FEDERAL BUDGET 2003-2004

An Institute of Policy Studies Task Force Report

By PROF. DR. KHAWAJA AMJAD SAEED
July 14 - 20 , 2003 

The Federal Budget 2003-2004 was presented by the Federal Finance Minister in the National Assembly on June 07, 2003 and this was approved on June 14, 2003. This article presents an analysis on aspects follow as:

MAJOR ASSUMPTIONS

The following box presents assumptions in respect of various indicators:

BOX NO. 1:
 ASSUMPTIONS

INDICATORS 2003-2004 2004-2005
. % %
1. REAL GDP 5.3 5.8
2. AGRICULTURE 4.0 4.3
3. MANUFACTURING
•LARGE SCALE 8.8 9.0
•SMALL SCALE 7.8 8.0
4. OTHER SECTORS 4.7 5.7
5. INFLATION 4.0 4.0

The success of the above budget will depend upon achieving the above targets.

CONTINUITY OF POLICIES

The democratic government of Pakistan announced continuity of objectives and economic policies pursued in the last three years. These are summed up as under:

BOX NO. 2:
CONTINUITY OF POLICIES OBJECTIVES

FOCUS DIRECTION
1. Number of Taxes Reduce
2. Tax Rates & Penalties Reduce
3. Assessment & Collection Procedures Simplify
4. Labour Levies Reforms
5. Dispute Settlement Efficiency
6. Tax Base Broaden
7. Tax Administration Honesty & Efficiency
ECONOMIC POLICIES
FOCUS APPROACH
1. Economic Policy Consistency
2. Tariff Continued Rationalization
3. Tax Laws Constant Reforms
4. Refunds Speedier Release
5(i) Banking Sector Reforms
5(ii) Capital Market Large Scale Allocations
6. Irritants Removal
7. Economic Reforms Continuity & Sustainability

The above objectives are sound and economic policies are in the right direction.

BUDGET 2003-2004

The following box presents master chart in respect of the above budget:

BOX NO. 3:
MASTER CHART

PARTICULARS RS. B %
NEEDED
1. Current Expenditure 645 80
2. ADP: 2003-2004 160 20
. 805 100
AVAILABLE
Current Revenue-Net 513 64
Shortfall 292* 36
. 805 100
FINANCING PATTERN
1. External Resources 159 54
2. Net Capital Receipts 37 13
3. Self Financing of PSDP by Provinces 30 10
4. Changes in Provincial Cash Balances 28 10
5. Bank Borrowings 28 10
6. Privatization Proceeds 10 03
. 292* 100
Source: Computed from: Budget Documents for 2003-2004, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 07, 2003.

REVENUE BUDGET 2003-2004

Revenue receipts are forecasted at Rs.728b. After deducting a sum of Rs.215b (relating to transfer to provinces, net federal revenue is estimated at Rs.513b. Indirect taxes (48%) consists of sales tax (Rs.223b), custom duties (Rs.78b) and federal excise (Rs.48b). The government has already announced tapering off federal excise and merging it in sales tax which is stated to be the future tax of Pakistan. Some comments are offered below:

DIRECT TAXES (RS.161 B):

The only significant direct tax law is Income Tax Ordinance, 2001. A sum of Rs.154b is expected to be collected under income tax. The remaining amount relates to workers welfare tax (Rs.6b) and capital value tax (Rs lb).

NON-TAX REVENUE (RS.157B)

Three main constituents of non-tax revenue include income from property and enterprises (interest, dividend, return and profit from post office and Pak Telecom Authority) constituting 59%, receipts from civil administration and others (22%) and miscellaneous receipts (19%) primarily consisting of royalty on oil and gas, passport and air travel fee.

SURCHARGES (RS.61B)

Surcharges represent differential between production cost and the fixed sale price of these commodities. Two surcharges include petroleum (75%) and natural gas (25%).

PROVINCIAL SHARE OF FEDERAL RECEIPTS (RS.215B)

Amount allocated as provincial share of Federal Receipts is the highest in the history of Pakistan. Hopefully the decision to allocate the amounts to various provinces will be announced in due course of time by the National Finance Commission with the approval by the President of Pakistan under Article 160 of the Constitution of Pakistan, 1973. The following box presents the proposed distribution of amount to various provinces:

BOX NO. 4:
DISTRIBUTION OF FEDERAL RECEIPTS TO PROVINCES

PROVINCE RS. B % POPULATION (%)
I. Punjab 107 50 57
2. Sindh 66 30 24
3. NWFP 25 12 14
4. Balochistan 17 8 5
. 215 100 100
Source: Computed from: Budget Documents 2003-04, issued by the Ministry of Finance, Government of Pakistan, June 07, 2003.

