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The new "economy road map"

  1. The new "Economic Road Map"
  2. Sea-food exports
  3. Trade with Afghanistan
  4. Financial defence of Pakistan

Economic package for the poor and needy aimed at alleviation of poverty

From Shamim Ahmed Rizvi, Islamabad
Nov 29 - Dec 05, 1999

The Finance Minister, Mr. Shaukat Aziz, who has been assigned the most difficult task of reforming and reviving the economy is busy these days in preparing an "economic road map" to resolve the daunting economic problems in the light of the guidlines given by the Chief Executive General Pervez Musharraf who is very keen to provide some relief to the people belonging to the poor and lower middle classes. Besides appointing 12 working groups comprising experts to study the different sectors such as tax reforms, industry, agriculture, investment and privatization, the Finance Minister is himself meeting a cross section of the people throughout the country to have a direct assessment of the situation.

Mr. Shaukat Aziz told newsmen in Lahore on Wednesday that on the basis of the recommendations of the different working groups and his own finding a comprehenive plan of action containing both long term and short term measures for revival and reformation of the economic structure of the country would by placed before the National Security council for approval by mid of December 1999. On the basis of that plan the Chief Executive will announce an economic package for the poor and needy aimed at alleviation of poverty. The Finance Minister said "our emphasis is that our economic road map should be home grown and based on our home ground realities and our economic demands. The Finance Minister underlined the need to widen the tax base, simplification of Taxation Laws and rationalisation of tax rates, speedy and transparent Privatization, reforms in the banking sector with an inbuilt accountability system, checking smuggling and tax evasion, checking the ever rising volume of economy and removing other distortions in the country's fiscal environment.

At different forums in his meeting with cross section of people in Karachi, Lahore and Islamabad during the last 2 weeks, the Finance Minister gave broad hints about his future plan of action. Talking to the newsmen in Islamabad and outlining his agenda of economic reforms, based on spending cuts, documentation, right-sizing and privatization by attracting support of international lenders for stabilisation of national economy, Finance Minister Shaukat Aziz identified restoration of business and investors' confidence, stabilisation of macro-economic framework, mobilisation of resources by expanding tax net, plugging leakages and tax evasion, smuggling and corruption, besides simplification of tax administration, boosting exports, discouraging non-essential imports and strengthening of linkage with global economy, as priority issues before the new government. No ordinary set of policies can arrest the down-slide, Shaukat Aziz said adding that "we have to challenge the status quo by devising break-out strategies".

Finance Minister said the government has not yet finished analysing whether it wants the stalled IMF tranche of 280 million dollars or not. "We are in the process of doing that we need to get our economy and our people to think differently now. We should not live from tranche to tranche. The IMF gives us good advice, but the programme we follow is at our discretion. We need to re-examine the whole situation, which is also part of the overall plan.

Addressing the members of the Lahore Stock Exchange on last Tuesday the Finance Minister said the government has decided to activate the Security Exchange Commission, to increase capital formation. At present banks and DFIs are weak, but they would be strengthened. As regards privatization, he said the government would not take any hasty steps and projects would be put on sale only when they can ensure a reasonable return. Responding to a question, the Minister said as a result of loan recovery campaign banks have collected over Rs. 8 billion defaulted loans, which was unprecedented. He said the recovery became possible only after government created an atmosphere for securing repayment of loans.

He said besides cash recovery, a number of people have surrendered land, property, shares and other valuable things to adjust their loans.

To a question about sick industries, he said these industries should be divided into three categories; those which have potential to be restored as productive units, secondly those which could be given on lease and third those where nothing has been left except land. They have to be sold out, he said.

Speaking at a meeting of the Lahore Chamber of Commerce and Industry Mr. Shaukat Aziz disclosed that in second round of accountability bankers who are responsible for advancing defaulted loans will also be taken to task as government has no intention to single out businessmen in this regard. The minister said bankers were equally responsible for present financial mess as no businessman could escape without the connivance of bankers. Thus, they will too be punished accordingly. He further said government had no intention to single out the business community in the process of accountability and government would try to end character assassination of businessmen taking place if any.

