It does not carry the national agenda of Self-Reliance and breaking of begging bowl
By AMANULLAH BASHAR
Jun 22 - 29, 1998
The sanctions, imposed by the United States on Thursday, may terminate Pakistan's deal with the United States for the purchase of 28 F-16 aircraft.
Pakistan has already paid $658 million, the total cost of the much needed aircraft.
Although, the sanctions are generally being described as softer and less punitive in nature as compared to the sanctions imposed on India, yet the most harsh impact of these sanctions may be the loss of F-16s.
It may be recalled that Pakistan had earlier placed an order for the purchase of 40 F16s which were delivered at a total price of $1.2 billion out of which $500 million were paid by Saudi Arabia.
The assumption for the possible denial of the delivery of F-16 aircraft by the US is based on one particular clause in the sanctions announced by Strobe Talbott, the Deputy Secretary of State, that all foreign military sales under 'Arms Export Control Act' have been terminated and licences revoked for the commercial sale of any item on 'US Munitions List'.
Washington will also deny export of all dual use items, controlled for nuclear or missile reasons. "We'll presume denial of all other dual use exports to entities involved in nuclear or missile programmes," said the deputy secretary.
If the agreement for exporting 28 aircraft was terminated as envisaged in the sanctions, Pakistan would be left with no option but to ask for the refund of the price.
It is, however, not yet clear whether the agreement for purchase of F-16s was irrevokable or not and how the Clinton Administration deals with, in this particular case. The US president, it may be recalled, had offered, only a week ago, to expedite the delivery of F-16s in his efforts to lure Pakistan to refrains from testing of the nuclear device.
The most significant development in the post-budget scenario is the reduction of 12.5 per cent duty on furnace oil, announced by the Finance Minister Sartaj Aziz while winding up the general debate on the budget 1998-99 in the National Assembly on Friday.
The step, ofcourse, may have the far-reaching impact on the economy bringing down the existing fuel price from Rs6,296 per tonne to Rs5,500 per tonne. This positive change in the budgetary proposals, which is obviously in conformity with the demand of the large scale industrial sectors in general and the private power producers in particular. The on-going tussle between WAPDA and the Independent Power Projects (IPPs), on the issue of power tariffs, is expected to be settled out of the court within a couple of days. HUB power project, it may be mentioned, had gone to the Supreme Court of Pakistan against the judgement of Lahore High Court for a cut in power tariff out of the ambit of the power purchase agreement, reached between WAPDA and IPPs. Due to high rate of furnace oil, supplied by the government, the IPPs were selling power at the exorbitant rate of 7.1 cent per unit instead of 6.5 cent per unit as imbibed in the agreement. By virtue of the government decision to reduce fuel prices, the power generation cost, both of the private and the public sector power generating organisations, would come down and consequently provide much needed relief to the consumers. HUB power has entered into negotiations with the representatives of the government as well as WAPDA to settle the dispute of electricity tariff, it is learnt.
The concluding remarks of the Finance Minister while winding up the debate on budget, according to an estimate, brought new concessions in the duties amounting to Rs3 billion. The concessions including reduction in duty on furnace oil and exemption from excise duty on those items which are already under sales tax to widen the scope of the GST. These items include refrigerators, computer components, reduction in excise duty on arms, ceramics, sanitary wares, synthetic, artificial fibres, tyres, tubes, paper sacks and glass.
The reduction of customs duty on refrigerators and deep freezers, from 45 per cent to 25 per cent, carries 10 per cent excise duty on imports and ten per cent excise duty in retail price of locally manufactured items. Since reduction of customs duty was affecting the local industry, it has been decided to withdraw excise duty on retail price of locally manufactured refrigerators and deep freezers.
The Finance Minister also announced a cut in customs duty on 1800cc cars so that overseas Pakistanis could import these cars by using their own foreign exchange. In order to avert the possible misuse of the concession by importing second hand cars, the depreciation allowance of these cars, imported under transfer of residence scheme, has been reduced from 50 per cent as announced in the budget to 25 per cent
In order to promote local assembly of the computers, the ten per cent duty on component has also been withdrawn. Earlier, the 10 per cent duty on import of personal computers was announced in the budget while duty on components was not removed which could have damaged the fast growing local computer industry. The tax credit on any transaction amounting to Rs 50,000 or above was allowed in the budget, if it is done through bank draft or crossed cheque. This condition is being amended to exempt utility bills or other miscellaneous expenses even if this amounts more than the limit of Rs50,000.
