anxieties would disappear. If the public sector schools actually started performing — even on an average level — quite a big chunk of the worries that haunt the poor would not be there. If the local government conscientiously saw to the provision of civic amenities, the poor could hope to get low-cost housing, clean water (so that they are not falling ill frequently), sanitation and uninterrupted power supply.

Are all these not important to the poor as to the rich? In fact, they need these facilities more than the rich because they have no choices. The rich have a substantial cushion and can spend their savings to buy bottled water, fix up generators in their homes, send their children to fancy private schools for the elite, and go abroad for treatment if they fall ill. They have plenty of choices. It is the poor who have no choices.

[U][url]http://www.dawn.com/2007/06/13/op.htm[/url][/U]

[B][CENTER][SIZE="4"][COLOR="Blue"]A failed economic record [/COLOR][/SIZE][/CENTER][/B]

[I][LEFT]BENAZIR BHUTTO[/LEFT][/I][RIGHT][I]Wednesday,JUNE 13,2007[/I][/RIGHT]

The 2007 Federal budget is a consumption-oriented budget that threatens to worsen inflation and poverty in Pakistan. The biggest burden on the Pakistani people is the spiraling inflation, which has eroded the standards of living. The budget relies on utility stores and food subsidies to control prices. This is too little to stem the tide of rising prices.
The military regime’s intention to make essential items available at utility stores by adopting the previous PPP plan for utility stores fails to appreciate that this can only succeed when other aspects of the economy are also addressed. Similarly, offering subsidies on essential agricultural produce is a temporary arrangement, which could end up distorting incentives for production.
To cure a patient the disease must be diagnosed. The disease of surging prices lies in consumption-oriented policies, excess liquidity, lower growth of essential agricultural crops, supply-side inefficiencies and growing cartelisation of the economy. The budget completely ignores these fundamental issues that lie at the heart of persistent inflation.
The relief provided to civil servants in the guise of promotions and pay raise is a welcome step, but it has no relevance for the factory workers, the self-employed, the informal labour and other people of limited means. The Public Sector Development Programme (PSDP) has received a hefty allocation of 520 billion but if the past is any test, this amount is unlikely to be spent. It is well known that the PSDP allocation announced last year spent one third less than the amounts allocated to it last year.
There is no fundamental change in budgetary priorities, especially in aiming to reduce non-development expenditures. Defence allocations have been raised without introducing any accompanying system of accountability. Pakistan’s people have the right to ask if their hard-earned resources are being spent on building real estate empires for generals or on strengthening defence capability. While the people of Pakistan support a strong defence for the country, this could only be achieved by ensuring that every penny spent on the armed forces is accountable to the people.
While higher inflation is hurting the poor most directly, it is also compromising the general economic health of the country. In recent years, runaway inflation has increased the cost of production, thereby reducing the overall competitiveness of our export sector. This is clearly manifested in a worrying decline in exports and a record current account deficit witnessed this year. The textile sector is facing tremendous problems in coping with the new global realities after the expiration of Multi Fibre Arrangement. In this background, a continuous increase in the cost of production is complicating matters for the textile sector.
Despite the continuous influx of easy money-through remittances and foreign aid disbursements-the Musharraf regime has added to the burden of foreign debt by more than 1 billion dollars. This is in addition to the significant increase in levels of domestic debt. Such a strong injection of liquidity has fuelled over-consumption, spiraled inflation and raised the cost of production for manufacturing sector. Both bilateral and multilateral aid flows to Pakistan have significantly increased during the previous years, but there is limited information as to how and where these aid flows are being used? The country needs to know where massive aid flows that Pakistan received were spent.
The regime’s claims of achieving a high investment to GDP ratio do not pass the test of scrutiny. Much of the increase in investment to GDP ratio comes from higher investments in construction and services sectors. There is no significant increase in manufacturing sector investment. In fact, growth of manufacturing firms fell short of target by two percentage points (8.4% as opposed to 11%). Revival of manufacturing activity is the key to creating job opportunities and reducing poverty. So, despite claims of rising investment, Pakistan’s manufacturing sector remains weak, struggling to survive in the face of cheaper Chinese imports. The claims that foreign direct investment has increased are also spurious. The private direct investment has been for the purchase of privatised units and not for investment in new projects that can create new jobs. This private sector investment has not added any new industrial capacity to the country.
This regime has rushed through a non-transparent and half-baked privatisation process that has caused loss to the national treasury as well as led to loss of jobs for labour. Economic historians will look back at this regime’s privatisation as the biggest scam of the military regime. The current regime has mismanaged privatisation like Russian oligarchs. Important national assets were sold at throwaway prices. Exact details of the privatisation contracts were never made public and there were important procedural irregularities. The electricity crisis in Karachi is one fallout of the half-baked privatisation process. KESC was sold to a group that had no experience in running electricity utilities.
This is like hiring a man who doesn’t know how to cook as chef for a five star hotel. Back in the 1990s the government of Pakistan People’s Party made substantial investments in KESC and had arrested the power crisis in Karachi. Now the thoughtless privatisation of KESC has wreaked havoc with the electricity infrastructure in Pakistan’s commercial metropolis. Another pioneering achievement of People’s Party under Quaid- e-Awam Zulfiqar Ali Bhutto was the setting up of Pakistan Steel Mill, which was about to be sold in a shoddy deal. The Supreme Court’s verdict that cancelled this sale is the clearest verdict on the mismanagement of privatisation under the present regime.
The regime claims that it has achieved high economic growth but this is another public relations gimmick. Growth cannot be sustained when inflation cripples purchasing power for the poor, exports are declining, current account deficit is widening and external debt is accumulating. More importantly, this government has ignored the physical infrastructure necessary for sustaining growth. The long power shutdowns and loadshedding is undermining the Pakistani economy. It is ironic that a government that prides itself on achieving 7 percent growth rate has failed to add any significant capacity to electricity generation. No new power project has been built during the past seven years of General Musharraf’s rule. Similarly, no significant investments in the water infrastructure have been made, which will compromise growth prospects of our agriculture.
Overall, the 2007 budget is a major disappointment for the nation. It does nothing to change the priorities of the rulers and only reinforces failure-in controlling inflation, in reducing current account deficit and in reducing mass poverty. It can simply be seen as a continuation of the in-egalitarian economic policies of the last seven years of dictatorship. It has strengthened my belief that dictators can never deliver development, they can only pretend development. Without genuine democracy of the people, there can be no development.

[U][url]http://www.nation.com.pk/daily/jun-2007/13/columns4.php[/url][/U]

Budget 2007-08
 

[SIZE="6"][COLOR="DarkRed"][B]Budget 2007-08 [/B][/COLOR][/SIZE]


[B]Salient features of the Budget 2007-08 announced by
Mr Omar Ayub Khan, Minister of State for Finance (errors omissions regretted)
[/B]

Mr. Omar Ayub Khan State Minister for Finance (The Minister) delivers the budget speech.

The Minister said he was proud to present the 5th Budget of a democratic government. Trials and tribulations are a part of every nation’s history. Nations which face them with courage and fortitude come off with honour and dignity.

Earthquake of 8th October 2005 devastated houses, hospitals, roads and mosques but it could not undermine Government’s resolve which remained unflinching. The Government accepted it as a challenge and now places littered with dead bodies and razed habitats have again come to life which speak of the efforts and courage of the nation. Government has disbursed Rs.66 billion for house construction and Rs.40 billion for death/injury compensation.
During the previous year 1500 schools, colleges and hospitals have been built and additional 2500 buildings would be constructed. An amount of Rs.1.5 billion would be spent on agriculture and livestock which will enable people to become self supporting.

Increase in oil prices in the international market last year posed a new challenge but the government, by giving a subsidy of Rs.111 billion on diesel, kerosene, fertilizer, electricity and food items, stabilized prices.


[SIZE="5"][B]Economic Performance[/B][/SIZE]

GDP growth rate remained at 7.02 percent. Growth rate was 5 percent in agriculture: manufacturing sector has grown by 8.8 percent and services sector by 8 percent. Since July of last year to April this year i.e in a 10 month period FDI in Pakistan exceeded $ 6 billion.

Government policies aiming at allocation of greater resources for poverty alleviation and creating employment opportunities have resulted in reduction of incidence of poverty from 34.4 percent in 2001 to 23.9 percent in 2005. In this way 12,700,000 people came out of poverty. The amount of money spent on poverty reduction and employment generation during last 5 years is Rs.1,441 billion.

