Wednesday, June 9, 2010

Pakistan's Budget 2010-2011 Priorities

Guest Post by Dr. Ashfaque H. Khan, Dean of NUST Business School, Islamabad.

Abdul Hafeez Shaikh, the newly-appointed finance minister, presented his first and the government’s third federal budget in the National Assembly on June 5, 2010. Budget 2010-11 is the first budget under the new National Finance Commission Award and as such it posed difficulties far many analysts, experts, trade bodies and other segments of our society in understanding the budget.

The varieties of comments made in the print and the electronic media on the budget reflect such misunderstandings. One such misunderstanding deals with the size of the allocations made to the health and educational sectors.



Dr Shaikh’s budget speech was unconventional in several respects. Firstly, more than half of the speech was extempore, reflecting his confidence in the budget. No finance minister has ever moved an inch away from the written text of the budget speech. Secondly, Dr Shaikh gave an Economics 101 lecture to his fellow parliamentarians, particularly explaining inflation, the burden of public debt and the crowding out phenomenon.

Thirdly, he was upright in acknowledging the many failures of his government in the last two years and expressed his resolve to address the challenges. Fourthly, he was extremely critical about the performance of the Public Sector Enterprises (PSEs) and the damage they have caused to the economy. In so doing, he indirectly criticised his own government in treating these enterprises as sources of unproductive employment.

Fifthly, he bitterly criticized his predecessor for “indiscriminate borrowing” and doubling public debt in a short period of time. This requires courage to call spade a spade. I am glad that I was not the only person to have expressed concerns on such indiscriminate borrowings and the rising debt burden.

Budget 2010-11 has been presented with a view to setting new directions for a responsible economic and fiscal management. This budget is a major departure from the last two budgets as it aims to make concerted efforts to address the prevailing economic challenges.



Pakistan’s current economic challenges include: declining investments and slower economic growth; rising unemployment and poverty; persisting double-digit inflation; unsustaining debt burden; depreciating exchange rate; power mismanagement; and waning confidence of the private sector.

The first and foremost principle in addressing the challenges listed above is to stabilize the economy. Macroeconomic stability is the pre-condition to generate growth momentum. Stabilization is therefore the main objective of the Budget 2010-11. Through this budget, the government intends to reduce inflation which is the best relief that it can provide to the poor people of this country. Targeting budget deficit at 4.0 per cent of GDP represents the government’s resolve in reducing “twin” deficits (budget and current account) and bring debt situation under control.

Reduction in deficits and burden of debt would release pressure on interest rates which will allow the SBP to reduce the discount rate, generate growth momentum and create productive employment opportunities.

While stabilizing the economy through the budget the government has not forgotten the poor and the fixed income group. The allocation to the Benazir Income Support Program has been increased from Rs46 billion to Rs50 billion, hence benefiting four million families. This is a targeted cash transfer program for the poor alone to minimize their difficulties caused by higher inflation in general and food prices in particular.

The budget also talks about the exit strategy of the beneficiaries of the BISP in line with the international best practices. The salary of the government servants has been increased (50 per cent) beyond their expectations. The pensioner has also not been forgotten as he would see it rising by 15-20 per cent. These were the human face of the budget.

The budget also acknowledges the dominant role of the private sector in promoting growth and creating employment opportunities. The role of the government should only be restricted to creating conducive environment for the private sector through right policies and investment in physical and human infrastructure. Currently the government is actively involved in several public sector enterprises such as PEPCO, PIA, Railways, Pakistan Steel, PASSCO, TCP, NHA, Utility Stores etc.

These PSEs are inefficient and poorly managed and are a burden to the national exchequer. Can a poor country like Pakistan afford to pay Rs245 billion from the budget to keep them afloat? The answer is obviously no.

Dr Shaikh has committed himself to restructure these eight PSEs in 2010-11 and make them financially solvent as part of the reform agenda. History around the world has shown that such PSEs cannot be made financially solvent through restructuring.

The only solution is to bring them on privatization mode and sell them to the private sector even if we get a single rupee. At least it will save Rs245 billion of the national exchequer which can be diverted to the development program. It is sad that Dr Shaikh did not talk about privatization of these PSEs and did not put any amount under privatization proceeds in the budget. Do we sill need ministry of privatization?

Dr Shaikh and his team should be congratulated for presenting a sound budget in a most difficult and challenging time. This budget is fully consistent with my thoughts which have appeared in this column. This was the only way forward to address the current economic challenges. This budget is not a populist budget but a realistic one.

Budget 2010-11 can be termed as stabilization budget with human face and reform agenda. Mr Prime Minister! Your economic team has presented a sound budget. It would need your support in executing and achieving the revenue, expenditure and budget deficit targets. These targets, though ambitious, are yet achievable, provided the provincial governments and yourself keep supporting Dr Shaikh and his team.

Note By Riaz Haq: Here are some of the highlights of Pakistan Economic Survey 2009-2010 released by Ministry of Finance:

* Gross domestic product (GDP) was at 4.1 percent as compared with 1.1 percent of the previous fiscal year.
* Inflation is less severe as compared to last year’s 22 percent but is still in double digits at 11.5 percent.
* Current account deficit is expected to decline to below three per cent of Gross Domestic Product during the outgoing fiscal year.
* External current account deficit was contained to 5.6 % of GDP (US dollars 9.3 billion) in fiscal 2008-09, from a high of 8.3 % of GDP in 2007-08 (US dollars 13.9 billion)
* Economic growth in 2009-10 is provisionally estimated at 4.1 %, higher than the targeted growth of 3.3% percent.
* The fiscal deficit was slashed to 5.2 % of GDP in financial year 2008-09, from 7.6 % of GDP in 2007-08, a fiscal adjustment of 2.4 % of GDP.
* Foreign Exchange Reserves have been rebuilt to nearly dollars 16 billion, from their low of under dollar 6 billion in October 2008.
* International credit rating agencies upgraded Pakistan from CCC plus to B Minus by S&P, while Moody’s revised its outlook to Stable.
* Manufacturing Sector posted a positive growth of 5.2 % during the current fiscal year.
* 44 % of population has access to sanitation, while 65 % to clean water.
* Pakistan has become the largest user of Compressed Natural Gas (CNG) in the world, as per the statistics issued by International Association of National Gas Vehicles on CNG. Presently, 3105 CNG stations are operating in the country and 2.4 million vehicles are using CNG as fuel.
* Literacy Rate has improved from 56% to 57%. Literacy rate in Punjab is (59 %), Sindh, (59%), Khyber Pakhtunkhwa (50%) and Balochistan at (45%).
* Social protection measures were expanded from around Rs 8 billion two years ago to around Rs 80 billion this year.

