Thursday, June 24, 2010

Look out for the neighbourhood changes By Shahid Javed Burki

NOW that Pakistan has a new economic team in place – a new finance minister and a new deputy chairman of the Planning Commission – this may be a good time to rethink the way the country should be planning for its future. In doing so it should look at the changing world outside its borders, in particular at the opportunities that are being created in the country’s immediate neighbourhood.

For decades, economic policymaking was focused on domestic issues. The world outside was never factored in to the strategy for development. This has to change in light of the significant developments that are taking place in the structures of the global production and trading systems. There are also important changes in the world of finance.

For a country that remains dependent on external flows in order not only to pay for investment but also to help it meet its external obligations, the restructuring of global finance must be fully understood. In the article in this space last week, I took a look at the emergence of sovereign funds as an important source of finance for the capital-short countries of the world, both developed and developing. The subject today is the development in Pakistan’s immediate neighbourhood. All the countries that share borders with Pakistan are experiencing enormous changes that could have a bearing on the future of its economy. These should be noted by our policymakers, in particular those who now have responsibility for finance and planning. Afghanistan, Iran, India and China are all going though changes, some positive and some negative. All of them matter for Pakistan.

Given its high rate of economic growth and industrial expansion, China’s appetite for natural resources – particularly energy and material – is practically insatiable. It is making massive investments in places such as Afghanistan and the Middle East to import the materials it needs. Some of this could be transported through trade corridors that connect China through Pakistan with these sources of supply

India also has natural resources and consumer goods to export to Pakistan, Afghanistan and points beyond. Those destined for Afghanistan and Central Asia could be transported through Pakistan. Gas from Iran and the Middle East is needed by both China and India, two giant economies that are short of energy. This could flow through Pakistan from the several points of origin to several points of consumption. Pakistan, in other words, could become a major artery of commerce for the fast developing and rapidly changing areas around its many borders.

For that to happen, a major change will be required in Pakistan’s position with respect to the use of its territory for the purpose of transit. Whenever I have discussed this possibility with the senior leaders of Pakistan, I have been told that security and geo-political considerations exclude the possibility of giving transit rights to India for trade with the countries it cannot reach via land.

That is a mistake for several reasons. The first is simply a cost-benefit issue. Before taking such a firm position, Pakistan should carefully study the benefits that would accrue to the economy if India was allowed to use the country’s territory for trade. Once an estimate is available – say the benefit to the Pakistani economy is equivalent to one per cent of the country’s gross domestic product every year – then Islamabad would know what it is sacrificing in terms of potential growth by not granting transit rights to India through its territory.

What kind of benefits Pakistan could expect from the use by India of its territory for international commerce? To begin with it will increase the use of the motorway system that Pakistan has constructed at a great cost to the economy. The system is underused. By charging Indian trucks and buses significant transit fees, the country would not only recoup some of the investments it has made. It will also be able to generate the revenues for expanding the system.

The current system links Lahore with Peshawar with a world-class motorway. This could be extended east to the border with China, northwest to the border with Iran and west to Karachi and Gwadar to provide Afghanistan, China and India access to the resources of the Middle East and the region’s rapidly developing markets.

Pakistan also needs to rethink its international trade strategy. The focus has always been on market access to the world’s developed countries – the United States and the European Union. And when Islamabad talks about market access the reference is to the export of textiles. Both elements of this trade strategy are misplaced. Even though textiles are the largest component of Pakistan’s industrial sector and provide employment to a significant proportion of the workforce engaged in manufacturing, this is not where the future is if the country wishes to build a strong and dynamic economy.

The country has to focus on the development of industries that have a rapidly increasing demand in the global market place, where a large number of new workers can find employment, where Pakistan can accommodate its youth in well paying jobs, and where there are important forward and backward linkages. These objectives won’t be easily realised in the sector of textiles.

Our planners have to concentrate their attention on the development of modern services – the IT and communication sector, the sectors of health and education, the activities related to sports and culture – which could provide employment for millions of skilled and well trained workers. A simple calculation tells us that employing an additional one million people in the IT sector alone can provide additional exports worth $20 billion a year.

The other important adjustment that needs to be made is to find markets closer at home than search for them in the places that are very distant from Pakistan. The gravity model of trade tells us that destinations of exports should be largely the countries in the neighbourhood. Pakistan is uniquely placed in this respect. It has as its immediate neighbours two countries that are the world’s most rapidly growing economies and have rapidly expanding markets. Both China and India should be the preferred destinations of the export industry in Pakistan rather than the United States and the European Union.

This brings me back to the need for aggressively developing trade and economic relations with India. I am aware of the fact that there are important constituencies in India that are against developing close relations with Pakistan. The same is true for Pakistan. Serving these two groups is not in the larger interest of both India and Pakistan.

At the “Aman ki Asha” conference held in New Delhi in May this year at which I was one of the keynote speakers, I was asked why Pakistan had not granted the “most favoured nation” status to India which it is required to do under the WTO. My answer was simple and honest. I said that the reason why that had not happened was once given to me by former President Pervez Musharraf. When I pressed him on that issue by saying that it was in Pakistan’s own interest to extend the MFN status to India, he said that the problem was that the term “most favoured nation” did not translate well in Urdu.

The conservative Urdu press would play up the issue that Pakistan had declared India to be the “nahaet pasandeeda mulk.” That would be hard for his government. The United States was once faced with the same quandary with respect to its trade relations with China. It dropped the term MFN in favour of trade promotion activity. Pakistan could do something similar.

The main conclusion that we should draw from this analysis is that a serious reconsideration of our economic strategy is required to factor in the opportunities available in the country’s immediate neighbourhood.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/look-out-for-the-neighbourhood-changes-160

Sharing national wealth By Afshan Subohi

THOUGH the budget proposals 2010-2011 have made the distribution of public resources comparatively fairer, these have failed to provide the much-needed impetus for augmenting national wealth. The people would be unable to realise their dream of a better life over the year ahead.

The share of provinces in the federal resource pool has been enhanced as envisaged in the Seventh National Finance Award, rising to 57.7 from 46 per cent earlier. This would translate into a steep 139 per cent increase in the share of Balochistan, 88 per cent for Khyber Pakhtunkhwa, 47 per cent for Punjab and 44 per cent for Sindh as compared to the outgoing fiscal year.

The NFC award has corrected a major fiscal anomaly in the quasi-federal system that was a persistent source of political tension. The devolution of financial power, it is believed, would lead to a more efficient and effective utilisation of funds as it does away with much of the Islamabad’s remote control mode. There would be automatic federal financial releases and without any hassle.

Besides, the government has pushed up the exemption limit of taxable income to Rs300,000 a year. The measure would provide some relief to the low rung of the salaried class.

To serve the dual purpose of increasing revenue generation and discouraging speculation in the capital market, capital gains tax has been introduced for trading on shares held for less than a year on a progressive rate. The government has increased the rate of sales tax by one per cent from 16 to 17 but exempted food, health and education from its ambit. It has slashed some subsidies on energy and food but their overall impact would only become clear over next few days and weeks.

Minister for Finance and Revenue Dr Hafeez Sheikh in his post-budget statement described tax measures as fair, just and equitable.

The minister, however, did not enlighten the nation on how the government intends to deal with the challenge of low propensity to invest in the real sectors of the economy. Despite a vast resource base, the country has one of the lowest rates of capital formation in the region. This threatens the very sustainability of even the current level of economic development as number of job aspirants keep swelling while the capacity to employ them stagnates.

The private sector is frustrated for being ignored. “It is the first budget that is devoid of any incentive to encourage investment or exports”, a businessman said while responding to a query through email.

“No matter how good a formula of redistribution, it cannot go far if there are no resources to distribute”, an analyst disappointed with the continued neglect of issues of growth and development under an elected government told Dawn.

“The outside help is not dependable. The government knows it better that the foreign funds are not easy to secure and often conditional. The local resources will have to be generated for sustainable development. However, more taxes in absence of expansion in the real economy would scare the financially resourceful class. It would ultimately lead to the outflow of capital in search of more secured investment options overseas,” argues an investment analyst.

Similarly, doleouts are symbolic gestures and not a solution to growing unemployment and poverty. The distribution of petty cash to a limited number of poor cannot create any significant dent in poverty when almost one-third of 170 million people subsist below the poverty line.

