June 22 - 28, 2009

The government presented Rs.2.89 trillion federal budget for the new fiscal year 2009-10 on June 13 which forecasts a growth of 3.3 percent for the country's economy, which grew by 2 percent, slowest in 10 years, in the outgoing fiscal year. The government believes that Rs.646 billion PSDP for fiscal year 2009-10, which is 17 percent larger than the size of PSDP for the outgoing fiscal year would not only reinforce the move towards economic recovery but also help government achieve or exceed gross domestic product (GDP) growth target of 3.3 percent. The officials hope that GDP growth target at 3.3 percent would be achieved through growth in the agriculture sector 3.8 per cent; services sector 3.9 per cent; and 1.8 per cent in the manufacturing sector.

GDP growth slid to 2 percent in the 2008/09 fiscal year ending on June 30, tantamount to recession for a country with annual population growth of more than 2 percent and with more than a third of its 170 million people living in poverty. The balance of payments crisis, an oil price shock and economic mismanagement contributed to a sharp slowdown in Pakistan's previously fast-growing economy in the past year. Worsening security, political uncertainty, economic difficulties, and power shortages combined to deter investment, and the textile industry, the country's main export sector, has been hit hard.

For the next fiscal, the government has looked for new areas of revenue to prevent a fiscal blowout due to weaker economic growth. For this purpose, the government has imposed tax on services and real estate in the next year and a 30 percent levy will be applied to corporate bonuses above Rs.1 million. The government aims to collect a record Rs.1.5 trillion in taxes in new fiscal year. Last year's tax revenue is estimated at Rs.1.18 trillion, less than a targeted Rs.1.25 trillion.

The country's tax revenue-to-GDP ratio dropped to around nine per cent during the 2008-9 financial year. The ratio had been fluctuating in a narrow band of 10 to 11 per cent for almost a decade despite lackluster and half-hearted attempts to reform tax administration and procedures, according to the official Economic Survey. The revenue-to-GDP ratio had either remained stagnant or declined owning mainly to structural deficiencies in the tax system and administration both at the federal and provincial levels. The indirect tax-to-GDP ratio stood at around five per cent and the direct tax-to-GDP ratio at around four per cent. To achieve a tax-to-GDP ratio of around 15 per cent, it was important to extend coverage of the tax net to under-taxed and un-taxed sectors of the economy in order to promote judicious distribution of the burden, according to the economic survey.

The government was expecting its total revenue to reach Rs1,910 billion during 2008-09 as compared to Rs1,499.5 billion during the previous fiscal year, reflecting a slight recovery in percentage of GDP because of a marginal improvement in non-tax revenues.

Output in the manufacturing sector was contracted by 3.3 percent in 2008-09 as compared to expansion of 4.8 percent last year and overambitious target of 6.1 percent. Small and medium manufacturing sector maintained its healthy growth of last year at 7.5 percent. Large-scale manufacturing (LSM) depicted contraction of 7.7 percent as against expansion of 4.0 percent in the last year and 5.5 percent target for the year. The massive contraction has been because of acute energy outrages, security environment and political disruption in March 2009. The LSM, which accounts for almost 70 percent of overall manufacturing, witnessed a broad-based decline of 7.7 percent against the revised growth target of negative 5.0 percent during July-March 2008-09. Main contributors towards this broad based decline were the impact of severe energy shortages, deterioration in domestic law and order situation, sharp depreciation in rupee vis--vis US dollar and, most importantly, weak external demand on the back of global recession coupled with slowdown in domestic demand. The increasing trend in inflation also affected consumers to curtail expenditure on durable goods.

Agriculture sector has depicted a stellar growth of 4.7 percent as compared to 1.1 percent witnessed last year and target of 3.5 percent for the year. Major crops accounting for 33.4 percent of agricultural value-added registered an impressive growth of 7.7 percent as against a negative growth of 6.4 percent last year and a target of 4.5 percent. The livestock sector grew by 3.7 percent in 2008-09 as against 4.2 percent last year.

Experts believe that textile sector, an export-oriented industry is more prone to international demand shocks and it is likely to be under severe stress amid a global recession. The government has already declared the fiscal year 2010 as the 'year of the industry' after the industrial sector witnessed a 3.3 per cent decline during the outgoing fiscal year. The government has allocated Rs70 billion package for the revival of five export sectors in the budget in the shape of reduced gas prices and incentives for value addition. The local experts believe that the government would ultimately borrow money from domestic sources putting pressure on interest rates. The central bank would not be able to reduce discount rate and a high-interest environment would continue to have an adverse impact on investment and growth.

Under IMF demands, the government agreed to reduce its budget deficit to 3.4 percent of GDP next year, though the Washington-based lender last month agreed to relax that target to 4.6 percent to help "boost growth. The central bank also agreed to raise borrowing costs in order to secure the IMF bailout, increasing its benchmark rate by the most in a decade to 15 percent.

The critics term the budget 2009-10 as anti-people saying it would multiply the miseries of common man on the one hand and deny any tangible relief to the industry on the other. They say that the government is blindly following the IMF dictates instead of addressing the plight of poor people in particular and salaried class in general. The government estimates to contain inflation at nine per cent as opposed to the 20 per cent in the outgoing year mainly due to decline in the oil prices and the food items' rates in the international market.

The critics say that the budget 2009-10 denies any tangible relief to the industry and GDP growth target can hardly be achieved if the slump in industrial output particularly in LSM sector continues in the next fiscal. They say that the government is blindly following the IMF dictates instead of addressing the plight of poor people.