Related Links:

Pakistan Budget 2010-2011 in Brief

Pakistan's Economic Performance 2008-2010

Incompetence Worse Than Corruption in Pakistan

Pakistan's Circular Debt and Load Shedding

US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance

India Pakistan Contrasted 2010

Pakistan's Foreign Visitors Pleasantly Surprised

After Partition: India, Pakistan and Bangladesh

The "Poor" Neighbor by William Dalrymple

Pakistan's Modern Infrastructure

Video: Who Says Pakistan Is a Failed State?

India Worse Than Pakistan, Bangladesh on Nutrition

UNDP Reports Pakistan Poverty Declined to 17 Percent

Pakistan's Choice: Talibanization or Globalization

Pakistan's Financial Services Sector

Pakistan's Decade 1999-2009

South Asia Slipping in Human Development

Asia Gains in Top Asian Universities

BSE-Key Statistics

Pakistan's Multi-Billion Dollar IT Industry

India-Pakistan Military Comparison

Food, Clothing and Shelter in India and Pakistan

Pakistan Energy Crisis

IMF-Pakistan Memorandum of Economic and Financial Policies

18 comments:

Riaz Haq said...

Here is Soutik Biswas of the BBC on India's vast bureaucracy:

Like the UK and other countries, India hires it civil service recruits through competitive examinations. But its bureaucrats also face being moved around much more frequently than elsewhere. At least half of those working for the Indian Administrative Service - the country's fabled "steel frame" - spend less than a year in a single position, studies have found.

They can also end up working for India's vast number of state-run factories, hotels and airlines without much experience. So an official administering a small north-eastern state ends up running an ailing airline or a senior policeman can head up a liquor company. Most state-run companies - Air India is a good example - are poorly run, critics say, and perpetually in the red.

Bureaucrats are also hobbled by interference as politicians promote, demote or transfer them at will. There is corruption among a section of officers. Few alternate between state and federal governments, leading to accusations of provincialism in the ranks. More worryingly, some officers are perceived as champions of their religious or caste-based communities and act as "protectors" of their group's interests.

India has a range of forward-looking policies but a poor record on implementing them - for which many say bureaucrats must take a major share of the blame.

It's not as if those in charge are blind to the need for civil service reform: I have counted nearly three dozen reports and committees set up by the government since 1947 to streamline and modernise the bureaucracy. "There is growing concern that our civil services and administration in general have become wooden, inflexible, self-perpetuating and inward-looking," said one government paper.

The question is why does a bureaucracy which does a fine job in some areas - rehabilitating tsunami victims, managing millions at religious festivals, conducting the world's biggest elections - struggle to conduct day-to-day affairs of the state smoothly?

The answer may be simple. India's bureaucrats need to be insulated from political influence, observers say. They deserve transparent appointments and promotions and fixed tenures. The civil service needs a code of ethics. But most important, as one analyst says, is the need to develop a "climate of probity in public life".


Many of these observations apply to Pakistani bureaucracy as well.

Anonymous said...

India's bureaucracy is advanced enough for a third world country.There are deficit areas mostly in poor states but the framework of the bureaucracy is pretty well suited for a large backward country like India.
It is basically the reason there is a unified country called India.

The main thing to remember is prior to ~2004 there has always been an acute shortage of funds to operationally implement projects sanctioned by the centre at the grassroots level.Now that we are fiscally solvent we are trying to modernize the bureacratic system by imparting training to bureaucrats at various IIMs etc as well as government training institutes.Its a slow process to modernize a bureaucracy the size of Indis's and optimistically will take atleast 10 more years to overhaul the whole thing.But the signs are encouraging.

Riaz Haq said...

Here's Ahmad Rahid's take published by BBC on Pakistan budget priorities for 2010-2011:

When the $38bn annual budget was announced in parliament on 5 June, legislators sat up when it was announced that defence spending would be $5.2bn for 2010-11 - a rise of 17% compared to last year or 13.7% of the total budget.

Even more shocking news came a few days later when Saqib Shirani, principal economic adviser to the government, corrected that figure to say that actual defence spending for 2010-11 would be $7.9bn, a 30% rise compared to last year and 21% of the total budget.

The government did not disclose how it accounted for some $1.3bn received over the past year in Coalition Support Funds (CSF) by the US administration for fighting "terrorism".

With 28% of the budget being reserved this year for servicing Pakistan's huge external debt of $54bn, nearly 60% of the budget is taken up by just two items - defence spending and debt servicing.

Almost the entire development budget of $9.2bn will be provided by outside donors.

Meanwhile the country spends just 2% of Gross Domestic Product (GDP) on education, despite the fact that average literacy is only 57%. Even the army admits that the lack of education is fuelling militancy.

However with the economy in a downward spiral and the government facing an internal funding crisis in the months ahead, Islamabad has begun to threaten the US.

Retired Lt Gen Syed Akthar Ali told parliament that the US government had for two years willfully withheld billions of dollars of CSF that were owed to Pakistan.

''The time that we have to rethink our security priorities about external threats is approaching,'' Mr Ali warned recently.

"We will stop operations (in Fata) and go back to the eastern borders,'' he added threateningly.

However he admitted that in the past six months the US had released $1.3bn in CSF arrears, but was still holding back payments of $1bn.

Prime Minister Yousuf Raza Gilani was equally blunt when he told visiting Richard Holbrooke, US special envoy for Pakistan and Afghanistan, that ''time is running out fast, public support can only be kept intact if the international community start delivering on their pledges.''