The Budget has an overall size exceeding Rs.1,874 billion. Federal Government expenditure is estimated at Rs.1,353 billion. Expenditure of this magnitude was made possible through greater revenue collection especially by CBR which will exceed Rs.1025 billion. In view of this, the size of total revenue has been set at Rs.1475 billion. Hence the overall fiscal deficit is estimated at Rs.398 billion which is 4% of GDP. During 2006-07 the budget deficit was 4.2 percent of GDP.

The government has allocated Rs 520 billion under PSDP which will be spent on development and welfare of people. Out of this, 52 percent will be spent on infrastructure development and 48 percent on welfare of people and on social sector.

Based on Provincial Chief Ministers and Finance Ministers assent to Presidential Orders amending NFC award, 45 percent of provincial share has been transferred to Provinces. During 2006-07 an amount of Rs.418 billion has been transferred while Rs.497 billion would be transferred during 2007-08 which would be 46% of the total amount. The transfer from divisible pool would reach 46.25% by the year 2010-11. If subventions are added, transfer of provinces would get 50 percent of the total amount.

The government raised 10 years Euro Bond in the international market which was over subscribed by more than seven and a half times. The government raised US $ 750 million through this Bond. This was despite the fact that the rate of interest offered was lower than that of previous periods. Last year this government launched 10 and 30 years bonds in the international market which elicited good response. This is a reflection of confidence of international investors in government policies.

The previous government between 1996-99 raised the rate of interest on National Savings Schemes as high as 18 percent because of which present government now has to pay a huge accumulated liability of Rs.163 billion which is more than 4 times of the principal.

This year an allocation of Rs.275 billion is being made for defence of the country.


[SIZE="5"][B]Relief Measures[/B][/SIZE]

Salaries of government servants are being increased by 15 percent in the present budget. Pension of government pensioners is being increased by 15 to 20 percent. Increase in pension is being given in two tiers: old pensioners will get 20 percent raise while new pensioners will get 15 percent raise.

Upgradation of posts was a long standing demand of the clerical staff. Employees in BPS 5, BPS 7 and BPS 11 are being promoted to BPS 7, BPS 9 and BPS 14 respectively. A total of 87500 federal employees will benefit from this measure.

Residential accommodation is a major problem for employees in Islamabad . Government has decided to solve this problem. Prime Minister Shaukat Aziz has ordered immediate construction of 37, 000 houses for the low paid employees and give it to them on ownership basis. Work on the construction of 5,000 units will immediately start for which land will be provided by CDA at official rate. Government employees will have the facility to get loan for construction of house.

Low cost Housing Scheme would be started in collaboration with Provincial and District Governments. Loan from HBFC will be available. Under this scheme an estimated number of 250,000 units would be constructed in the next 5 years.

For the welfare of Railway employees the government has decided upgradation of Basic Scale by one step for the remaining 62,482 staff excluding Secretarial Staff. Long standing demand of Railway employees regarding upgradation of posts has already been accepted alongwith increase in their allowances. A total of 12,510 employees have benefited from this increase. In this way, government has provided relief to 74,992 Railway employees.


[B]Additional Relief:[/B]

1. Minimum wage of unskilled workers is being increased from Rs.4000/- per month to Rs.4600/- per month

2. Old Age pension, old and new both, has been increased by 15 percent. Minimum pension has been increased from Rs 1300/- to Rs 1500/- per month

3. Worker’s widow shall now get pension of her deceased husband as per entitlement. Earlier she used to get minimum pension

4. Earlier husband or wife, both contributing to Old Age Benefit, would not get pension of the deceased partner. Now the surviving partner shall get the pension of the deceased spouse

5. Under the Workmen Compensation Act 1923 workers receiving more than Rs.6000/- per month were not entitled to compensation on account of disability. This restriction has been removed and now all the workers regardless of their wage level would be entitled to compensation on account of disability caused during the course or as a result of performance of duty

6. Contract employees have been made entitled to receive companies profit under the Companies Profit (Workers Participation) Act 1968. The limit of profit has been enhanced from Rs.12000/- to Rs.20000/-

7. Workers Welfare Fund Ordinance 1971 is being amended to allow industrial workers to get medical, education, housing and death grant from Worker Welfare Fund. This facility shall apply to those units having an annual income in excess of Rs.500,000/-

8. Workers Welfare Fund Ordinance 1971 amended to increase the limit of death grant from Rs.200,000 to Rs.300,000/-


[B]Utility Stores:[/B] Under this and under the Prime Minister’s Ramzan and Eid package, relief of about Rs 5 billion was provided. In addition, government has allocated subsidy worth billions of rupees in the Financial year 2007-08.

Daal Chana, Moong and Mash which is being sold in market at Rs 38 per kg, Rs 56 per kg and Rs 72 per kg would be sold in Utility Stores at Rs 29, Rs 47 and Rs 57 respectively. From tomorrow there would be a per kg relief of Rs 10, Rs 5 and Rs 5 on tea, sugar and rice respectively. Cooking oil will sell at the utility Stores at Rs.67 as against the market price of Rs.80/- per kg.

It has been decided to increase the number of Utility Stores by additional 5,000 and provide a utility store at every Union Council in the next 4 months.

For the first time, people will also get medicines at reduced rates at the utility stores.

The government is setting up farmer markets at federal, provincial and district level, so that farmers bring their produce directly to the market, thereby circumventing hoarders, middlemen and profiteers. Moreover, daily bazaars would be set up. First daily bazaar would be set up at Islamabad while the first whole sale bazaar is being immediately set up in Islamabad .

An allocation of Rs.7.5 billion has been made for Pakistan Bait-ul-Mal which is Rs.2.5 billion more than the allocation for last year. Pakistan Bait Mal is at present helping 1,500,000 households through its food support programme. This year 700,000 more households will benefit thus bringing the number of beneficiaries to a total of 2,200,000.

A subsidy of 20% payable on electricity charges for tubewells is being introduced. This subsidy will be shared by the Centre and Provinces equally.

The minister also announced additional subsidy on DAP from Rs. 400 per bag to Rs. 470 per bag.

President, General Pervez Musharraf announced the Rozgar Scheme in the last financial year. The small amounts advanced at low rate of markup of 6% enabled the youth to start their own businesses. In the last financial year 10,321 applications were approved under this scheme and Rs.1 billion disbursed. Rs.104.7 billion will be disbursed under this scheme in the next 5 years.

There is a shortage of skilled manpower. In order to meet this shortage in the last year’s budget the government established NAVTEC . The allocation is five times higher in this year’s budget as compared to the last budget.

In order to help our youth General Pervez Musharraf ordered an Internship Programme so that the youth gain experience to be able to gainful employment. For this purpose, each graduate is provided a stipend of Rs.10,000 per month. As of now 8,000 interns are working and this figure will increase to 30,000 next year.

Micro-Credit Banking has been started and so far, one million households have benefited from Micro-Credit. The target for the next three years is 3 million households.



[SIZE="5"][B]Healthcare[/B][/SIZE]

In the cities of Islamabad , Rawalpindi , Karachi , Lahore , Faisalabad , Peshawar and Quetta , 815 medical clinics are being set up at the Union Council level. In each medical clinic there will be a doctor, lady health-worker and dispenser.

Safe drinking water: President General Pervez Musharaf has given directions for installation of a water purification plant in each Union Council on emergent basis. A total of 327 plants have been installed.

Khushal Pakistan Programme : Under this programme, 14,000 villages were provided electricity, at a cost of 1.5 billion rupees; 1207 cities and villages were provided sui gas at a cost of 71 billion rupees; roads were constructed and water supply schemes launched. For the KPP, around 34 billion rupees are being kept in the current budget. In the last 5 years, the government provided electricity, sui gas connections, constructed roads, provided clean drinking water and sanitation facilities at a cost of Rs. 51 billion. Under the KPP, in 25 districts of Balochistan, development work of Rs. 3 billion is being undertaken. Further schemes will be identified by MNAs which will be implemented immediately. Rs.5 crores will be paid to each district, Rs.1 crore to each Tehsil and Rs.10 lac to each Union Council for development work.

Agriculture: As a result of government measures, the growth in agriculture sector in the current financial year was 5%. Wheat production is now more than 23 million tons thanks to timely fertilizer availability , agriculture loans and availability of water. Support price of wheat (Rs.425 per maund) benefited the farmers to the tune of Rs. 250 billion. Cotton production increased by 4.8% over last year. Rice production was also very healthy.

Livestock: To promote the sector, the Government has formed two companies in the private sector:

a. Livestock and Dairy Development Board
b. Pakistan Diary.