The move to absorb additional labour and unemployed youth without economic expansion would actually depress the already low labour productivity levels. It could even make an enterprise where manpower is adjusted, sick by increasing the wage bill without adding value. It is not a viable or a sustainable solution.

The country desperately needs new investment in agriculture, industry and trade to increase job opportunities.

As the government does not have the capacity and the resources to make major investment, it needs to prop up private sector to do the job. The budget proposals 2010-11 have failed to address this basic issue.

“Yes, there are problems but the country needs investment. The corporate sector has earnings and savings that can be invested. It is their national duty to plough back these resources in the economy by expanding their operations. But because of the privileges they enjoyed under military dictatorships they have become addicted to risk-free investments. Yes, the current government cannot afford and does not want to promote rent seeking”, said a leader of Pakistan Peoples Party defending the budget.

“They (private sector) just do not like the democratic government. The government went out of the way and accommodated their demand of deferring the introduction of value added tax despite the immense pressure from the donors. They are still complaining. I do not think it is possible to satisfy their greed and condone their irresponsible social behaviour”, said a seasoned bureaucrat who participated in the budget-making exercise responding to the criticism of the budget by the trade representatives.

“The Budget 2010-11 offers no policy package to encourage investment in the real sector that could boost the rate of capital formation. I see no future of even social sector initiatives such as Waseela-i-Sehat, Youth Internship Programme, etc. as the flow of resources is not guaranteed”, an analyst commented when reached in Islamabad.

The 10 per cent tax credit for balancing, modernisation and replacement and five per cent tax credit to a company for listing in a tax year is not seen enough of a stimulus for boosting investment.

“The government is trying to swim with both hands tied at its back. It would be naïve to expect robust performance under the difficult circumstances”, said another well-placed government sympathiser.

“I do not agree with the approach. The country needs fresh investment and the government should make it happen. Yes, it needs innovative initiatives. It needs confident economic leadership. Instead of taking the bull by the horn, the new budget shows that government is just trying to appease everyone. It is not laying the foundation for sustainable development”, an economist summed up on the condition of anonymity.

The writer is currently attending a conference on Innovation Journalism at Stanford University.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/sharing-national-wealth-460

Margin financing rules and investor risk By Khaleeq Kiani

THE draft Margin Financing Rules placed on the website of the Securities and Exchange Commission of Pakistan for public comments seem to be inconsistent with the investors’ constitutionally guaranteed right of equality before the law.

The draft rules are also in conflict with statutes under which these purport to have been made and the regulatory body itself has been created.

The draft rules will give the stock brokers an opportunity to make money in two ways: First, they will be able to lend money to their clients at exorbitant interest rates as they did in the past. Second, the leverage so introduced in the market will generate trading volumes and multiply brokers’ brokerage commissions.

On the other hand, draft rules will breed false hopes of gains among investors funded by the borrowed money. As the empirical evidence demonstrates, nobody has ever been able to do it at least in the long run. These rules under section 16 of SE Ordinance protect brokers’ interests.

Investors’ protection lies in the effective enforcement of Sec 22 and 24 of SE Ordinance and Sec 28 of CDC Act which provide heavy penalties and imprisonment for those who misuse the leverage facility provided under the draft rules.

The SECP has consistently protected brokers’ interests through diverse and sometimes very risky leverage facilities. When it came to protecting investors, the SECP established the offence under section 22 of the Ordinance against 56 KSE brokers in April 2007 but exonerated them all on irrelevant grounds.

When five brokers made confessions before the SECP of their offence under Sec 28 of CDC Act in June, 2009, it did not prosecute the offenders. This discriminatory application of capital market law to protect brokers’ interests and deny the investors legally mandated protection was inconsistent with the constitutional provisions.

An Act of Parliament (or Ordinance) can only empower a regulator to register the regulated entities and issue directives to regulate their working. Sec 5 and 5A of SE Ordinance empower the SECP to register stock exchanges and brokers. Sec 40B of the SECP Act and Sec 20 of the SE Ordinance empower SECP to issue directives to regulate their working. The SECP intends to implement the proposed margin financing facility through directives of the sorts which no statute empowers it to issue.

The SECP has resolved the problem by conferring this power on itself through rules 13, 19 and 22 of the draft rules. Moreover, SECP wants stock exchanges and brokers to duplicate registrations for margin financing which no law empowers it to do. It has again resolved its problem by conferring this power on itself through rule 3(4) and on the stock exchanges through rule 8 of the draft rules. Taking a clue from the past, the SECP seems to have made an assessment that the brokers’ abuse of leverage facility is bound to recur.

The SECP has devised a mechanism in draft rules, shedding its responsibility to check brokers’ malpractices. Rule 8 requires a stock exchange to register the broker for margin financing and rule 9 requires to regulate his activities. Its attempt to marginalise its responsibility this way is in conflict with Sec 5A of SE Ordinance and Sec 20(4)(d) of the SECP Act which requires it to register the brokers and regulate their working.

Even otherwise draft rules are a strange mix of irrelevant, ambiguous and non- transparent provisions. The core matters of a margin financing regime like initial margins, maintenance margins and margin calls are missing from draft Rules. Rule 13 couches these concepts in ambiguous terms and leaves their specifications to future directives which no law empowers the SECP to issue.

The earlier Margin Trading Rules, 2004 which the draft rules purport to replace at least made a mention of initial margins and maintenance margins although their numerical specifications were likewise withheld from the rules and kept under the SECP’s discretion.

In Rules 11 and 13 of its earlier rules of 2004, SECP had prescribed a plethora of credit risk assessment, reporting, monitoring and disciplining requirements. However, nothing worked and the massive abuse of margin financing facility by brokers contributed heavily to the market crashes of 2005 and 2008. In contravention of the earlier rules, brokers used clients’ funds for margin financing.

In violation of Rule 4(1)(a) of 2004, brokers pledged en block their clients’ shares without clients’ authorisations, for their personal gains. All the checks against abuse provided in earlier rules failed because the SECP wilfully avoided to specify the percentage wise initial margins and maintenance margins in striking contrast with the international best practices where initial margin is normally fixed at 50 and the maintenance margin at 25 per cent.

Specification and diligent enforcement of these margins could prevent the misuse of margin financing facility better than the plethora of requirements prescribed by the SECP in its earlier rules.

Interestingly, draft rules repeat some of the same provisions which have already been abused by brokers and nobody has been punished. For instance, Rule 12(1)(b) and 21(c) prohibit brokers to use clients funds for margin financing and to pledge clients’ shares without their authorisations. Like the earlier Margin Trading Rules, draft rules avoid specification of margins.

A new provision of shares lending and borrowing in draft rules makes the investors even more vulnerable. Now anyone having no shares will be able to borrow and short sell the same in the hope that market will decline and he will be able to purchase and return to lender the same shares at lower prices.

What if borrowers’ bet fails, market rises and the borrower is trapped in the middle? Who will be responsible to return lenders’ shares if the borrower defaults? Again provisions governing such sensitive matters have not been made part of the draft rules. Rule 19 leaves such matters to the SECP to specify in its directives which again no law gives it the authority to issue.

The Rule 4(1)(b) provides for suspension of registration of the stock exchanges for margin financing for failing to comply with provisions of SE Ordinance. What about the eligibility of a stock exchange to get registered for margin financing if it faces serious allegations of breach of the Ordinance and the SECP has avoided to investigate the matter? What about the eligibility of 56 brokers in terms of rule 7(e) to get registered for margin financing against whom the SECP established the breach of Ordinance in 2007 but exonerated them from punishment?

Whether the arbitrary draft rules will stand the test of judicial scrutiny is not yet clear.

What is clear is that the SECP seems ready to take the first step towards another stock market debacle.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/margin-financing-rules-and-investor-risk-460

The IMF option By Nasir Jamal

THE calls for an early exit from the International Monetary Fund’s stand-by arrangement (SBA) have intensified in the recent weeks as public investments shrink, energy subsidies go and unemployment and poverty rise.

But can Pakistan afford to quit the fund at a time when inflation is resurging, external assistance and foreign investment dwindling, gap between public spending and income widening, public debt mounting and growth decelerating?

On top of that, the government’s tax revenues are stagnating, and its effort to mobilise more domestic resources and restructure tax regime by replacing the existing, distorted general sales tax (GST) with the future-looking value added tax (VAT) is being opposed both inside and outside of the parliament.