At a conference in Tokyo a year ago, major donors who make up the "Friends of Pakistan" pledged $5bn in aid, but so far few pledges have been honoured except by the US.

''There is grand disillusionment amongst the Europeans for Pakistan's refusal to address our concerns - transparency about aid funds, improving governance, using aid money to build up defences against India rather than fighting terrorism and its lack of concern for minorities,'' a senior European diplomat said.

Mr Gilani's recent trip to the European Union (EU) in Brussels, following the brutal killing of 90 Ahmedis in Lahore by militants was a public relations disaster, with the EU bluntly refusing to fund Pakistan unless it improved its governance record.

Yet even as Pakistani leaders cajole the West for more money and warn of an impending economic collapse, the army insists that the world must recognise Pakistan as a full blown nuclear power.

Riaz Haq said...

India's Debt-GDP ratio is worse than Pakistan's.

Here are excerpts from an interview with US investor Jim Rogers published in Forbes March 2010 issue.

After all the budget euphoria, it is time for a reality check. Investor and venture capitalist Jim Rogers remains deeply skeptical of India's future. In an interview with S. Srinivasan, he argues that the country is sitting on a fiscal time bomb.

Some specific global lessons or examples that India can adopt from other countries such as China?
Open your borders to foreign capital and brains. For example, foreigners cannot enter retailing in India, but Wal-Mart, etc. are all over China. Your politicians close down free commodity markets every time prices rise as if the markets were making the prices rise!

Farmers can own only very, very small farms, so India cannot compete on the world stage, yet India should be one of the great agriculture nations of the world.

What will it take to get you to invest in India?
Some sense of 21st-century reality. Open the economy [in areas] such as retailing, energy, agriculture, etc. Make the currency fully convertible.

What are the lost opportunities in the budget, according to you?
The same things I just mentioned. Likewise why not start reducing the gigantic debt if things really “are getting better,” as he claims?

You have watched India for a long time. Where do you think the country will go from here?
Continue muddling along until the reality of the huge debt-to-GNP [ratio] hits home and stops things.

Riaz Haq said...

Here's a Dawn report on Pakistan risking IMF support by failing to raise taxes:

KARACHI: A delay in implementing a new sales tax in Pakistan after October may disrupt the delivery of vital assistance from the International Monetary Fund (IMF), finance officials and analysts said on Wednesday.

Pakistan was due to implement a value-added tax (VAT) or a reformed general sales tax of 15 per cent by July 1, but the 2010/2011 budget deferred imposition of the tax until Oct. 1 because of a failure to reach consensus among provinces.

Analysts said a delay in the latest billion-dollar tranche of funds from the IMF might cause a ripple effect on aid from other other multilateral agencies and donors.

“Failure to introduce the VAT would almost certainly jeopardise Pakistan's access to the remaining $4 billion under the IMF stand-by loan and $300 million under the World Bank,” Maria Kuusisto, Asia analyst at the London-based political risk research firm Eurasia Group, wrote in a note.

It could also keep Pakistan from extending the IMF loan beyond December 2010, she wrote.

Failure to impose the tax would be “serious business”, a Pakistani economist familiar with the situation said.

“No money will come from the World Bank or the Asian Development Bank either, and Pakistan will have a serious financing problem for their budget deficit,” he told Reuters.

The IMF and Pakistan are having talks and the programme is not in danger, said Asif Bajwa, special secretary at the Ministry of Finance. But the IMF itself is concerned.

“The delay in introducing the VAT could delay disbursements under the IMF program. We hope the VAT can be introduced soon so the IMF can move ahead with program reviews and disbursements,” IMF country representative Paul Ross told Reuters via email.

The IMF is due to meet in August to review Pakistan's progress against targets for the end of June before approving the next tranche, likely to be $1.1 billion to $1.2 billion.

On the brink of default, Pakistan turned to the IMF in November 2008 for a $10.66 billion loan package to help put its economy back on track. It received the fifth tranche of $1.13 billion last month.

In an effort to meet IMF conditions, the 2010/11 budget raised taxes on sectors like capital gains, increased a sales tax and slashed some food and energy subsidies. Pakistan's tax-to-GDP ratio of around 9.5 per cent is one of the world's lowest.

Cutting the deficit, targeted at 4 per cent of GDP for fiscal year 2010/11, is key but poses a serious inflation risk and could hurt the economy just as it tentatively recovers from its lowest growth rate in decades. Last year's deficit was 5.1 per cent.

“The tax collection target is grossly over-ambitious,” Ashfaque Hasan Khan, dean of Islamabad's NUST Business School, said when the budget was released earlier this month.

Riaz Haq said...

"America’s economy is set to shift away from consumption and debt and towards exports and saving", says a story in the Economist magazine. Here are some excerpts:

STEVE HILTON remembers months of despair after the collapse of Lehman Brothers in 2008. Customers rushed to the sales offices of Meritage Homes, the property firm Mr Hilton runs, not to buy houses but to cancel contracts they had already signed. “I thought for a moment the world was coming to an end,” he recalls.

In the following months Mr Hilton stepped up efforts to save his company. He gave up options to buy thousands of lots that the firm had snapped up across Arizona, Florida, Nevada and California during the boom, taking massive losses. He eventually laid off three-quarters of its 2,300 employees. He also had its houses completely redesigned to cut construction cost almost in half: simpler roofs, standardised window sizes, fewer options. Gone were the 12-foot ceilings, sweeping staircases and granite countertops everyone wanted when money was free. Meritage is now catering to the only customers able to get credit: first-time buyers with federally guaranteed loans. It is clawing its way back to health as a leaner, humbler company.

The same could be said for America. Virtually every industry has shed jobs in the past two years, but those that cater mostly to consumers have suffered most. Employment in residential construction and carmaking is down by almost a third, in retailing and banking by 8%. As the economy recovers, some of those jobs will come back, but many of them will not, because this was no ordinary recession. The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return.

America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky.