DEBT SERVICING (RS.256B)

A few years ago, the shadows of debt default were looming large over our heads. By Allah's grace, our foreign debts were rescheduled by Paris Club. Some foreign debts have been written off. Others have been rescheduled. Accordingly, we are now enjoying fiscal space and consequently the burden of debt servicing on the federal budget for 2003-04 now stands reduced to 40%. The following box sums up the break up:

BOX NO. 5:
DEBT SERVICING

PARTICULARS RS. B %
1. Interest on domestic debt 170 66
2. Foreign Debt
•Interest 40 16
•Repayment 46 18
. 86 34
. 256 100
Source: Computed from Budget Documents for 2003-04, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 07, 2003.

The following comments are worth noting:

i) As against the perception that burden of debt servicing foreign debts is more than the internal debts, the actual position is the opposite. Debt Servicing for interest of internal loans (Rs. 170 billion) is 66% compared to 44% for foreign loans (interest and repayment).

ii) No provision for repayment of internal loans is made and therefore not included in the budget under the heading "debt servicing".

iii) The Government has worked out a strategy of foreign debt reduction by 2010. A determination to annually return some amount relating to foreign debt has been spelled out. There is a need to accelerate the pace of domestic resource mobilization to reduce reliance on foreign loans to attain the dream of economic sovereignty as visualized by our democratic set up.

iv) A happy announcement has been made by the Federal Finance Minister that the current IMF assistance program will be the last one and the Government will say good bye for future assistance. This is a happy augury and this spirit needs to be extended to other foreign and internal loans. The ongoing program is likely to terminate in November, 2004.

OTHER EXPENDITURES (RS.229B)

Other expenditures heading has assumed priority number two after debt servicing. There is a need to carefully review the amount and reduce it. Some policy decisions need to be undertaken in this respect. Moreover there is a need to associate the Institute of Cost and Management Accountants of Pakistan for developing an expenditure rationalization strategy.

An awareness needs to be created in the minds of all stake-holders that expenditure reduction will appropriately be in line with the spirit of reducing budget deficits and accordingly contribute a step forward in the journey of economic sovereignty. The following box presents composition of "Other Expenditure":

BOX NO.6:
OTHER EXPENDITURES

PARTICULARS RS. B %
1. Subsidies 64 28
2. Civil Administration 63 28
3. Grants 62 27
4. Pensions 38 16
5. Unallocable 2 1
. 229 100
Source: Computed from Budget Documents for 2003-04, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 07, 2003.

To ensure harmony in relations between the Federal Government and provinces of Pakistan, decision has been made to give subsidies and grants to provinces. However, a determined effort is needed to reduce expenditure in respect of civil administration.

DEFENCE (RS.160B)

The amount allocated to defence is a classified one. As a single block amount, it is, included in the budget without any broad details. It is, therefore, difficult to offer any comment on its break up. However, it will be interesting to note the following:

a) The amount is the same as per revised budgeted amount for 2002-2003.

b) Indian Budget for 2003-2004 has allocated Indian Rs.752 billion for defence expenditure. Indian Rupee is 46 to 1 US Dollar. Our Pakistan Rupee is Rs.57 to 1 US Dollar. When converted into an equivalent amount in Pakistan Rupee, the Indian defence expenditure works out to Rs.932 billion. By Allah's grace, our armed forces, due to motivational inspiration, strongly believe in the concept of "Quantity Outnumbered".

c) In view of the above, it would be inappropriate to demand reduction in defence expenditure.

ADP 2003-2004

A sum of Rs.160 billion has been allocated for ADP for 2003-2004. If this amount is appropriately and genuinely spent, lot of jobs will be created and poverty alleviation can be ensured. A momentum of accelerated growth will be ensured and a confident start in respect of forward march to socio-economic reforms will be embarked upon. Break up of the amount allocated in this respect is given below:

BOX 7:
ADP 2003-2004—MAJOR DEVELOPMENT EXPENDITURES

PARTICULARS RS. B %
1. Departments of Federal Government 61 38
2. Provincial ADPs 47 29
3. Autonomous Bodies 36 23
4. Special Areas 9 6
5. Special Programs 7 4
. 160 100
Source: Computed from Budget Documents for 2003-04, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 07, 2003.

Some comments are as under:

i) A carefully developed strategy has been worked in terms of priorities to agriculture, water, transportation, communication, health, education, IT and other departments. Accordingly budget allocations have been made.

ii) A sum of Rs.47 billion has been allocated to Federal Government contribution to Provincial ADPs. This is the highest amount ever allocated in the history of Pakistan. Break up of the amount is given in the following box:

BOX NO. 8:
ALLOCATION TO PROVINCIAL ADPS FOR 2003-2004

PROVINCE RS. B % POPULATION (%)
1. Punjab 23 49 57
2. Sindh 11 23 24
3. NWFP 9 19 14
4. Balochistan 4 9 5
. 47 100 100
Source: Computed from: Budget Documents 2003-04, issued by the Ministry of Finance, Government of Pakistan, June 07, 2003.

