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Old Saturday, June 04, 2011
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Default Budget proposals for the next fiscal year 2011-12 in the National Assembly

ISLAMABAD, June 3: Finance Minister Dr Abdul Hafeez Sheikh unveiled the budget proposals for the next fiscal year 2011-12 in the National Assembly here on Friday. The following is the text of his budget speech.

PART-I

“Madam Speaker,
Let me start in the name of Allah, the most gracious, the most merciful. I am thankful to Allah for the responsibility placed upon me to present the fourth budget of the democratic government before this historic parliament. In presenting the fourth budget, Prime Minister Gilani, has become, after Shaheed Zulfiqar Ali Bhutto and Liaqat Ali Khan, the longest running PM in Pakistan’s history. This is a great tribute to the political leadership of our country, to President Zardari, to the leadership of all the major political parties.

This is a historic parliament. It reflects the will of the people. It has set high standards of debate. It has conducted itself honourably. It has passed landmark legislation. It has strengthened the Federation. It has redressed historical inequities. It has empowered the provinces. Above all, it has restored the constitution.

The Constitution of Pakistan was framed in 1973 by Shaheed Zulfikar Ali Bhutto and the national leaders of that time. It was a shining moment for Pakistan.

In that moment we all came together. Our Constitution was assaulted in 1977. It took us 32 years to restore the constitution.

This national duty was performed by this House. Let us pay a tribute to those who are responsible for meeting the aspirations of our people. Let us pay a tribute to the President Asif Ali Zardari, who voluntarily gave up his powers to the Parliament.

Leader of the House, Prime Minister Gilani, and Leader of the Opposition, Chaudhry Nisar Ali Khan also deserve special tribute for playing a key role in ensuring the supremacy of the Parliament. The restoration of the Constitution was another shining moment. We again came together. A new Pakistan emerged. A new beginning was made.

Whenever we have come together we have surprised the world with our achievements. In 1947 when we came together we overcame the odds and this country was born. In 1965 when our country was attacked we came together, and aggression was resisted. In 1998 we came together to protect our nation and the world witnessed our capabilities. In the earthquake of 2005 and the floods of 2010 we came together and showed the world our resilience and generosity.

This is a Pakistan in which democracy has made a comeback. The new Pakistan is also one of coalition politics. Of give and take. Of the balancing of forces. Of developing shared understanding. Of lively public discourse. Of getting along. Of generating consensus.

Of responsiveness to Parliament, the media, the business community, civil society, and above all, to the People of Pakistan.

The judiciary is free to interpret the Constitution, to apply checks on the government, and to provide justice. The media is free to report, to comment, and to critique.

Provincial governments have been assigned greater responsibilities and given greater resources. The Parliamentary committees provide oversight and scrutiny on the working of the government. The financial institutions like the State Bank, the Securities and Exchange Commission, and the Competition Commission enjoy extraordinary autonomy. They are empowered to conduct monetary policy, regulate the financial sector, and curb monopolies and cartels. The regulatory bodies such as PTA, NEPRA, OGRA, are free to conduct their affairs without government intervention. And in an extraordinary act of bipartisanship, a move unheard of in parliamentary history, the Leader of the Opposition is the Chairman of the Public Accounts Committee. And he performs this role with great responsibility and enthusiasm. These are the foundations of a new Pakistan that make us all proud.

However, a lot of hard work still needs to be done. We must let democracy take root. We must safeguard our freedoms. We must allow our institutions to strengthen. We have to build sound governance that serves people.

Madam Speaker, with hard work I am confident that the foundations for transformation will be securely laid. The Economy We Inherited

Let us all recall where the economy was when this House and this government took charge in 2008. My friend, Senator Ishaq Dar sahib, who was the first Finance Minister of this government, was rightly alarmed at the state of the economy that he inherited. He said then; “The mismanagement of economy has resulted in overspending of Rs558 billion and if the government does not take corrective measures then fiscal deficit will touch 9.5 per cent of GDP by June 2008.”

By 2007, a combination of oil price increases, expenditure on security and policy lapses had set the stage for a full blown crisis. The fiscal space created by the 2001 debt rescheduling and successful privatisation was squandered by fuelling a consumption boom instead of undertaking structural reforms in the country. Double digit inflation has been recorded since 2006 and had reached to an alarming level of 25pc, perhaps the highest ever. Growth had slowed down, fiscal deficit had ballooned to 7.6pc, and the external current account deficit was 8.5pc. International reserves had declined from 16 to 6 billion dollars and a sharp decline in the value of the rupee and the further evaporation of reserves was imminent.