The crisis and then the recession put an abrupt end to the old economic model. Despite a small rebound recently, house prices have fallen by 29% and share prices by a similar amount since their peak. Households’ wealth has shrunk by $12 trillion, or 18%, since 2007. As a share of disposable income it is back to its level in 1995. And if consumers feel less rich, they are less inclined to spend. Banks are also less willing to lend: they have tightened loan standards, with a push from regulators who now wish they had taken a dimmer view of exotic mortgages and lax lending during the boom.

Riaz Haq said...

IMF's Dominique Strauss-Kahn has indicated approval of Pakistan's progress on economy, according to the following story from Dawn:

WASHINGTON: The head of the International Monetary Fund on Monday praised Pakistan's commitment to an 11.3 billion-dollar rescue package, despite a delay in setting up a nationwide tax.

IMF managing director Dominique Strauss-Kahn said that while Pakistan could not be considered a “normal country” in light of its wave of violence, the government has made a “good step forward” on economic reforms.

“There is a lot of concern but no real problem. I think they are going ahead rightly,” Strauss-Kahn said in a group interview. The Washington-based international lender approved the latest 1.13 billion dollars of the package in May and allowed two waivers on conditions, including giving the government the right to overrun the budget deficit.

As part of the IMF bailout, Pakistan agreed to impose a nationwide value-added tax to bolster government coffers and drum up badly needed funding to fight poverty.

But Pakistani leaders are squabbling over how to set up the tax. Some Pakistanis have voiced fear that the delay could lead to a cut-off in IMF support.

Strauss-Kahn acknowledged the IMF had “questions” about the tax and energy prices, but added: “I must say that a lot already has been delivered by the government.”

Another concern, Strauss-Kahn said, was to ensure that donor nations, informally grouped as the “Friends of Pakistan”, follow through with pledges.

“The question is... does the so-called Friend of Pakistan set of countries... really deliver and provide the resources, because all the resources needed are not supposed to come from the IMF,” he said.

Donors met in April 2009 in Tokyo and pledged 5.28 billion dollars to help stabilize Pakistan, which is the Islamic world's only declared nuclear weapons state and lies on the frontline of the US-led war on extremists in Afghanistan.

The US Congress last year approved a five-year, 7.5 billion-dollar plan to build roads, schools and democratic institutions in Pakistan. -AFP

Riaz Haq said...

Here's a piece from Daily Times on Pakistan's fiscal crisis:

KARACHI: The foreign loans obtained by the government reached 55 percent of the gross domestic product (GDP) and any new loan will put Pakistan on the list of mortgage states.

Public Accounts Committee (PAC) Special Committee on Budget Analysis Chairman Chaudhry Nisar Ali Khan, who is also head of PAC, expressed concerns over the grave situation Tuesday.

The PAC of the National Assembly will take serious views of the budget 2010-11 and foreign loans position today (Wednesday).

According to the government’s GDP rules and regulations, the government cannot surpass GDP’s 60 percent limit of taking foreign loans, as the present situation is already alarming.

Around 70 percent of the annual budget is being spent on defence, (Rs 675 billion) and Rs 683 billion on retiring foreign loans and interest, he added.

The federal government under National Finance Commission Award has to give 55 percent to 57 percent of the Rs 1 trillion towards the provinces’ share.

Punjab will get 47 percent share, Sindh partaking stands at 45 percent, Balochistan at 139 percent and Khyber Pakhtunkhwa 88 percent.

The PAC committee members including PPP MNA Raheela Qaimkhani, PML-Q MNA Waqas Akram, PML-N MNA Ramzan Masila, Jamat-e-Islami Senator Fareed Piracha and MQM Senator Dr Abdul Haq will discuss in length the budget 2010-11 allocations on major heads, implications of new taxation on the direction of International Monetary Fund (IMF) and World Bank and share of major sector in GDP.

The PAC members special committee on budget analysis will also deliver their expert opinions and suggestions to the government to save the country from plunging into the list of mortgage states.

It is a matter of concern that the budget deficit 2010-11 is Rs 680 billion and the government has already planned to levy tax on public utilities, which are already running on the higher side.

The government will fetch over Rs 46 billion from sales tax, billions of rupees from withholding tax, billions from surcharge on cigarette and curtailing 30 percent budget allocated for public welfare development projects in the country.

The government was unable to meet the condition of restricting the gap between its income and expenditure to under Rs 769 billion or 5.1 percent of the GDP. Pakistan has ended up with a budget deficit of 6.2 percent.

Commenting on the situation, Sindh Agriculture Forum senior member Shakeel Ahmad said the country’s foreign debt stood at Rs 3,000 billion and in only two years 2008-09 alone, it swelled to Rs 9,400 billion.

He said country’s export target is $20 billion while imports will stand $32 billion with a gap of $12 billion. Under such industrial and commercial activities, the country will not reach the export target, he added.

The IMF wanted Pakistan to raise tax revenue from the present 10 percent of GDP to 15 percent by 2013, which is peril for our economy, Ahmad maintained.

The IMF has already indicated that the conditions for release of the last tranche of $1.85 billion bailout package for Pakistan will be tougher.

The IMF would ask Pakistan to meet its conditions for levying tax on the agriculture sector, enhance energy price and ensure implementation of value-added tax (VAT) (new form of general sales tax) by October 2010.

He demanded of the President Asif Ali Zardari and PAC to inform the nation about the fact-findings, as the nation has great concern about the fate of the country.

Finance Minister Abdul Hafeez Shaikh and State Bank of Pakistan Acting Governor Yaseen Anwar along with a team are holding a meeting with the IMF officials in Washington on August 5 to pave way for the release of over $1.8 billion, the second last tranche of the $11.4 billion bailout package.

Riaz Haq said...

Pakistan's top tax man paints gloomy picture of economy, reports The News:

KARACHI: Chairman of the Federal Board of Revenue Salman Sidiqqui has said that the government cannot provide a bailout to the industrial sector as the regime is facing an unannounced economic emergency.

He stated this while addressing a ceremony under the aegis of the Karachi Chamber of Commerce and Industry here on Saturday.

Talking to the media on the occasion, the FBR chairman said that the government was trying to curtail loans to control inflation.

The current amount of loans stands at Rs140 billion not 500 billion rupees, he added.