Mohammad Hanif Janoo, President, KCCI, reviewing the budget estimates, said, while the dependence on foreign resources does not seem to be diminished. The fiscal measures envisaged to contain smuggling, to mobilise remittances from overseas Pakistanis and to strengthen the capital market, are appreciable measures taken in the budget.
The government, Janoo recalled, earlier had adopted a policy of low income and corporate taxes rates in order to broaden the tax-net. However, through the imposition of 10 per cent surcharge on income and wealth tax as well as deferring the envisaged reduction in corporate tax rate which was due this year , would not be in conformity with the government's declared policy. The budget has again intended to broaden the GST by extending it upto the retail stage. In view of the controversy, cropped up last year, it would have been appropriate to resolve it through consensus prior to its introduction.
The people of Pakistan had to experience two major events during the last fortnight. The first was the nuclear tests carried out in the last week of May, and the second was the federal budget 1998-99 presented on June 12, 1998
The budget of June 12, presented by the Finance Minister Sartaj Aziz, however, did not speak about pre-requisites to face the repercussions of the international pressure and sanctions which may hit the national economy in the wake of the historic event of May 28,1998 which elevated Pakistan to the status of the countries having nuclear power. Ofcourse the nuclear tests, carried out by Pakistan, were not the mere demonstration of its nuclear capabilities. Pakistan had left with no option but to go nuclear in the larger interest of maintaining peace in the region through balancing of power which was heavily tilting in favour of India.
Commenting on the budget estimates, veteran economist and former deputy chairman Planning Commission, Qazi Aleemullah has described the budget for 1998-99 as brilliant but in patches only. It does not carry through the national agenda, presented by the Prime Minister for bringing self reliance and breaking of the begging bowl.
The fiscal package given in the budget does not take care of the harsh and difficult challenges, the nation may face as the price of becoming a nuclear power against the will of the world powers.
Contrary to the spirit of the national agenda, the government has emphasised more on foreign resources.
The slogan of the government, repeated off and on, for broadening the tax base, has now become a cliche. It has become a boring statement now. Whenever the budget season comes, there is always a hue and cry for brining new tax payers into the tax fold but practically speaking, either the poor are penalised through indirect taxes or those existing tax payers already in the tax net.
According to Zammurrud Hussain Jaffery, a renowned income tax practitioner and former president Income Tax Bar Association, out of 140 million people of this country, only 1.1 million pay the direct taxes. Out of this limited number of tax payers more than 4 lakh belong to salaried people, whose tax is deducted at source.
The existing tax payers in this budget, too, have been made to pay more taxes. These additional taxes include 10 per cent surcharge on income and wealth taxes.
According to an analytical view, the budget document is quite indifferent over the gap of $1.5 billion of the current account which is approximately estimated to the size of $2.5 billion. The services account has been expected to be partly financed through the home remittances to the tune of $ one billion. The temporary freezing of foreign currency accounts by the government under the state of emergency is feared to have shaken the confidence of the valuable source of home remittances.
New foreign currency scheme
In order to offset the possible adverse effects of the May 28 action of freezing the foreign currency accounts and to facilitate the flow of home remittances and mobilise foreign exchange resources, the following instructions were issued by the State Bank of Pakistan (SBP) which announced some remedial measures on June 20.
All inward remittances of foreign currency under the Home Remittance Scheme shall be payable at a rate of Rs46 per US dollar with effect from June 22, 1998. In the case of other currencies, the amounts would be payable at the above rate crossed with New York's closing mid rate for the previous working day. The difference between the Authorised Dealers (AD), applicable buying rates and the special rate at which payment is made, may be claimed by the ADs from the respective Chief Managers of SBP on submission of a statement showing total currency-wise amounts, the ADs clean TT buying rate, the amount payable by them and the amount actually paid. The same principle will also apply to such payments made from non-resident rupee accounts of overseas bank branches and exchange companies. In other words, payments to the beneficiaries of Home Remittance' will be made at the assumed rate of Rs46 per US dollar and the difference between this rate and TT clean buying rate claimed from the SBP. The SBP will be carrying out a random check to ensure that the foreign branches of the ADs receive and transfer home remittances promptly and efficiently. Any negligence or delay will invite strong action by the SBP.