Such is the intensity of opposition to VAT that finance minister Hafeez Shaikh named it as “reformed GST” in his budget speech for the next fiscal year and delayed its enforcement till October 1 to gain time for building a bipartisan political consensus and take provinces on board on it.

Many analysts believe that it would be difficult, if not impossible, for the government to obtain a wider political support for VAT and develop a bipartisan agreement on the issue. Even those who want Islamabad to exit from the IMF programme are not prepared to support government on tax resource mobilisation to reduce reliance on external bilateral and multilateral financing. But political rhetoric apart, none of the economic experts or politicians has come forward with an alternative strategy in case the fund programme is terminated prematurely and VAT abandoned.

“What other options are you left with but to go to the IMF for money when you are not ready to enforce financial discipline and mobilise your domestic resources (to meet your needs)?,” wonders eminent economic expert Shahid Kardar.

“If we exit from the fund’s programme it’ll become difficult for other bilateral and multilateral lenders donors to support us financially,” he argues. At the same time, he says, “we will not learn to enforce strict financial discipline on ourselves unless the world abandons us, completely.”

Ali Cheema, another leading economist, cannot agree more with him. “When expenditure is rising and revenues falling, what alternative do you have?,” he asks.

But, he says, politicians could get out of the IMF programme if they decide to make hard choices – imposition of strict financial discipline through cuts in public spending and reorganisation and restructuring of taxes to increase domestic revenues.

Nonetheless, the government cannot make this trade-off on its own. Others will also have to support it. Yet the chances of politicians making this trade-off remain slim. “Even tax reforms are being carried out not because we want to do it but because the fund is pushing us for this,” laments Cheema, who is dismayed by politicisation of the debate on VAT for the benefit of the rich who do not want to pay taxes.

“Imposition of VAT has to be a political decision. But it should not be used for doing adversarial politics,” he contends.

He dismisses fears of hyper inflation as a result of imposition of VAT. “Consumers are paying value added tax for last 20 years in the form of GST. It is only that it is now being levied at the retail stage and is being freed from all distortions and exemptions to the rich.” He feels that VAT is being opposed because it would document the economy and reveal actual income of many who are not paying taxes commensurate to their financial position.

The opponents of the IMF programme, including former finance minister Salman Shah, criticise what they dub as harsh macroeconomic stabilisation conditions attached to it and hold them responsible for the slower growth, job losses, inflationary pressures, high domestic energy prices etc.

Others argue that the economic slide could have been steeper and uncontrollable if the fund had not stepped forward to help Islamabad in November 2008 in the absence of sufficient bilateral assistance specially when the war against militancy is claiming a huge portion of its limited fiscal resources.

The Institute of Public Policy’s annual report on the state of the economy during 2009/10 underlines that the return of “considerable” macroeconomic stability and reduction in financial imbalances are largely due to the financial assistance provided by the fund. Yet, at the same time, it concedes that the policies of fiscal tightening being pushed by the fund for macroeconomic stabilisation are responsible, albeit partially, for causing hardships to people and pushing poverty.

Whether one likes it or not, many believe that Islamabad may have to join yet another IMF programme once the ongoing facility expires in December to protect the “fragile economic recovery” and pay back the loan to the fund unless we get our economic and financial priorities and policies right. The government has to return $11 billion to the fund in three years to June 2015, according to the IPP report.

No matter what position one takes on the country’s relationship with the IMF, one thing is clear: we just don’t have alternative to the fund’s financial assistance for the moment. Not unless we decide to live within our means and pay taxes, honestly.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/the-imf-option-460

Why value added tax? By Waqar Wadho

SINCE its inception in 1954 in France and wherever it has been initiated, VAT has been debated more extensively than any other tax mode. But for more than 100 countries, VAT is the mainstay of their tax systems because it is said that it raises more revenues with lower costs than any other broad-based consumption tax.

What makes it more fascinating than GST or other sales taxes is that VAT generates higher revenues in a neutral fashion. A comprehensive VAT does not cause individuals or firms to budge their choices, such as goods or locations etc. It does not discriminate capital or the labour intensive firms, specialised or the integrated firms, or corporate or the non-corporate firms.

The present sales tax system in Pakistan can be claimed a VAT with coverage up to manufacturing stage. Another salient facet of the VAT is that it’s the first consumption tax to integrate the taxation of services with the taxation of goods. Today, most of the countries have been taxing services comprehensively along with the goods.

In a country like Pakistan, where services account more than 54 per cent of the GDP, taxing services comprehensively would fetch much more revenues required to bridge the growing budget deficits.

VAT is also called the money-machine due to its revenue generation capacity. In OECD countries, it raises revenues up to five to eight per cent of the GDP, while its share is between 15 to 20 per cent of the total tax receipts. In Pakistan where sales tax accounts for more than 60 per cent of the tax receipts, an introduction of VAT will certainly bring a much-needed boost in the tax revenues.

The underlying reasons why Pakistan should adopt it are associated with very basic features of the VAT. 1) Tax coverage: manufacturers, wholesalers and retailers, all would be registered. The extension through the retail stage would not only make this sector documented. In contrast to the general perception, the VAT contains the regressive effects of the conventional sales tax system. Even a quasi- progressiveness can be achieved by levying two to three different tax rates. For example, in France the normal VAT rate is 19.6 per cent, but for tourisms, cultural services, transport, restaurants and water etc. , the rate is reduced to 5.5 which is further reduced to 2.1 per cent for the medicine, press etc.

2) Tax base: VAT taxes the broadest possible range of the goods and services. It ensures the comprehensive taxing of the services that brings in efficiency as compared to the conventional sales tax system.

First, by not taxing services comprehensively, the tax rate for goods will be higher, which would enlarge the excessive burden of the tax.

Second, since Pakistan is developing economy and in its process of the development, the productivity gains of the industrial sector are likely to be larger and taxing only goods would be equal to taxing these gains in the industrial sector that would further erode the development process.

Furthermore, the income elasticity of demand for most services exceeds unity and thus taxing services will have an overall progressive impact. The efficiency argument of comprehensively taxing services does not rule out the role of exemption on the social grounds. Thus, education, health, social and public services can be exempted. Even, it would be better to introduce zero rates for these services as they could claim reimbursements of the inputs they used.

The voice against the VAT is build around an illusion that it would feed a spiral of tax, prices and wages that would lead to inflationary impacts on the economy, and it will adversely impinge on the poor. For its adverse effects on the poor, since it stretches up to the retailers and comprehensively taxes the services; the VAT is less distortive than the existing general sales tax.

Regarding inflation, VAT by itself, can never lead to a sustained increase in the rate of change of prices (it may change the level of price). Second, there is no evidence from the previous studies that VAT has actually caused any inflation. Third, when we talk about the price hike due to VAT, one need to take into account the existing tax that it will replace.

The prevailing general sales tax can be cascading i.e. the tax is imposed on every stage of supply chain without deduction of the tax paid in early stages. On the other hand, the comprehensive VAT avoids the GST cascading. Fourth, VAT enforces tax neutrality, there would be no changes in the aggregate demand and thus would not have any impact on the aggregate price level.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/why-value-added-tax-460

Fiscal stimulus for investment By M. Iqbal Patel

THE federal budget 2010-11 has failed to address serious problems such as issues in industrialisation, rising unemployment and rampant corruption. It appears to be a routine exercise with the hands of the policymakers tied behind their backs under the Stand-by Agreement (SBA) with the IMF.

The VAT has been deferred till October 1. The GST will continue for the interim period July-September with increased rate of 17 per cent, from 16 per cent. The burden of additional taxes will fall on the impoverished masses.

In addition to one per cent increase in the GST rate across the board, the government has also raised excise duty by 100 per cent to Rs10 per mmbtu of natural gas, from Rs5.

Both of these measures would have multiple adverse effects on ordinary citizens. But the matter does not end here and the Nepra has approved an increase in KESC tariff from 0.6 paisa to Rs1.70 with retrospective effect from July 2009 to March 2010 which will make the life of the consumers miserable.

The budget proposals will have negative effect on the socio-economic conditions. The development budget for education and Higher Education Commission (HEC) has been reduced from Rs21.3 billion to Rs20.8 billion. The Economic Survey 2010 has recognised that public expenditure on education as percentage to GDP is the lowest compared to other countries of South Asia. The current budget has cut Rs7 billion from allocation for the Higher Education Commission which is bound to devastate the infrastructural and academic development of the public sector universities across the country.