He said in the first phase, the Islamabad Electric Supply Company (Iesco) would be privatised, adding that the economic sector was facing a crisis and the government could not meet its expenditures.

He questioned how it could be possible to provide resources to the business community in these circumstances.

The FBR chairman pointed out that no one would come forward from abroad to provide a bailout package for the restoration of the economy.

"We should resolve our problems and every citizen should be brought into the tax net," he added.

The FBR chairman suggested that a ban had to be imposed on the government from borrowing from the State Bank.

Policymaking is not the responsibility of the FBR but its function is its implementation.

He advised tax defaulters to contact the actual department for the solution of their problems. The FBR is working for the welfare of various departments.

It is not difficult to overcome the issue of economic deficit through local resources, he underlined.

To a question, he said that the economic downfall started after the government borrowed loans from banks.

Salman Sadiqqui urged businessmen not to attach any expectations to the government as it was facing economic problems.

He suggested traders should set up representatives of the business community for the solution of their problems regarding tax.

On this occasion, a KCCI member, Qasim Teli, said that traders were facing several problems about tax, adding that the traders wanted to pay tax but the policy of the government should be clear in this regard.

The government should improve the tax system. He demanded an end to corruption in the FBR.

Referring to various complaints on export refund claims, the FBR chairman said that a committee of the KCCI should be formed by the chamber office-bearers, who could help the board in resolving the claims of exporters.

"I assure you that all the refund claims will be made expeditiously as compared to the past and non official malpractices will be tolerated," he added.

The FBR chief said that the Board's Revenue Advisory Council will be asked to have a working relationship with the KCCI and further gave an assurance to the business community members that functions of the FBR will be restructured after consultation with the members of the chamber.

Riaz Haq said...

The Afghan transit trade (ATT) through Pakistan has long been exploited as a way to smuggle goods into Pakistan without paying import duties. Now the Supremen Court is looking into the dusappearance in Pakistan of containers addressed to Afghanistan, accordin to The News:

ISLAMABAD: The Federal Board of Revenue (FBR) chairman Salman Siddique submitted in the Supreme Court on Thursday a list of 58 officials who held positions from January 01, 2007 to December24, 2010, when the national exchequer suffered a whooping loss of Rs37 billion because of pilferage of containers which entered the Pakistani territory under Afghan Transit Trade (ATT).

The list submitted with the Registrar office through CBR’s counsel Raja Muhammad Irshad in compliance with the Supreme Court orders includes the names of former chairpersons of CBR/FBR, members of Customs, Customs Collectors Karachi Port and Port of Qasim, Collectors of Quetta and Peshawar, secretaries commerce and finance, Director General Customs Intelligence and Investigation and the relevant officers of NLC who held the charge during that period.

The report contains the names of four former Major Generals of the National Logistics Cell (NLC) and three former chiefs of FBR. According to FBR counsel Raja Muhammad Irshad, the list contains the names of former Finance Secretary, former FBR chiefs Abdullah Yousuf, Ahmed Waqar, Sohail Ahmed and member Customs Muneer Qureshi. He said the names of six former secretaries, three former FBR chairman, three former heads of NLC and 44 officials of Customs are mentioned in the 58 members list.

Federal Tax Ombudsman (FTO) Dr Shoaib Suddle has already submitted a comprehensive report over the matter in the Supreme Court testifying that a huge number of containers containing have been pilfered inside the country without crossing the border causing enormous loss to the national exchequer to the tune of Rs19-37 billion.

He pointed out that the loss caused at the hands of Customs Department during the past almost four years is only a tip of the iceberg.

The report said strict action is required against all the concerned officials of the Customs and other departments, who held charge during that period. The court thereupon directed the FBR chairman to furnish a list of these officials. The court has directed all these people to file their reply on the report of FTO through FBR by January 27.

Riaz Haq said...

There seems to be consensus developing among Pakistani economists that "prompt measures needed to control rising inflation", according to a report in Daily Times:

LAHORE: Pakistan is fast heading towards higher inflation and to overcome this grim scenario; improvement in governance coupled with a drastic cut in expenditure and revenue generation is crucial.

The doom and gloom scenario needs an urgent handling. Good governance, good policies, good institutions, good macroeconomic management are the drivers of economic growth that have gone dormant for quite some time. This was the crux of the speeches delivered at Economic Dialogue 2011 held at Lahore Chamber of Commerce and Industry on Tuesday. Senior economist Dr Akmal Hussain said the country is facing its gravest economic crisis in history after 1971. He said the economy is in deep recession, poverty along with high inflation is a recipe for disaster.

Unfortunately, he added, the government has zero fiscal space. He warned that Pakistan was heading towards higher inflation if immediate improvement in governance is not accompanied with cut in expenditure and substantial increase in revenue.

The former WB Executive Abid Hassan said that the institutional decay has now started taking its toll and the government should take appropriate measures on emergent basis to stop this decay. He said that with every passing day the country is going deeper and deeper into the economic mire. “Today we have reached a situation where even an economic stimulus would not work. The government should concentrate on tax collection and controlling unnecessary expenditures. Unless and until these two measures are not taken, the economy would not be able to be back on rails,” he said. The PIDE Vice Chancellor Dr Rashid Amjad said that the present day doom and gloom scenario could be changed by overcoming the acute energy shortage being witnessed by the country. The issue of circular debt needs to be taken care of by those sitting at the helm of affairs. “PSDP has a multiplier effect on the employment and economy. It should not be cut,” he said.

Former chief Economist Planning Commission Dr Pervaiz Tahir blamed the political chaos for our economic woes and termed the dictatorship democracy cycle as mother of all ills.

Energy sector expert Munawar Baseer, ex Executive committee member Almas Hyder and LCCI President Shahzad Ali Malik while appreciating the input provided by the economists said that most of the issues and challenges faced by the country are more of political. The political leadership while realizing the sensitivity of the situation should come up with a solid solution with close coordination with the chambers. “The policies are being made in isolation without the consultation of real stakeholders and that’s why the economic situation today has become more complex and directionless,” he said. The speakers said that the business community should be involved for the sake of correct decision-making.

