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Federal Budget - an analysis.

To recap, the budget for 2000-01 has been presented in the "tasting time" of our history. If and this is big if- the budget estimates ensue as projected and IMF approves new PRGF programme, there is nothing to worry about. But its changes are remote. As Shaukat Aziz and lately Chief Executive have called for "contingency plan", it appears that the government is not sure of the budget targets. In this case, belt tightening will became inevitable, development programme slashed, utility charges raised, accentuating inflation which will make the life of common man miserable and anti-poverty programme thrown overboard. However, one should hope for the best.

Like a shrewd player, Finance Minister Shaukat Aziz laid his cards on the table much before the presentation of the Federal Budget on June 17, the first budget of the Musharraf government as well as of the 21st century in order to benumb the trading community in particular and people in general. The thrust of the budget is the quest for additional revenue to be achieved through widening the tax net the modus operandi being the tax survey initiated on May 27 against heavy odds.

The budget has been presented within the framework of three-year macro-economic programme. On the whole, this is a balanced budget in the present circumstances described as "testing time" in the history by finance minister without heavy additional taxation because of the widening of tax net, expected to yield additional Rs. 96 billion in the current year over the estimated actual of Rs 340 billion of the outgoing year implying an increase of 28 per cent. This contrasts with revised estimate of Rs 352 billion of the outgoing year and an increase of 24 per cent. Whether the tax survey will result in additional tax revenue of this magnitude is a moot point. In fact, the results of the tax survey will be available towards the end of the current year. This is based on the assumption of 5% growth in GDP, 5.9% in industry and 3.9% in agriculture as compared to 4.5%, 1.6% and 5.5% respectively for the outgoing year. which was fortutious having bumper cotton and wheat crops. Industry, languishing over the last few ye ars, is unlikely to achieve the target which may pull down the overall growth rate.

First, the tax relief. The abolition of wealth tax since July 2001 has been widely acclaimed by the business community as it was a long standing demand to boost saving and investment. Import duty on computer has been abolished leading to lower prices. Tax exemption on bonus shares has been extended for the new year which the President of Karachi Stock Exchange wanted for three years. A 10% credit for new investment and BMR has been allowed. Tax exemption has been provided on interest on non-performing loans and credited to suspense account. Salaried people have been given relief in tax liability ranging from 5% to 80% for lower income groups. As a prelude to reduction in lending rates interest rates on new deposits in national saving schemes has been slashed by 1.5 per cent. Import duty on sugar was cut from 35% to 25% and 10% excise duty abolished. Central excise duty on the import of 16 items has been abolished. Import duty on newsprint has been reduced from 10% to 5%. Oil cake used as cattle feed has been exempted from sales tax. As a measure to boost exports imported accessories are allowed duty free. Similarly 70% of refunds an account of duty drawback is allowed within 24 hours and the next within 30 days. No duty no drawback facility has been allowed for garment exporters, a long standing demand of exporters. Sales tax on non-registered firm has been reduced from 3% to 1 5%.

The above concessions were offset dry increase in withholding tax on imports from 5% to 6% and 0.25% percentage point in export, which has been decried by the business community. Diesel prices were raised by 5%, a move flayed by transporters and farmers. A surcharge of 5% on companies other than banking companies was criticized by the business community.

The total expenditure has been estimated at Rs.698 billion, Rs.120 billion development expenditure and Rs.578 billion non-development. The availability of resources is Rs.178.5 billion external and Rs.51 9.5 billion domestic. According to finance minister, the overall deficit in the current year is Rs.162.1 billion constituting 4.6% of GOP compared to Rs.193.1 billion (6.1% of GOP) in the outgoing year. In other words, Rs.42 billion will be used to finance current expenditure in the budget. Although finance minister has pointed out that the external financing has been discussed with foreign countries and agencies, yet it is premature to say whether the enormous amount of foreign assistance envisaged in the budget will be forthcoming. Any shortfall in resources will result in cut in development expenditure, as in the past.

Defence expenditure prima facie fell from Rs.143.4 billion (RE 1999-2000) to Rs.133.5 billion in the budget but in effect, it rose to Rs.159.6 billion or by 11.3% as the pension of defence personal has been placed under the head general administration in the current year. Debt servicing has been estimated to decline from Rs.313.7 billion ( RE 1999-2000 ) to Rs.305.6 billion on account of fall in servicing of domestic debt and foreign loan repayments. Overall current expenditure increased by 2.3% but general administration and defence together jumped by 12% from Rs. 163 billion (RE 1999-2000) to Rs. 182 billion in the budget.

The finance minister wanted to portray the budget as welfare-oriented in order to qualify for IMF's poverty reduction and growth facility (PRGF) programme Zakat payment has been raised from Rs.300 to Rs.500 per month to some 1.3 million households. An allocation of Rs.21.3 billion has been made to poverty alleviation programme compared to Rs.3.6 billion last year. As the receipt from Zakat is falling, it is being envisaged to levy a welfare tax of 2 per cent on bank accounts. A provision of one-month salary to lower grade employees with a maximum of Rs.2000 on festival is a sweetener. Would this result in poverty alleviation?