Under these companies two big projects have been started worth 2 billion rupees. Under Prime Minister Special Cell livestock produce and allied services will be spread to 1963 Union Councils all over the country benefiting three million poor farmers. As a result of these measures, 12 million litres additional milk will be produced and 2 lac tons additional meat will be produced.

A multinational company has set up the largest milk processing plant in Asia in Pakistan . Similarly, other companies are also bringing investment from within as well as outside the country.


Along with the subsidy on fertilizer, the government has also increased the availability of agricultural loans. In 2006-07, agricultural loans of Rs. 160 billion were targeted.

With the use of better seeds agriculture production can potentially increase by 20% to 30%. The government has allocated Rs.336 million for production of better seeds. 15 new seed testing laboratories will be set up. For better production of cotton, BT Cotton seeds and Bio-Safety arrangements will be introduced.

The government also provided the agriculture sector Rs.250 billion which was entirely spent in the rural areas. The farmers spent this amount on their children’s education, purchase of motorcycles, televisions, cycles, WLL sets, furniture, tractors, harvesters etc. They set up tubewells and built houses.

Construction industry has grown exponentially. There are 52 other industries associated with construction. Employment has also been generated in other industries 200,000 jobs in the motorcycle industry; 35,207 in banking, 24,000 as a result of installation of mobile towers, 90,000 additional jobs in the IT Sector; 2,000 jobs in cement industry.



[SIZE="5"][B]Mega Projects [/B][/SIZE]

The Minister announced the launch of Neelam-Jhelum Project which will cost Rs. 84.5 billion.

The next in line is the Bhasha – Diamir Dam, the design of which will be completed in 2008. However, Rs. 500 million have been reserved for this Project in the PSDP. Work on Gomal-Zam Dam, Kurram Tangi Dam, Subak Zai Dam is in full swing.

Work on the up-raising of Mangla Dam started by WAPDA is close to completion. As a result, 2.09 million acre feet additional water will be available for storage and 644 MW electricity will be generated. By construction of these Dams, 2.6 million acres land will be irrigated.

The Government has allocated a sizeable amount for Greater Thal Canal, Reni Canal and Katchi Canal on which the work is in full swing. The Government is also starting work on expansion of Kara Kurram Highway. The work on the expansion of Hasanabdal-Mansehra Section will start in the next few months. The N-5 Highway will be linked with the National Trade Corridor. For this purpose.

Gwadar: So far an investment of Rs. 13.5 billion has been made on this Project. This amount excludes foreign investment. The Coastal Highway which links Karachi with Gwadar has already been completed.

The Government has decided to increase share of education to 4% of GDP. During the last 2 years, the education budget increased by 36%.

Private Equity Fund: It has been made tax exempt till 2014. In case assets or shares of private companies are sold to Private Equity and Venture Capital Funds, the rate of Capital Gains Tax has been reduced from 35% to 10%.

Real Estate Investment Trust: Through REITs a new form of investment tool is being introduced for investment in capital markets which will enable small investors to reap profits from investments in real estate, which , so far, was open only to large investors. In order to increase use of REITs their use has been given tax concession. For example, the profit of REITs, will be exempt from taxation upto 90%, upon distribution. The most important tax concession for REITs is that under this scheme sellers of property will be exempt from tax upto 2010.

Amendment in Companies Ordinance: For the benefit of shareholders, any shareholder who has 12.5% shares of any company can call for an election of new Board of Directors in the next AGM. In order to provide protection to minority shareholders, any person or persons with 20% or more than 20% shares of any company, can request SECP for special audit.

Demutualization: In order to bring our capital market upto international standard the demutualization of stock exchange is being implemented. Under this assets of stock exchange transferred to demutualized exchanges will be given special tax treatment.

Industrial Sector: This year the growth of large scale manufacturing was 8.8 percent. Sugar (19.6%), beverages (28.4%), shoe (13.2%), paint and varnish (43.8%), motor tyre (17.2%), cement (21%), steel (24%), air conditioning (36.8%), electric transformers (25%) and tractor manufacturing (11.4%).

Special Economic Zones: A SEZ near Lahore is being set up for Chinese products, with Chinese assistance. Chinese companies would exclusively invest there. Apart from that, companies intending to set up SEZs would be given various tax breaks. Those companies making investment will be given different incentives. Appropriate laws are being framed for this purpose.

On account of continuity of policies, good faith, sincerity, honesty and dedication of the government. Investment of US $ 6 billion has been made during one year.

Tariff reform is an integral part of tax policy initiatives. For the last many years not only the tariff rates have been gradually reduced, but the number of tariff slabs has also been reduced considerably. The Tariff Rationalization process is an on-going process. This will continue in the coming years as well. Furthermore, in order to reduce cost of raw material, a zero tariff slab has been proposed. This change is expected to accelerate industrial development, promote exports and increase national income.

The guiding principle of the government policy is to increase exports, ensure availability of cheap raw material for industries. To continue with the policy, customs duty is proposed to be withdrawn from the machinery used in horticulture, furniture, marble & granite, surgical and medical instrument-business. Similarly, the customs duty on raw material used in the electrical, capital goods, paper & paper board, chemicals, plastic and rubber industries is proposed to be reduced by 5%.

The country is facing acute shortage of electricity. To provide relief to the people and industrial establishments, it is proposed to withdraw customs duty on generators for home consumption. Similarly, reduction in customs duty is proposed on generators for industrial consumption. Likewise, it is also proposed to withdraw customs duty on the components used in alternative energy sources such as solar energy and wind energy. The sales tax at import stages on these items has also been proposed to be waived off. To encourage energy saving lamp, customs duty is proposed to be reduced from 15% to 10%.

CVT: Presently CVT is levied on imported cars, while the domestically manufactured vehicles are exempt from CVT. In order to remove this the disparity, withdrawal of CVT on imported vehicles is proposed. However, to maintain protection level intact, adjustment in customs duty at the rate of 5%, 10% & 15% for different CCs of cars is proposed. There is a proposal to levy 5% withholding tax on the local vehicles. To facilitate the middle income groups customs duty on 800cc cars is not being charged. Finally, the capping for old and used cars previously for 5 years is being reduced to 3 years so that the domestic industry attains stability. The condition of 3 years will be applicable to TR, Gift Scheme, and Baggage rules.

Textile is the back-bone of the economy. Besides export earnings, this sector is a prime source of employment generation. Therefore, more attention is required to be focused on this sector so that to make it internationally competitive. Some time ago R & D facility was provided to this sector. Now the DTRE system is being revamped whereby the import of PSF will be allowed. Through DTRE, R&D facility will also be available to fiber manufacturers @ 3.5%, which will be availed through SBP. The facility of debt/swap to spinning sector is granted. Similarly, for exporter the existing WHT rate of 0.75% to 1% is being rationalized and 1% rate of WHT is being proposed. The textile exporters will also be the beneficiaries.

Keeping in view the widening trade deficit and also to restrict the conspicuous consumption, 1% levy special surcharge is levied on all imports with the exception of petroleum product, edible oil, fertilizer, medicine, necessary food items (vegetable & pulses). Furthermore, the already exempted items will continue to remain exempt from this levy.

Sales Tax & Excise: The scope of zero rating is being widened to include sewing machine, bicycle & cotton seed oil. Cable TV is a basic necessity of daily life, therefore, excise duty on cable TV is proposed to be withdrawn. The traders belong to FATA & PATA are facing difficulties in carrying out their businesses due to unresolved disputes lying pending with the courts. Therefore, in consultation with them, the sales tax already due is proposed to be waived off enabling them to carryout their business.

The raw material imported for iron and steel plastic and paper industries the sales tax of 15% is proposed to be enhanced 20%. However, the rate of 15% sales tax on final product for these sectors will remain the same.

Income Tax: A task force was constituted to bring improvement in the provisions of law relating to holding companies. In view of the recommendations made by the task force, amendments are proposed in legislation relating to Holding Companies; 75% share holding will be required if none of the companies is a listed public company; 55% share holding will be required if one of the group companies is listed public company; Current losses can be surrendered by Holding Company to a subsidiary or between subsidiaries which fulfill the requirements of share holding; inter-corporate dividend shall be liable to 10% adjustable withholding tax.

It is proposed that for formation of group, transfer of shares between companies and the owners in one direction may not be treated as taxable event. Further, group taxation is allowable for 100% owned companies as one fiscal unit and no relief will be available in respect of losses prior to formation of group. It is also proposed that group taxation will be restricted to domestic companies only and for assessment on group basis option will have to be exercised for a minimum period of 5 years.