They urged the government to evolve a more realistic and pragmatic framework by putting an end to inter-provincial disparity and the disparities within the province. The government should re-do its priority list and concentrate on the few areas that come on the top of that priority list.

It is very unfortunate, the speakers said, that the country has become the most inhospitable for both the local and the foreign investors for security reasons.

“Our inability to reach a consensus on water issue and inability to tap hydrocarbon potential of Balochistan has virtually pushed us to the wall,” they said. staff report

Riaz Haq said...

Here's an outline of Pakistan's 2011-12 budget as published by Dawn:

ISLAMABAD: The government has finalised a consolidated budget of Rs3.854 trillion for the next financial year, envisaging a revenue of Rs2.787 trillion, fiscal deficit of Rs912 billion and provincial transfers of Rs1.224 trillion.

The budgetary allocations indicate that current expenditures of most of the federal ministries will be frozen at the level of the current year because of tight fiscal position.

Official documents available with Dawn show the government has set a tax revenue target of Rs2.1 trillion, 2.3 per cent above the current year’s revised target of Rs1.71 trillion. This includes a Rs1.952 trillion tax target of the Federal Board of Revenue (FBR) against current year’s revised estimate of Rs1.588 trillion. The non-tax revenue is estimated at Rs687 billion, up 30 per cent from this year’s revised estimate of Rs526 billion.

Of the total revenue of Rs2.787 trillion, the provinces would get Rs1.224 trillion and Rs1.513 trillion would be for the federal government.

The government had set a revenue target of Rs2.410 trillion for the current year, but it has now been revised to Rs2.235 trillion, because of a shortfall in FBR collection, non-introduction of RGST and slow economic growth.

The centre’s total expenditure has been estimated at Rs2.549 trillion, up from current year’s revised estimate of Rs2.314 trillion. The centre would extend Rs55 billion subsidies to the provinces.

The size of the federal Public Sector Development Programme has been estimated at Rs280 billion against current year’s original estimate of Rs270 billion which was brought down to Rs180 billion.

Another Rs35 billion would be spent for flood relief assistance, slightly less than current year’s Rs40 billion.

Pensions would require Rs118 billion against Rs107 billion this year. Likewise, federal government’s service delivery cost has been estimated at Rs200 billion, which is about Rs20 billion more than current year’s revised estimate of Rs180 billion – brought down from budgeted Rs221 billion.

SECURITY AND INTEREST: The government would earmark Rs495 billion for defence, about 12 per cent more than current year’s allocation of Rs442 billion. Another Rs340 billion would be made available through grants for security expenditure, up 19.3 per cent from current year’s Rs285 billion. Put together, security-related expenditures would amount to Rs835 billion against this year’s Rs727 billion, up by 15 per cent.

An almost equally a large amount of Rs786 billion would be paid as interest cost, which is about Rs60 billion or 8.3 per cent more than current year’s revised debt servicing of Rs726 billion. The government had earmarked Rs699 billion in the 2010-11 budget for debt servicing which has been revised to Rs726 billion.

About Rs50 billion would be allocated for the ministry of interior, up from current year’s Rs44 billion.

BUDGET DEFICIT: The federal government’s fiscal deficit has been estimated at Rs1.036 trillion that is expected to be reduced to Rs912 billion because of a Rs124 billion cash surplus to be provided by the provincial governments. For the current year, the government had envisaged an overall deficit of Rs685 billion (4.5 per cent of GDP) that has now been revised to Rs960 billion or 5.5 per cent of GDP. The provinces were expected to generate a cash surplus of Rs167 billion but it was revised to Rs112 billion.

The budget deficit would be met through Rs95 billion worth of grants, net domestic bank borrowing of Rs807 billion and net external borrowing of Rs10 billion.

Riaz Haq said...

Here's a Dawn Op Ed by Pak economist Shahid Burki on budget 2011-12:

AT this difficult time in its history, Pakistan has one of the most competent teams of economic managers in place in years. They are stars from the field of finance, development, planning and investment banking.
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The first, of course, is the country’s dismal resource situation. As has been said repeatedly, the country continues to slip in terms of collecting a reasonable amount of national income as taxes.

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There are several unpleasant consequences of this. The most depressing of these is that the government does not have much left in its hands to pay for social services the poor need and deserve.
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The other side of the resource coin is government’s non-development expenditure. It is widely known that there is an enormous amount of waste in the way it spends its meagre resources.

The finance minister should have addressed this issue more fully and with resolution. He also needed to lay out a credible plan for addressing waste and inefficiency in the way large public sector corporations are being managed.

Managers of most of these poorly performing entities have been appointed on the basis of their links with those in power rather than on the basis of competence. It is not surprising that they are a huge drain on the public exchequer.

The finance minister did well when he had the portfolio of privatisation in one of the administrations of the Pervez Musharraf period. He could have used that experience to lay down a strategy and a plan for handing over some of these enterprises to the private sector.

This brings us to the issue of the fiscal deficit which has been the Achilles heel of the management of the Pakistani economy. The budget, with an eye on the on-going discussions with the IMF, promises to reduce this to four per cent of GDP. Whether this will help to win the support of the Fund will depend on how that institution sees the tax effort in light of the country’s history.

The managers of the economy have once again decided not to touch agriculture as a source of revenue. This means they were not able to overcome the resistance of the big farmers who have managed to get their sector exempt from income tax. The constitution does not allow federal income tax to be levied from agriculture, but Islamabad can exert pressure on the provinces to take care of this sector which accounts for over one-fifth of the national income. During my brief tenure as the de facto finance minister in 1996-97, the access of the provinces to the resources in the Divisible Pool was made conditional upon raising income tax from agriculture.

We prescribed two per cent of agricultural income as the minimum for drawing from the divisible pool. Unfortunately this was not looked at as a condition in the Seventh National Commission award announced at the end of 2009 but it could have been done retroactively in the budget. But that required political will.