The government response
Thus, the government of President Zardari and Prime Minister Gilani, inherited on March 8, 2008, a fragile economy, an acute BOP crisis and a large fiscal shock. The government had no choice but to go to the IMF. A stabilisation program was sought amounting to $11.1 billion to strengthen our international reserves, and tighten fiscal and monetary policies to fight inflation.

The efforts of the government began to pay off. Inflation was moderated and the. growth momentum started to return. The fiscal deficit was brought down and new pro poor schemes were launched. Areas where we needed to show better results were in domestic resource mobilisation, creation of new jobs in private sector, resolving the energy shortages and better targeting of subsidies.

One challenge that the Budget for FY 2010/11 faced was that this was the first year after the landmark NFC Award, which substantially enhanced the share of Provincial governments in the divisible pool and increased the challenge of the Federal government to finance its expenditure obligations. We however, consider it a temporary difficulty that in the long run is the best thing that has happened to augment the welfare of our people. Since, a much bigger share of expenditure responsibilities that affect our people, such as health, education and law and order are provided by the Provincial governments, we are hopeful that national expenditures on these services will rise as additional resources are transferred from the federation to the provinces.

It was against this setting that the Budget for FY 2010-11 was presented in which we took several measures to provide relief to our citizens. Salaries were increased by 50pc, benefiting government employees. Tax exemption limits were increased from Rs100,000 to Rs300,000 benefiting 1.2 million low income tax payers. No income taxes were levied. Custom duties were not increased for any item and brought down for 29 to reduce the burden on the public. A comprehensive reform proposal for sales tax was offered doing away with exemptions and special treatments and capital gains tax was imposed to bring short term gains from stock trading into the tax net. Very importantly, a deficit target was fixed at 4pc and strong austerity measures were introduced to check inflation. All non-salary expenditures of the federal government were frozen at the level of previous year’s actual. The PSDP was also frozen at the previous year’s level. To protect the poor and vulnerable segments, targeted social safety nets such as BISP were enhanced.

Adverse shocks
However, soon after the budget three major events jolted us severely which I would like to share with this august House:
Our country was struck by the greatest natural calamity of our history: The Great Floods of 2010. The world has not seen a calamity of this magnitude in modern times. No country has had to deal with a disaster of this scale. No area of the country was spared. The floods struck us all the way from the mountains in the north to the sea in the south, covering a length of a thousand miles. All four provinces were affected. Eighty plus districts were inundated. Families saw their loved ones drown.

Farmers saw their standing crops rice and cotton destroyed. People saw their homes washed away. Our brothers and sisters had to spend days in fear and nights under open skies. Bridges, roads, railways, dams, power plants, factories, refineries, irrigations systems, schools, hospitals and other infrastructure were impacted. Entire towns like Nowshera, Charsaddah, Muzagfargarh, Rajanpur, Jacobabad, Khairpur Nathan Shah and Qambar, Shadadkot and Jafferabad and Dera Allahyar were submerged or cut off for weeks.

Once the waters had receded only then could the economic toll be calculated: 20 million people affected; 1.6 million homes damaged; two million hectares of standing crops destroyed; 300,000 cattle lost; 25,000 km of roads destroyed; inflation increased due to disruption of supplies while revenue collection suffered.

The overall assessment of damage stood at $10 billion or Rs850 billion and GDP growth reduced by two percent. The requirements of looking after the flood affected, allocations for their support and rehabilitation, resulted in additional fiscal strain on the government and the macro-economic framework had to be adjusted.

While the floods caused us grave economic hardship…and the effects will be felt for a long time…. they also showed the true character, resilience, dignity, generosity and strength of our people. Many in the international community helped us both through the UN and through bilateral support. These included the US, Japan, UK, China, Saudi Arabia, Turkey, UAE and others. We are thankful to all of them. I would like to pay a special tribute to the First Lady of Turkey who donated her personal necklace to be auctioned to help our brothers and sisters.

While others helped, the big story of the Floods is that Pakistanis helped Pakistanis. They opened their homes and their hearts for their brothers and sisters.