It is proposed that transfer of shares between companies and share holders in one direction under an approved scheme, (not involving cash) may not be taken as taxable event if the purpose of such transfer is formation of a group. The incentive will be available under scheme of Merger and Acquisition, approved by High Court, SECP or SBP (as the case may be) which does not involve cash payments.

For computation of income of the banking companies a separate schedule will be added to the Income Tax Ordinance, 2001. This measure is being taken on the recommendations of the SBP and PBA on the analogy of taxation of Insurance Companies. Inter corporate dividend is proposed to be subjected to adjustable withholding tax @ 10%.





[url]http://www.dawn.com/events/budget07-08/index.htm[/url]

[B][SIZE="4"][COLOR="Blue"][CENTER]A budget full of promises[/CENTER][/COLOR][/SIZE][/B]



[I][LEFT]By Sultan Ahmed[/LEFT][/I][I][RIGHT]Thursday,JUNE 14, 2007[/RIGHT][/I]

ANALYSTS are unanimous that the fiscal package for 2007-08 presented by the government is an election year budget. In an election year, governments try to mobilise the maximum of resources and promise the largest number of relief measures particularly to the poor. The government has just tried to do that and in a very complex situation and come up with a number of relief measures – monetary, material and social welfare.

The government has begun with the large electorate of over four million who are in the employment of the federal, provincial and local governments. It has increased their salaries by 15 per cent and pension by 15 to 20 per cent, with higher relief for the more aged. The grades of the low paid employees have been raised including from grade 11 to 14 which is a substantial rise.

It has also decided to allot 250,000 plots of land and apartments for the low-paid employees and 37,000 plots, houses and 8,500 apartments to the underpaid. It is also subsidising the sale of a variety of goods through the utility stores for which a subsidy of Rs13 billion has been earmarked. But one analysis shows that the food subsidy for the nearly 80 million poor of this country will be only two rupees per head per annum.

The government has great faith in the ability of the utility stores to sell essential goods at concessional rates. So it is increasing the number of utility stores from 1,000 to 6,000. But will the government be able to set up 5,000 utility stores, one each in a union council area within 4 months, well before the elections? There are too many complaints against the utility stores, but now the revamped and refurbished stores are supposed to do better. On their success may depend the success of this government.

While the government is privatising major public sector projects, it is going in for the utility stores in a big way and it is increasing the number of items, including medicines, to sell there. Evidently while the government is helping businessmen in every way possible, it has lost faith in the ability of the businessmen to sell goods at fair prices. This is clearly a dichotomy. But the government is in a hurry to deliver goods less expensively at a time of rising prices and rampant profiteering. Now it is the turn of the grass-roots bureaucracy to deliver as the government wants and as the people need and make it a success.

The opposition has rejected the budget saying it offers no relief to the common man and widens the gulf between the rich and the poor. It has also protested that the standing committee of the National Assembly on finance was not consulted before the budget was presented. That has never happened before under the system of close door budgeting practised by the government. If instead we adopt the open budgeting policy of the US there will be few budget surprises and the committee will be fully consulted. There is much to be said in favour of open budgeting instead of the hush-hush budget making and then hasty amendments one after another.

The opposition complains that the budget shields the rich. It is valid to the extent that the capital gains profits have been exempt from taxes and so also the large profits from real estate which should have been taxed if not by the centre, at least by the provinces.

Earlier it was repeatedly emphasised by the rulers that the budget will have no new taxes, but it provides for additional tax revenues of Rs 44.425 billion to raise the total tax revenues next year to Rs1.025 trillion and that includes the one per cent surcharge on imports excluding a number of items such as vegetables. A new withholding tax of 5 per cent has been levied on purchase of locally manufactured cars above 800 CC. Sales tax on 85 raw materials has been increased. Wealth tax reappears in the form that if you earn more than five lakh rupees, you will have to file a statement. Retail price of cigarettes has been increased by 5 per cent. The travel tax has to be paid on air tickets bought abroad now. Additional General Sales tax has been levied to the extent of Rs 23 billion.

Before the budget was presented it was said the subsidies would be to the extent of Rs200 billion but now these are only Rs114 billion. Ten industries have been given concessions. These include textile spinning industry which gets them in the form of interest reduction. But they have to pay Rs4,600 as minimum wage to their workers. Will they pay that in reality and push up the prices of their products which will aggravate the inflation.

Inflation should not abate if it does not come down due to the concessions given to the farmers including the 25 per cent subsidy on power for tubewells. The government has come up with its largest public sector development programme at Rs 520 billion. If the amount is fully utilised it should create a remarkable increase in employment and production.

Dr Salman Shah says the government wants to reduce the debt-GDP ratio to 20 per cent, but that is not to be done soon but in 10 years and at the rate of 2.5 per cent per year. National debt as a ratio of GDP goes down when the economic growth rate is high and the GDP becomes larger.

In the same manner, the tax-GDP ratio has gone down to 9.5 per cent this year from 10.5 per cent because of the larger GDP following higher economic growth. A lower national debt including domestic debt means less revenue spent on debt servicing and more funds available for development.

Similarly inflation is the outcome of higher economic growth. As more and more money is pumped into the economy and the demand for goods and services increases, the prices go up and the State Bank’s tight monetary policy is not able to restrain that inflation as money comes from many other sources including home remittances to the extent of Rs5 billion and foreign direct investment to the extent of Rs6 billion and as untaxed money circulates very fast.

But now the CBR has come up with an instrument to whiten the black money. How well those with the black money respond to the CBR’s gesture remains to be seen. The Rs1.874 trillion budget also promises a new deal to those under 25 of age. Dr. Salman Shah wants to develop them, train them and equip them for the greater task in life as they are 100 million in number and they are the future of the country.

In this connection the four per cent of the GDP to be spent on education will become handy if the money is well spent. Rs29.4 billion has been earmarked for quality education, let us hope it will help raise the standard of the education in spite of many misgivings. Many promises have been made to the youth who outnumber others in the country but they have not become a reality except in small parts.

In this era of globalisation the youth has to acquire the necessary skills and competence to build a better economy and a brighter future for the country. The budget is full of promises and the ministers have added to them. What matters is to what extent they make them a hard reality.

P.S: Of the three Ds of the Pakistan economy – defence, debt servicing and development outlay– the development outlay has the top most priority now followed by debt servicing both domestic and external and defence. The largest claim of Rs520 billion PSDP is for the development followed by debt servicing and defence.

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[B][CENTER][SIZE="4"][COLOR="Blue"]A very good budget [/COLOR][/SIZE][/CENTER][/B]


[I][LEFT]By Ikram Sehgal[/LEFT][/I][RIGHT][I]Thursday,June 13, 2007[/I][/RIGHT]

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

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

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

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

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

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

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

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

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

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

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

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

The writer is a defence and political analyst. Email: [email]isehgal@pathfinder9.com[/email]


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[B][SIZE="4"][CENTER][COLOR="Blue"]Human face of poverty[/COLOR][/CENTER][/SIZE][/B]


[I][LEFT]Friday, JUNE 15,2007[/LEFT][/I]

THE toll poverty can take on families was made evident by Wednesday’s story of a pregnant woman in Karachi who wants to sell her unborn child because she does not have the means to raise it. This must be the hardest decision for a woman to make. In this case, the woman and her husband, who is a daily wage earner, have already five children to care for, and lots of debts to pay off. They simply cannot afford another child. Any government would have been shamed by this news, for it reflects its failure to eradicate poverty, but not ours. It holds forth on how this year’s budget is for the poor when nothing is further from the truth. While figures on poverty have been brought down from the previous years’, the number of poor people may not have. That number is going to grow unless the government acts. Part of the problem is that very little attention is paid to the social sector, so that there aren’t enough avenues for the poor for employment or earnings. There must be more low-income housing projects, more schools in far-flung places, more healthcare centres and, of course, more job opportunities so that they can make both ends meet.

But how will this happen? The government needs to set up and encourage more microfinance institutions modelled after the Grameen Bank, which can empower poor people by providing them with small credit. There has been much talk of poverty alleviation and much money earmarked for it — but where has it all gone? For example, where have the funds from the zakat been going? Or the funds from the proceeds of the privatisation of organisations? For that matter, what about the Poverty Alleviation Fund itself — what success does it have to show? There must be an audit of those funds so that one knows where the money has been spent thus far and to what effect. This will indicate what strategy needs to be developed to help steer people out of poverty and enable them to live a decent life.


