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Budget 2001-2002

World Bank / IMF conditionalities for the new Budget

From Shamim Ahmed Rizvi,
Apr 09 -15, 2001

The economic managers of the country who have started working on the budget exercise for the financial year 2001-2002 are faced with a difficult situation. The expected increase of about Rs.100 billion in the revenue generation during the on going fiscal is nowhere in sight. The feared short fall of about Rs. 40 billion between the estimated revenues and the actual collection has disturbed all calculations.

The government has managed to meet this short fall through repeated increase in prices of utilities, extension of GST even on Agriculture inputs like fertilizers etc. and reduction in public sector development. There is a limit and these options will no more be available in the coming financial year. On the contrary, government is committed to reduce the number of taxes, bring down the tax tariff on import and raise the salaries of public servants which has become almost a must in view of the increased cost of living.

In his concluding remarks at the seminar "What kind of a budget 2001-2002 should be? What industrialists and traders want? What government is planning? Will people get any relief? organised by the Jang Group of Newspapers, the Minister for Finance, Mr. Shaukat Aziz, said that broadening of tax base, alongside reduction in the number of taxes will be the main areas of focus for the government while it tailors the next (2001-2002) federal budget. He assured the audience that coming year budget would be business friendly and growth oriented.

In the new budget the number of slabs on import duty will be decreased to four, Shaukat Aziz, said adding that the highest rate of duty would, at the most, be 30 per cent while the lowest is still to be decided. In the next budget, the government will be cascading duties on raw material as compared to the finish products, he said. Definitely, to save the local industry, duties on import of raw materials will be kept at a lower level than that on imported finished goods. Low tariff discourages smuggling, he added.

Unlike last year this year there will be no mini-budgets, he announced. However, he held that addition in the number of tariff of utilities has nothing to do with mini-budget. Budget which means addition in taxes. He described addition in utilities charges just an adjustment. "We've just passed the increase in oil prices to consumers, but did not increased it for the addition in the government's revenue", he added.

The other option to stable petrol prices was that the government had sustained the increase in the import bill, which was detrimental to its budget deficit and to meet this deficit it would have to further borrow money. He said the government instead opted not to borrow any further sums. Last year, the import bill of petroleum was increased by Rs. 7 billion, he mentioned.

The onus of debt on Pakistan is too much as compared to its debt retirement capacity. The foreign debt is US $ 36 billion. The amount of local debt is nearly the same. To minimise debt servicing over the country, the government decided to replace old debts with the new debts of low interest. Moratorium, default or rescheduling is not the proper way to get rid off the foreign bad loans, he said. It will damage Pakistan's credibility in the world and will do an everlasting damage to the country.

President Karachi Stock Exchange Yasin Lakhani underscored the importance of confidence building measures to the government to help traders set their agendas on long term basis. The government has reduced the fuel prices while, on the other hand, the KESC and Wapda have increased the power tariff, he mentioned. To restore traders' confidence, the government should end the SRO culture, he suggested. He further stressed for the formation of a contingency plan to tackle the WTO.

Tariq Saeed, former president of G-77 Chambers of Commerce and Industry, suggested to unfold the budget proposals to remove the anomalies before the announcement of budget. He said the CBR should make public the sales tax recoveries code wise so that one can see the actual rise in revenue.

The Chief Executive Gen. Pervez Musharraf has also directed the budget makers to cut the number of taxes. The number of federal taxes should be kept at the minimum. More emphasis should be on tax collection, catching tax evaders and cleansing the tax collection machinery. He said that he had been told by the experts that the revenue generation could be more than doubled if the tax evasion is effectively checked and that could be possible only through a corruption free tax collection system.

General Musharraf also directed that the federal budget for 2001-2002 should mesh closely with the three-year rolling development plan, which is part of an overall 10-year development plan. He identified Gomal Dam, Hingol Dam, RBOD, Katchi Canal, Coastal Highway. The Reservoir and raising Mangla Dam, water supply schemes in Karachi and Quetta and northern bypass road project in Karachi as critical projects. The cabinet sources say the Chief Executive directed the Planning Division to confine itself to these major projects.

Federal Minister for Commerce and Industries Abdul Razak Dawood said that under the agreement with IMF and impending World Trade Organisation regime the maximum tariff would be 35 to 30 per cent from July 1. Afterwards the tariffs would be further brought down to 30 to 25 per cent. He said it is an area of great concern and "It depends on how we utilize the tariff reform to give necessary flip to our engineering sector".

Coming from the top level it all sounds well, but the ground realities do not support these optimistic views. According to CBR sources the government will have to abandon all its plans to reduce the number of taxes and the rate of taxation. Poor receipts, sources said, have discouraged them to cut tax-rate or reduce the tax deduction stages as this would further reduce the desperately required deposits.

Apart from this, the tax survey yielded extremely poor results, and though the chairman CBR had promised the government that it would increase the revenue receipts by at least 25 per cent. Expansion of the tax net and documentation of taxable incomes and turnovers were the aims of the survey which have not been realized. To balance the expenditure and revenue side during fiscal year 2001-2002 is going to be an uphill task, they believe.