IMPLICATIONS AND REPERCUSSIONS OF FEDERAL BUDGET

FOZIA AROOJ (Fozia.Arooj@hotmail)
June 22 - 28, 2009

Fiscal year 2008-09 has been the year of economic stress on the downtrodden masses of Pakistan. Sky rocketing price inflation, up surging power and gas bills and shrinking real incomes have been taking their toll on the meager financial sources of distressed people. Industrial concerns, manufacturing businesses and commercial enterprises have been hard hit by this situation. Besides there was a domestic and global demand contraction leading to a drastic cut in the industrial output and profits.

Energy shortages, security concerns, and expensive credit have added fuel to the fire. The budget for fiscal year 2009-10 has been presented in the parliament in the above-mentioned grim situation. All eyes looked forward to it in search of a ray of hope for their survival. For the government there are concerns about revenue generation, budget deficit, current account deficit, foreign exchange reserves, GDP growth rates, industrial growth rates, stock market indexes, corporate profits, etc. However, it is imperative to keep in consideration the real purpose of all economic planning exercises and budget making i.e. the welfare of the people. In addition, people are undoubtedly most bothered about three fundamental variables i.e. unemployment, poverty and inequality.

The government has announced a consolidated budget of Rs2.897 trillion for 2009-10. It is almost 27% more than the FY 2008-09 estimate. Budget deficit at Rs722.5 billion is estimated to be about 24% higher than the FY 2008-09 estimate of Rs582 billion. The focus of the budget has been curbing inflation and improving tax generation capacity. It exhibited a deficit of 4.9% of GDP which is higher than the 4.6% cut of value prescribed by IMF for conditionality of further loans. Out of this deficit 1.5% is planned to be plugged from external resources, mainly 'Friends of Pakistan' and money coming for internally displaced persons, which economists think will be unreliable, while the rest will be met from additional taxation and internal sources.

Economic experts are of the opinion that this budget is highly dependent and risky as there is no guarantee that 'Friends of Pakistan" countries would honor the commitment by extending finance up to the limit they have pledged. They say in case of making budget on uncertain resources, the government will have to borrow money from domestic sources, which will put pressure on interest rates. The SBP would not be able to reduce discount rate. Therefore, a high-interest environment will continue having adverse impact on investment and growth.

PROPOSALS

Following important proposals have been put forth in the budget 2009-10:

1. The highest amount of Rs.341.62 billion has been allocated for military defense against an appropriation of Rs 295 billion in the previous budget. The rationale behind raise in defense budget is the current wave of insurgency and need of the country to exhibit minimum credible deterrence level against the militants. There are internal as well as external threats facing the country and a burning issue of national security.

2. There is a drastic cut in subsidy on electricity. This factor has made a common person believe that the economic planning is neither growth-oriented nor people-friendly. As a commitment with the IMF, subsidies have been slashed on power sector, which will result in increase in the electricity tariff. The massive cut in power subsidies will hit the small provinces harder.

3. Excise duty on petroleum products will be levied in the shape of a carbon surcharge, which would eliminate the existing petroleum development levy. This development has also not been welcomed, as it would increase transportation charges as well as freight expenses making consumer products even more expensive resulting in soaring inflation. Rising oil prices will continue to be a threat to efforts aimed at curbing inflation and bridging the current account deficit.

4. The target for FBR tax revenue has been set at Rs1.372 trillion, almost 16% higher than this year's revised estimates of Rs1.179 trillion. This target seems too ambitious, as the previous years target has also not been achieved. Any shortfall in tax collection or foreign assistance targets could force the government to borrow more from domestic sources or cut development spending at the cost of economic recovery.

5. Rs40 billion export investment support fund has been proposed. The government will contribute Rs10 billion towards this fund; another Rs10 billion will be contributed by the Export Development Fund; and the balance of Rs20 billion will be contributed by governmental agencies through mopping up of surpluses in commercial banks. This fund is likely to boost exports of agricultural products. Focusing on rural areas, particularly the agriculture sector, and the budget has bypassed the revival of the industrial sector because no relief has been announced for the textile sector, which has 55% share in export proceeds.