The government, its organisations like the armed services, the NDMA, elected representatives and above all the civil society rose to the occasion and we again became a nation united, both, in sharing of the pain and in sharing of our generosity. Let us pay a tribute to those who reached out. Let us also pay a tribute to overseas Pakistanis, from Oslo to Jeddah and from Houston to Abu Dhabi for their support. Above all let us recognize whose hearts were there for their fellow countrymen. Above all let us honour the resilience, the strength and the grace of the people of Pakistan who have suffered this calamity. We salute you.

We will not forget your suffering. And we will do whatever we can to alleviate your suffering and bring you back into the economic mainstream.

The government tried to deal with the floods at various levels. A program of Cash Compensation was launched for giving Rs160 billion. In the first phase Rs32 billion have been disbursed. Farmers have been given subsidized credit and fertilizer and seeds. The cost of this package is Rs8 billion. Hundreds of billions of rupees are being allocated for the rehabilitation and development of flood affected infrastructure.

The second factor which impacted us seriously was the unexpected increase in the international price of oil. As you know, dependence on imported oil is a great source of vulnerability and threat to our economy. The price of oil is affected by the increase in the demand from the fast growing economies of Asia, the matters of psychology and speculation, and of course the uncertainty and disruption of supplies from the recent developments in the oil producing Middle East.

When our last year’s budget was prepared the price of oil was expected to be in the range of 70-75 dollars per barrel.

However, the prices rose to $125 per barrel during the year.

The high price of oil pushed up prices of many products, caused hardship to our citizens and severely impacted the supply of electricity and threatened the stability of the economy. The government tried its best to keep prices low for less privileged income groups. The government even sacrificed more than Rs50 billion of its own in the process.

Unfortunately, there is no good way to subsidize only the needy. The rich benefit from the subsidy as well. Thus, while the government loses money the benefit is enjoyed not only by the poor users of public transport but also by the rich owners of luxury cars. This is not a fair system. We must show courage and move away from such general subsidies to subsidies only for the deserving. I will say more on this subject later in my speech.

The third factor which continued to affect us adversely was security. We live in a difficult neighbourhood. We are faced with threats to our country’s security. We remain engaged in a struggle for the safety of our citizens.

We are the victims of war and terrorism. We have paid a heavy price. 5,000 of our jawans have embraced martyrdom and 30,000 of our citizens have lost their lives.

Even women and children have not been spared. Our towns, villages and bazaars have been bombed. Our schools and hospitals have been targeted. Our FC academy, our Intelligence offices, our police stations, our navy installations and even our GHQ has been attacked. Even our mosques and the shrines of Bari Imam, Data Darbar and, Abdullah Shah Ghazi have not been spared. I want to pay a tribute Madam Speaker to our armed forces, to our paramilitary, to our police and above all to our citizens. I want them to know that the nation is with you. That we salute you. And that in these difficult times we have to stand united.

This security situation has grave consequences for our economy and the welfare of our people. It affects our perceptions. It affects our business environment. It affects our investment flows. It affects the growth of our economy. And ultimately it affects the welfare of our people.

Our government responded to these challenges by:
• Deepening our austerity measures through another round of expenditure cuts amounting to Rs20 billion, banning of fresh recruitment and reducing petrol allowances of senior government officials.

• Pruning of expenditures through a Rs100 billion cut in development expenditures, while preserving regional balance and early completion of projects.

• Further limiting un-targeted subsidies
• Pushing for public sector enterprise reform especially in the area of energy (I will say more about that later)
• In keeping with our objective to strengthen resource mobilisation we took several revenue actions:

• While we could not enact the RGST law because political consensus eluded us, our resolve to expand the resource envelope was not weakened. Exemptions and zero ratings in our sales tax system were removed.

• Establishment of an automated refund system
• Levied one-off additional taxes to meet the requirement of our citizens affected by floods. Measures for this effort were (i) a small surcharge on income tax liabilities and (ii) raising the special excise duty by 1.5pc.

• We also worked on administrative reform at FBR reform (I will dwell on this later) which has started to yield results and the targets for revenue collection are being achieved.

As we begin the new fiscal year, I am confident that the difficulties we have faced in the last three years are moderating. There are signs of recovery.

Most notably, during the year, our exports have shown an unprecedented growth of 28pc in the first ten months of the fiscal year. Similarly, remittances are likely to cross the double digit mark at $11.2 billion, which is again historic.