The budget speech also promises to reduce the rate of inflation by half, to nine per cent in 2011-12. The assumption here is that a smaller fiscal deficit will reduce the printing of money for financing which in turn, by decreasing the supply of money, will bring down inflation.
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Where will this budget take the economy over the next financial year? The answer unfortunately is not very far. It will not revive economic growth, not reduce the dependence on foreign flows, not reduce the incidence of poverty nor lessen the gap between the rich and the poor, and not help to integrate the economy with rest of the world. Something better was expected from a team of this talent and experience.

Riaz Haq said...

Here's Daily Times overview of current revenue issues in Pakistan budget:

ISLAMABAD: The United States’ reluctance in release of the committed $500 million arrears of Coalition Support Fund (CSF) is creating difficulties for Pakistan and further delay in release of the amount might increase the budget deficit from 5.1 percent of the gross domestic product (GDP) to 5.3 percent of the GDP for outgoing fiscal year 2010-11, a senior official of Ministry of Finance informed here on Monday.

CSF: In case of formal approval, the release of the $500 million by the US before June 30, 2011 would help contain the budget deficit at 5.1 percent of the GDP, otherwise with the rejection by the US, the budget deficit for outgoing fiscal year is to jump to 5.3 percent of the GDP for 2010-11, the official added. The official explained that total CSF arrears due against United States for the outgoing fiscal year are $1.8 billion and Obama’s administration had submitted a request for release of $500 million to Pakistan before June 30, 2011. The US lawmakers who are supposed to approve or reject this request within two weeks had sought one week more and later three days extension for deciding the fate of release of $500 million to Pakistan and the extended period of three days expired on Monday. In case the US lawmakers remain undecided or reject the request of the Obama’s administration then Pakistan’s budget deficit is going to increase from 5.1 percent of the GDP to 5.3 percent of the GDP in outgoing fiscal year 2010-11.

Etisalat: The official informed that the prime minister has tasked the federal minister for finance to settle the issue of release of $800 million to Pakistan as privatisation proceeds of the Pakistan Telecommunication Company Ltd (PTCL). The official informed that the Pakistan People’s Party government is of the view that 98 percent disputed properties have been transferred to PTCL and only 2.0 percent remaining properties should not create obstacle in release of the remaining privatisation proceeds.

Circular Debt: The official informed that the federal government has credited Rs 120 billion paid out in 2010-11 for clearance of the power sector circular debt in the accounts of the fiscal year 2009-10. The government strongly believes that this circular debt was related to the fiscal year 2009-10 and its payment was due and its payment in 2010-11 should be credited in the accounts of 2009-10 instead of 2010-11. The official sources said that the crediting of the Rs 120 billion in the accounts for the fiscal year 2009-10 would help contain budget deficit going up to 6.1 percent of the GDP.

Provincial budget surplus: The official further informed that provinces were required to create Rs 120 billion budget surplus from federal transfers to contain the budget deficit in limits. However, by the start of the month of June 2011 provinces have reported a budget surplus of Rs 85 billion and last instalment of share in federal taxes under the 7th National Finance Commission and it would remain unutilised in June 2011 and would help contain the budget deficit and provincial budget surplus is expected to reach at Rs 115 billion for outgoing fiscal year.
..

Riaz Haq said...

Here's Daily Times overview of current revenue issues in Pakistan budget Contd:

Provincial budget surplus: The official further informed that provinces were required to create Rs 120 billion budget surplus from federal transfers to contain the budget deficit in limits. However, by the start of the month of June 2011 provinces have reported a budget surplus of Rs 85 billion and last instalment of share in federal taxes under the 7th National Finance Commission and it would remain unutilised in June 2011 and would help contain the budget deficit and provincial budget surplus is expected to reach at Rs 115 billion for outgoing fiscal year.

Debt servicing: The official said that increase in interest rates have also badly impacted budget of the country and the federal government had paid Rs 29 billion additional on debt servicing in 2010-11. The government had projected payment of Rs 699 billion for debt servicing of local and foreign loans in 2010-11, however, actual servicing of debt has inflicted a cost of Rs 728 billion including Rs 654 billion for domestic debt servicing and Rs 74 billion for foreign loan servicing.

Commodity circular debt: The official informed that commodity circular debt was estimated at Rs 290 billion and federal government has extended guarantee of only Rs 90 billion out of the total amount.

Foreign inflows: The official informed that some foreign inflows are expected for 2010-11 and $193 million USAID disbursement, $200 million Asian Development Bank disbursement is expected soon, while World Bank has already released $38 million.

FBR revenues: The Ministry of Finance is confidant that Federal Board of Revenue’s collection is to reach at Rs 1.592 trillion against the downward revised target of Rs 1.588 trillion for the outgoing fiscal year 2010-11 due to Rs 80 billion revenue for corporate sector on account of advance tax.

Riaz Haq said...

It seems that the latest 2011-12 budget passed by the PPP-led coalition pleases neither the right nor the left. Here's a view from the World Socialist Forum:

The $31 billion budget was passed, without amendment, by the National Assembly in June after months of maneuvering by the PPP. Attempts by rival parties to posture as opponents of IMF austerity, especially on the part of Nawaz Sharif’s Pakistan Muslim League (N), produced a months-long political crisis for the PPP. Although the entire political establishment supports austerity, privatization and other pro-business reforms, the PPP’s rivals have sought to distance themselves from the implementation of policies that they know will incite opposition from the working class and rural poor.

Had the National Assembly rejected the budget, the coalition government would have been forced to resign. Ultimately, the PPP was able to get the budget passed with the support of the Pakistan Muslim League (Q) and the Karachi-based Muttahida Quami Movement (MQM).

The MQM had previously left the coalition in May forcing the PPP to invite the PML (Q)—which served as a civilian veneer for the Musharraf dictatorship— to join the government so as to provide it with the parliamentary votes needed to adopt the budget and share the burden of imposing unpopular measures. The MQM subsequently rejoined the government and helped pass the budget.

The PPP-led government is determined to narrow the budget deficit in order to bring an end to a freeze on IMF credit. The IMF has refused to disburse any money to Pakistan since May 2010, citing the government’s failure to implement draconian pro-market reforms, including a Goods and Services or VAT-type tax. The government is desperate to secure the remaining two tranches of an $11.3 billion loan originally issued in 2008, about $3.2 billion. It has also indicated it will soon be seeking additional IMF funding, at least in part so it can begin paying back the 2008 loan.