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[B][SIZE="4"][COLOR="Blue"][CENTER]Budget: flaws and omissions[/CENTER][/COLOR][/SIZE][/B]



[I][LEFT]By Shahid Kardar[/LEFT][/I][RIGHT][I]Friday,JUNE 15,2007[/I][/RIGHT]


IN an environment marked by judicial and political turmoil, a beleaguered government with its popularity (if it ever had any) in negative territory, and faced with what seems an unavoidable election, has unveiled a populist budget that it desperately hopes will help it at the hustings.

After its tirade against former civilian governments, the spin on the increase in development expenditure (while people continue to suffer long hours of loadshedding), claims of a sharp reduction in poverty and generous pro-poor relief measures announced in the budget, the government must now be scratching its head, wondering why it has merely succeeded in generating a negative reaction.

The key challenges confronting the economy that the budget was supposed to attempt to tackle are inflation, the growing budgetary and external trade deficits, continuing high rates of unemployment in parts of the country and the widening disparities of incomes and wealth.

Meeting competing demands for resources, while maintaining fiscal discipline, required the government to walk a tight rope on budgetary allocations and taking decisions on trade-offs between short and medium term goals and objectives. However, with the election looming on the horizon, the government decided to throw caution to the winds. It has chosen not to make the tough choice to raise the tax-to-GDP ratio to narrow the growing gap in this indicator (already two to three percentage points) between ourselves and our South Asian neighbours.

The most worrying feature of the budget is the likely impact on the fiscal deficit, which, given the lack of effort to raise additional resources and continuation of exemptions, and even new reliefs, is likely to grow, especially considering some of the unknowns, like the subsidy for electricity consumption of tubewells.

This could have serious adverse implications for inflation (which is likely to increase if expenditure is not reined in), which will further erode the purchasing power of those trying to eke out a living. Macroeconomic stability achieved after a long and hard struggle (in fact by this government) with a fair sprinkling of luck thrown in by the events of 9/11, has been lost. In 2003/04 the fiscal deficit was 2.4 per cent of GDP and inflation three per cent. These numbers have officially risen to 4.2 per cent and eight per cent respectively.

These macroeconomic imbalances are inducing pressures and new challenges for sustaining the present healthy rates of economic growth.

In this connection it is worth pointing out that while we are being assured that the gradual reduction of the fiscal deficit is as per the course laid out in the Fiscal Responsibility Act, there is reason to be concerned about hidden deficits in the shape of huge accumulated losses of public sector enterprises like Wapda, KESC (even after privatisation based on written agreements with the private owner and operator), the Railways and PIA to which there are large additions on an annual basis, around one per cent of the GDP.

In other words, there are hidden deficits because of losses of public sector enterprises that have not been accounted for in fiscal deficit. Such "creative accounting" has resulted in the reporting of lower fiscal deficits. These will eventually have to be either borne by consumers through higher tariffs, or will have to be bankrolled through the budget.

The bulk of the budget will be financed, including the modest pro-poor expenditures (despite the official hype created about the subsidies for food items the increase in allocations for all subsidies over the last year (including for electricity and fertiliser) is only Rs6.3 billion, with a mere Rs200 million set aside for pulses), by largely taxing the not-so-affluent instead of those who have the wherewithal to bear the burden of the expansion being planned for 2006/07.

A number of measures could have been taken to broaden the tax base and achieve horizontal equity among different interest and income groups, instead of selectively choosing some sectors for special treatment. Pakistan is in many ways a unique country where a principal source of income and wealth creation in the last two to three years — capital markets — continues to escape serious taxation.

Just in the last two years, the stock market index has jumped from around 6,000 points to over 13,000 this month with market capitalisation shooting up to reflect a capital gain of more than two trillion rupees accruing to holders of listed shares, which escaped taxation because of a specific tax exemption for capital gains arising from trading in listed securities. If these gains had been taxed at close to the same rate as dividends, then far more would have been raised than through the much-touted CVT on transactions in shares.

Hence, the decision of the government to continue to extend the tax exemption on capital gains arising from trading in listed securities has once again demonstrated that economic policies are not just skewed in favour of the rich but are also speculator friendly, disincentivising investments in the real sectors of the economy.

In a country where the distribution of assets is heavily skewed compared with the distribution of incomes and where there are no taxes on either deaths or gifts (wealth tax has also been withdrawn) the continuing exemption from taxation of massive capital gains in recent years from trading in shares has huge implications for widening inequalities between the affluent and the less privileged segments of the population.

This budget provides more shelter to inefficient assemblers of motor vehicles and motor-cycles — the means of transportation of the less privileged segments of the population — who already enjoy an extraordinarily high level of protection through the import tariff structure. They will continue to pocket, as private profits, what would have been tax revenues.

The government has also been shy of broadening the base of GST on services largely because the main beneficiaries of revenues from this source would have been the provinces.

Moving on to other announcements in the budget, public sector employees whose salaries and pensions have been raised by 15 per cent and those whose basic payscales will be upgraded (both these measures will place a huge budgetary burden on the provincial governments) represent roughly seven per cent of the total workforce, while EOBI and the minimum wage (raised to Rs.4,600) related proposals will cover less than five per cent of the remaining workforce.

Considering that the government has not been able to implement even the former, it is not quite clear how it will enforce the revised legislated figure for the minimum, especially considering its own inability to force contractors, executing its construction schemes to pay their workers the minimum wage.

As for the much larger number of unprotected, self-employed people or those working in the informal sector or as landless agricultural labourers, the curse of inflation will continue to plague them in the foreseeable future.

The benefits of the huge continuing subsidy on electricity and fertiliser and the new subsidies on consumption of electricity by agriculture tubewells and some commodities like ghee, pulses and sugar to be sold through utility stores (whose number is to be increased by 4,000 over the next four months!) instead of being meant specifically for the poor, will also be available to more affluent households/farmers.

Moreover, the introduction of subsidies is a bad idea, as, they eat into the vitals of the economic body. Once introduced they become difficult to withdraw. A better strategy to keep prices in check would be to reduce the cost of doing business and control government spending that fuels consumption expenditure beyond the productive capacity of the economy.

The route to provide cheap essential consumption items through utility stores has been used repeatedly with little effect. This is a failed model because it serves only a small proportion of the intended population with much of its success in the enrichment of the private coffers of the employees of the corporation. That some of the goods are likely to find their way to neighbouring countries where prices of the same items are higher is also a possibility that cannot be ruled out.

Furthermore, the decision to pick up 25 per cent of the electricity cost of tubewells, will not only be painful for provincial budgets which are expected to bear half the cost, the proposal is also not sound because it disincentivises the conservation of energy and extraction of groundwater both important national needs.

Moreover, the subsidy, the principal beneficiaries of which will be the large farmers, is open-ended, there being no ceiling on the level of subsidy per tubewell. The proposal also provides Wapda with an opportunity to mask its distribution losses as electricity consumption by tubewells. Even if a subsidy had to be provided it would have been far better to agree to pay a lump sum per month per tubewell, as that would have provided an incentive to farmers to save on electricity to reduce production costs.

Similarly, to ensure a wider distribution of the subsidy on fertiliser (instead of it being principally appropriated by the large farmers) it would have made more economic sense to reduce the GST on it.

Islamabad continues to be determined to keep more and more resources for itself, and not share them with the provinces. The skewed distribution of resources will ensure that the federal government implements more than 70 per cent of the development programme. Islamabad resists giving the provinces more money through the NFC award by pleading that it is squeezed for funds, since it has a number of obligations relating to defence, debt servicing and administration.

The reality is that our rulers are simply unwilling to give up activities that the Constitution places squarely in the provincial domain. We now have an absurd situation of Islamabad constructing provincial roads and implementing schemes in rural areas (for instance under the Khushaal Pakistan Programme employing non-formula based transfers) simply because it is not prepared to share with the provinces a portion of the increasingly larger share of the cake that it is keeping for itself.

This execution of schemes at the local level also has significant implications for service delivery and accountability since it will be the lower levels of government that will eventually be responsible for maintaining in good working condition the assets created under these programmes. While the federal government denies provincial governments and local populations any direct participation either in identifying and prioritising their needs or in the execution of the schemes that it has designed, it naively expresses surprise, if not contempt, at the Baloch not being happy with all the development work being done for them by Islamabad.

Moving on to the areas that the budget speech chose not to dwell upon, it is noticeable that it was silent on what the government plans to do with the deficit on the external trade account. The decision to levy an additional one per cent surcharge on most imports ostensibly to discourage imports will make little difference to the import bill, although it will raise the private sector's cost of doing business, particularly pushing up the cost curve of exporters whose duty drawbacks are not likely to be raised to neutralise their resultantly worsened cost competitiveness.