Remittances have crossed the one billion mark in each of the last three months — another record. I can also report that we will have a surplus in the current account of balance of payments at the end of this year. Owing to these positive factors, the country has accumulated historic reserves of $17.3 billion and the rupee has displayed stability.

Rural areas have benefited from our policies. Due to the historic decision of our government to ensure higher commodity prices to our farmers, Rs400 billion have been injected into our rural economy, which in turn has increased the production of agricultural commodities and the demand for durable goods in the economy has helped revive industrial production and brought prosperity.

However, there should be no mistake that our challenges remain daunting and there is little room for complacency.

Challenges and vision
To put the economy on a stable and desirable long term growth trajectory, several persistent challenges must be addressed NOW! We as a country:

• have struggled with chronic fiscal difficulties for the last 25 years leading us to have worked a number of times under the IMF Programme.

• our growth rate has been less than what was needed to meet our development needs.

• lack a long term focus and consistency in our economic policies to give investors and entrepreneurs a stable enabling environment.

• have public sector enterprises that continue to drain the budget and block market opportunities.

• have regulatory and governance structures that do not encourage investment and the development of competitive markets.
Democracy must be bold enough to take on these challenges, I urge my colleagues to come to grips with these challenges. We must deliver development to the people of our society while reducing our aid dependence.

We have a young population- 50pc of our population is under the age of 20, labour force is growing at 3.6pc per annum. To employ the youth entering the labour force, we need a growth rate of 7pc per annum and more importantly we must be able to sustain this growth rate for a decade or more. Unfortunately we have never been able to sustain a growth rate of more than 6pc for more than three years. Moreover, our productivity growth rate is also far lower than comparator countries. We need to address these issues and begin a period of sustained high growth.

Growth Strategy
We will make “jobs and growth” a national priority!
By factoring in our local conditions and after extensive engagement with various stakeholders we have developed strategies to stimulate growth in the economy. The government tasked the Planning Commission to develop a New Growth framework to address the constraints to investment, productivity and competitiveness. Even in this resource constraint environment where the PSDP is limited, we estimate that a sustained implementation of reform strategy could increase our growth rate by as much as three percentage points per annum.

While our development program will continue to build infrastructure (and I will talk about that later), let me highlight some aspects of our “jobs and growth” strategy:

• We must make productivity measurement and improvement a priority everywhere. To begin with governance reforms will be developed to put in place performance based and professional management focused on public sector service delivery.
• Public Sector Enterprise (PSE) Reforms and selected privatisation will not only improve public sector productivity but will also provide more space for private sector investment.

• More focused and professional regulation along with openness will seek to develop vibrant markets to attract private investment.

• We will configure our cities through better management and liberalized building and zoning regulations to unleash the potential of several industries including construction, retail, ware housing, entertainment, hospitality, transport etc.

• Youth will be engaged and included in every aspect of our economy. We hope to unleash the potential of youth entrepreneurship in several of our new creative cities.

This is a large reform agenda, but one whose time has come. The challenge is to work with the various ministries and provincial and local governments to operationalise and implement this agenda. If we are able to implement this reform agenda well not only will we be able to accelerate our growth to 7pc, we will extend gainful opportunities to a large segment of our youth. This is long overdue!

Budget Strategy 2011-12
We will strengthen our stabilisation efforts this year. 15

• We hope to reduce the fiscal deficit further.

• We hope to reduce our rate of inflation to single digit levels through continued fiscal consolidation.

• Develop a broad, equitable and stable revenue mobilisation system to meet our development needs.

• Maintain and further develop social safety nets for the vulnerable while moving rapidly towards the elimination of untargeted subsidies.

• Strengthen restructuring of the loss making public sector enterprises where possible. We must also find the courage to close down or privatize where required.

• Invest through our public sector development program in vital infrastructure and much needed human resource development.

• Reduce our debt to sustainable levels, well below the required 60pc of the Fiscal Responsibility and Debt Limitation Act (FRDL). 32. To meet these objectives Madam Speaker, we are continuing to reduce the fiscal deficit towards a long run target of 3pc of GDP. Recall that last year the deficit was 6.3pc of GDP. As I noted before, this year, despite large and unprecedented floods, substantial unprecedented increase in oil prices and large increase in food prices, our efforts have achieved a fiscal deficit of 5.1pc of GDP.