Similarly the allocation for health has been slashed by 27 per cent to Rs16.94bn from Rs23.15 billion in 2009-10 The finance minister has defended the low allocation for education and health by saying “these are provincial subjects”.

Besides the above, the budget has not mentioned of steps to be taken to eliminate circular debt which is affecting the performance of energy sector and is the main reason behind the power crisis, resulting in industrial slowdown and high unemployment rate.

One may safely conclude that the budget has failed to fix the right direction for revival of the economy, alleviation of poverty, creating job opportunities, elimination of corruption, financial indiscipline in the state-run units and resolving energy crisis.

However, the budget has some appreciable features as it provides tax incentives on foreign and domestic investment. Foreign lenders would enjoy tax-free repatriation of profits earned on foreign industrial loans. The rate of withholding tax has been reduced from 30 to 20 per cent on non-specified payments to non-residents.

Besides, tax-free payment to non-residents on profit on debt will be allowed 10 per cent tax credit for BMR, five per cent tax credit to a company in the tax year of its enlistment. It has enhanced the ceiling of the income tax exemptions for the salaried and non-salaried class to Rs300,000.

After a long period of 36 years since 1974, the capital gains on sale of securities have been brought into tax net which is a welcome step on the part of policymakers as well as the stock exchanges.

Withholding tax at the rate of 0.3 per cent is applied on cash withdrawal from a bank exceeding Rs25,000 in a day is now extended to all banking transactions. This measure is not necessary as the withholding tax was initially imposed to curb cash transactions to encourage documentation but taxing the payment made through any mode such as Pay Order etc., would result in change of banking culture and will promote parallel economy.

It is not clear whether the tax will be imposed on payment through crossed cheque though FBR Member has stated in the press statement that it wouldn’t apply to crossed cheques transactions but this should be required to be notified by the FBR to avoid the confusion.

In any case, this step would have adverse effect on the banking culture and needs review.

The taxation measures include harsh penalties for the taxpayers who failed to comply with the provisions of the tax statute which requires reconsideration to create taxpayers-tax collectors friendly environment.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/fiscal-stimulus-for-investment-460

World Bank and Thar coal project By Ashfak Bokhari

THE World Bank’s decision to drop its plan for providing technical assistance to the Thar coal project worth $20-25 million is being interpreted by many as its reluctance to finance coal-fired plants in Pakistan.

Although the bank has made no such indication, nor conveyed any such intentions to the government, the fact remains that in recent months it has been under fire from several quarters including the developed countries for spending billions of dollars on ‘polluter’ projects in developing countries.

Coal is still the cheapest fuel in the world and affordable to the poor but the coal-based energy projects are being discouraged for they release vast amounts of gas emissions into the atmosphere. While scrapping the plan, the World Bank made no mention of pollution the Thar project may cause as the reason for withdrawal of its funds. Instead, it said, these financial resources can more effectively be used to address the energy shortfalls in the near-term in an environmentally sustainable manner such as extension of the Tarbela Hydropower Project.

The bank has been working on $650 million project for containing losses in the natural gas transmission system and increasing power production from Tarbela Dam. Besides, since the Thar project is still at a preliminary stage, and the stage of appraisal has not yet come, the World Bank says it has opted to divert resources towards other crucial projects.

The World Bank, perhaps, has become cautious after facing worldwide condemnation for extending a $3.75 billion loan to South Africa in April to build one of the world's largest coal plants. The decision drew sharp criticism even from the Obama administration. An international coalition of grassroots, church and environmental activists launched a massive protest against the controversial loan, saying it would hurt the environment by putting out 25 million tonnes of carbon dioxide a year.

In Pakistan, the World Bank’s decision not to finance the Thar coal project apparently for environmental reasons is not convincing enough because the country’s industry does not contribute much to carbon emissions and its carbon footprint is one of the lowest. So, not much harm to the ecology could be expected from the Thar coal project on completion.

Engro Energy, which has leased a block at Thar, wants the government to convince the World Bank in this respect because Pakistan happens to be one of the least polluters.

Meanwhile, Dr Samar Mubarakmand, a nuclear scientist who earned fame for his instrumental role in 1998 nuclear tests, is working on a project for generating electricity through gasification of Thar coal reserves. It will be ready by next year and if implemented successfully it will eliminate the problem of pollution by converting Thar coal into clean energy. The Thar coal reserves of 175.5 billion tons, discovered in 1992, have a potential to generate 5,000 MW for at least 800 years, according to Dr Samar.

It is interesting to note a contradiction in the World Bank’s policy in dealing with coal-based projects. It says that the world must reduce its dependence on fossil fuels, but, at the same time, it is funding several giant coal-burning plants that will each emit millions of tonnes of carbon dioxide a year for the next 40 to 50 years. But more interesting is the double-standards practised by the US in this matter. It opposes loans for coal-fired plants, as in case of the South African project, by abstaining from voting on the proposal in the WB board. The abstention allows the loan to be approved while also allowing the US to go on record in opposition to it.

It abstained from voting on a $2.81 billion loan from the African Development Bank for the same power plant last November. During Copenhagen summit, the US advocated development of no or low-carbon energy sources in developing countries. That the US opposes coal-fired power is something difficult to believe because it has 600 coal-fired plants within the country which provide more than half of its energy supply. Another 60 coal-fired plants are at various stages of planning. The US refuses to accept limits to its domestic greenhouse gas emissions, though it did agree, for the first time, to modest cuts in Copenhagen.

In a communication, China and India warned the WB president Robert Zoellick in Copenhagen that the US should not be allowed to flex its muscle unilaterally as the bank's largest donor. They argued that the bank's core mandate is poverty alleviation and economic growth and climate change should only be addressed when it impinges on those efforts; and coal is still crucial to increasing access to electricity and thus those poverty and development efforts.

Not every country can take the same path toward a clean energy transition. But the question critics raise is that does investing in plants fired by coal – which releases more carbon dioxide emissions per unit of energy produced than any other fossil fuel – really best serve people in South Africa and other countries receiving bank funding? South Africa's finance minister says, it does. He argues in a Washington Post op-ed: “we have no choice but to build new generating capacity – relying on what, for now, remains our most abundant and affordable energy source: coal."

The WB’s, World Development Report-2009 advises against, “locking the world into high-carbon infrastructure” but makes no mention of the bank’s plans to support coal power plants in India, South Africa, Botswana and other developing countries. Last year the WB and its partner, Asian Development Bank, approved $850 million in loans to finance a coal-fired plant in Gujarat, western India, which a US lobby group says would be one of the biggest new sources of greenhouse gases on earth, emitting 26.7million tonnes of CO2 a year for the next 50 years.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/world-bank-and-thar-coal-project-460

Big farmers still out of tax net By Shamim-ur-Rahman

ENRICHED by the increased revenue receipts from the Federal Divisible Pool under the 7th NFC Award and proposed sales tax on services, the Sindh budget 2010-11 has focused on infrastructure, connectivity, energy and further revenue generation. However, big farmers remain exempt from income tax.

The total budget size is estimated at Rs422 billion as against the revenue of Rs397 billion with a deficit of Rs25 billion.

For accelerating socio-economic activities, the provincial ADP has been raised by 53 per cent to Rs115 billion from the current year’s allocation of Rs75 billion. The total size of the development outlay adds to Rs135 billion that includes federal PSDP grants of Rs14.4 billion, foreign project assistance Rs4.2 billion and DERA/SCIP Rs1.5 billion.

The finalisation of the budget estimates took much time due to contentious issues pertaining to GST and the proposed VAT. According to budget documents, estimated revenue receipts from the divisible provincial pool are at Rs207.3 billion, showing 78.2 per cent increase over 2009-10 budget. This, however, includes the receipts on account of abolished Octri and Zila Tax. The estimates under oil and gas receipts are Rs51.2 billion against revised estimates of Rs53.7 billion.

The Provincial Own Receipts, have been projected at Rs50.5 billion, up 27 per cent over revised estimates of outgoing year. The collection of an estimated Rs25 billion from the sales tax on services is expected to start from October.

The provincial government claims it could collect Rs40 billion in this regard but has deliberately made conservative estimates. The federal finance ministry has advised the Sindh government not to levy sale tax on services for three months. The current revenue expenditure has been estimated at Rs268.3 billion, with an increase of 19.3 per cent over revised estimates of Rs224.8 billion.

