FEDERAL BUDGET 2008-09

AROOJ ASGHAR (arooj.asghar@hotmail.com)
May 26 - June 01, 2008

New government must be confronting difficulties in preparing the federal budget 2008-09 as economy is under pressure owing to law and order situation and high cost of doing business. In this context, the government should revisit previous government's policies. Besides these issues, Pakistan's economy is confronted with a huge trade deficit, exorbitant financial and utilities cost, insufficient infrastructure, lower tax and investment-to-GDP ratio, shortage of electricity and water, and high rate of local and global inflation. It would be appropriate for the people's representatives to prepare budget on the principles of equity, rationality and ability to pay.

According to Ishaq Dar, the not-so-rich in Pakistan paid around ten percent of their income by way of taxes while the rich paid much less. Pakistan's current tax-to-GDP ratio is the lowest at nine percent whereas even low income countries have eighteen percent, middle income twenty five percent and high income countries has forty percent. Similarly, per capita income in Pakistan is the lowest at US$909 in the region against US$965 in India, US$1,558 in Sri Lanka and US$3,400 in Thailand. One of the major hurdles in increasing the tax base is non-discrimination between taxpayers and non-taxpayers. In order to encourage people to pay tax honestly, it would be better if government give incentives to taxpayers against non-taxpayers besides implementing better corporate governance, transparency and fairness.

In simple words, budget is the receipt and payment of the government. There are few limited resources from where government it earns cash but have to spend on numerous areas. The primary objective of the budget is to provide relief to poor without affecting the economic growth. Few of the sources of cash generation are taxes and privatization proceeds of state owned assets.

In recent years, people have speculated a lot in real estate business and earned millions of rupees from almost noting. Presently no capital gain tax is levied on sale of properties which should be reintroduced.

Likewise, in recent years Karachi Stock Exchange index has increased manifolds though it is presently decreasing. Foreign investors have heavily invested in KSE. It was earlier suggested that capital gain tax should be levied on sale of shares. It was considered in past but later dropped due to pressure from the big brokers. Two entirely different opinions exist on this issue, one to impose another not to impose. People of former opinion believe that tax should be imposed with certain conditions and exempted on meeting certain criteria as it is levied in USA and all other stock markets of the world. While others feel that this tax will erode the market price. Since last few years, Government of Pakistan is planning to privatize PSO and other big state owned enterprises which are listed as well. People of later opinion believe that if capital gain tax is imposed then the share price of these companies along with other companies will drop. Drop in the share price means lesser privatization proceeds. In this context, government should have to evaluate the gains and losses of imposition of capital gain tax. A conclusion can be drawn through an intelligent excel working. The tax should not be imposed just to address the popular issue but it has to be rationalized with certain facts and figures. If there is a substantial net gain in imposition of tax then this tax should be levied otherwise close this chapter once for all. It is also widely believed that at the end of the day fundamentals in the market prevails rather than artificial and speculative prices therefore there wouldn't be any significant price reduction of state owned assets.

In a recent publication, The Wall Street Journal reported that foreign investors are eager to invest in Pakistan. Due to overall bad economic polices of previous government, Pakistan is no more an agricultural country likewise no where in the league of industrialize countries but is merely a trading country like UAE and other Middle East countries. Foreign investor is more interested in investing in stock market and in the service sectors like banking, oil marketing and telecom, which create cheap employment opportunities with heavy profits and easy profit repatriations. Most of the foreign investment has gone in the last five years in these sectors and going forward it is expected that these areas will remain attractive for the foreign investors. Here cheap employment means that mobile companies and consumer finance departments of banks have hired thousands of people at a price which can not be called as good salary/package. Most of the employees are on third party contract which obviously deducts their margins as well. They do give very high salaries and bonuses to their management team because they believe in the theory of benefiting higher staff for formulating and implementing polices through lower staff. Government should formulate such policies which can provide benefit to the lower staff of these private companies like making mandatory for these companies to put these employees on their payroll and give them similar benefits for example gratuity and provident fund, medical allowances etc...

We have been listing a lot that Pakistan's telecom sector has outperformed in past few years and over US$ 1 billion FDI has flown in Pakistan. I wish a few million would have been invested in the telecom equipment manufacturing area as well. Pakistan is now merely a trading country, we buy imported mobile phones and pay hard earned money which otherwise would have been spent on development of poor people. It would have been much better if previous government had taken concrete steps in establishing export quality telecom and IT equipment manufacturing plants mainly mobile phones in Pakistan. In that situation, Pakistan would be net gainer rather than net loser in telecom and IT sector. Having said so, new government should announce incentives for the investor who invests in mobile manufacturing industry. This single step will create millions of job opportunities directly and indirectly and will also increase the tax collection in the country.

