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Great expectations A further standpoint

By Syed Furqan H. Shamsi
July 09 - 15 , 2001

The proficient justification of taxes in the current budget through the extensive appropriateness of customs duty and sales tax will ultimately reduce the cost of industrial goods and will escort boost exports and encourage investment.

Pakistan's economy have shown a blends of record for the last fifty years but it still has to go miles for the peak. Budget is a key concept for any country's economy, financial architecture, development and for policy issues.

The federal budget presented on June 18th, 2001 depicted a gap of nearly Rs. 187 billion which is to be filled mainly by borrowing while allocating over 40% of the disbursement for debt-servicing. The balancing act between keeping the debt burden under control and achieving a healthy balance of payments remains the biggest challenge for the economic managers. Through this budget, People would get some relief and investors some inducement within the existing patterns with an assistance of some reshuffling of existing taxes as had already been set out in good details in the IMF's policy framework paper relating to the stand-by arrangements. Altogether, The budget appears to be largely agreed with the IMF requirements under the Stand-by agreement (SBA).

During for the current year, the poor agricultural performance was the result of the water shortages in most parts of the country during the most period of the year that pulled down the overall GDP growth. Manufacturing Sector performed well with support from the petroleum refinery, textile, fertilizer and other related industries. GDP growth rate declined to 2.5 per cent due to the aforementioned explanation while the manufacturing sector inflates upto 6.78 per cent. The fiscal deficit was dipped to 5.3 per cent from 6.5 per cent of 1999-2000 whereas the inflation rose to 4.7 per cent from that of 3.4 per cent prevailed in 1999-2000. It was estimated that about 87.9 per cent of total investment was financed through national savings.

The size of the budget has been increased by Rs. 53.7 billion to Rs 751.7 billion. Primarily financed through internal resources (i.e. tax and non-tax) to the extent of Rs. 491 billion and Rs 261 billion from external resources, which include Rs. 48.7 billion project aid and Rs 190.6 billion non-project aid. Net revenue receipts are expected to total Rs. 453.8 billion in 2001-02 as against Rs. 412.1 billion of the estimates for the current year. These receipts are expected to finance 60.3 per cent of total expenditure. The decline with reference to the current year's is mainly due to the decline in the domestic borrowings.

Rs. 130 billion has been allocated for FY02 development expenditure particularly for Public Sector Development Programme (PSDP). On the expenditure side, debt-servicing will consume Rs 329 billion, Defence Rs 131 billion and expenditures on the operations of the administration will cost Rs 80 billion. With so much of the added tax revenue going towards the enhanced debt servicing, so little will be left for other profitable activities.

There appears to be no surplus on revenue account despite the debates about debt exit strategy and a substantial increase in revenues. The target of Rs. 457 billion has been set for the revenue collection for FY02 higher by 16.9% as compared to Rs. 406 billion revised target for FY00-01. One of the major highlight of the budget for the current fiscal year is the promotion of the Fiscal Responsibility Law which may curtail the limits of the government's borrowing for fiscal deficits financing. The budget looks as though to be contractionary with the tax implications shaped within it. The main concern within the taxation imperatives present in the budget is the institutional restructuring for the better collection and to widen the tax base.

Major incentives announced for the exporters are their endowment to keep their 50 per cent earnings in foreign currency accounts to purchase raw materials or machinery. This action to be backed by the predicament where they increase their exports 10 per cent more than the last years'. The proficient justification of axes in the current budget through the extensive appropriateness of customs duty and sales tax will ultimately reduce the cost of industrial goods and will escort boost exports and encourage investment. Housing finance was given a boost with allowances in for interest payments on mortgages declared income tax deductible up to a certain limit. The fiscal incentives for the house building industry will benefit various industries directly. Agriculture motivations are partially a step towards the elimination of government role and compensating the poor cash-flows as a long term objectives of the government.

Overall, the budget portrays a combine and multi-dimension approach to streamline the process. Poverty, Unemployment, Imbalances in source of income, illiteracy, Lack of investment in human capital are all the issues which are augmenting to the current situation. We crave a policy framework lasting at-least for 5-7 years; and which the announced budget moderately ascribes. We need to develop capacity to back national debt, enhance exports while encouraging investment both domestic and foreign. However the framework demanded and the considerations of budget should be aligned for a better future.

The author is presently working as Associate Consultant with Anjum Asim Shahid Associates (Pvt) Ltd. (A Human Resource and Social Sector Consulting firm).