The district development portfolio has been estimated at Rs18 billion. According to annual budget statements, Rs87.6 billion have been allocated for district governments which is substantially higher than Rs68 billion in the revised estimates for 2009-10. Karachi has got the lion’s share of Rs16 billion as against Rs13 billion shown in the revised estimates for the outgoing year.

The chief minister’s district Khairpur is number two with Rs5.8 billion while Hyderabad will get Rs5,3 billion. Similar allocations have also been made for taluka and town municipal administrations. But surprisingly, neither the chief minister referred to the local government elections nor has any allocation for the same been made in the provincial budget.

Now that Capital Value Tax (CVT) on immovable property has fallen in the provincial domain after the 18th Constitutional amendment, the Sindh government has projected a total receipts of Rs2.5 billion. The budget projects collection under different categories in the urban and rural areas. It has halved the incidence of this CVT and proposes to collect it at two instead of at four per cent that was being collected by the federal government. For the commercial immoveable property, it would be 2.5 per cent. As such the provincial government claims that its measures for both the categories would reduce the burden on the people by 37.5 per cent and 50 per cent respectively.

The government has also proposed to reduce rates of stamp duty on Conveyance Deed to two from the existing three per cent in order to expand the net and facilitate greater documentation. In this regard, the valuation table of immoveable properties would be increased in accordance with prevalent inflation.

The government has also proposed to reduce stamp duty in favour of Real Estate Investment Trusts. In this context it will be reduced to one from the existing three per cent on Conveyance Deed and from one to 0.5 per cent on registration. Stamp duty is also being reduced on some financial instruments ( participation term certificates, TFCs and other commercial papers) to harmonise the rates with those of Islamabad and Punjab.

But when it comes to revenue from tax on agriculture, the total receipts have been estimated at Rs220 million. The receipts from tax on motor vehicles have been estimated at Rs3.8 billion. The government also intends to generate revenue to the tune of Rs600 million from electricity duty under various heads throughout the province.

While terrorism and organised crime have proliferated despite increased allocations for the law enforcing agencies, the budget allocates Rs29.6 billon, which is 65 per cent more than Rs17.9 billon earmarked in 2007. The law and order remains one of the biggest challenge for the government because it has not yet succeeded in curbing targeted killings and sectarian violence which are politically motivated.

Claiming that it was pro-poor budget, the Sindh Chief Minister, Syed Qaim Ali Shah, referred to Benazir Women Support Programme and other poverty alleviation programmes, besides urban development projects .including revival of Karachi Circular Railways with Japanese government assistance.

He also referred to the innovative North Sindh Urban Services Corporation (NSUSC) which, he said, has already begun operations and will now take over the water supply, sewerage, solid waste management services of the seven cities in north Sindh in Phase I. This will be followed by another cluster in central Sindh covering cities like Nawabshah, Moro Shahdadpur, Hala, Sanghar and Dadu.

An allocation of Rs10 billion has been made for starting coal projects from provincial resources. The Sindh government is hoping to get matching contribution from the federal government. Development of energy related infrastructure, including construction of roads, railways, airport and transmission lines etc is high on the provincial government’s agenda to attract investment.

In order to meet the water shortages, the government also plans to build reservoirs on major canals. These will be filled during rainy season The current investment of the provincial government on irrigation and drainage is Rs4.8 billion which has been increased by 100 per cent to Rs10.5 billion. The budget as usual contained allocations on social sector such as health, education, etc.

Be that as it may, the development projects the chief minister mentioned in his speech were ongoing projects and there is hardly any new major initiative.

But analysts say, with rising of tariff of electricity and gas, and price of petroleum products, it would be naïve to expect that the government will meet all its projected targets. Frequently fluctuating cost of energy input will not only impact on the general public, industry and the business community, it would also upset the cost of different development projects due to enhanced cost of transportation. Rising cost of commuting will also result in price hike of everything.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/big-farmers-still-out-of-tax-net-460

Thursday, June 17, 2010

Pakistan's growth prospects: analysis By BR RESEARCH

ARTICLE (June 05 2010): First the headlines; the economic survey is out, and looks unimaginably transparent, analytical, frank and forthright - something that reminds one of the survey documents prepared by Dr Arshad Zaman, way back in the 80s. And now the real news; Pakistan's economic growth is still 'fragile' demanding a 'cautiously optimistic' stance from policy makers and a series of tough reforms across the board.

The country's GDP growth for the year ended June 2010 stood at 4.1 percent, a number which could have been around 6 percent, according to finmin officials, if energy shortages hadn't stalled business activities all around the year. While that may sound like an exaggerated blame on energy woes, there is no doubt that power shortages will continue to weigh on the economy next year. And that - will be the real test for the economy.

So far this year, a rebound due to the low base affect helped bring about industrial growth. But with spare capacities gradually being utilised at different paces in different sectors, the question is whether the next year will witness the same level of growth. Aside from energy shortages, another key impediment is low capital formation.

The Economic Survey shows that total Gross Fixed Capital Formation (GFCF) fell by 0.6 percent, as the private sector witnessed a drop 3.5 percent. Included in this decline, is the 4.9 percent slide in manufacturing sector (down 12.4 percent in LSM) and 18.8 percent in the electricity and gas sector.

This is validated by the fact that the marginal propensity to consume in the private sector remained high at 80.5 percent of the GDP this year, while government expenditure increased from 8.1 percent to 8.9 percent. So, with not much change in net exports gross capital formation declined from 17.4 to 15 percent of GDP in the outgoing year.

And just as the LSM sector, small and medium businesses are likely to be strained. "The small and micro-enterprise sectors, which employ the bulk of the non-agricultural labour force, and are less well captured in the national accounts data, are much less insulated, and therefore significantly more vulnerable to shocks such as wide spread disruptions to energy supply," the survey aptly points out.

But what stands out as an even bigger concern is slowing farming growth, which eased to 2 percent in FY10 from 4 percent in the year before, and its falling contribution in economic growth. In 2009-10, the share of services in headline growth was roughly in line with its average, at 59 percent, but agri growth was much lower than its five year average.

"Despite its critical importance to growth, exports, incomes, and food security, the agriculture sector has been suffering from secular decline....with growth in the sector, particularly in the crop sub-sector persistently falling for the past three decades," the survey said.

And knowing that Pakistan is one of the world's most arid countries, farming growth looks structurally challenged in the next few years, unless the proposed plans to construct small and medium dams are actually implemented. "According to the benchmark water scarcity indicator, Pakistan's estimated current per capita water availability of around 1,066 M3, placing it in the "high water stress" category," the survey warns.

DOCUMENTATION & ENERGY Aiming to deal with potential hiccups in growth, the ministry needs a number of reforms. And central to these, amongst others, are documentation and formalisation of economy.

Be it a matter of agricultural reform, tax reform or a question of providing targeted subsidies to the needy, documentation holds the key. The good thing is that the ministry has recognised this in its survey by highlighting the policy disincentives towards formalisation of the economy.

The ministry also adds that pervasive mis-declaration and under-invoicing of imports, costs the economy anywhere between Rs 100 billion to Rs 300 billion in lost revenue yearly, according to certain estimates. The second significant issue is energy. The Economic Survey has rightly acknowledged that circular debt has caused a lot of problems, but now with tariff subsidies removed, there should be no more excuses in the future, blaming circular debt for underachievement.

The report also indicates that power line losses remain at previous year's level, which is an alarming sign as it would keep the pressure of circular debt on the fiscally constrained government. But then again, boosting energy infrastructure requires plenty of foreign investment, which might not be in the offing in the next few years, given the war against terrorism.

Pakistan's economy took a hit of $11 billion, on account of war on terror, this fiscal year - a number which is seen only growing in the years ahead. All in all, this survey seems like a decent, whole-hearted and unbiased effort to paint the economic condition of the country. One hopes that the underlined warnings and cautious approach advised by the makers of this report is heard in the relevant ministries before the fears cited by Sakib Sherani materialise.