It is also important for the new government to resume the privatization process immediately so as to get investors back in the country. In order to generate cash, government has to adopt transparent privatization process. In my opinion, privatization process can only be called transparent and reliable of it is routed though stock market. Let the market decide the price of the shares instead of financial consultants and investment bankers. Based on the fundamentals, stock market will definitely set the right price which will not be objectionable to anyone. While reviewing the various transactions of privatization in Pakistan, it becomes very obvious that only those transactions are free from doubt which was routed through stock exchange. It would be relevant to quote the example of privatization of Pakistan Steel Mill; consultants determined the price which is still under criticism. Without going into the debate of whether it was rightly determined or wrongly but consequently the deal was denounced. Present government should focus on privatization and set realistic targets in the budget.

There are various sub-sectors in manufacturing sector in Pakistan which are underperformed and in order to help them; zero-rated import duty on raw materials should be imposed in the Finance Bill 2008-09. It is said that five sectors namely automobiles, pharmaceuticals, transport, communication and construction, will be the major beneficiaries of this benefit. Presently, maximum import duty on raw material is twenty five percent which should be brought down to either zero or maximum five percent. One of Pakistan's major exports is ready made garments, the textile sector, needless to say that this sector is under continuous threat from China and India. Like these countries, government must have to give relief to this sector so as to boost related exports. On one place, government is required to provide relief to the textile sector whereas on the other, the industry players should act more transparently and honestly. It is being said that R&D facility will be discontinued in Finance Bill 2008-09. A few might have misused the R&D but a major part of the sector has not misused the facility. In order to relief this sector, government should announce relief package for this sector which employs millions of people directly or indirectly.

Pakistan being an agrarian economy should refocus on agro industries for achieving sustainable growth. It is said that the growth achieved in the past eight years is not sustainable because the focus was on producing items which had limited domestic demand and no export base at all. Pakistan's export earnings are at less than fifty percent of its imports which is a big cause of trade deficit. It is important to focus on the exports of value added items. Concessions on import duties might not be a long term measure, but will help in short term only. Government needs to promote locally manufactured items by improving the human skills and management practices.

Government should also eliminate import duties on raw material used in pharmaceutical industry. This will bring down the prices of medicine, hopefully, though there is no precedent of deflation in Pakistan. Likewise, construction cost has increased manifolds. It has become a dream for a poor man to have his own house. Government should also take steps in bringing down the duties and taxes on transport and constructions sectors. Moreover, government should also take steps to control smuggling of these items.

Small and Medium Enterprises (SMEs') is an area in Pakistan which has not been fully utilized and can be very helpful in generating jobs, and broadening tax base. It is therefore, important for the government to provide relief to people through reduction in tax rates for SMEs'.

Oil in international market has touched 130 dollar a barrel yesterday. In this situation, it is not possible for government to keep the same old oil prices. OGRA will propose and government will increase oil prices in next month. Since January 2008, on three different occasions oil prices have been increased. With any further increase inflation which is already in double digit will further increase. Consequently the poor will suffer most. There is no easy solution to this. One of the worst things happened in Pakistan is the emergence of thermal based IPPs' though presently we have electricity only because of these IPPs'. Alas anyone have considered the long lasting impacts of furnace oil on the economy at that time and would have encouraged investors to develop coal and hydel power plants. It is not irrelevant to blame the power policies for poor financial performance of almost all the manufacturing sectors. The biggest price difference between the products of China/India and Pakistan is the cost of electricity. It is not possible for Pakistani manufacturers to produce cheap goods when they have to run their manufacturing concerns on electricity being generated on imported furnace oil. The problem doesn't end here, load shedding further aggravate situation. Manufacturing concerns and traders have to use diesel generators which further increase the prices and squeeze their profit margins. Government must declare incentives to investors for the development of coal and hydel based power plants so that Pakistani goods can be internationally competitive plus will help government in improving its balance of payments.

While summing up, Previous government must have done good work and Pakistan progressed well in past but in all fairness things started deteriorated since March 2007 which is still continue without break. This would be the first budget of new government and would be one of the most difficult budgets of this decade. Government can only provide relief to its people, if Pakistan does considerable well in manufacturing sector, good governance and financial management. It would be nearly impossible for the government to provide relief to poor people if Pakistan remains a trading country. There is no comparison of us with Middle East countries, they have oil money and can import luxury and necessary items, even then they can have surplus budget. But in case of Pakistan, we can't afford to spend our hard earned tax money on importing mobile phones, tea, even wheat. It is vital to provide relief to manufacturing and agriculture sector. As known to all Pakistan's manufacturing and industrial sectors is suffering from various structural problems resulting in slow growth rate, nearly zero investment, technical inefficiencies, poor quality and quality control management and almost no research and development. Obviously these factors bring growth rate down and make goods uncompetitive in the world market.