Nov 17 - 23, 2008

Advisor to prime minister on finance Shaukat Tarin has recently presented before the federal cabinet for approval 9-point agenda to bring economic stability in the country. According to the plan tax network will be expanded to agriculture, real estate, capital market, and all those sectors which have latent potential for revenue generation. In concurrence a long awaited panel of economists report finally was made public. The proposed measures are to contain macro economic imbalance worsened in this fiscal year. To get immediately out of economic crisis the measures seek cut in certain expenditures and exploration of sources of revenue.

While 9-point agenda is reminiscent of Shaukat Aziz's drawn-up 9 point agenda for economic development, report of panel of economists, joined their heads together a month ago to ponder at cures for economic hardships, recommend ways that seem to funnel substantial revenue in the system and enable government to overcome present macro economic instability in medium term.

But, few recent measures adopted by the government to deflate inflationary pressure and slash fiscal deficit will clearly result into slowdown in growth in long term. For example, increase in discount rate popularly loathed by borrowers will create credit crunch if banks pass on rise to interest rate spread shunning instruction of State bank that directs banks to restraint such upward revision. Cut in budget for public sector development programs in fiscal 2008-09 can also adversely affect development projects.

Deteriorating law and order condition in northern areas is impelling military expenditures to inflate therefore there is an unlikelihood of curtailment in defense budget in short run. Government has started to publicize astronomical military expenses it has incurred so far. Recommendations in panel report seek a decrease of Rs30 billion in defense spending and of Rs100 billion from Rs371 billion to Rs271 billion in PSDP FY09. As a matter of fact, an average 20 percent rise in military personnel salary has jacked up defense budget. Subsequently, soft portion to slice expenses from forthwith is hard to find. However, other non development expenditures can be mowed away at once. Panel finds Rs40 billion as controllable other expenditures. Moderation in traveling by entourage at state expense can save money.

State bank policy rate hike by 200 basis points from 13 to 15 percent can be instrumental in discouraging government bank borrowing and mitigating amount of government internal debt servicing. This time monetary tightening was solely aimed at to fulfill basic criteria of IMF loan-soon to be sanctioned by end of month. Otherwise, last three increases failed to achieve prime objective of controlling inflation. Instead, its contagious effects over other economic fundamentals unraveled sequels of afflictions to economy and pulled inflation to all time high 25 percent. An average inflation in FY09 stays around 20 percent. Despite global commodity prices downfall, consumer price index in Pakistan stays around 22 percent. Panel report says proposed steps will bring down CPI to 17 percent in FY10. Further cut in subsidies by Rs30 billion will not do well to consumers.

SBP sees GDP growth to 4 percent in FY09 as opposed to planned 5.5 percent. Exchange rate grave disparity has already rendered loss to balance of payment and further volatility following inaction to contain will likely to bulge import bill compounded with sustainability in importation. The foreign reserve is fast depleting and only ADB's $300 million and IDB's $200 million loans have been received. The IMF bailout to balance of payment is awaited. The chance of external lending is gloomed by downgrade of sovereign credit rating farther in to junk territory. Last week, S&P cut its long-term foreign currency rating on Pakistan to CCC from CCC-plus and its long-term local currency rating to CCC-plus from B-minus.

Government budgetary borrowing from the State bank reached steeply to Rs369 billion from July 1 to November 8. Panel report suggests upright two percent increase in rate of return on national saving certificates will provide government Rs250 billion from non banking sources. Although government vowed to offload its dependence over bank credit to reduce fiscal deficit it has been continuously meeting its revenue shortfall from public debt since its taking over the throne. In an absolute violation of Fiscal Responsibility and Debt Limitation Act 2006 government borrowing keeps on rise. Fiscal deficit is currently 7.4 percent of GDP. This needs to be brought down to 4.3 percent, report adds.

Advisor on finance also emphasized the need to prepare 20 year vision for the socio-economic development in the country. For it, importance of public-private partnership was brought under discussion. In fact, it was told that private sector participation in government planning and policy decision would inevitably be ensured. After approval from the federal cabinet this plan will step up to the next stage of implementation.

Panel report proposes to raise Rs75 billion from new taxes and Rs55 billion from regulatory duties. Lately, FBR has entitled zero percent import tax on machineries. Although, the move was to accelerate industrial production, will at this time of parsimony this incentive be effective? However, broadening of tax net to real estate, agriculture, and capital market will be instrumental to enhance success rate of government revenue generation target.

While real estate and stock exchanges are facing tough time nowadays, agriculture sector can immediately be taxed as this sector has long been immune from taxes. In a wide contrast to its share in GDP, agriculture contribution in annual revenue is equal to nothing. It is incomprehensible why do properties transactions enjoy tax relief while billion of rupees transactions must have taken place; notwithstanding a current of recession is observed in real estate market. When artificial price rise of properties was showering bounties to realtors why did state treasure remain deprived of its dues. Neither stock market boom has been advantageous to state monies. The imposition of capital gain tax was postponed at the behest of personal expediency. Both sectors will become a bonanza of government revenue once reactivated with gusto. Yet, will tax proposals witness an erstwhile golden era in real estate and capital markets? Will tax net expansion to 12 services, proposed by the panel, pave a way for resilience or constrict an actual growth? Time will tell.