Source: FBS

Source: http://www.brecorder.com/index.php?id=1064890&currPageNo=1&query=&search=&term=&supDate=

Other-side of Budget By Muhammad Ahmad Sabazwari




Source: http://jang.com.pk/jang/jun2010-daily/15-06-2010/col1.htm

Adopted Budget & Future of Our Institutions By Sakandar Hameed Lodhi




Source: http://jang.com.pk/jang/jun2010-daily/14-06-2010/col9.htm

Budget 2010: A Review By Dr. Mirza Ikhtiar Baig




Source: http://jang.com.pk/jang/jun2010-daily/14-06-2010/col4.htm

Buget & Mini Budget By Sakandar Hameed Lodhi

Tuesday, June 15, 2010

Budget & Mini-Budget By Sakandar Hameed Lodhi




Source: http://jang.com.pk/jang/jun2010-daily/08-06-2010/col12.htm

Thursday, June 10, 2010

Federal Budget By Dr. Shahid Hassan Siddiqui




Source: http://jang.com.pk/jang/jun2010-daily/08-06-2010/col1.htm

What Says Transparency International By Munnu BAi

Source: http://jang.com.pk/jang/jun2010-daily/04-06-2010/col8.htm

Economic data, growth rate

Authentic data are sine qua non for sound economic policy planning and management. Without accurate data, policy making would be erroneous and lopsided. That is why developed nations spend a lot of time, money and energy to put in place credible statistical organisations that function without political interference and on purely professional lines.

For the next fiscal year starting July 1, the government has set a GDP growth estimate of 4.5 per cent with an inflation (GDP deflator growth) rate of 8.9 per cent. It has estimated nominal growth GDP at 13.9 per cent, current account deficit at $6.5 billion, nominal exchange rate at Rs87 to a dollar, net foreign income at $6.57 billion and net indirect tax at Rs883 billion.

Nominal GDP has been estimated at Rs16,975 billion. The government expects to achieve 4.5 per cent GDP growth rate for next year with agriculture output growing at 3.8 per cent, manufacturing at 5.6 per cent and services sector at 4.7 per cent.

These estimates are based on assumptions that energy shortages would be managed to help revive production in key sectors. Inflation would likely be 9.5 per cent mainly by pursuing prudent fiscal and monetary policies. Higher growth in agriculture and manufacturing and lower inflationary expectations would keep the inflation within single digit.

The International Monetary Fund disagrees with these projections. It has estimated that the economy would grow at 4.3 per cent of GDP with GDP deflator of 12.5 per cent nominal GDP size of Rs17,319 billion.

Successive governments have been talking about creation of an independent statistics authority but they have not delivered on their promises. Even today, Federal Bureau of Statistics (FBS) continues to function as a subordinate division of the finance ministry. As a result, the FBS has never been able to enjoy credibility and respect such professional organisations aught to have in open and transparent economies. This becomes more difficult when finance ministry has political reasons to show results in order to prove success of its economic policies.

This year, too, the estimates finalised by the National Accounts Committee (NAC) attracted usual suspicions of data manipulation. The suspicion was reinforced by criticism coming from Dr Ashfaque Hassan Khan, who has been member of the NAC and finance ministry’s economic adviser for more than a decade.

The FBS says that a number of problems are faced when economic statistics are used for constructing national accounts. There is a wide range of challenges including lack of uniformity and harmonisation of concepts, definitions and classifications adopted for different surveys and subsequently used in estimation of national accounts (GDP/GNP) that need to be addressed.

Lack of (regular and continuous) training of professionals of national accounts to become familiar with the modern techniques and concepts being adopted in the system also contributes to the problems. There is, therefore, a dire need for timely release of data to all users along with sources and methodology of estimation to improve the public perception about the data reliability.

This year, the NAC amongst others endorsed provisional growth of 4.1 per cent for gross domestic product (GDP) and -0.6 per cent for gross fixed capital formation (GFCF)/investment for 2009-10 but the most interesting thing was revision in last year’s GDP growth to 1.2 per cent from two per cent. It is normal that three types of estimates are made every year. These include provisional estimate for the current year 2009-10, revised for the previous year 2008-09 and final for 2007-08.

Provisional estimates are based on six to nine months annualised data. Sometimes sources provide the projections for the whole year and if they do not provide the projections, FBS has to fill the gaps. In case partial or no data is available, last year’s figures are repeated.

Data providers also supply revised data for the previous year and final figures for the earlier year. If the provisional data is mature enough, the revised and final estimates will vary less otherwise the variation will be large. Hence, each year National Accounts estimates pass through three stages.

The authorities need to improve the status and independence of FBS to ensure its credibility. It is time to make it independent from the ministry of finance and the government to ensure authenticity of the official data.

At the same time, the quality and timeliness of data should be improved by the FBS through capacity building of FBS staff and experts besides the up-gradation of FBS infrastructure. But more importantly, the FBS should have the authority to release macroeconomic numbers on the day NAC approves them along with analysis and estimation methodology and data sources.—Khaleeq Kiani

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/economic-data-growth-rate-760

Punjab budget and conventional wisdom

WHAT will be new about Punjab budget for the financial year 2010/11? “Apart from huge increase in the total federal transfers to the province from the divisible pool under the new National Finance Commission award and other sources, it will be a conventional budget,” Tanvir Ashraf Kaira, the provincial finance minister, told Dawn last week.

Thanks to the increased provincial share under the new NFC award finalised earlier this year, the provincial government is expecting federal transfers to surge to Rs450 billion 2010/11 from the budgetary estimates of Rs337 billion – including the share from the divisible pool, federal grants, and straight transfers – for the outgoing year.

“Initially we expected the total federal transfers to shoot up to Rs470 billion. But the estimates have been revised down recently,” an official of the provincial finance department said. “The exact numbers will be available only after the announcement of the federal budget,” he said.

In answer to a question about the cost of devolution of different departments and responsibilities to the provinces from the federation after the passage of the landmark 18th amendment to the constitution, the minister said the devolution of responsibilities as result of abolition of concurrent lists would be transferred to the provinces from 2011/12.

“Since the concurrent list has been abolished post-NFC award, the federal government would also transfer additional funds to the provinces for their responsibilities,” he said. The federal government had given a verbal commitment to the provinces to this effect during the process of negotiations on the new NFC award. “We had an idea at that time about the abolition of the concurrent list and were able to get the pledge from the federal government,’ Kaira said. But, Islamabad had not given this commitment in writing. Therefore, it was not binding on the federation and could require fresh negotiations on the issue, he admitted.

Tax rationalisation: The provincial budget, likely to be presented before the Punjab assembly towards the end of this week, will also propose “rationalisation” of some major provincial taxes. “Frustrated by its inability to increase provincial tax revenue, the Punjab government is considering rationalising some major provincial taxes in the budget for the next financial year to improve provincial tax revenues,” a senior provincial official, who refused to give his name, said.

“The rates of some taxes like stamp duty and property taxes may go up in order to generate more revenue for the province’s development,” he said and pointed out that rationalisation of stamp duty in 2007 had resulted in an increase of more than 13 per cent or Rs1 billion in its collection from Rs7.5 billion in 2006.

“A little bit of change in tax rates according to the economic conditions and requirements of the province always results in increased revenue collection,” the official said. But, he said, the decision on the proposal as to which taxes were to be rationalised and to what extent was yet to be approved by the chief minister.

Punjab has been trying to reform its tax administration to increase provincial revenues for the last several years under the governance reforms programme financed by the Asian Development Bank, but its efforts have so far not produced the desired results due to bureaucratic resistance and lethargy as well as rapid growth in the size of the federal transfers to the province.

Like in other provinces, Punjab’s bureaucracy has never been able to achieve the budgetary tax collection targets. But that has not deterred it from increasing the targets every year. In 2008/09 the province could collect only Rs28 billion at the end of the year against the target of Rs40 billion. This year too, it had set a tax collection target of Rs49.5 billion, but has revised down it to just Rs35 billion, or 25 per cent higher than last year’s collection.

The officials, however, are still not sure if the government will be able to achieve it. The budgetary target for the next financial year 2010/11 is now being increased to above Rs59 billion or more than double the actually tax revenue collection in 2008/09. “You bet the government will never even get close to the proposed tax collection target for the next financial year let alone achieve it,” another provincial official said.

“Since the federal government has taken the major task of collecting tax revenue on behalf of the provinces upon itself, they do not find it much important to reform their own tax administration systems and increase provincial tax collection,” said a former senior provincial finance department official.