Finally, even if we accept the government's claim that the budget is investor friendly the prevailing political instability (which will only exacerbate after Musharraf's announcement that he will contest the presidential election in uniform) can hardly expected to titillate the discerning senses of private investors .

To sum up, this budget may well leave a legacy and a trail of financial mismanagement that a future government will have to be grapple with on assuming office. This writer for one would not envy their position.

The writer is a former finance minister of Punjab.


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[B][SIZE="4"][CENTER][COLOR="Blue"]Budget 2007-08 [/COLOR][/CENTER][/SIZE][/B]


[I][LEFT]By Mir Jamilur Rahman[/LEFT][/I][RIGHT][I]Satureday,June 16,2007[/I][/RIGHT]

The budget today is exactly one week old. Nearly everybody -- opposition politicians, treasury benches, budget experts and analysts -- have had their say. Depending on which side one is standing, the budget has variously been described as people friendly, pro-elite, anti-people and anti-poor. It has also been called gimmicky and a pathway to prosperity. On the TV talk shows, former finance ministers are seen and heard quarrelling with their current counterparts on the authenticity of the figures and claiming that the budgets presented by them were far better than the one presented last Saturday by the Musharraf government

A national budget per se is neither good nor bad. It is the implementation of its policy targets that makes it good or bad. If the implementation is efficient, the budget would prove good. If its policies are not implemented honestly and correctly, even a good budget will become sour. To be sure, no government can afford to present a budget that does not meet to a great extent the needs of the people. The budget also has to reflect the aspirations of the people otherwise it will be condemned universally making the government unpopular.

The debate on the budget provides the opposition the opportunity to discuss any matter under the sun. That being the case, it is not understandable why the opposition insisted to move an adjournment motion on the Karachi killings on May 12. When the motion was denied, the opposition first protested noisily in front of the speaker's chair and then walked out boycotting the budget speech. It was a defeatist attitude.

It is a huge budget. It is 21 per cent bigger than the last budget. The overall size of the budget stands at 1.874 trillion rupees, a mind-boggling figure. How much is a trillion? It is a million million, 1,000,000,000,000 (12 zeros). Its hugeness is ample proof that Pakistan is moving forward economically and financially. The budget has been generous to government employees and pensioners by raising the amount of their salaries/pensions. It has allocated Rs113.9 billion for relief of the common man in the shape of subsidies that will reduce the prices of pulses, sugar and tea. The budget proposes to increase the minimum monthly wage to Rs4, 600. This amount is not adequate but to extract even this minimum wage from private sector employers would not be an easy task. Many public sector companies have also been provided subsidies to save them from bankruptcy.

The budget proposes to abolish import duty on electric generators for home use. This measure will provide some relief to the people who live under the constant shadow of load-shedding. A similar relief by abolishing sales tax ought to be provided to people who install security alarm system. It is not fair that people are not provided state security for their homes and hearths and when some of them make their own security arrangements, they are punished with 15 per cent sales tax.

As a policy matter children's apparel and shoes should be exempt from any tax. Babies should also not be charged any tax on the milk they drink. Similarly, all medicines should be free of taxes. It would be most cruel to tax a person for having falling ill. The heavy taxation under various heads on air travel has stunted the growth of air travel industry. In fact, it has started going downhill. Taxation on air travel should be abolished entirely or reduced to a reasonable level. The 15 per cent sales tax on cellular calls is on the higher side by international standards. This should be halved. This reduction will increase the number of cellular users and the government will earn much more than it is earning now from cellular phones.

The truth is the budget has progressively lost its mystical aura and people are no more excited for the new budget as they used to be. The reason is that most of the non-tax budgetary proposals are known well before the budget day. For instance, the proposals to raise salaries and pensions and the subsidy on food items were publicly known well ahead of the budget. Obviously, the foreknowledge that salaries and pensions would be raised and prices of food items would be slashed could not be exploited to one's advantage, as could be the case with tax proposals.

The liberalised trade regime has also contributed to the transparency of budgetary process reducing greatly the bureaucratic stranglehold on the commerce and trade. The liberalisation has also reduced the budget excitement. There was a time not long ago when inside information about the change in import duties of some essential items could make a trader into a millionaire. If the trader or industrialist could not lay his hand on what the budget would bring, he may lose a chance of making a million or two. In those times the chief controller of imports & exports, a grade-19 post, was considered a kingpin of commerce and industry. It was a prized post. Nothing could be imported or exported without first obtaining a licence from CCI&E.

Two other customs rules come to mind, which appear ridiculous with hindsight. It was an offence to keep unauthorised foreign exchange. While travelling to or from Pakistan, body search was made to ensure that the passenger was not taking out or bringing in foreign exchange. How times have changed. Now Pakistanis can open and operate a foreign currency account in Pakistan without any hassle.

The telephone instrument was another prohibited item. It was immediately confiscated if found in the luggage of a homecoming traveller. These confiscated instruments were handed over to the PTCL for safekeeping! However, the establishment of cellular phone companies have changed it all. Now there is no restriction on bringing in or taking out a telephone instrument.

Severe criticism has been made regarding international debt, which now amounts to 38 billion dollars. The criticism stems from the repeated government claim that it has broken the kashkol (begging bowl). It was a wrong and superfluous claim. A developing country cannot meet its economic targets if it were to forgo loans. A good credit rating is an important aid in getting loans and Pakistan has now no difficulty in obtaining loans because it is sustaining its growth at a steady rate of seven per cent for the last few years. Moreover, Pakistan now has a robust amount of 15 billion dollars in the forex reserves. That also helps in obtaining loans on easy terms.

It now all depends on the government to make the budgetary proposals work for the common man. The government's first test would be the opening of thousands of utility stores and keeping them stored with food items. That will eventually decide if Budget-08 was good.



The writer is a freelance columnist.

Email: [email]mirjrahman@yahoo.com[/email]


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[B][CENTER][SIZE="4"][COLOR="Blue"]Federal budget 2007-2008: a review [/COLOR][/SIZE][/CENTER][/B]


[I][LEFT]By Prof Khurshid Ahmad[/LEFT][/I][RIGHT][I]Sunday, June 17,2007[/I][/RIGHT]

Budget making is definitely a very serious exercise and the budget document a solemn piece of legislation that reflects a nation's resolve how best to overcome economic hardships and how to effectively harness the available resources to achieve autarky in all fields of national economy.

Unfortunately, the budget presented by the government for the fiscal 2007-2008 is highly disappointing. It is obviously an election budget and not one based on genuine economic logic. The government has taken credit for what it claims to have achieved by way of seven per cent rise in the GDP and $14 billion as foreign exchange reserve. The question, however, arises as to what extent are these due to the government's economic policies and to what degree due to exogenous factors like foreign remittances of Pakistani expatriates and economic and political assistance received as a result of the government's dubious surrender to US pressure after 9/11.

A recent study on development indicators released by the World Bank on April 15, shows that from 1999 to 2005 the average GDP per capita growth in Pakistan on the basis of purchasing power parity has been 4.62 per cent. During the same period the average per capita increase in other developing countries was: Philippines 5.17 per cent, Indonesia 5.77 per cent, Turkey 5.79 per cent and India 7.32 per cent. It is important to note that the average growth of GDP per capita for all low-income countries during this period was 6.38 almost 30 per cent more than what was achieved in Pakistan. In this context too much clap drap about macro indicator is to be taken with a pinch of salt.

The government's claim about reduction in poverty to the extent of 10 points, i.e. from 34 per cent of the population to 24 per cent, is similarly hardly tenable. In fact this would mean almost 33 per cent of the people living under the poverty line to cross the poverty line upwards. This means that every year 2-3 per cent of the population has moved above poverty line. In aggregate terms this would mean that out of 52 million people living under the poverty line some 13 million have improved their status and got out of the grip of poverty. A statistical miracle indeed!

What about the ground realities? Do these confirm the government's claim? Even the survey (PSLM 2004-05) on the basis of which this claim is made contains evidence, which falsifies this official position. Accordingly to Vol. II of the survey, giving provincial and district data, it is stated in Table 5.1 (Page 406) that actually 24 .15 people interviewed had claimed that they were worst off or much worst off in 2005 as compared to 2001. The remaining 51.5 said that their position has not changed. How can the official claim of 33 per cent of people moving upward from poverty line be reconciled with this confession by the same group of people? Asian Development Bank's latest report on Poverty Reduction Programme of Pakistan (Working Paper No. 4, 2007) also records people's perception that the development programme conceived so far, including the SAP, have not brought about any real qualitative change in the country, particularly, in rural areas.

