POST-BUDGET ANALYSIS

The budget document keeps the hope alive for that utility prices may come down in not too distant a future

By AMANULLAH BASHAR
June 16 - 22, 2003 

The Federal Budget for the year 2003-04, with an outlay of Rs805.2 billion against the projected receipts estimated at Rs626.2 billion, was presented by the finance minister amidst hue and cry raised by the opposition in the National Assembly last week.

The gap of Rs179 billion between income and expenditures is to meet through borrowings.

The voices raised by the opposition on the occasion of budget presentation had however nothing to do with the economic interests of the people. All that uproar was focused to serve the party interests rather than to highlight the grievances and economic hardships faced by the masses. Contrary to the expectations of the people in general and the business community in particular pinning high hopes for some relief in exorbitant utility prices, the relief was given to a certain class of the society that is the government employees and the pensioners.

A 15 percent raise in the salary as well as concessionary loans for house construction to the government employees sounds that it was a pro-government budget.

The utility services, especially electricity and telephone instead of providing quality services at the enabling rates, have assumed the role of tax collecting agencies. Consequently, the government levies on the consumption of petroleum, electricity and telephone have pushed high the prices of these essential items having a widespread economic fall out from farm to factory and kitchen of a housewife to the oven of the industrial sector.

In this budget too, the government has allocated Rs53 billion for two power generating companies i.e. WAPDA and KESC to keep the cost of electricity under control. Justifying the heavy financial support to these power companies, it is said that without this financial support the electricity tariffs would have called for much larger increases. This incentive to the power companies has been given to mitigate the impact of increased cost of electricity. The budget document elaborates two things about the cost of utilities.

First, for lack of any significant domestic source, country has to depend on imports for meeting energy needs. Second, government has no control over international prices. The effect of changes in international oil prices is passed on transparently.

The budget document, however, keeps the hope alive for that utility prices may come down in not too distant a future. In this respect, the document explains that the country was nearly through with the frontloaded payment due to Independent Power Producers (IPPs), after which there will be substantial cut in electricity tariffs. Another step taken towards reduction in power tariffs is the supply of additional gas to oil-fired power projects even in the private sector which would significantly lower the cost of production.

To some extent, the reasons for high tariff rates appear to be valid, however, the other side of the pictures presents a different look.

KESC claims that over 80 per cent of its power generation has already been shifted from oil to the gas-fired system, yet the benefit were not passed on to the consumers and it continues to charge power rates fixed on the basis of oil-fired system. The price-hit consumers also say that when industry like cement can entirely moved to the cheaper source of coal-fired system why the power sector cannot move on the same track. The government, however, claims that it is trying hard to develop new power projects on coal and hydel. The cost of these projects will be significantly lower than oil-fired projects. The combined effect of these developments will be positive on utility prices in the coming years and hopefully this burden will also be abated.

HIGHLIGHTS OF THE BUDGET

—Total Expenditures Rs805.2 Billion
—Total Receipts Rs626.2 Billion
—Deficit Rs179 Billion
—Wealth tax repealed
—Cut in Withholding tax from 7.5 per cent to 5 per cent
—Duty on paper and board abolished
—Income Tax returns under Self Assessment Scheme
—25 per cent cut in excise duty on cement
—15 per cent increase in salaries of government employees
—20 per cent increase in health allocations
—Wire and cables free from excise duty
—30 per cent increase in Development Budget
—Tax refund system to prevail
—10 per cent customs duty replaced with 20 per cent sales tax on imported oil seed
—Duty on vehicles of 1800cc and above reduced from 200 per cent to 150 per cent
—Duty on tea, spices, silk yarn and ball bearing reduced

AGRICULTURE SECTOR

Agriculture sector which, offers a strong support to the economic growth of the country, has been allocated Rs1,502.546 million from Public Sector Development Program. This allocation indicates an increase of 91.45 percent as compared to the allocations of Rs784.799 million in the previous year. This fundamental sector contributed significantly during the previous year by registering 4.2 per cent growth. The crop wise achievements showed that the wheat production was estimated at 19.2 million tons that was almost close to the target of 19.5 million tons mainly due to high temperature stress at grain formation stage.

The cash crop of rice also recorded an increase as its net output was 4.5 million tons; sugarcane production was 52.1 million tons against the target of 48.1 million tons. The cotton crop was estimated at 10.2 million bales against the target of 10.5 million bales registering a shortfall of 0.3 million bales. However, the overall growth in the major crop registered an increase of 5.8 per cent against the target of 0.3 per cent, while the growth rate in the minor crops was 0.4 per cent against the target of 3.5 per cent.

During the current year, the government plans to extend high priority to augmentation of irrigation water through construction of dams and lining of canals. A number of measures have also been taken to provide relief to the growers which include cut down in electricity rates while fertilizer prices would also be stabilize under this policy.