“That is precisely why provincial tax revenues constitute only a fraction – may be 10 per cent or even much less than that – of the income of any of the four provinces. The federal money, on the other hand, constitutes more than 80 per cent of their total revenues. Why work when some one else is working for you?,” he asked.

That may be largely true, but other factors – primitive tax administration, rampant corruption in provincial tax departments, tax exemptions allowed to powerful lobbies like landholders and industrialists, etc – are also responsible for the poor provincial tax effort performance in Punjab. Although finance minister Tanvir Ashraf Kaira had promised to initiate tax reforms in the province in his budget speech for the outgoing year 2009/10, nothing has been done so far. Nor do officials see happening the next fiscal year.

Some officials blame narrow base of provincial taxes for low provincial tax revenues. But others don’t subscribe to this view. “Property tax, stamp duty and agriculture tax are considered to be major revenue generating taxes,” a senior official of the planning & development department said on the condition of anonymity.

Some analysts say, Punjab can generate several billion rupees in tax revenues in one year provided it withdraws agriculture and property tax exemptions and reform its tax collecting departments on modern lines as suggested by the ADB. But will it?

Development budget: Apart from enhancing tax collection target, the Punjab government is also mulling over raising budgetary allocations for development next year to around Rs190 billion from Rs175 billion for the outgoing year. Few believe that the province has the capacity to spend that kind of money.

The government has already quietly slashed its development spending for the outgoing year. “We have released Rs140 billion for development so far and I hope that this amount will be spent by the end of the year,” says minister Kaira.

But many officials reject his assertion, saying the utilisation of development funds is more likely to remain below Rs130 billion.

The minister says the thrust of development spending next year will on social sector and economic infrastructure building. The development funding for social sector is being enhanced to Rs72 billion from Rs59 billion during the outgoing year. “In addition to social sector, we also plan to make allocations for pro-poor subsidies under subsidised flour and sasti roti scheme in the current budget,” Kaira added.

The enormous subsidy of Rs30 billion or more given on controversial wheat flour and sasti roti schemes during the outgoing year is often blamed to have played havoc with the provincial finances. Many analysts term the schemes as “nothing more than giving charity to the poor”. It would have been much better if the government had put the money in productive sectors for creating sustainable jobs,” an economic expert said. He was of the view that a large part of the subsidy had ended up in the pockets of those who did not deserve it or was lost in corruption. Sources say, the budgetary allocations for maintenance of law and order could also see a quantum jump from Rs43 billion set aside in the budget for the outgoing fiscal year, necessitated by the rising incidence of terrorist attacks in the province.—Nasir Jamal

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/punjab-budget-and-conventional-wisdom-760

The fiscal dilemma By Shahid Javed Burki

THOSE who remember economic history would recall that the most notable contribution the British economist John Maynard Keynes made was to argue that governments should use their capacity to create money to step up the rate of economic growth.

That should be done when the economy is in serious stress which has resulted in a significant increase in unemployment. His great contribution was to point out that governments can get caught up in a trap if they meet the situation by curtailing expenditure rather than expanding it.

Reducing government expenditure would result in greater unemployment, decline in income, decline in government revenues and fall in government expenditure. This produces the Keynesian vicious cycle. The only way to step out of it is to stimulate the economy. Asked by some of the conventional economists as to what would be the long-term consequences of such an approach, Keynes said famously that in the “long run we are all dead.”

From my brief description of the way Keynes would have seen the revival of stalled growth is to suggest Pakistan’s policymakers are dealing with exactly the kind of situation envisaged by the great economist. The difference is that because of his work we understand what would be the consequences of limiting government expenditure or by curtailing private demand through increased taxation. In both situations, Pakistan will suffer further loss of economic dynamism. Already the rate of growth is not much more than the rate of increase in population.

Since the flow of incremental income is greatly skewed in favour of the rich, a low GDP growth means increase in poverty. This Pakistan cannot afford at such a difficult time in its history. The little bit of recovery that we have seen in the last few months will evaporate if too severe a retrenchment is undertaken on the fiscal side. And yet, Pakistan cannot spend its way out of the economic problems it confronts. This is precisely what the Greeks tried to do and we know the consequences. This is Pakistan’s fiscal dilemma.

A week ago at an Islamabad meeting I made public the main findings of State of the Economy: Pulling Back from the Abyss, the third annual report issued by the Institute of Public Policy, Lahore. The IPP was founded by a number of us – including Sartaj Aziz, Jehangir Karamat, Hafiz Pasha, Shahid Hamid, Shahid Kardar, Pervez Hasan and myself. The tone of each report has become more worried. In the first report issued in 2008 we dealt with the challenges and opportunities the economy faced.

We presented the government with a menu of options from which it could choose to set the economy on a sustainable, reasonably high rate of growth while reducing the incidence of poverty. In the second report published last year we thought the economy might emerge from the crisis it was then dealing with provided some actions were urgently taken by Islamabad.

The set of options were now limited. In this year’s report we are of the view that we stand at the edge of an abyss from which we might pull back, again with appropriate government policies. Each of the three reports was presented before the government announced the budget for the following year, hoping that some of our ideas would be looked at seriously by the policymakers.

For Pakistan, financial year 2007-08 set the stage for what was to happen later. Fiscal deficit as a percentage of GNP increased from a reasonable 4.3 in the previous year to a whopping 7.4 per cent. The main reason was the loosening of the purse strings by the government to prepare for the elections of February 2008. This was compounded by the increase in the price of oil and food which resulted in a sharp decline in the country’s reserves as the import bill mounted. Current account deficit increased from 4.9 per cent to 8.4 per cent. By the time action was taken, a democratically elected government had assumed office which thought that the international community would come to the country’s rescue by providing quick-disbursing assistance to stem the run on the reserves.

After all with Pakistan’s long record of military rule, there was a justifiable assumption that the world would not let the country sink as it was busy establishing a democratic political order. A Friends of Democratic Pakistan group, the FODP, was assembled which promised help on the condition that a programme was first negotiated with the IMF. Pakistan having promised in the closing years of the Musharraf period that it would never return to the Fund had to go back. This it did with what it called a “home grown” policy programme that would provide some support to the poor as the economy slowed down through fiscal retrenchment. In 2008-09 there was an adjustment of 2.2 percentage points in the fiscal deficit which declined from 7.4 to 5.2 per cent. GNP growth also slowed down to 2.5 compared to 6.2 per cent in the previous year.

The about-to-be concluded 2009-10 fiscal year was a better year in the short-term. The rate of growth picked up as industrial activity recovered somewhat. Balance of payments deficit declined as imports plummeted and the price of oil declined. The level of reserves improved, reaching about $15 billion. But in the hope that the money promised by FODP would arrive – an assumption that supported the 2009-10 budget – the government did little to reduce its expenditure, particularly on non-development activities. The level of fiscal deficit once again began to increase.

What is especially worrying is the distribution of the cost of adjustment across the various segments of the population. Our report estimates that even though fiscal deficit declined, overall consumption increased by as much as one per cent. Some classes benefited a great deal. Wheat farmers, for instance, saw large increases in their incomes as the price of procurement was increased by the government to increase the output of this vital crop.

Since national income accounts must balance, fiscal deficit decline accompanied by increase in consumption meant that something else had to give. This was the rate of investment which declined, not a good development for a slow growing economy. Also the increase in consumption was those of the relatively well-off groups, including the wheat framers who had surpluses to sell. Clearly, these trends are unhealthy and need to be checked through the adoption of the right set of policies, particularly on the fiscal side.

It appears to us that when the current programme with the Fund ends this December, another dose of finance will be needed from that institution. The Fund in return will ask for a sharp fiscal adjustment which will once again slow down the rate of economic growth, increase unemployment and add to the number of people living in poverty. Islamabad should resist such an approach. In our report we have developed an alternative model that calls for a less radical fiscal adjustment.

At the same time we have asked for a meaningful response by the citizenry towards taxation. With the tax to GDP ratio as low as it is, the government cannot afford to increase by much the expenditure on such social services as health and education. Without these Pakistan cannot turn its large and young population into an economic asset rather than a growing social and economic burden.

There are clear choices for the government as well as the citizenry. Sacrifices have to be made to pull back the country from the edge of an abyss. But these sacrifices need to be made by all segments of the population. The burden should not fall on those who are politically and economically weak.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/the-fiscal-dilemma-760

Budget objectives

FINANCE Minister Dr Abdul Hafeez Sheikh spelled out some key objectives of the budget 2010-11 which, according to him, were part of a 24-hour 365 days-a-year overall policy and economic management.