It will be interesting to note that in the unanimously approved Constitution of Pakistan, 1973 no guidelines are available for distribution of amount for allocation to Provincial ADPs. The level and extent of Provincial ADPs primarily depend upon allocations made by the Federal Government. For strengthening Federal and Provinces relations, it will be appropriate to continuously increase the above allocations to all the provinces.

AUTONOMOUS BODIES (RS.36B)

A sum of Rs.36b has been allocated for development programs of autonomous bodies. The allocations are summed up in the following box:

BOX NO. 9:
COMPOSITION OF ALLOCATION FOR AUTONOMOUS BODIES

PARTICULARS RS. B %
1. WAPDA
Power 13 36
Village Electrification 1 3
. 14 39
2. Karachi Electric Supply Company 4 11
. 18 50
3. National Highway Authority 18 50
. 160 100
Source: Computed from Budget Documents for 2003-04, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 07, 2003.

Ideally autonomous bodies must raise their finances from the capital market rather than be a burden on Federal ADP. In view of importance of energy and communication link, the Federal Government has included the above amounts.

SPECIAL AREA(S) (RS.9B)

SPECIAL PROGRAM(S) (RS.7B)

The allocations made above are for meeting needs of special areas and some are for special programs specific to needs. This initiative is a welcome step.

FINANCING PATTERN

Unfortunately there is a deficit of Rs.132b in the recurring budget 2003-2004 and consequently instead of a positive contribution the position is otherwise. However, the Government has worked out the following strategy to finance the ADP 2003-2001:

BOX 10:
FINANCING PATTERN FOR ADP 2003-2001

PARTICULARS RS. B %
1. External Assistance 159 99
2. Internal Resources (95) (60)
3. Self Financing for PSDP by provinces 30 19
4. Changes in Provincial Cash Balances 28 18
5. Bank Borrowing 28 18
6. Privatisation Proceeds 10 6
. 160 100
Source: Computed from: Budget Documents 2003-04, issued by the Ministry of Finance, Government of Pakistan, June 07, 2003.

Some comments on important aspects are as under:

EXTERNAL ASSISTANCE (RS.159B)

External grants (Rs.43b) relate to Saudi Oil Grant (Rs.31b), project grants (Rs.3b) and budgeting support grants (Rs.9b). These represents 27% of external assistance. Other aid is expected to be Rs.23b from Islamic Development Bank, Jeddah (Rs.17b) and short term credit (Rs.6b). The other sources include program loans (Rs 52b) and project loans (Rs.41b).

INTERNAL RESOURCES (RS.(95)B)

In respect of internal resource, the amount has been worked out as under:

PARTICULARS RS. B
Deficit in Revenue Budget 2003-04 132
Less: Net Capital Receipts (Rs. 89b - Rs. 52b) 37
. (95)

It is hoped that in future domestic resource mobilization will be accelerated and expenditure reduction strategies will be operationalized to enable the Federal Government to produce surplus from the future revenue budgets to positively contribute to the financing for future ADPs.

CONCLUDING COMMENTS

Pakistan's socio-economic problems are many. One budget cannot address these. However, there is a need to develop strategic directions to their solution. A long way is needed to solve these. Moreover there are several dimensions for presenting views on the budgetary announcements. This piece focused on the broad analysis of the budget for 2003-04 (Recurring and Development). It is high time that we reconstruct Pakistan as "Pakistan Incorporated", adopt participatory approach, accelerate domestic resource mobilization, rely less and less on foreign loans, reduce poverty, meet basic needs, associate professionally qualified accountants in national development, introduce safety nets for vulnerable class of the society, generate employment, strengthen foundations of social sector, develop physical infrastructure, reduce the gap between haves and have nots, usher in an era of prosperity on a wider scale, improve performance of financial sector and undertake all such steps as will ensure economic growth with social justice.

Implementation of steps to achieve foregoing targets will enable us to achieve goals set by the thinker of Pakistan, Allama Iqbal and the founder of Pakistan, Quaid-e-Azam Muhammad Ali Jinnah. A dedicated and determined will with a clear-vision can enable us to achieve the goals. Bright future lies ahead.

The author is Principal, Hailey College of Banking & Finance, Constituent College of the University of the Punjab, Lahore.

Email: kamjadsaeed@yahoo.com