One feels seriously concerned about the mis-presentation of facts and data by the government. Surprisingly, there are serious discrepancies and contradictions in the budget speech and documents. The minister of state, as well as the prime minister and his advisors have claimed that the size of the current budget is Rs1,875 billion. Yet in the federal budget document the total outlay of the budget is given as Rs1, 599 billion: (Budget in Brief, Chapter 2, p.7). This goes to show how irresponsible the government has been even in a highly serious exercise like budget-making.

Even a cursory glance of the budget reveals at least six major failures, which may be summed up as follows:

1. The country is faced with unprecedented balance of payments and balance of trade deficits. When the government took over in 1999-2000, the trade deficit was $1.74 billion. Now it has risen to over $11 billion. In fact, it is feared that this deficit could be well over $13 billion. The balance of payment deficit in 1999-00 was $1.14 billion, which turned positive in 2002-2003 and became $3.16 billion in the year the current National Assembly was elected. Presently the B/P deficit has reached the Himalayan figure of $6.2 billion. The budget fails to come up with any policy initiative to drastically reduce these two major deficits.

2. Economic growth can be sustained only if the Commodity Sector of the economy grows and becomes the main engine of growth. The growth we are witnessing at the moment is based more on the services sector and exogenous factors like foreign remittances and the US aid for Pakistan's mercenary role in its 'war on terror'. There has been no significant and sustained quantitative or qualitative improvement in the agricultural sector of economy. Basically, the agricultural sector has remained a neglected sector where the cost of production is escalating resulting in food inflation. The industrial sector is also lagging behind, particularly the textile industry, which accounts for almost sixty per cent of our exports. It is because of this crisis in our textile sector that exports have seriously lagged behind. In fact, raw cotton is now being exported ($3 billion this year), while value-added textile exports are on the decline. Other industries including leather, surgical instruments and even the sports industry are in serious trouble. Their cost of production remains high, making our exports uncompetitive. The government has neglected these problems. Unless these problems are thoroughly reviewed, this may lead to even de-industrialisation of Pakistan. Already 116 textile mills have been closed, half a million spindles gone out of motion and several million people rendered jobless. So strong in rhetoric, the budget is silent on the problems of the country's most crucial commodity production sector.

3. Inflation is beyond anybody's control. The common man is caught in its menacing grip. He is unable to have two square meals a day. Food inflation, according to official figures, is over 10 per cent and according to unofficial assessments between 15 to 20 per cent. This is ironical in the context of claims about bumper agriculture crop. The proposed relief measures stated in the budget are non-starter. Subsidies have always increased corruption and failed to deliver. There can't be a substitute for a correct economic strategy to fight inflation. Out of a subsidy of Rs210 billion that the government claims to offer in vital sectors of public interest, over Rs90 billion are meant for WAPDA and KESC. One wonders, how this hefty subsidy could be relevant in reducing inflation and bringing any relief to the poor consumers? The country needs a policy to reduce the cost of production by reducing import duties and sales tax on items of daily use. Utility Stores do not cater for more than two per cent of the population and do not serve the poor only. They are hardly the answer. Inflation can be fought only with a combined use of monetary and fiscal policies, taking care of the demands and supply sides simultaneously. This is, however, not being done. That is why the Frankenstein of inflation has been haunting the country throughout the tenure of the present government. Inflation in the year 1999-2000 was 3.58 per cent. In 2002-2003 it was 3.1 per cent and in 2004-2005 it rose to 9.3 per cent. It has been eight per cent during the current and last fiscal year. The budget has miserably failed to seriously address the very crucial issue of inflation in all its dimensions.

4. The other major problem faced by the country relates to poverty and unemployment. Both are organically linked. So is the question of human resource development and manpower and educational planning. The budget is full of rhetoric but there is no plan to effectively face these challenges. There are no sufficient allocations for poverty reduction and massive promotion of health-care. A vital sector like education is starved of resources. The government has increased expenditure and remains addicted to ostentatious living. The development expenditure has been revised downwards to the tune of Rs36 billion. The budget fails on the count of real development, poverty eradication, human resource development and social welfare.

5. Another major problem relates to the elitist nature of the economy. Musharraf-Shaukat policies have made the rich richer and the poor poorer. The extent of inequalities in the country has increased to scandalous proportions during the last eight years. The government's economic survey admits that the top 20 per cent are getting at least 400 per cent more than what is being received by the lowest 20 per cent. According to another study, out of every 100 rupees added to the national income, only Rs3 go to the lowest 10 per cent and over Rs40 to the upper 10 per cent. The stock exchange and real estate boom has only been instrumental in producing millionaires and billionaires because of speculation, not through real value-addition in the economy. The country's elitist class of big landlords and capitalists has become the robber-barons. They are subject to no tax. It is the common man that is crushed under the weight of indirect taxes, while the class of exploiters is spared of any effective tax regime. Inequalities are multiplying and producing divisiveness and polarisation in society. The budget fails to even take note of this gruesome situation.

6. Finally, the government's claim about the fiscal discipline is fictional. The budgetary deficit is above Rs300 billion. The quantum of both the external and domestic debts has increased. Total national debt has swollen to more than Rs1500 billion during the last seven years. The debt management strategy has totally collapsed. Another aspect of the government's failure relates to squandering away of the fiscal space of around forty billion dollars provided during the last seven years in the form of remittances from Pakistani expatriates ($26 billion) and foreign assistance ($10-12 billions). These huge resources have not been harnessed in investment avenues and the bulk of them has gone in conspicuous consumption, real estate and stock exchange speculation. The country is living beyond its means. The rulers have set the worst example. Unproductive expenditure has recorded exponential increase. So has expenditure on the armed forces, whose budget has increased three-fold from around Rs90 billion to virtually over Rs300 billion in the 2007-08 budget. This has made the country's economy lop-sided and the government will have to account for this strategic failure.

Finally, huge allocations made for district and tehsil governments and local unions, are for all practical purposes a lucid political bribe to be used for election purposes. This is a total abuse of public money.

Viewed in this backdrop, the federal budget 2007-08 deserves to be thrown out by the parliamentarians in the same way as happened with the budget presented by Mr Yasin Watto in 1986-87. This year's budget deserves a similar fate. Would the National Assembly do its duty or buckle under pressure from the government in uniform?



The writer is a member of the Senate and affiliated with the Jamaat-i-Islami. Email: [email]khurshid@ips.net.pk[/email]

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[B][SIZE="5"][COLOR="Blue"][CENTER]Not a pro-poor budget[/CENTER][/COLOR][/SIZE][/B]



[I][LEFT]By Tasneem Noorani[/LEFT][/I][RIGHT][I]Monday,June 18,2007[/I][/RIGHT]

BUDGETS are a ritual that governments have to go through once every year. They are no longer as exciting as they used to be, when tariffs were high and long lines of cars queued up at petrol pumps on the eve of the budget because of expected increases in the price of petroleum. Now there is no such hassle because budgetary levies are imposed throughout the year in the form of mini-budgets.

This year, there are no significant new hikes in duties or taxes, and if there are, they are camouflaged well. Being an election-year budget, we hear words like ‘subsidy’, ‘poverty alleviation’, ‘salary increases’, ‘increase in basic wage’ etc. The policy has come full circle. In the first seven years, the word ‘subsidy’ was an abuse in the economic corridors of the government and all strategy was based on a market economy. There was talk of following the policy of the survival of the fittest. Now, we hear of subsidy on daal, rice, sugar, fertiliser, electricity etc.

Some years ago, the country had a ration depot system, where the poor could get atta and sugar at fixed rates. It was thrown out of the window some two decades ago because it was difficult to implement and it bred corruption. Now we are planning to set up 5,000 utility stores all over the country within four months. This appears to be the main plank of our pro-poor budgetary strategy. I heard a discussant in one of the numerous discussion TV shows call this a “utility store budget”.

In the year 2000, the writer was the secretary, ministry of industries. Those were the early years of the “privatisation, deregulation and liberalisation” strategy. My minister was insistent on the complete closure of utility stores. Having seen the government function longer than he had, I pleaded that perhaps we should reduce the scale, (there were perhaps 450 or so stores then) but not kill the organisation.

I argued that governments sometimes need to make headlines though utility stores, and seem to be doing something when they can’t solve the actual problem. This difference of opinion generated its own heat, but I stood my ground and the higher forums upheld my point of view.

I was quite satisfied but never thought I would see the pendulum swing. Setting up 5,000 utility stores in four months is a wish which only a genie can achieve. Even a multinational retail marketing company with its enormous human and financial resources would not plan more than a dozen stores in that time span.

