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The difficult task of balancing revenue and expenditures and to qualify for poverty reduction and growth (PRGF) facility of the IMF

June 25 - July 01, 2001

At the face value it may appear that Federal Budget for the year 2001-2002 may not help in creating conducive environment for accelerating GDP growth. However, one should not underscore the efforts of current economic managers of doing the difficult task of balancing revenue and expenditures. The policies pursued have helped in restoring Pakistan's credibility with the international financial institutions. Despite the worst drought in Pakistan's history, the overall performance of the economy cannot be termed disappointing. During July-April period, large-scale manufacturing has registered highest growth at 7.8 per cent, inflation rate was below 5 per cent, revenue collection exceeded Rs 400 billion and fiscal deficit was at 18 years lowest. All these factors lead to believe that Federal Budget is continuation of the same policies and the country will be able to achieve most of the targets.

Even before the Budget was announced the overall consensus was that further reduction in expenditure would not possible and the only available option was to broaden revenue base. However, the GoP has decided to lower tariff and tax rates and achieving an enhanced revenue collection will not be an easy task. The already announced increase in gas and POL prices is expected to raise higher development surcharge on these products to compensate for reduced collection of duties and taxes, to a large extent. However, successful implementation of sector specific policies will play the key role in determining quantum of investment, broadening manufacturing base and achieving higher GDP growth rate. At least three sectors  textiles, fertilizer and cement offer the highest potential for accelerating GDP growth rate.

While performance of textile sector will be largely dependent on cotton crop size, availability of polyester staple fibre at attractive prices is expected to provide a helping hand in improving capacity utilization of spinning units. Though, there has been inordinate delay in announcing fertilizer policy, the expectations are that the GoP may accept fertilizer industry's demand supply of gas (feedstock) at a price which is comparable with gas price in the Middle East. With the announced incentives for construction sector, cement offtake is expected to increase and improve profit margin for the sector in general.

Saying this much, analysts fear cost-pushed inflation in the country. Persistent depreciation of rupee, increase in gas and POL prices and the forecast for hike in electricity tariff will continue to cause higher rate of inflation in the country. Higher rate of inflation is expected to erode competitiveness of export oriented industries and may not allow the exports to grow at desired rate.

As regards revenue collection, analysts believe that meeting an ambitious target fixed for the next financial year will not be any easy task. Revenue collection for the year 2000-2001 was relatively higher mainly due to some one time gains, which will not be possible during next financial year. Therefore, one cannot rule out downward adjustment such adjustments have been a common practice in the past. The Central Board of Revenue always succeed in finding some escape goat for their lethargy and/or inefficiency and they may find some reason to do this once again.

Before analyzing the figures and forecasting the impact of proposed measures, it is necessary to have a look at the budget. The GDP growth rate has been projected at 4 per cent. There is an effort to move towards free market. An ambitious export target of US$ 9.8 billion and CBR-related revenue of Rs 458 billion has been fixed. Expenditures are estimated at Rs 829 billion whereas total revenue projections are Rs 643 billion indicating a fiscal deficit of Rs 186 billion or 4.9 per cent of GDP.

According to an analysts, "Federal Budget is another insipid document inspired by the IMF philosophy." Whereas others say, "The economic managers did not have any other option, except to follow the IMF prescription because the country has to qualify for PRGF. It is a must to overcome adverse balance of payments situation." The present regime's fiscal trade record has led the country to an optimistic path for the future with an enhanced revenue collection and disciplined spending.

Although the government's effort to control fiscal deficit is expected to reduce reliance of foreign debt, the external sector has to be addressed more prudently. With an economic slow down in Pakistan's key export markets, achieving the export target will not be an easy task and reduction in imports may not be there. Therefore, support from the IMF under PRGF and external debt rescheduling coupled with higher foreign direct investment can only help in overcoming external account problems.

The GoP has fixed an ambitious revenue target of Rs 458 billion. Some analysts strongly believe that it is not realistic and wishful thinking. Revenue collection has always been a contentious issue. It is feared that for the current financial year, CBR would fall short of the revised target by nearly Rs 15 billion. Till May end Rs 345 billion have been collected and June collection, at the best, could be another 60 to 65 billion rupees.

Aiming at stabilizing exchange rate and changing composition of money supply, the central bank has been increasing interest rate since September 200. Over the months discount rate and T-Bill rates have moved upwards and any reduction in these rates during the next fiscal year is ruled out by the analysts.

The gradual move towards a more market driven exchange rate has caused massive rupee depreciation against dollar. Analysts believe that unless net forex reserves stabilize above US$ 2 billion, rupee is expected to remain weak against dollar. However, the expected support by international financial institutions and external debt restructuring will the most important factors in determining the exchange rate.

Following the IMF conditionalities no major exemptions were allowed for the capital market. However, following specific budgetary measures announced are likely to have a direct and positive impact on equities market:

* 3-years capital gain tax exemption
 Bonus shares issues by companies will be tax exempt
* Corporate tax enhanced to 35 per cent from 34.65 per cent
* 40 per cent payout rule becoming lenient
* TFCs holding of individuals beyound certain limit now taxable
* A one per cent increase in yield on National Savings Schemes

An area which needs specific mention is the reduction in tax rate of commercial banks by 8 per cent. Though the rate, 50 per cent, is still high when compared with other sectors, one should not expect any drastic cut in the coming years simply because the GoP would not like to loose its tax collection from commercial banks. However, the move is expected to improve profit after tax of a number of banks.


Whatever may be the targets or measures, achieving the desired objectives depend largely on how good or bad nature treats the country. In the recent past, simply because the nature was kind enough, Pakistan was able to post better results. It seems that the worst of drought like situation is over and agriculture sector may once again becomes the driving force for higher GDP growth.

High crude oil prices are expected to keep Pakistan's oil import bill high. However, export of some POL products may ease the pinch. Still a lot depends on how effectively and efficiently the country is able to utilize other energy resources, particularly coal.

A sector which needs immediate attention of policy planners is fertilizer. The agenda has reduced to a single point feedstock price. The policy planners now have to choose either of two options: 1) fixing feedstock price which is comparable with gas price in the Middle East or allowing the country to once again become net importer of fertilizer.

While All Pakistan Textile Mills Association (APTMA) has already expressed its feeling of 'being totally ignored', they have to convince policy planners to qualify for special/specific incentives. However, they should not expect any change in Prudential Laws to allow the mills to borrow above the fixed limits.

The GoP must also address the mounting 'circular debt' in energy sector. Unless financial health of WAPDA and KESC is improved this issue cannot be resolved. The GoP has already tried various alternatives. Now only one option is left, privatization of these two entities. The country needs uninterrupted supply of electricity at affordable price. Why should there be any effort to keep these entities in government control?

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