Fostering growth and reducing poverty would remain the primary focus of the coming budget
From SHAMIM AHMED RIZVI
June 03 - 09, 2002
The Finance Minister Mr. Shaukat Aziz, declared that despite increase in the defence budget, public sector development spending will be enhanced in the coming budget for the year 2002-3 to be announced by the middle of next month. He also announced that a fiscal responsibility law would be promulgated to check the growth of debt and a mechanism put in place to ensure prudent fiscal discipline from the next financial year.
Mr. Shaukat Aziz was addressing a pre-budget seminar arranged by Daily News in Islamabad. The day long seminar, divided in four sessions, was addressed by over a dozen well known economists, researchers and scholars besides Finance and Commerce Ministers. They included former Finance Ministers Sartaj Aziz of Nawaz Sharif government, former Commerce Minister, Ahmad Mukhtar in Benazir cabinet, economic adviser to government, Dr. Ashfaq, noted economists Dr. A.R. Kamal, Dr. Sulman Shah, PP leader Shah Mehmood Qureshi, Former Secretary General Finance, Mr I.A. Jafery, Chairman Riaz Malik and Dr. Tahir of Planning Commission.
Referring to Indian hostilities, the Finance Minister said Pakistan was exercising maximum restraint, but if the war was thrust on the country "they will find us well-prepared to meet the challenge. The country had all the resources and power to ensure the national defence we have provided whatever was needed for our defence forces and will continue to meet all their requirements", he added.
On the budget 2002-03, which was the main subject of The News pre-budget seminar: "Post-9/11 possibilities of Economic Revival" Aziz said fostering growth and reducing poverty would remain the primary focus of the coming budget. The government was committed to pursuing the taxation reforms and administrative reforms of the Central Board of Revenue to broaden the tax base and facilitate taxpayers.
Finance Minister Aziz and Chairman CBR Riaz Malik both detailed some basic outlines of the reforms strategy. The minister said reforms would focus on induction of the information technology by eliminating the discretionary powers of the taxmen to curb corruption. He also announced a self-assessment scheme in this regard, and extended use of the computers in filing and analyzing of tax returns.
On the issue of stability of the reserves and exchange rate, Finance Minister Shaukat Aziz announced the establishment of legally functioning exchange companies from July 1, 2002, under prudential regulations of the Central Bank, replacing existing open market moneychangers. The banks would also be allowed to sale and purchase foreign exchange, and the Central Bank would intervene in the market through these banks.
Experts believe that unification of the kerb and interbank exchange rate through the establishment of these companies would help fetch $4 billion remittances through formal legal channels from the fiscal 2002-03, against the anticipated over $2 billion during the current fiscal year. At present, the State Bank of Pakistan (SBP) made outright purchases, both through kerb and interbank, to stabilise the value of rupee. The rupee had appreciated by 7 per cent since September 11, due to large inflows of dollar and depressed demand in the domestic market. The bank bought almost $2.6 billion during first three quarters of the current fiscal year from the kerb and inter bank market. Aziz said that such purchases were necessitated, as the appreciation of rupee was hurting exports from Pakistan that had shown 1.8 per cent decline during July-April, over the corresponding period of the last fiscal year.
He also announced that tariff structure would be streamlined further from the next fiscal year, with a maximum tariff slab of 25 per cent, from 30 per cent at present. The government also announced that tariffs on the industrial raw materials and other inputs would be lowered further to reduce the cost of doing business in the country.
Finance Minister Shaukat Aziz also spoke about the financial health of the state-owned enterprises (SOEs) which he claimed were better placed now after years of losses that forced the government to pump in fresh liquidity to improve their balance sheets. He said just in the case of Karachi Electric Supply Corporation (KESC), the government had to put about Rs. 83 billion to cover its accumulated losses. Now, he maintained, many SOEs were much better, as cost cutting, structural reforms and liquidity support had improved their outlook. He cited the example of the Nationalized Commercial Banks (NCBs) as a success story, which he said were all set to go for privatization now.
The minister said that a 3.3 to 3.5 per cent GDP growth was expected during 2001-2002, with a low inflation of around 3 per cent. He said the government would target one per cent additional growth rate for 2002-03 over the actual base of the current fiscal year.
There was almost a consensus amongst the speakers (excluding government functionaries) that despite all rhetoric and tall claims by the government the revival of economy was not yet in sight. According to them the greatest cause of concern was the decline in growth rte and the investment both domestic and foreign Mr. V.A. Jafarey in his well documented article said. The immediate priority, in the post rescheduling period should be to revive economic growth and investment and other dynamics of the economy and accelerate poverty alleviation measures. "By revival, I mean that we should try, in the first instance to recover the pre-nuclear level of economic activity and then reach forward to attain a growth rate of 6.5% of GDP with other indicators consistent with it". Since 1999, economic progress has been uneven. In the external sector, while we have achieved stability and made noticeable progress in several departments, the trend in foreign trade should be a cause of concern. Exports have stagnated in the last four years. Imports have shrunk, due to recession and low investment, Growth remains depressed. The fiscal deficit has not deteriorated but it is nowhere near 4% of GDP, the target relentlessly pursued by the IMF between 1988 and 1998. However, the greatest cause of concern is the decline in investment, total, domestic and foreign. The consequences of this decline for future growth and wellbeing are too obvious to be stressed. There are political and international factors which have weakened investors confidence and which are beyond the reach of economic policy but there are also economic reasons, Mr. Jafarey added.