Besides the on going projects, a number of new projects have also been initiated in this agriculture sector which includes National Agriculture Research Program, restructuring and strengthening of National Agriculture Research System and strengthening of laboratories and other facilities in compliance with WTO conditions.

Oil-seed cultivation is another important part of the agriculture sector which is also being promoted on priority basis to cut down the import bill on this account. In this respect, the project of Rapid Conversion of Wild Olive Species and Accelerated Promotion of Olive cultivation in NWFP and Potohar region will continue. In this promotional drive, oil palm seed will be distributed among the growers in Sindh and Balochistan under oil palm development pilot program. An agreement will also be finalized with the government of Japan for procurement of fisheries research vessel for Marine Fisheries Department.

ENERGY SECTOR

The energy sector has been given its due share in the budget with an allocation of Rs35.16 billion during next fiscal year when the power sector would be reinforced with additional 1450 megawatt capacity with the operation of Gazi Barotha power project.

During the new financial year, fuel sector will get Rs646.704 million. The installed power generation capacity would increase from 18,052MW to 19,502MW. The target for total energy generation including private sector has been fixed at 77,724GWh in 2003-04 as compared to 15,144GWh during 2002-03 showing an increase of 3.4 per cent. The power sector plans to add 595,000 new connections both in the WAPDA and KESC distribution systems, besides electrification of over 2000 new villages.

OIL

Currently, Pakistan produces about 65,128 barrels per day which is planned to enhance up to 73,216 barrel per day this year.

GAS

The natural gas production has been planned to increase up to 3,472 MMCFD against an estimated production of 2,654 MMCFD in the previous year. In the new fiscal year, drilling of 77 new wells is planned in the public and private sector, comprising 32 exploratory and 43 appraisal development wells. Currently, a large portion of the LPG is imported to meet the domestic requirement. In the current financial year, LPG production has been planned to increase to 1,245 tons per day.

COAL

The coal production has also been planned to increase to 3.6 million tons per annum which shows a 6 per cent increase over the coal production in the previous year.

In order to accelerate coal production from local resources, a feasibility study in the public sector on Thar coal development will be completed this fiscal year in collaboration with international consultants.

CNG

Efforts are being made by research organizations such as Hydrocarbon Development Institute of Pakistan to convert public transport to compressed natural gas instead of HSD. The gas infrastructure projects are scheduled to be completed in the new financial year.

IMPORTANT STEPS

Finance Minister Shaukat Aziz has, however, described the federal budget as investment inducing and employment generating aimed at poverty alleviation from the society.

A special saving scheme along the lines of pensions will be initiated. The scheme will offer a higher rate of profit for widows. Fresh incentives for the overseas Pakistanis, including an increase in the duty-free allowance, raising it from $800 to $1000 per year for holders of silver card and from $1500 to $2000 per year for gold card holders was also announced.

In his concluded remarks, the finance minister observed that this is budget without any new taxes. In fact a large set of relief measures aimed at improving the welfare of the common man was proposed in the budget.

These measures, he outlined, include increase in salary, pension and provision for housing finance. In addition, the budget provides encouragement to private sector for investment in SMEs, housing and agriculture sectors all of which have the potential to create new jobs. The development plan included in the budget will accelerate the growth process and employment creation. This budget will thus be a harbinger of renewed economic activity. This is the need of the national economy, which has been stabilized and is now poised for a take-off. This is indeed a golden opportunity for the nation. We have all the necessary elements in place. It is up to us, how far we want to take this opportunity, the finance minister observed.

The key to future success will be our ability to stay the course. Continuation of reforms and consistency of policies are essential. It will be easy to stray this course, more difficult to hold ourselves together and forge ahead with second generation reforms. The dividends of the reforms that we are already reaping should be a sufficient basis to hope for an even a better future that awaits us, the finance minister remarks.

PSPD

The focus of Public Sector Development Program (PSPD) worth Rs160 billion is on infrastructure sectors and other projects to reduce poverty characterized by formidable unemployment.

The program envisages spending Rs89.2 billion in the areas of public works, human resource development and poverty reduction. In these areas, some new programs have also been launched to alleviate poverty mainly because of commitments with donor agencies.

REACTIONS

People from different walks of life have come out with a mixed reaction of the federal budget for 2003-04. Mian Nasser Hyatt Maggo, President of Karachi Chamber of Commerce and Industry (KCCI) said that the federal budget was not up to the expectations of the trade and industry and was unlikely to benefit the general public.

The budget is short of incentives for exports and export-oriented industry. The budget does not deal with the higher rates of General Sales Tax (GST) as no reduction has been made. Although a revenue target of Rs510 billion has been fixed for 2003-04 yet nothing has been done to expand the existing tax base. Despite the long standing demand of the business community, extraordinary powers of the Central Board of Revenue (CBR) have not been curtailed. He said that the two percent reduction in Income Tax rate is just an eye wash.

