available resources in the interest of the economy
June 24 - 30, 2002
The Federal Budget for the financial year 2002-03,
is the third annual exercise of the present government to get the
optimum benefits of the available resources in the best interest of
the people and the economy of Pakistan.
Although, majority of the budgetary proposals
presented by the Finance Minister Shaukat Aziz were identical to the
usual budget making exercise, yet some of the aspects were really
appreciable and are likely to set new trends in our economy, if the
soul of the purpose was not injured by the powerful lobby of the
The most outstanding and significant aspect of the
budget is the introduction of the new Income Tax Ordinance with effect
from July 01, 2002 while the second one is the effective control over
the backbreaking impact of the debt-servicing on our economy.
According to a financial expert, the best
characterized as tinkering round the edges of a fiscal system whose
structural features are increasingly being shaped by IMF and World
Bank conditionalities. However, the budget contains one major
departure from its predecessors: the formal introduction of the Income
Tax Ordinance 2001 from the start of the next fiscal year July 01,
The Ordinance is as the Finance Minister described
it a philosophical departure from the previous ITO 1979, in that it
transfers the responsibility of determining taxable income and
computing income tax, from the income tax officer to the taxpayer.
Provided the letter and spirit of the new tax law is given full play
and does not fall prey to fiscal expediency, or opposition by vested
interest. The new law aims to shift the course of the country's tax
culture. It will help shaping the income tax regime along with sales
tax as one of the twin pillars of the future fiscal revenue edifice of
The Debt-Servicing and the Defence Expenditures are
the two major factors, which generally consume the major chunk of the
available resources. Expenditures under these two heads have been
curtailed in the federal budget, which certainly is an outcome of the
successful rescheduling of the external debt of the country.
A cut of 12 per cent especially in the debt
servicing side reflects the skill of the economic managers in their
budgeting exercise for the country.
It is however difficult to put an exact suffices to
the federal budget. People have to think twice before making a
judgement whether it should be called as the investment friendly,
peoples friendly or the government friendly budget. The housewives
however feel unhappy over what they generally remark the taxing of the
vegetable oil and increase in electricity charges which they say
adversely affect the kitchen of every house whether rich or poor.
Against the total outlay of Rs742 billion, the
gross revenue receipts for the next year have been estimated at
Rs674.9 billion. The revised receipts of Rs632.8 billion and the
overall budgetary deficit has been fixed at 4 per cent of the GDP
against 5.7 per cent recorded in the current year.
Despite formidable situation due to mounting border
tension between India and Pakistan, the allocation for defence in the
next year's budget has been lowered to Rs146 billion against Rs151.7
billion estimated in the revised budget for the current year. This
also shows the command and confidence of the government over the
The Federal Budget is a continuation of the
long-term strategy of the government and hence is a logical
progression from the financial year 2002 budget and the changes in the
economic policy over the last year.
The key theme of the government's economic
strategy, which include enhancing tax revenues through increasing the
tax base, improving tax collection, curtailing unproductive
expenditure and reducing the role of the government in the economy,
are all prevalent in the budget. The budget, while neutral for the
economy, is rather expansionary relative to the financial year 2002
budget. This is because of the extra fiscal space created by positive
developments in the external account over the past eight months, with
forex reserves now standing at a record high of $6 billion. This
outstanding reserve position achieved by the present team of economic
managers is not due to September 11 or as a result of Pakistan joining
the coalition against terrorism. It is the culmination of the policies
as the government achieved $4 billion foreign exchange reserves before
September 11, 2001, as observed by the finance minister in his budget
speech. The process of de-dollarization is another indication of
government's economic policies and also the stable exchange rate, the
IMPACT OF THE BUDGET ON THE SOCIAL AND ECONOMIC
SECTORS OF THE COUNTRY.
An amount of Rs2.6 billion has been earmarked for
the education sector in the budget 2002-03 against Rs2.5 billion
allocated in the current fiscal year.
The government's strategy would focus on primary
and secondary education, universal education, technical education,
higher education and reforms in traditional Islamic institutions of
learning. The Cost of Education Sector Reforms (ESR) to be implemented
by the provincial and the local government is estimated Rs55 billion
for a period of three years.