Dr. Salman Shah in his paper said that it was heartening to note that, of late, the policy makers and influential International Financial Institutions (IFIs) had started talking about the importance of growth but "I have not yet seen it being translated into effective policies. I don't need to remind this august gathering that while the government can take credit for correcting some of the external sector imbalances our savings-investment imbalances and low levels of saving and investment rates continue to bedevil the economy." The all important economic growth rate was at an all time low of 2.6 per cent last year and we are heading for another year of disappointing growth. An early indicator of a further slow down in the economy is a major drop in incremental credit takeoff by the private sector this year. Between July 2001 and March 2002, the drop has been an astounding Rs. 45.3 billion compared to the same period last year. There is an air of bafflement and resignation in official circles as to why economic growth has eluded us in spite of Pakistan's diligent pursuit of prescriptions of the international financial institutions (IFIs), he added.
Shah Mahmood Qureshi, the PPP leader, while commenting on the sorry state of affairs in the agriculture sector criticised the policies of the government, which have landed this productive sector in great trouble. He spoke well and pointed out many weak areas of the farm sector, which needed the immediate attention of the policy makers.
Mr. Qureshi said for the last two years the growth rate in agriculture sector had remained stagnated and people have been made to suffer on account of sad developments on this front. For example, he said GST on fertilizer had resulted in higher prices of the commodity, resulting in the lesser use of it, which would further affect the productivity of all the major crops. The price of diesel have been revised upward considerably just when the farmers have been busy in cultivating their cotton crop and this could affect the productivity of the crop on which the whole national economy depends. He said three areas needed to be looked into before thinking about the revival of agriculture sector.
The first issue was of the water shortage and unless we do not address it properly, agriculture would not come out of its present stagnation. The second important issue according to Mr. Qureshi, was the crises of marketing in the farm sector the farmers have been plundered over the years in the name of private forces' growth. But this element, far from extending help, is rather looting the farmers and depriving them of their due rights, causing more poverty in the rural areas. He said when the present government took the reign of powers in 1999, the cotton crises emerged, which virtually ruined the farms sector. A committee was formed to sort out the matter, but no one knows about the fate of the recommendations of the committee, while the farmers were left to bear the loss of billions of rupees. Likewise, he added we are spending billions of rupees on the import of oilseeds despite the fact that we can achieve self sufficiency within four years provided right kind of policies were pursued. This is the result of market failure.
He said now it was the 'Government of Technocrats' who though take pride in their knowledge of the concerned sectors, but have failed to deliver. For example, he lamented that they had failed to convince the so-called technocrats sitting in Export Promotion Bureau and Civil Aviation Authority that why the mangoes be sent abroad from Multan. But the problem is still there. The mango product is ready, the buyers is waiting for the consignment to reach the destination, but again the marketing problem is there as the technocrats are not ready to listen or help the mango growers. Last year, the growers had a surplus of 1 million tons of wheat, but the Commerce Ministry failed to sell it. He said we have no food processing industry so our products are wasted locally and farmers are not getting their due income.
The third point raised by Mr. Qureshi was the failure to implement the policies framed by the respective governments as after a lot of labour these reports and recommendation were compiled but due to rapid changes of governments they could not be implemented resulting in a deeper crisis.
Addressing the seminar the Commerce Minister Mr. Razzak Dawood said that tariff restructuring exercise for the next fiscal year has been completed and is being discussed with the Central Board of Revenue (CBR) to give it a final shape. He said that the Ministries of Commerce and Production went through an extensive exercise to complete the task assigned last year for tariff rationalisation. "We believe that business sector should be internationally competitive at global level, and reduction in duties is part of this strategy," Dawood said, adding that reduction in duties led to increase in growth and production. He, however, added that input cost in Pakistan was high and slashing of duties was essential to make the industry competitive.
About trade policy, Dawood expressed dissatisfaction on trade policies in the past, saying that several sectors were ignored while framing those policies, and NWFP was the main complainant for being ignored. Replying to a question regarding investment, he said that investment was not impressive during this fiscal year, except in oil and gas sector. He said that value-added exports were expected to increase by 57 per cent against 52 per cent of previous year and 37 per cent in 1999.
Governor of State Bank of Pakistan Dr. Ishrat Hussain opined that new types of investors, those who take risk to invest their own capital, believe in a certain work ethics, and are innovative and motivated enough to penetrate in the word market are not emerging in Pakistan. He was replying to a question at a seminar as to why investment in the country was not picking up as earlier.