If the idea is to franchise these utility stores, it will do harm to the government’ image. When the differential of the price at which daals, sugar and ghee will be sold in at utility stores compared to the market price, is so high, you can certainly expect big windfalls for various ‘smart’ groups of people. What the people are likely to get is poor quality, short-weighted commodities and that also a few days of the month. If the government is really serious about the matter, it may want to re-examine the rations depot system, even though it will tantamount to an economic retreat. It was at least structured and the commodity did get to the poor.

Another way of looking at the utility store initiative in the budget is to make a simple calculation. If out of a population of 160 million, only 50 per cent are assumed to be below the poverty line or fall under the definition of potentially poor, each of the 5,000 stores will have cater to 16,000 people daily.

Also, it is difficult to understand why such drastic steps are required to take care of the poor, when, as claimed in the budget speech, atta in Pakistan is the cheapest in the area and we have reduced the incidence of poverty from 34.4 per cent to 23.97 per cent, since 2001. And to cap it all, our per capita income has almost doubled in that period. This is as baffling as our stock exchange performance.

The positive sign one notices is the attention that government servants have received, especially the lower grades, where not only the salary has been increased by 15 per cent but their current grades have been upgraded, and they have been given the hope of perhaps owning a house one day. This will improve their morale and hopefully their performance.

The government should stop wasting time in setting up commissions to look into making the government servant’s salary market competitive, because after numerous aggressive recommendations, all that the ministry of finance can afford each time is a maximum raise of 15 per cent. The government should instead aim to bring the salary and perks of government servants to realistic levels, in say five to seven years, by giving annual increases which are above the inflation rate.

The car lobby, which was receiving bouncers in the previous two budgets, has connected with the ball well this time and has bounced back. The decision to restrict used car import to only three-year-old cars will result in more expensive used car imports, improving the competitiveness of locally produced cars.

On the macro level one sees very little in the budget to tackle two very serious problems — that of the widening gap in power production and consumption, and declining industrial production. On the power front perhaps it can be said that the ministry of water and power will push Nepra into enticing more investors to get cracking. Merely the announcement of intent, or opening ceremonies, is not going to reduce the agony of the public that is being forced to sweat it out and is resorting to rioting.

As for industrial growth, the growth rate has come down from 18 per cent a couple of years ago to eight per cent this year. Even this figure is not reflected in the export industry where the growth in exports this year was more like six per cent. This is worrisome as the trade gap which the government continues to play down is on the increase.

Surely the increase in minimum wages, however laudable, is not going to encourage the growth of industry and subsequently exports. One of the reasons for the high cost of doing business for the textile industry was the last increase in minimum wages. This one could be the knock-out punch, especially for the labour-intensive garment industry.

I see little good news for the textile industry. While we have been spending over four billion dollars in investment in machinery to prepare for the post quota regime, our competitors India, China and Bangladesh have invested much more. Added to this is the higher cost of labour, both in absolute terms, compared say to Bangladesh, and in terms of productivity, compared to China and India.

One sees more trouble for the value added part of the textile industry in the coming year. With the closure of the more labour intensive garment factories, the government claim of providing one million jobs may go into reverse gear. Some of the doable things, for instance in the textile sector like supporting an entrepreneur set up electronically-managed state-of-the-art warehouses in the country of destination or assisting him purchase international brands, have become casualties of committees and reports.

Unfortunately, the budget exercise each year is the culmination of the hopes of various lobbies and the wealthy, while the have-nots continue to wallow in abject poverty. Let us pray that in future years we start making the main budget for the poor, rather than make them wait for the trickle-down effect.

tasneem.noorani@tnassociates,net

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[CENTER][B][SIZE="4"][COLOR="Blue"]Disregarding the fundamental concerns[/COLOR][/SIZE][/B][/CENTER]

[I][LEFT]By Muzhar Javed Malik[/LEFT][/I][I][RIGHT]Monday, June 18,2007[/RIGHT][/I]

Some people say, “Budget is a jugglery of figures”. Surely, a cynical comment! Budget is a well thought-out and comprehensive plan of what the government will spend for its various programmes in the year ahead and how it expects to raise money to pay for them. It is a very focused exercise that necessitates broad vision to diversify sphere of influence, resolute will to set ambitious targets, unflinching commitment to achieve set goals.

In the evaluation of budget, the yardstick used to gauge the strength is of prime importance. Basically, the tone and tenor of budget is tested with the financial standing of the regime, public expectations, grievances of all the stakeholders and challenges confronting the country.

Domestically, Pakistan is facing the daunting task to mitigate the miseries and sufferings of the poor by addressing their real concerns of widespread unemployment, abject poverty and rising inflation. Government has the obligation to provide proper health, sanitation, clean drinking water and housing facilities to all in general and lower and middle class in particular. The provision of quality education is also the prime responsibility of government not only for the sake of promoting literacy but also for the economic survival in this highly competitive world. What has been done to address the problem of unemployment is induction of internees in government departments.

The internship programme initiated by the government is a welcome step but faulty one and may not yield the required results. The very purpose of the said programme is to equip the young graduates with state of the art training and skills. Will it be possible in public sector organisations where the quality of incumbent manpower and other infrastructure is always questionable? The government should make it practical and fruitful through public-private partnership. The government should induct these internees in private organisations where diversity, professionalism and state of the art facilities are available at the same place and pay the stipend from the national kitty. In this way two birds will be killed with one stone. On one hand, quality training will be made available and on the other hand, private sector will also benefit. Above all, the candidates proving their worth during training would be able to pave the way for permanent job that is impossible in public sector. Secondly, the government intended to create thousands of new jobs in different industries. That seems more like a hollow promise because no mechanism has been announced to make it possible. For eradicating rampant poverty, no worthwhile measures have been proposed. Provision of subsidy on essential items through Utility Stores Corporation will not work because the Utility Stores mechanism has not been a remarkable success in our case primarily for two reasons. One the USCs network is very limited and is not enough to cater to the needs of 73 percent below $2 population. Secondly, no check and balance mechanism is practically in place to address the issue of over-charging and other problems facing the poor at Utility Stores. Raise in pay is nominal considering the current trend of Consumer Price Index (CPI) and especially Sensitive Price Index (SPI) and it will hardly make any difference to the low-grade employees. The increase in minimum wages of unskilled workers of private sector becomes irrelevant and seems distant dream considering the implementation gap and resistance from the corporate elites. These poverty related measures seem cosmetic in a society where people are forced to sell their organs and fathers are selling their children to make both ends meet.

For education and health, allocation is stagnant in terms of GDP ratio. In spite of IFI’s strong recommendations and government’s repeated assertions of investing more in education, national, institutional and international obligation has not been fulfilled. In spite of the fact that the current report on Millennium Development Goals illustrates that Pakistan lags behind in 12 indicators especially in education and health related, but no special attention has been paid.

Another challenge facing the country is sustainability of the current trend of economic growth that seems unrealisable until the power and energy crisis is resolved for which government has not suggested immediate steps. Government has also not put forward some pragmatic and practical steps to control the twin deficits of trade and current account.

Balance between current and development expenditures is horrible and must be rationalised. Development expenditures are insufficient considering the infrastructure development requirement to sustain the trend of GDP growth in general and foreign investment in particular. Secondly, only allocation of funds is not important but more important is utilisation of funds that must be taken care of, as it happened in case of development budget of 2006-07 of which two-third remained un-utilised and no action has been taken. The government must address the implementation and spending gap concerns. Government must introduce some check and balance mechanism to ensure the raising of funds and more importantly utilisation of allocated amount of money in particular head.

The government claims of breaking the begging bowl seem false when external debt has exceeded $38 billion, internal debt amounts to Rs2500 billion. Under the circumstances, every new-born baby will owe Rs2900 and government has allocated Rs641 billion to debt servicing from budget. Defence is consuming Rs916875 billion that gives the impression of the country being the “security state”. Defence budget is not Rs275 billion but it must include the amount to be paid to the retired army-men in form of pension that has been included in non-defence budget.

It is pertinent to note that the budget in question may not be as pathetic as the public’s disappointment. But the frustration of the public as a whole lies at the heart of primarily two obvious reasons, one, the current regime has been harping the mantra of its affluence from day one and always propagates the overflow of money from the national kitty and believes in charity to other nations. And two, in the election year, politically charged environment, considering the pain of the poor, public was expecting a special bailout package from the government which the incumbent regime failed to offer.

Surely the budget cannot appease all the segments of the society or all the stakeholders. But it must be populist in character, pro-corporate in substance and more relevant for the common man and for this political will and commitment is top pre-requisite which like others, this regime too lacks.


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