This large sum and from our own resources, it is
not possible to fund the entire cost of this programme. A number of
donor agencies, impressed by the quality of the programme, had shown
keen interest to provide necessary financing and the government hoped
to provide increasing allocations to the ESR in the years ahead. In
order to improve girl's participation in education, the Ministry of
women development has also introduced a new programme named "Tawana
An amount of Rs134 billion has been allocated for
the Public Sector Development Program 2002-2003 against budget
estimates of Rs130 billion of the current year, showing a three per
cent increase as compared to last year. Actually, the PSPD allocations
are 7.5 per cent higher than the current year's final revised
estimated of Rs124.7 billion.
Of the total allocation of Rs134 billion for the
next year, Rs90 billion would be spent on federal projects against
Rs100 billion during the current year, down by 10 per cent, including
Rs46.7 billion for federal ministries and divisions, Rs26 billion for
state-owned corporations, Rs9.4 billion for special programmes, Rs7.7
billion for special areas like Azad Kashmir, Northern Areas, FATA and
Rs44 billion for provinces.
The provincial programmes for 2002-2003 have been
kept at Rs44 billion, which is higher, by 46.7 per cent when compared
with the budget estimates of 2001-02. The provincial PSPD has been
formulated keeping in view the additional resources being transferred
to the provinces under 2.5 per cent GST transfers.
At present the older refineries operating in
Pakistan — NRL — ARL and PRL — operate within a regulated rate
of return band, consisting of a ceiling net return on paid-up capital
of 40 per cent and a floor of 10 per cent. Earnings above the ceiling
are paid to the government of Pakistan by way of a surcharge, while a
shortfall below 10 per cent is received from the government as a
subsidy. This system does not apply to the PARCO refinery, which was
set up under the 1994 Petroleum Policy and is guaranteed a minimum 25
per cent return on capital or the recently floated Bosicor refinery
which is being set up under the 1997 policy that removed return
guarantees. Last year the government paid the refineries Rs13.5
billion in arrears for subsidies due to them, as
international-refining margins dropped.
The budget proposes to remove the floor return and
let the old refineries compete in the market without intervention.
Instead the refineries will be given tariff protection: 10 per cent ad
valorem on import of HSD, 5 per cent ad valorem plus 1 per cent
surcharge on import of kerosene, LDO and JP-4. Excise duty on oil
products is being abolished and the per unit petroleum levy reduced to
limit the impact on consumer prices. Despite the duty protection, this
move will expose the refineries (except PARCO which will continue to
receive the guaranteed return) to the volatility of global oil
refining margins, including the possibility of operating losses when
margins dip below a certain level.
The reduction in custom duties on imported cars is
negative news for the domestic automobile and motor cycle sector, In
itself, the proposed cut in duty will not impact vehicle prices and
hence the assemblers' revenues and profits. However, while the duties
are still very high after the cuts, providing domestic assemblers with
sufficient protection against imports, the reduction signals the
initial response from the government to the continuous collusion
between domestic manufacturers to reduce supply in order to
artificially raise prices and boost their profitability at the
customers' expense. Domestic assemblers are being told to behave, or
else face steeper cuts next time that would impact prices and
earnings. The cuts in duty also mean that assemblers will need to
accelerate indigenization levels to hedge against the threat of
possible future cuts in duty. Investors would now also need to focus
on the aspect of assemblers' performance in making stock investment
The increase in the motor vehicle
depreciation-ceiling amount from Rs0.75 million to Rs1 million may
have a positive impact on the demand for the 1300cc/1600cc/2000c
models produced by Indus Motors (Toyota) and Honda Atlas. However the
negative impact of the above mentioned duty cut is a more significant
factor for the auto sector in Pakistan.
The reduction in the corporate tax rate for banks
by 3 per cent from the next fiscal year for five years (to achieve
parity with the standard corporate rate of 35 per cent) is clearly a
positive development for banks' post-tax earnings. Although, the
reduction in banks' tax rate was widely expected, the announcement of
a timetable removes uncertainty and hence is a positive development.
The protection afforded to the sector in the form
of duty drawbacks is being gradually phased out and the revisions,
which were delayed, will now be effective from July 1, 2002. The trade
policy will disclose the extent of the revision. However a decrease in
the duty drawback may have an adverse impact on textile exporters
whose earnings have already been impacted by the country's tenuous
political and economic situation.
The withholding tax of 10 per cent on the import of
filament yarn has been removed in the Federal Budget to enhance the
usage of polyester stable fiber (PSF). The purchasers of local PSF
will be able to import the same under the DTRE rules or claim duty
drawback on deemed import basis. These measures are primarily designed
to encourage the use of PSF in the textile sector and to provide some
relief to companies producing blended yarn and fabric.
