June 22 - 28, 2009

The fear expressed in these columns three weeks ago that the financial year 2008-09 is likely to be worst in the running decade has been confirmed by the Economic Survey of Pakistan released in Islamabad last Thursday by Advisor to the Prime Minister on Finance, Mr. Shaukat Tarin.

According to this official document, the incumbent regime missed virtually all main macro economic targets set in the budget 2008-09 for the outgoing fiscal year; that included 5.5 percent Pakistan's real GDP growth, 12 percent inflation, Rs l250 billion net revenue and per capita income of 1,085 dollars.

The survey says that Pakistan's GDP growth has been estimated at 2 percent for the current fiscal year as against the original 5.5 percent, which was then revised to 3.5 percent and further clipped to 2.5 percent as per the agreement with International Monetary Fund (IMF).

Likewise, the inflation target was fixed at 12 percent by the incumbent regime in the budget for current fiscal, which in reality stood at 22.3 percent in the first 10 months of the 2008-09. "Per capita income in dollar terms rose from finalized figures $1,042 last year to $1,046 in 2008-09, showing marginal increase of 0.3 percent." However in last year's Economic Survey the target for per capita income was $1,085, which has come down to $1,042.

Growth in agriculture and rise in remittances by expatriates, which surpassed the targets, are the only two redeeming features of the economic performance of the outgoing year in which the government had no contribution. Agriculture performed well because of good weather and the expatriates raised the amount of remittances to their dependants in Pakistan to meet the cost of soaring inflation.

The revenue target was fixed in the budget at Rsl250 billion and was irrationally revised upward by the government to Rsl360 billion, then revised downward to Rs l300 billion and yet again reduced to Rs1172 billion which too seems impossible to materialize in the end. However, Shaukat Tarin said during the press conference that the country's real GDP grew by 2 percent in 2008-09 against a target of 4.1%. He said that the 2 percent economic growth has been estimated because of four shocks: macro economic imbalances, external trade jerk, global economic crisis, and domestic security issues.

He mentioned that when the present government took charge, situation of Pakistan's balance of payment, current account deficit and trade deficit was in the danger zones, which have now improved by joining the IMF program. He said that the government had consolidated the economy in the current fiscal year and now was ready for growth-oriented budget.

He was asked why the government had not included the 17.2 percent poverty figure of 2007-08 in the survey, worked out by centre for poverty reduction and social policy development of planning development (CPRSPD) and validated by the World Bank. The Bank had advised the government to disseminate public message that country's poverty had come down to 17.2 percent to show that Musharraf regime had performed very well. When Musharraf took over the government the poverty was 34 percent, which had reduced to 17.2 percent. In response, Tarin said that while WB had validated the 17.2% poverty figure but there were indications of surge and we had initiated the rapid survey to this effect, which would come up with final figure of poverty after three months period. However, he said that estimates were that the poverty would stand at over 30 percent during last fiscal year.

People were committing suicide and selling their kids because of the poverty, so obviously the poverty figure of 17.2 percent needed to be closer to reality. To a question, he said that FBR needed to be reformed in such a way that maximum revenue could be collected in the next fiscal and structural reforms were being implemented and the World Bank's team was already in town for talks on this very important issue. He said that the government would not forget the fault lines and put its house in order to increase the revenues of the country.

On the issues of change in policy for the construction sector and drastic cut in last year's growth from 5.8 percent to 4%, which was done apparently to bring the reasonable growth of 2 percent close to the target agreed with IMF, he said this government was crystal clear in its facts about the growth and did not believe in manipulation of the figures. However, he said that Pakistan had asked World Bank, IFC to come forward and help government to make federal bureau of Statistics independent, which would report not to the ministry of finance, but to the national assembly.

He said that country's debt had increased to over $51 billion by end of this fiscal and total public debt had increased by Rs1.367 trillion in first nine months of 2008-09 to Rs7.3 trillion, up by 23.2%. He said public debt was shared between rupee and foreign currency ratio of 40:60. The rise in debt is mainly because of depreciation in Pak rupee. The total domestic debt is positive at 3.7 trillion at end-March 2009, which implies net addition of Rs484 billion in nine months of current fiscal.

Mentioning about the taxation, he said, "We will not tax the people who are already paying, rather will tax those who are not in the tax net." He said that the government would this time levy taxes on real states and service sector. However, two other sectors including stock exchanges and agriculture sector would be included in the tax net the next time. To a question as why economic mangers have failed to bring the agriculture sector in the tax net, which grew by 4.7 percent, he said he was ready to tax this sector, but he would be subject to martyrdom in next day. In the last 62 years, no one dared to impose taxes on agriculture sector because of the strongest lobbies in the countries. However, he assured that in the years to come this sector would be brought under tax net.

Tarin when questioned said that the government would come up with major allocation for IDPs and will not rely on foreign aid. However, he expects that Pakistan will get over $ 2billion from FODP in next fiscal and for IDP $550 million. He explained that his government remains stuck to the fiscal deficit of 3.4 percent, but this has been relaxed to 4.6 percent because of the $2 billion inflows from FODP, which will be spent on social sector. The 6.6 percent fiscal deficit has further increased to 4.9 percent keeping in view the expected inflows for IDPs. He said that budget deficit financing would be no more an issue as country would be getting more grants from FODP and 100% grants for IDPs.

To a question Tarin said that in case the flows of $5.28billion pledged by FODP (Friends of Pakistan) are delayed then Pakistan would move to IMF to fill the gap and whenever the FODP inflows come in the same amount would be given back to the IMF. He said that Pakistan has asked IMF for an additional facility of $ 4 billion for this purpose. He clarified that $ 4 billion will be part of the stand by arrangement and it will not be treated as loan. Manufacturing sector has contracted by 3.3 percent in 2008-09 as compared to expansion of 4.8 percent in last year. Large-scale manufacturing depicted contraction of 7.7 percent as against expansion of 4 % in the last year and 5.5 percent target for the year. The services sector grew by 3.6 percent as against the target of 6.1 percent and last year's actual growth of 6.6 percent. Finance and insurance sector witnessed a slowdown to 12.9 percent in 2007-08 but registered negative growth of 1.2 percent in 2008-09.

Transport and communication sectors depicted a sharp deceleration in growth to 2.9 percent in 2008-09 as compared to 5.7% in last year. Gross fixed capital formation could maintain its strong growth momentum and real fixed investment growth contracted by 98% as against the expansion of 3.8% in the last fiscal year. The survey says that agriculture sector has depicted a stellar growth of 4.7% as compared to 1.1% last and against target of 3-5% agricultural value added sector registered an impressive growth of 7.7 % whilst the sector recorded negative growth of 6.4 percent last year and had target of 4.5%. The livestock sector grew by 3.7 percent in 2008-09 as against 4.2 percent last year.

The overall FBR tax collection remains less than satisfactory and actually with deceleration in real term. Resultantly, the tax collection to GDP ratio is likely to be around 9 percent of GDP as against target of bringing it in to the vicinity of 10%. Tax revenue collected by the FBR amounted to Rs.898.6 billion during the first ten months (Jury-April) of the current fiscal year, which is 17.7 percent higher than net collection of Rs.763.6 billion in the corresponding period of last year. The net direct tax collection was estimated at Rs332.5 billion against the target of Rs496 billion during Jul-April 2008-09. Indirect taxes grew by 18.2% during July-April 2008-09.