He said, introducing austerity culture, promoting fiscal discipline, keeping inflation under check, protecting the poor and the vulnerable, providing well-targeted subsidies and creating jobs were the objectives that would be met through the budgetary measures for the next fiscal year.

He announced freezing of all non-development expenses at FY10 levels and a 10 per cent cut in remunerations of the members of the federal cabinet as a first step towards an austerity drive. To remove hassles, funds allocated under the federal annual development plan would be released automatically on quarterly basis. from FY 11. He said that 80 per cent of the federally financed development projects would be the ones that were nearing completion. The twin measures would ensure full utilisation of development funds, timely delivery of development projects and accelerate job creation.

The federal government would finance development spending worth Rs280 billion next year while roughly 58 per cent of Rs663 billion PSDP would be handled by the provinces. Higher development spending by the provinces is expected to accelerate nation-building activity like health, education, infrastructure facilities and create jobs.

According to the Economic Survey of Pakistan-2010, unemployment increased 5.5 per cent in FY10 despite an estimated GDP growth of 4.1 per cent. In his budget speech, the finance minister mentioned lack of job creation and revenue mobilisation, revamping of public sector enterprises or PSEs and energy crisis as, “weak areas of macroeconomic recovery.”

Dr Sheikh said that the budget had been made under a framework of international commitments—an obvious reference to the performance criteria set in the IMF’s $10.66 billion loan programme. He announced that from October 1, the government would switch over from the present ‘distorted’ version of general sales tax to a reformed one—without naming it as value-added tax.

Introduction of reformed GST (or VAT) is aimed at doing away with exemptions currently being enjoyed by “powerful lobbies”. The finance minister also wants to contain the government’s inflationary borrowings from the banking system and do away with ill-targeted subsidies granted to Public Sector Enterprises (PSEs) to help achieve greater fiscal discipline. He reminded the parliamentarians that public debt to GDP ratio had reached a ‘dangerous level’ of 55 per cent and that under fiscal responsibility law, the government could not go beyond 60 per cent.

While lamenting subsidies being enjoyed by PIA and other PSEs he asked, “who from the poor people travel by air?” and went on to reveal that whereas the entire civilian government’s annual expenses came to roughly Rs165 billion, Pakistan Electric Supply Corporation (PEPCO) alone “wants an annual subsidy of Rs180 billion.” The finance minister also disclosed that subsidies granted to PSEs were making a dent of Rs235 billion in the national budget and warned that withdrawing such subsidies was not easy “as powerful people are involved in it.”

The minister who took oath of his office barely hours before announcing the new budget said that the reformed GST (or VAT) would not be levied on health, education services and on food items.

The new budget envisages some other measures as well to protect the poor and the vulnerable groups against possible increase in the cost of living due to withdrawal of subsidies and exemption or enhancement in their existing duty and pay rates.

These measures include increase in the minimum wages from Rs6000 to Rs7000, an increased allocation of Rs50 billion for Benazir Income Support Programme, inclusion of youth training and guaranteed payment of the equivalent of minimum wages of 100 days to those enrolled under such training, a big 50 per cent rise in the basic pay of the government employees of grade 1-16, enlargement of health insurance cover to government employees and increase in their pensions etc.—M.A.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/budget-objectives-760

Stubborn food inflation By Mohiuddin Aazim

FOOD inflation recorded a double-digit increase in the last three fiscal years and it also remained consistently higher than the overall Consumer Price Index inflation.

Both trends continue through the fourth consecutive year. And it looks uncertain whether the policymakers would succeed in halting these trends in the next fiscal year.

In the current fiscal year food inflation had bottomed out at 7.5 per cent in October 2009 at a time when overall CPI inflation was also falling rapidly. But it began to bounce back since then and shot up to 14.5 per cent in April 2010.

In its third-quarterly report on the state of the economy, the State Bank of Pakistan has pointed out that the rise in food and energy prices seen since January 2010 is now having a strong second-round effect. Commenting on the fact that food inflation remains higher than the overall CPI inflation, the central bank says, this phenomenon implies that domestic consumers are paying the cost of lower productivity in some areas, imperfect markets and government intervention in commodity prices.

“It has also been observed that domestic prices of most of the food items rise with the surge in their international prices. However, in case of a decline in international prices, the pass-through is largely insignificant”, says the report. Examples of this can be traced in case of almost every food item, notably, wheat, sugar, rice, tea, palm oil etc.

Domestic and global supply shocks, low per-acre yield of local food crops, high input costs including the cost of fertiliser, gas, electricity and bank finances, increasing cost of transportation due to upward movements in fuel oil prices, lack of proper storage facilities, ill-timed government intervention in commodity markets, broken links in supply chain and higher commodity prices in the international market during the recession of 2008-09 all have fuelled food inflation.

Over-spending by government and consequent inflationary borrowings from the central bank, presence of a large parallel economy which helps cash-rich middlemen to manipulate commodity markets, lack of political will to enforce competition laws, ensure a disciplined pass-through of international price movements on domestic price-line and contain hoarding, smuggling and other malpractices—and absence of a proper mechanism to protect consumer from undue price-hikes have also made it difficult to keep food prices at reasonable levels.

Managing food inflation is becoming increasingly difficult. The governments—both the elected ones and those run by military dictators—make tall claims about expanding social safety nets and providing relief to the poorer segments of the society. “But no government gives really pro-agricultural growth policies or check speculative activities in commodity markets to keep food inflation low,” says a senior former SBP official.

Many like him think that food inflation cannot be checked unless a policy is framed to accelerate the rate of increase in per-acre yield of food crops and create a balance between the pressing needs of feeding a fast-growing population and earning foreign exchange through exports.

“Take for example, the case of growth in rice exports in the last fiscal year. It helped the country earn substantial foreign exchange but at the same time speculators skyrocketed domestic rice prices,” pointed out a commodity wholesaler in Jodia Bazar.

Government officials say food inflation has remained higher than headline CPI inflation for the last few years also because of increase in support prices of such major crops as wheat, rice and sugarcane. “Now, you have to choose between the two. Allow a rise in support prices to boost agricultural income and eventually move towards food self-sufficiency but let food inflation rise in the short- run. Or let agricultural income and agricultural output remain static and eventually face higher food inflation in the long run,” says a member of the federal government’s economic advisory council.

But he frankly admits that a lot needs to be done in terms of enforcing fiscal discipline and promoting best business practices to keep both headline and food inflation in check.

“At the same time the central bank’s monetary policies should also aim at bringing in some stability in exchange and interest rates and containing currency in circulation to curb inflationary expectations.”

At the time of food price crises like the ones seen in the recent years in case of wheat and sugar it is the inflationary expectation that complicates the crisis. Curbing inflationary expectations need timely actions. In 2009, the surge in sugar prices was not merely because of low sugarcane production in domestic and international markets. The government’s failure to make timely decision on sugar imports and crackdown on hoarders of sugar stocks were also at the root of the problem. Wheat crisis that the country experienced in 2008 was of the same making.

Domestic sugar prices have moderated due to a decline in international prices since January 2010 on the back of increased production in Brazil and India. “However, going forward, sugar-importing countries are expected to make fresh purchases to replenish domestic stocks. Therefore, international sugar prices are likely to rise again by mid 2010,” warns the SBP in its third quarterly report.

The recent easing of wheat prices is also unlikely to last long primarily due to public procurement policy and possible exports.

The latest round of increase in prices of fresh and packaged milk and beef and mutton has also been triggered primarily because of exports of these items amid higher cost of production of dairy and livestock products due to rising electricity and fuel oil prices. The downward revision in domestic fuel oil prices effective from June 1 is likely to be more than offset by an increase in electricity tariff with retrospective effect from April 1.

The central bank is anticipating fiscal deficit of FY10 to reach 5.6 per cent of GDP against the revised target of 5.1 per cent. This is bound to keep inflationary pressures in FY11 as well. The government had aimed at keeping FY10 headline inflation at 9.5 per cent but the SBP has warned that it could reach as high as 12.5 per cent. Amid this situation and in view of the fact that structural problems in food production and food supply chain management remain in place, it would be too optimistic to hope for an immediate relief in food inflation.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/stubborn-food-inflation-760