Both production and export of cotton cloth and made
ups increased during the outgoing financial year, indicating that the
local textile sector is realizing value addition is the only way the
industry will be able to compete after opening up the market to world
trade in the financial year 2004.
The privatization of PTCL and other public sector
entities that are at an advanced stage of privatization should be
completed at the latest by December. Though the deadline for
privatization has not been stated explicitly, the Privatization
Commission has been talking about September as the specific deadline
for the complete of PTCL's privatization process.
The cellular service providers have been optimistic
that the current budget would bring a reduction in activation charges
to Rs1500 from the current Rs2000. However this has not materialized.
Instead, withholding tax on telephones, mobile phones and prepaid
cards for fixed/mobile phones are being rationalized downwards.
The current budget abolishes the central excise
duty on optical fibers. This should give incentive to private sector
corporations in the telecommunication as well as the IT sectors.
This budget is also emphasized a shift in focus
away from thermal power generation and towards hydel electricity. The
reason is the high cost of imported furnace oil and its negative
impact on input cost and the country's foreign exchange reserves.
The total installed capacity of electricity
generation in Pakistan has increased by 76,045 GWh since 1991 to
152,923 GWh as at June 30, 2001. This was driven by the 48,907 GWh
capacity additions of new IPPs since 1997. Hydro electricity accounted
for 28 per cent and thermal generation (gas and furnace oil) and other
(nuclear/coal) equaled 72 per cent of total generation in 2001. The
installed capacity of hyderal electricity generation has remained
static since 1995 at 42,276 GWh.
The government owned national utility WAPDA
remained the leading electricity generating company in 2001 with a
share of 50 per cent in total electricity generation of 68,117 GWh.
KESC, HUBCO and KAPCO (International Power of UK) produced 11.7 per
cent, 10.5 per cent and 9 per cent of total generation respectively,
whereas the share of other IPPs remained close to 16 per cent in 2001.
There are 13 listed IPPs on the Karachi Stock Exchange of which Hubco
commands almost 85 per cent share in the power sector's market
capitalization. The decision of the government to privatize KESC by
December 2002 and two Jamshoro Power Co Ltd thermal power generating
units has assured the positive restructure of the power sector in
Pakistan. The power sector reform process is likely to continue as
International Financial Institutions have linked future funding with
these power sector reforms and the government would be inclined to
service its tariff agreements with various IPPs. The government is
also planning to announce a new power policy focused on Hydel
generation to attract long term investment into the second and has
already earmarked Rs29 billion for Ghazi Brotha hydropower project in
the budget for 2003.
The government has recently decided to remove more
than Rs5 billion out of a total of Rs6 billion of subsidies granted to
domestic consumers who use up more than 18 per cent of the total
natural gas produced in Pakistan. The use of natural gas by cement
plants has also been on the decline — drop of 18.5 per cent over
2000 as the government has increased natural gas prices by over 4.5
per cent during December 2001 with a planned price increase of 10 per
cent in July 2002.
The existing transmission and distribution network
is insufficient to accommodate the recent gas discoveries.
According to industry sources, oil and gas
exploration companies are reluctant to increase the pace of their
exploration activities not only because of the low returns, but also
because the current transmission and distribution infrastructure's
inability to absorb new gas supplies. According to industry sources,
the government of Pakistan requires around $600-700 million foreign
investment to overhaul and expand its existing transmission and
distribution network. Foreign investment in the oil and gas sector,
which has shown signs of an increase over the last two years, is bound
to pick up once the government deregulates the gas sector going
forward. The change in the return formula is the key if the government
is seriously interested in attracting foreign investment to the gas
sector. However, protection of the interest of the consumers is also
of vital importance for overall economic growth of the country. Hence
the government will have to maintain a balance between the interest of
the investors as well as the consumers in the larger interest of the
Patriotic Pakistanis are happy over the good
results shown by the economy. Unprecedented balance of payment
position and over $6 billion reserves all give a sense of achievement
to the people. But how long this patriotism will last if the benefits
of these achievements are not passed on to the common man. Their major
concern is to be able to live within the available means. However, the
rising inflation continues to deprive of their purchasing power.
People in general are least bothered if the prices of automobiles have
been reduced in the budget. In fact they are more concerned of
increasing prices of daily living such as vegetable oil, utility bills
and transportation charges. They need a budget, which can at least
make life easy for them