New rules for foreign currency accounts
The SBP has decided to allow the opening and free operation of new foreign currency deposit accounts by residents as well as non-residents under new rules. Commercial Banks holding licences as ADs and those Non-Bank Financial institutions which have been given restricted ADs, licences for this purpose, are free to accept foreign currency deposits (or issue certificates of investment, as applicable) from any person (which term includes residents as well as non residents, Pakistani and foreign nationals, a firm, company and other legal entities) in any foreign currency. The NBFIs and banks accepting the funds would not be required to surrender the same to the SBP nor the SBP would provide a forward cover in respect of such accounts. The institutions accepting such funds will be free to keep/invest the same abroad in addition to their usual Nostro balances or to invest/lend it in Pakistan. They will also be free to recover reasonable bank charges on handling cash transactions in foreign currencies received into or paid out of such accounts. The balances of new foreign currency accounts will not be required to be reported to the SBP in the statement prescribed on pages of Appendix V of the Foreign Exchange Manual. Instructions regarding reporting for monitoring purposes of transactions under the new scheme will be issued separately.
The ADs will be free to decide the rate of return that they offer to the depositors. They would also be free to lend/invest the funds so mobilised in any manner they like and they will also be free to cover their exchange risk in any manner, as they would be required to maintain a 'square' position in respect of these funds.
New foreign currency accounts would be allowed by the ADs under the above system with effect from June 22,1998. These instructions would also apply to all those account holders who have been allowed to continue to operate their foreign currency accounts vide F.E Circular 12 and 17 of 1998 and any subsequent amendment thereof as well as through letters addressed by the foreign exchange department to the individual ADS/Account holders. ADs will however, ensure that the proceeds of goods exported from Pakistan, and payments received for services rendered in Pakistan, are not credited to such accounts.
It would be permissible for the Ads to lend such funds to borrowers in Pakistan, subject to observance of regulations prescribed by the Banking Policy and Regulations Department. Before lending any money in foreign currency to persons/firms etc. in Pakistan, observance of usual standards of prudence, including the ability of the borrower to repay the loan, would be ensured.
In the case of a loan to an exporter, it would be permissible to adjust the foreign currency proceeds of exports in repayment of the loan and profits/interest thereon. Only if the exporter has surrendered the full proceeds of the loan to an AD against payment in rupees. In the case of a loan against imports, the importer can obtain foreign exchange to the extent of the C&F value of the imports, from an AD, if such import and payment therefore, are covered by the ITC and foreign exchange regulations and use the same for repayment of the loan. The payment of profit/interest will, however, have to be made by him from his own resources. In the case of all other loans, the borrower will pay profit/interest and repay the loan from his own resources.
With the coming into force of these instructions, no new foreign currency account will be opened under the old scheme nor any fresh credit be made into the existing accounts except interest/profit and items in transit on May 28, 1998. The existing non-resident foreign currency accounts of overseas Pakistanis can, however, receive fresh remittances, which can be withdrawn in rupee at the special rate of Rs46 per dollar. The exempted category of account holders may continue to operate their existing accounts in accordance with the existing instructions or may open new accounts in terms of this circular, if they so wish. Forward cover will continue to be provided by the SBP for permitted fresh credits in the existing accounts as well as for FE 45 deposits.
It has been decided by the government that the accounts, opened under this scheme will enjoy the protections available under the Protection of Economic Reforms Act 1992.
ADs will maintain a separate ledger for the new accounts opened under this scheme, in order to distinguish them from the existing foreign currency accounts.
The regulations relating to CRR, SLR and capital adequacy would also apply to these deposits. The figures of assets and liabilities in foreign currencies would be converted into rupees at the concerned ADs buying rate, for the purpose of reporting in the returns prescribed under the SBP Act. Those ADs who do not quote their own rates for foreign currencies (i.e NBFIs), or who do not quote the rate for any particular currency, may adopt consistently the rates quoted by another ADs.
National Debt Retirement Programme (NDRP)
There will be no restrictions on receipt of fresh deposits under this scheme and the amounts payable under the scheme shall continue to be paid in the respective foreign currencies on maturity.