During the past year, the state has increasingly relied on borrowing from the central bank to fund its budget deficit, stoking inflation to 13 percent. According to Finance Minister Abdul Hafeez Shaikh, the government hopes to reduce the deficit to 4 percent of gross domestic product during the 2011-2012 fiscal year, down from 5.7 percent of GDP for the financial year that ended June 30. It plans to achieve this by decreasing its expenditure and broadening the country’s tax-to-GDP ratio, which, at around 9 percent, is one of the lowest in the world.

After failing to secure the requisite political support to impose a new goods and services tax, the government created a Reformed General Sales Tax (RGST), ending sales-tax exemptions on about 500 items. This is expected to bring in additional revenues of about 200 million Pakistani rupees, even while the government lowers the sales tax rate by one percentage point from 17 to 16 percent.

The RGST and other indirect taxes whose burden fall most heavily on the working class and toilers are supposed to raise 64 percent or close to two-thirds of the government’s 2 trillion rupees ($23.2 billion) in tax revenues


http://wsws.org/articles/2011/jul2011/paki-j22.shtml

Riaz Haq said...

Here's a story in The News about Pakistan debt service load on $80 billion being equal to Greece's debt service load on $320 Billion debt:

LAHORE: Pakistan government is paying the same interest on it $80 billion domestic debt that Greece has to pay on its $324 billion debt because of higher interest rates, said group leader All Pakistan Textile Mills Association Gohar Ejaz in a meeting.

Apprising his group about the severity of high interest rates, he said Greece, the 37th largest economy in the world, and Italy, the 6th largest, cannot service their debt at very low mark up. “How can we expect to survive such high interest rates?”

The group met to discuss the steep decline in textile exports in October.

Elaborating his point, he said Pakistan’s Rs7 trillion domestic debt is equal to $80 billion. He said the government is paying on average 11 percent interest on this debt, which comes to around $9 billion or Rs780 billion. He said the sovereign debt of Greece is $324 billion and it has to service it at a mark up of three percent only. He said the debt servicing amount of Greece comes to a little over $9.5 billion.

In other words, due to high mark up the impact of servicing of $80 billion domestic debt of Pakistan is the same as that of over four times higher debt of Greece, he claimed.

“When a strong economy cannot pay this amount in debt servicing, how can we expect Pakistan to grow at such high interest rate regime?”

Leading spinner S M Tanveer said that the basic role of all central banks is to ensure sustainable growth with creation of jobs.

He said the central bank of the United States has maintained zero or near zero interest rate to induce growth.

He said this did not lead to inflation in the US as it stands at two percent.

Ejaz said that inflation in Pakistan is driven by high costs of production.

An APTMA member Shahzad Ali Khan said that the investments have totally stopped during four years of high interest regime.

He said due to high interest rates the investors prefer to park their money in banks and other financial institution to ensure guaranteed return of 12 percent. On the other hand whatever is earned in businesses is consumed by debt servicing, he claimed.

The textile entrepreneurs pleaded with the government and the central bank to bring down the interest rates by 3-4 percent to give a jump start to growth and investment.

They warned that Pakistan would be left out of main textile markets if fresh investments in the sector were not facilitated.


http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=79572&Cat=3

Riaz Haq said...

Here's an Op Ed piece in The News by columnist Farrukh Saleem:

Myth 1: The allocation for defence is the single largest component in our budget. Not true. The single largest allocation in Budget 2013-14 went to the Public Sector Development Programme (PSDP). The second largest allocation in Budget 2013-14 went to servicing the national debt. The third largest government expenditure, including off the budget allocations, are the losses at public-sector enterprises (PSEs). Yes, the fourth largest government expenditure goes into defence.

Myth 2: The defence budget eats up a large percentage of the total outlay. Not true. In Budget 2013-14, a total of 15.74 percent of the total outlay was allocated for defence. PSDP and debt servicing were 30 percent each. What that means is that more than 84 percent of all government expenditures are non-defence related.

Myth 3: The defence budget has been increasing at an increasing rate. Not true. In 2001-02, we spent 4.6 percent of our GDP on defence. In 2013-14, twelve years later, our defence spending has gone down to 2.7 percent of GDP.

Myth 4: We end up spending a very high percentage of our GDP on defence. Not true. There are at least four dozen countries that spend a higher percentage of their GDP on defence.

They include: India, Egypt, Sri Lanka, the United States, the United Kingdom, South Korea, France, Eritrea, Oman, Saudi Arabia, Israel, Jordan, Liberia, Brunei, Syria, Kuwait, Yemen, Angola, Singapore, Greece, Iran, Bahrain, Djibouti, Morocco, Chile, Lebanon, Russia, Colombia, Zimbabwe, Turkey, Georgia, Guinea-Bissau, Ethiopia, Namibia, Guinea, Turkmenistan, Kyrgyzstan, Algeria, Serbia and Montenegro, Armenia, Botswana, Ukraine, Uganda, Ecuador, Bulgaria, Lesotho and Sudan.

Myth 5: The Pakistan Army consumes the bulk of the defence budget. Not true. In the 1970s, the Pakistan Army’s share in the defence budget had shot up to 80 percent. In 2012-13, the Pakistan Army’s share in the defence budget stood at 48 percent.

Now some facts:

Fact 1: The Pakistan Army’s budget as a percentage of our national budget now hovers around eight percent.

Fact 2: Losses incurred at public-sector enterprises can pay for 100 percent of our defence budget.

Fact 3: Pakistan’s armed forces are the sixth largest but our expenses per soldier are the lowest. America spends nearly $400,000 per soldier, India $25,000 and Pakistan $10,000.

Fact 4: Of all the armies in the world, Pak Army has received the highest number of UN medals. Of all the armies in the world, Pak Army is the largest contributor of troops to the UN peacekeeping missions.

Mark Twain once remarked, “Get your facts first, and then you can distort them as much as you please.”


http://www.thenews.com.pk/Todays-News-9-246627-Defence-budget