A failed economic record

BENAZIR BHUTTO

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.

http://www.nation.com.pk/daily/jun-2007/13/columns4.php

Budget 2007-08


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


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.


Economic Performance

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.


Relief Measures

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.


Additional Relief:

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/-


Utility Stores: 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.



Healthcare

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.



Mega Projects

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%.





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A budget full of promises

By Sultan Ahmed

Thursday,JUNE 14, 2007

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.

http://www.dawn.com/2007/06/14/ed.htm#4

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Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

A very good budget

By Ikram Sehgal

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

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

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

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

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

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

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

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

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

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

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

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

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


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

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Human face of poverty

Friday, JUNE 15,2007

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.


http://www.dawn.com/2007/06/15/ed.htm#2

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Budget: flaws and omissions

By Shahid Kardar

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.


http://www.dawn.com/2007/06/15/op.htm

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Budget 2007-08

By Mir Jamilur Rahman

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: mirjrahman@yahoo.com


http://www.thenews.com.pk/daily_detail.asp?id=60792

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Federal budget 2007-2008: a review

By Prof Khurshid Ahmad

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: khurshid@ips.net.pk

http://www.thenews.com.pk/daily_detail.asp?id=60861

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Not a pro-poor budget

By Tasneem Noorani

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

http://www.dawn.com/2007/06/18/op.htm#2

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

By Muzhar Javed Malik

Monday, June 18,2007

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.


http://jang.com.pk/thenews/jun2007-w...06-2007/p5.htm

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.