About wealth tax, the minister said that this tax was little bit regressive which should be done away with. But somehow the government will have to make out this difference from alternate sources. In such a way that this relief is not only meant for the rich, he added. Similarly the government will rationalise the income tax assessment rate and will impose industry-wise taxes whereby audit for factory will be undertaken so that true input cost and other expenditure can be determined which will form the basis for industry-wise taxation. However, government will try to levy rationalise taxes on every segment of the society," he added.

Talking to the Member of Federation of Pakistan Chambers of Commerce and Industry in Karachi, the Finance Minister assured the business community that the present government did not intend to disturb their business and that only the hardened and wilful defaulters would be sternly dealt with under the accountability drive. Referring to the economic situation in the country he expressed confidence with regard to the improving the government's short-term liquidity position of the country and measures that are underway to pre-empt any declining trend in the country's foreign exchange reserves.

Shaukat Aziz was critical of the existing taxation framework which, according to him, warrants expansion of the tax net and simplification of tax assessment procedures. He also pointed out that 70 per cent of yields from income tax came in the form of withholding tax which in his view was not at all a satisfactory pattern for taxing income and therefore needed reforms. He emphasized that these deficiencies in the taxation policy would have to be rectified and then alone tax collections could be expected to make improvements with accompanying favourable impact on the government's liquidity position.

Mr. Shaukat was of the view that interest rates in Pakistan were comparatively high and need to be adjusted downwards. It may be expected that he would initiate appropriate alternations in the existing monetary policy of the State Bank of Pakistan so that the open market operations should be so oriented as to bring about downward movement in mark-up rates slowly.

In the meanwhile the economy experienced deep recessionary trends in the first quarter of the current financial year as almost one per cent contraction was recorded in money supply during this period, with nearly Rs. 10bn going out of circulation.

According to State Bank data in the first four months the contraction was to the tune of 0.70 per cent (minus Rs. 9.93bn) reflecting the combined effect of domestic credit contraction of 0.55 per cent (Rs 27bn) and the foreign net assets of 0.15 per cent (Rs 1.66bn).

The net credit to private sector during the period under review has been recorded at (-) Rs. 20.12bn reflecting a total lack of interest of the private sector in the economic activities. According to the credit plan (1999-2000) during the current financial year, the non-government sector (the private sector and the public sector enterprises) was to get as much as Rs. 113bn. Instead in the first three months of the year the banks have mopped up Rs. 23.76bn from this sector.

The situation in the government sector, however, is totally opposite as against a net retirement target of Rs. 7bn earmarked in the credit plan for the year, the government has borrowed (net) in the last three months a sum of Rs. 11.49bn.

Net budgetary borrowing has been recorded at Rs. 16.91bn during the first three months against the whole year retirement target of Rs. 15bn. Understandably as a result of this acute wave of recession the rate of inflation in the country during the first four months (July-October) remained depressed at the rate of 3.43 per cent against 6.66 per cent recorded in the same period last year.

The industrial growth (cumulative for July-September) at 4.9 per cent against 4.1 per cent in the same period last year, however, appears promising. However, in view of deepening recessionary trends afflicting the economy, the date requires to be looked rather more closely. The trade gap in the first four months was $ 587m against $ 385m in the same period last year, showing a record expansion of 52.5 per cent. Exports have increased by a paltry 6.3 per cent at $ 2.48bn against a massive increase of 12.5 per cent in the import bill of $ 3.20bn.

In the first four months the tax collection remained stagnant at Rs. 85bn against a collection of Rs. 85bn recorded in the same period last year.

The flow of workers remittances in the first four months have declined sharply by nearly 50 per cent. Upto September 1999, the flow amounted to $ 215m against $ 300m recorded in the same period last year.

As the country is not making any repayments to the official and commercial creditors since the grant of rescheduling facilities by the Paris and London clubs, the amount in the foreign exchange reserves (FER) which has been fluctuating between $ 1.5bn to $ 1.6bn in the last four months presents only a distorted picture of the FER's real worth.

Net foreign investment in the country has been on the decline for the last 18 months. However, according to SBP data, in the firs three months of the current financial year the country received a total direct investment of $ 148.3m as against $ 105.8m in the same period last year. The portfolio investment which was on the decline all these months went down further by $ 54.6m against the withdrawal of $ 9.1m in the same period last year.

In view of this depressing situation the Finance Minister's task is indeed arduous. It is hoped that requisite steps for redressing the economic ills and rejuvenating the economy would be taken and in this task the finance minister would receive full support of the leadership at the helm.