The budget of 2011-12, Madam Speaker, will target a budget deficit of 4pc of GDP. This target will allow us to achieve some debt reduction since our deficit this year is going to be less than our requirement for debt servicing.

We hear the complaints of the people and therefore are strongly committed to reducing the rate of inflation. We have already committed to discontinue borrowing from the State Bank through an amendment of the State Bank Act which this House judiciously passed. We will also eliminate our debt to the State bank within a period of eight years. Through these efforts, like other prudent countries, we have ended the period of fiscal policy dominating monetary policy.

Meanwhile, we are also taking several administrative measures for easing the burden of inflation on the people.

i. We have intervened in commodity markets such as wheat and sugar to ensure stable supplies at affordable prices.

ii. At times such as Ramadan, generous packages for the vulnerable have been made available
iii. Our 7,000 plus Utility Stores as well as Sunday and Friday bazaars have provided crucial supplies at favourable prices to many

iv. Many levels of government have collaborated to monitor supplies and prices to prevent hoarding, shortages and excessive price increases

v. The government gave hundreds of billions to energy sector as subsidies vi. The government reduced its borrowing from the State Bank through strict controls on spending to reduce inflation.

Energy Reforms
I must emphasize that without eliminating our untargeted subsidies, budgetary control will be impossible. In particular, our power system must operate efficiently and cost effectively without subsidy and ensure full cost recovery. The taxpayer must not pay for the management inefficiencies of these entities.

The government has subsidized power sector losses of over Rs1,000 billion in the last three years to ensure a lower tariff to consumers. The government has taken various steps to reduce inter corporate circular debt including picking up of Rs400 billion, improving Pepco’s receivables and creating efficiency to reduce the difference between determined and notified tariff. In addition, the government has initiated conservation programmes to create efficiency in the use of energy to control demand.

The government is taking steps to improve regulatory oversight by empowering NEPRA to notify monthly fuel adjustments in tariff directly. NEPRA will also be professionally upgraded to manage and regulate the power sector more effectively following Pepco’s dissolution in July, 2011.

This government has added over 2000 MW of electricity generation and another 1400 MW are being added in this year.

It must be recognized that reform will only be complete when we have DISCOs and GENCOs that are professionally run as independent corporate entities, controlling their losses, collecting their bills, and earning the trust of their consumers. We have made a start in that direction, thanks to our leadership. The Prime Minister has put in place professional Boards of Directors to begin the process of corporate restructuring. In addition the Cabinet Committee on Restructuring has approved codes of Conduct for the BODs, and rules for inducting CEOs and CFOs. There are plans to bring the private sector to manage these electricity companies.

PSE Reform
Public Sector Enterprise inefficiency is choking our economy. These must be urgently restructured. Our Cabinet Committee on Restructuring has developed a restructuring model based on a professional Boards of Directors and by inducting professional management from the market.

Some progress has been achieved including restructuring BODs of 8 Power Sector Distribution Companies (DISCOs), National Transmission and Dispatch Company (NTDC), Pakistan Steel Mills (PSM) and Pakistan Railways.

Turn around plans for power sector and PSM are under implementation and consequently haemorrhaging has been curtailed in these PSEs.

We need to strongly push this reform forward in the next year. The restructuring of PIA, PASSCO, USC and TCP is also underway. This is essential to reduce the burden on the budget and improve public service delivery.In addition to our restructuring efforts, the Cabinet Committee on privatisation has also identified several public sector enterprises listing on stock market and privatisation in the Public Private Partnership (PPP) mode. Given our fiscal problems, resources from the listings, a public offering and PPP privatisations of enterprises such as State Life, National Insurance, Steel Mill, PIA, PSO, PPL and OGDCL could help provide much needed funds for development and other important needs. In addition, these initiatives could invigorate our markets and spark interests of the international investors in Pakistan. Madam Speaker, many countries have involved the private sector to grow their economy. We should also!

Social Protection
Even in these difficult times we have remained committed to the ideals of Shaheed Zulifiqar Ali Bhutto and Shaheed Mohtarma Benazir Bhutto, and provided for the poor, the weak and the vulnerable. Our Benazir Income Support Program (BISP) has received acclaim from our development


Text of budget speech 2011-12:
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