BUDGET-MAKING ON UNCERTAIN RESOURCES

SYED FAZL-E-HAIDER
June 22 - 28, 2009

The government expects Rs 444.975 billion in loans in the next fiscal year as compared to Rs 347.807 billion in 2008-09. The country hopes to get Rs 65.438 billion in grants in the next fiscal year as against Rs 19.625 billion of the outgoing fiscal year. The critics however say that the government has made budget on uncertain resources, as no one is 100 per cent sure that the money would actually come from the countries who have pledged it. At the time of earthquake of 2005, friendly countries had pledged $4 billion, which did not fully materialize. Given the worsening security situation in the country, the local experts however fear that the defence and debt servicing costs would continue to rise forcing the government to slash development spending and rely on foreign funding to meet its financial needs and obligations.

"Defense and debt servicing costs may exceed estimates, resulting in a cut in development spending," Bloomberg quoted Asif Qureshi, head of research at Invisor Securities in Karachi as saying. "A lot of this budget will depend on external assistance being received in time because there are no real measures which will increase the tax base."

"The major risk in this budget is foreign funding. We have heavy reliance on that, but if that is delayed or does not go through, there is no fall-back solution," Reuters quoted Ashfaque Hasan Khan, a former senior official in the Finance Ministry as saying. "That would mean that the government will have to cut down development expenditure, which will be a big problem and difficult politically," said Khan, a former senior official in the Finance Ministry.

The business community, which was expecting remedial measures to remove its problems, has expressed its disappointment over the budget 2009-10, as it deems that the government has not taken appropriate measures to reinvigorate the declining industry. High mark-up rate, electricity and gas tariff and shortage of power supply had badly crippled the business and industrial activities in the country. Islamabad Chamber of Commerce and Industry (ICCI) has criticized the imposition of carbon tax on POL products and CNG fearing that it would further dampen the industrial growth.

The government has targeted collection of carbon surcharge on petroleum products at Rs 122 billion in budget for 2009-10 and Rs 12 billion collection through carbon surcharge on compressed natural gas (CNG). The government will charge Rs 8 per litre carbon surcharge on high speed diesel oil (HSDO), Rs 10 per litre on motor spirit (MS), Rs 6 per litre on kerosene oil, Rs 3 per litre on light diesel oil (LDO), Rs 14 per litre on HOBC and Rs 6 per kg on CNG, according to Finance Bill 2009-10.

The carbon tax is aimed at protecting the environment by reducing emissions of carbon dioxide and thereby slow climate change. It can be implemented by taxing the burning of fossil fuels that include coal, petroleum products such as gasoline and aviation fuel, and natural gas, in proportion to their carbon content. Critics however say that the government is unlikely to use the revenue collected from carbon surcharge for environment protection, but the funds so collected would be utilized to bridge the budget deficit. Though carbon tax has immense potential to generate revenue, but it has its drawbacks due to its disproportionate impact on low-income households and economy, according to the analysts. Fairly speaking, the earnings through carbon tax should be used for the projects designed to clean the environment from pollution and welfare of low income groups.

The government has already declared the fiscal year 2010 as the year of the industry' after the industrial sector witnessed a 3.3 per cent decline during the outgoing fiscal year. The government has allocated Rs70 billion package for the revival of five export sectors in the budget in the shape of reduced gas prices and incentives for value addition. The local experts believe that the government would ultimately borrow money from domestic sources putting pressure on interest rates. The central bank would not be able to reduce discount rate and a high-interest environment would continue to have an adverse impact on investment and growth.

Local business community had emphasized the government to present a tax free budget for the next fiscal year. The businessmen stressed the need to take measures for restoration of industry suggesting broadening the tax net instead of increasing tax slabs. They had demanded withdrawal of surcharge on electricity bills in order to provide some relief to the consumers, as the load shedding irked the whole nation and industry is going to close down due to energy crises. They had also demanded decrease in sales tax on raw material and finished products, as the existing rate of 15 percent sales tax is the highest in entire region.

The country's economy missed its original and revised growth targets for the outgoing fiscal year 2008-09, as it grew by just 2 percent against the original budgetary target of 5.5 percent and downward revised target of 2.5 percent. Industrial sector posted a negative growth of 3.6 percent against the growth target of 6 percent fixed for current fiscal year. Manufacturing sector also missed its growth target of 6.1 percent as its growth has been recorded at negative 3.3 percent for ongoing fiscal year. Similarly, the services sector recorded a growth of 3.6 percent in ongoing fiscal year, against the target growth of 6.1 percent.

For the outgoing fiscal year ending this month, the government had projected the exports to be at $22.9 billion, however, due to the recession around the globe and structural issues in local economy like power, gas shortages and law and order issues, the exports are now projected to be around $19.5 billion projecting a shortfall of $3.4 billion in current fiscal year. This shortfall is also attributed to the impacts of global financial crisis that hit the US and EU economies, the major trading partners of the country. In the next fiscal year 2009-10, the total exports of the country are projected to be $19.9 billion, as against the latest estimates of $19.5 billion in ongoing fiscal year 2008-09, projecting an increase of just $400 million.

The local experts believe that the government would ultimately borrow money from domestic sources putting pressure on interest rates. The central bank would not be able to reduce discount rate and a high-interest environment would continue to have an adverse impact on investment and growth.