KCCI Chief expressed his concern that no relief on import duty on machinery has been allowed while the important sector of Information Technology has also been ignored. He was of the view that reduction in import duty of machinery and development of IT and the SMEs was essential for the development of industry and the exports of the country.

He, however, observed that the only positive steps in the budget were the abolition of the Wealth Tax and reducing the number of Audits for the entrepreneur to once a year.

KCCI Chief Nasser Maggo said that the budget speech of the finance minister was extraordinarily short this year and perhaps that is why some important issues were not discussed in the budget speech such as the matters of privatization of public sector entities. The finance minister also failed to mention the ways and means to cover up the deficit of Rs179 billion in the budget. While contradicting the announcement regarding DTRE made in the budge speech, the KCCI president said that nothing has been conveyed to the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) as well as the KCCI by the ministry of finance. The matters related to DTRE have not been resolved so far. However, proper comments could not be offered since the finance minister has not given details of the amendments in DTRE rules.

The KCCI president while describing the reduction in the Central Excise Duty on cement as nominal, said that reducing the duty on cement by Rs250 was inappropriate and would not benefit the construction industry. He criticized the government for not reducing the duty on small cars and motor bikes. He maintained that reduction in the duty on small cars and motor bikes could benefit small industry and the general public. Reduction in duty on 1800CC cars from 200 per cent to 150 per cent is meaningless since production of such cars was only 5 per cent of the total production and such cars are included in luxury items and their use is also very limited.

APTMA

The All Pakistan Textile Mills Association (APTMA) has termed the overall budget as growth-oriented. However the budget document lacked direction for industry preparedness under post-2005 era under WTO regime. The industry was expecting level playing field, to remain competitive in the local as well as foreign markets especially for man-made fibers and its products. The rationalization of tariff for these materials has not been considered in the budget.

The proposed rationalization of Tariffs had the potential to propel the industry towards the goals set in the textile vision 2005. However, the measures to amend the DTRE constitute an extremely positive step. APTMA specially applauded the inclusion of Polyester Staple Fiber in the DTRE regime.

Submission of Section 73 of Sales tax Act 1990 is rightly made, it should not be misinterpreted again to use against the organized sector for netting un-organized sector.

Regarding amendment made in the sales tax refund rules, the APTMA expressed the hope that manufacturer-cum-exporters would not suffer again in the hands of implementers. There is further need of amendment to allow refunds on stocks, which has been ignored in the budget. APTMA also lauded the amendments introduced with regard to single audit in a year.

The industry was expecting measures in the budget to achieve the preparedness and fully compliance by 2005. Cost of doing business in Pakistan is still high particularly the cost of utilities which is on the rise instead of rationalization for the industry to complete internationally. APTMA urged the government to review the energy policy for the industry in order to attract further investment, increase and sustainable comparative advantages.

APTMA also expressed his concern on the amendment introduced in SRO 554(1)/98 disallowing import of consumable spares and accessories under the said SRO. It may be added that the said SRO has helped attract substantial investment during the last five years, helped industry sourcing quality spares under the incentive terms of the said SRO. Disallowing accessories and spares would mean that unorganized sector would crop up to meet industry's requirement thus exchequer would not benefit by disallowing spares and accessories.

Anjum Saleem, Chairman APTMA has urged the government to review this in the larger interest of industry and exports of the country.

Commenting on the federal budget, Sheikh Javaid, Chairman Export Processing and Free Zones Committee of the FPCCI observed that the budget does reflect promise to the common.

He said that duty relief should have been more significant on smaller cars since a small car is a necessity and not a luxury. Besides, increase in duty on used computer monitors should be withdrawn in the interest of IT literacy in the country.

Regarding establishment of Free Zones in the country, Javaid suggested that such zones should be established separately by respective ministries e.g. ministries of finance, commerce, communication, investment and privatization on different patterns with the active participation of the private sector. The old pattern under which EPZA was established should be abandoned due to its complete failure. This will create a healthy competition among various zones with different package of investment incentives studded with organizational and operational mechanism. These zones should be named as free economic zone, free export zone, free processing and manufacturing zone and sea port special zone etc.

He reiterated that successful economic activity at Gwadar can only be achieved if private sector is induced in various administrative and regulatory bodies constituted so as to play its due role. It might receive the same fate as that of the industrial estates in Pakistan such as Nooriabad, Hattar, Gadoon Amazai and Karachi Export Processing Zone, he warned.

Sheikh Javaid was of the opinion that investors in the area of packaging of fruit and fish, shipping, construction, warehousing etc are taken into confidence by allowing incentives to their respective fields in order to ensure rapid growth of the national economy.