The amount remitted under the above scheme in profit bearing deposits can, however, be converted into rupees at the rate of Rs46 per dollar (or the applicable rates for other currencies), at any time. The restriction on encashment before two years is hereby withdrawn for the purpose of conversion into rupees. Such encashment will, however, be subject to the condition that the depositor will adjust the difference of the return already paid to him on quarterly basis at the rate mentioned in FE circular No 2 of 1997. and the rate payable under the foreign currency deposit scheme for the completed period on quarterly basis for which the deposit has been held. For instance, if a deposit under the NDRP was made in US dollar on July 15,1997 for five years, on which return was payable at the rate of 9 per cent per annum, and it is encashed on June 17, 1998 (i.e after completion of three quarters), the deposit would deem to have earned return at the rate payable on a six months deposit under the FCA scheme, which was 6.3438 per annum. The difference between the amount of return already paid and the revised amount admissible would be deducted from the principal amount before allowing encashment.
The deposits received as Qarz-e-Hasna and those received for investment in return bearing account can, on maturity, be rolled over at the request of the depositors. It is permissible to change the maturity of a deposit from a lower initial period to a longer period. Such elongation of maturities would entitle the depositor to receive the higher applicable return even for the previous quarters. For instance, if a deposit was placed in US dollar for a period of three years at the rate of 8 per cent per annum, and the maturity is increased to five years, which attracts a return at the rate of 9 per cent per annum, the difference of one per cent would also be paid for the earlier quarterly periods, the new scheme said.
Support from friendly countries
Why the economic managers were so indifferent with the international sanctions while preparing the budgetary proposals, has been answered to some extent. The remarks made by Prime Minister Nawaz Sharif, although, did not identify the scale of the assistance, yet, the assurance given by the friendly countries, was apparent in his words.
The Islamic countries have assured Pakistan that they would provide as much foreign exchange and oil as Pakistan would require on extraordinary soft terms.
According to informed sources, the friendly countries have agreed on the provision of foreign exchange and oil on flexible terms.
The sanctions announced by the United States on Thursday against Pakistan have signalled to the governments both of Pakistan and India that the US government is not happy with the nuclear tests carried out by them. The sanctions, however, may not be hitting the interest of the people of these two countries in general.
The effect of specific sanctions against India totals about $2 billion in stopped loans, guarantees and economic development while the figures released for Pakistan only show an immediate postponement of $26 million, of which $25 million would be in IMF assistance.
The sanctions announced by Strobe Talbott, Deputy Secretary of State, include termination or suspension of foreign assistance under the Foreign Assistance Act, with exception provided for humanitarian assistance, food or other agricultural commodities.
This category comprises $21 million in economic development assistance and housing guarantee authority for India, $6 million in Greenhouse Gas Programme for India. No new projects by Trade Development Authority for India, as far as Pakistan was concerned, of this assistance has already been banned.
Delivery of previously approved defence articles and services to India will be suspended.
All new commitments of US government credits and credit guarantees by EXIM, OPIC and Commodity Credit Corporation (CCC) have been halted but the US Administration will support legislation to permit CCC credits for food and agricultural commodities. This provision allowed in the sanctions may help Pakistan in importing about two million tonnes of wheat from US or in other words allow US to a sizable export of the commodity to Pakistan.
OPIC coverage has been stopped for India and this will hurt New Delhi by about $300 million annually. Pakistan has no such coverage as it was just recently opened under the Harkin/Warner Amendment.
Exim was also recently opened for Pakistan with one request for $1.1 million pending while India will face blockage of $500 million under EXIM guarantees.
The IMF and World Bank funding for India to the tune of $1.17billion would be stopped but for Pakistan no IMF/World Bank fundings have been presented by their boards. Only a $25 million IMF assistance will be suspended.
The US will issue executive orders to prohibit US banks from extending loans for credits to the government of India and Pakistan.
The US will continue to favourably consider, on case to case basis, other transactions which do not support nuclear, missile, or appropriate military activities.
The sanctions imposed by the US, Japan and other countries, apart from posing other challenges, have placed Pakistan in a position where it will have to show its grit to come out of the tight corners. Although the friends have provided a valuable support at this time of trial, the spirit of a sovereign state demands that the trust, reposed by the friendly countries, is not betrayed by allowing the rampant corruption to prevail among the inefficient and incompetent government functionaries and the so called political grand masters who are eroding the very edifice of the state on account of their personal gains. All socio-economic ills are needed to be eliminated irrespective of the political considerations. The critical juncture through which the country is passing on, can earn a respectful place for the country among the comity of the nations, provided the nation is led to get through it successfully. But on the other hand it also has the venom to poison its reputation in case of failure to rise to the occasion, the choice is, however, with the people of this country.