Inflation rate of 3.4% has been estimated for the outgoing year and 4% for this year, which analysts reject as ridiculously low as the prices of consumer goods are showing uptrend. The recent of hike of transport fare and prices of diesel, gas and medicines coupled with higher sugar and wheat prices should be particularly noticed. The mini-budgets are likely to be unveiled, although denied by Shaukat Aziz, in the form of hike in power, petroleum and telephone charges. It has been observed that any shortfall in projected revenues will be met by jump in utility prices, a fact which will exacerbate inflationary pressure. The devaluation of rupee will also add to inflationary spiral. More significantly, the price hike, following GST on retailers, for which survey is being undertaken, will gather momentum, slogging the common man.

Indirect taxes are regressive in nature, yet the budget forecasts over 23% increase, a retrogressive step that will make the people poorer, militating against the anti-poverty programme. It has been pointed out that food items will be exempted from the GST but it is not clear how stores with turnover of over Rs.1 million will be treated if these sell food items also. Similarly, fall in profits of national savings schemes will unpringe the low-income people like previous, unemployed and widows who mostly invest in such schemes.

IMF has imposed four conditionalities in order to qualify for PRGF programme, namely quantum leap in tax revenues, GST on services, agricultural income tax and settling of row with Hubco. Failure on any count will disappoint IMF whose team is visiting Islamabad in July. Only upon a favourable report, IMF Executive Board will be able to approve the PRGF programme and the first tranche will be available in September. Therefore, the coming couple of months are going to be crucial where unpopular decisions would become inevitable. Federal government has passed on the buck regarding GST on services and agricultural income tax to the provinces. GST on services will be levied by Centre but distributed among the provinces in accordance with the distribution formula as it is a provincial subject. Agricultural income tax in vogue since the early 1990's but only a pittance of revenue could be generated. Two types of taxes are being conceived - land tax and tax on agricultural income. The ability to raise substantial re venues would be thwarted by drought conditions prevailing in Sindh and Balochistan. Besides, farm lobby has been avoiding the tax over the last fifty years due to undue political clout. The provincial budgets of Sindh and NWFP have indicated that details of agricultural income tax are being worked out. How long will it take and how much revenue would be generated remain to be seen. Punjab has levied two taxes i.e. land tax and agricultural income tax which are expected to yield Rs. 15 billion.

Row with Hubco has not yet come to an end. Yet, Shaukat Aziz has assured that soon after the budget, he would take up the issue.

Shaukat Aziz has pointed out that a "contingency plan", the details of which have not been unveiled, has been underway in case of failure of IMF to approve the PRGF programme. What would happen then? Pakistan is now trying for a total write-off of foreign loans, a fact which is not possible in the absence of IMF's nod, which may be coutingent upon about signing CTBT. In a recent visit to Washington, foreign minister Abdus Sattar was reminded of the urgency of signing CTBT which was due September 1999.

On the external front, the rupee has been under severe pressure following large trade deficit of over $1.7 billion during the outgoing year. On May 31 and June 22 rupee was "adjusted" by 40 paisa downward against the US dollar. Exporters to Europe were complaining of appreciation of rupee against most of the European currencies, retarding exports. With the recent devaluation of Indian Rupee by one rupee, devaluation of Pakistani Rupee was on the cards. Exporters have been allowed to retain 5% of export to be sold in the kerb market. In coming weeks, rupee would be further devalued by 6% to 7% to regain competitiveness in exports.

In order to enliven the languid industrial sector, two institutions are planned. Corporate and Industrial Restructuring Corporation will be established in July to revive on priority 144 sick industrial units. The Chairman of the Corporation was looking to undertake the revival of 1000 units out of the total of over 4, 000 units. Micro Credit Bank, as part of poverty alleviation programme, will start lending credit to small and medium size industries from August 14. The effectiveness of both institutions will be judged by the success achieved in meeting the respective objectives for which they are meant. Yet, on the other hand, industry will receive a serious blow when maximum tariff will be reduced from 35% to 30% by July next year at the instance of IMF and WTO as these steps will lower the level of protection by cheapening the imported goods. As agriculture has cyclical fluctuations, it is likely to perform worse this year (because of drought etc.) compared to last year. Therefore, it is imperative that in dustrial sector is extended maximum incentives by restoring investor's confidence eroded by drive launched against loan defaulters and traders. The demand for loan has not yet picked up. Although interest rats have declined. The recent increase in gas tariff has been flayed by business community as it will raise the cost of production of cement and other products where it is used. Water shortage is also affecting industrial production. It is estimated that industries in Karachi are losing production worth Rs. 100 million daily due to shortage of water. To protect industry, it is imperative to promulgate anti-dumping laws soon.

To recap, the budget for 2000-01 has been presented in the "tasting time" of our history. If -- and this big if- the budget estimates ensure as projected and IMF approves new PRGF programme, there is nothing to worry about. But its chances are remote. As Shaukat Aziz and lately Chief Executive have called for "contingency plan", it appears that the government is not sure of the budget targets. In this case, belt tightening will become inevitable, development programme slashed, utility charges raised, accentuating inflation which will make the life of common man miserable and anti-poverty programme thrown overboard. However, one should hope for the best.
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Author:Asad, S. Hasan
Publication:Economic Review
Geographic Code:9INDI
Date:Jun 1, 2000
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