6. The budget contains proposals for a quicker revival of the construction, auto and telecommunication sectors. These sectors are expected to lead the economic recovery during the next year, just as they did for several years in the period 2003-07. Remarkable relief is given to cell phone industry. Regulatory Duty of Rs.250 per set of cellular phone is eliminated. Custom duty is reduced from Rs 500/- to Rs 250/- per set on cell phone. Excise duty on cellular is down to 19%. SIM activation charges are reduced from 500 to 200. These incentives announced for the manufacturing sector could lift the spirits of the corporate sector and stop further retrenchments. In some sectors such as automobile, pharmaceuticals, cement, surgical and sports activity may actually increase reversing the trend of increasing unemployment in urban areas.

7. A 5% reduction in excise duty on automobile has been proposed. Withholding tax on domestic vehicles is ended. However, local vending industry is despondent over not getting any relief.

8. Current excise duty on cement is to be reduced. This rip out in duty has made cement cheaper but it is unlikely to have any impact on the life of a common person whose necessity is food.

9. The Public Sector Development Program has been doubled to Rs626 billion against the revised estimates of Rs359 billion for 2008-09. The public sector investment in the social and economic infrastructure - particularly in water and power, irrigation, roads, education, and health under the Public Sector Development Program should also help kick-start economic growth. Thus, it should not be a problem for the government to achieve the target of 3.3% GDP growth. However it is pertinent to relate that the there is hardly any step towards abridging the gap of social service infrastructure. It seems as if the government had given up on the millennium development goals (MDGs) altogether. There is no mention of goals or progress made so far in the budget. The country signed on dotted line in 2000 to achieve eight MDGs by 2015 aiming to cut poverty by half of year 2000 level. It could be because the poverty has increased dramatically over the last three years to over 30%.

10. The education sector, including higher education, will get Rs31 billion, which is about 54% higher than current year's Rs20.1 billion. Budgetary allocation for Science and Technology is doubled. Rs.4 billion are allocated for basic education and primary schools. Rs.22.5 billion are allocated for Higher Education Commission.

11. A record Rs23.2 billion has been earmarked for health sector, up by 66% from Rs13.99 billion of the current fiscal year.

12. Capital Value Tax on real estate is increased to 4% from 2%.

13. The government has doubled withholding tax on imports and pledged to extend the scope of tax on several services. However, these are feeble attempts to restore the domestic market for local industry by increasing duty on import of non-essential items. Some of the impact of the increase in existing taxes would be offset by tax incentives given to the car and telecom sectors.

14. The allocation for power sector has been doubled to Rs22.8 billion from Rs11.4 billion in 2008-09. Currently, 15 independent private powerhouses with a total capacity of 2,921 megawatts are in different stages of development. Out of these, nine projects for 1,861MW will be commissioned in 2009; four projects for 776MW will be completed in 2010 while two projects for 284MW are due for completion in 2011.

15. Allocation for agriculture is Rs. 18 billion from Rs14.4 billion in 2008-09. The government vowed to carry out a series of measures for boosting agriculture growth and marketing to increase the supply of food items. It is unfortunate that the rulers have again failed to tax the rich agriculturists. An amount of Rs2.5 billion will ensure food security and productivity enhancement of farmers. BT cotton hybrids varieties will be offered to farmers. Livestock, agriculture, and fisheries will be treated as industry. An amount of Rs300 million has been allocated for capacity enhancement of dairy products, Rs400 million for poverty reduction through small holders livestock and dairy development.

16. Rs60 billion has been allocated for water sector. As many as 32 small and medium dams, 8 in each province will be financed. Rs12 billion has been allocated for the raising of Mangla Dam, including resettlement of displaced people; Rs10 billion for improvement of water courses and Rs15 billion for canal improvement and rehabilitation of irrigation system.

17. Limit for the exemption on Income Tax for salaried male is being enhanced from Rs 180,000 to Rs 200,000. Limit for the exemption on Income Tax for salaried female is being enhanced from Rs 240,000 to Rs 260,000. Senior citizens will now enjoy 50% relief in their tax liability in case of income up to Rs 750,000.

18. In order to discourage consumption of cigarettes excise duty and sales tax on cigarettes is proposed to be enhanced.

CONCLUSION

The current budget has to achieve its objectives and prove to be pro poor, pro growth and investment friendly. The funds allocated for each sector and ventures are to be properly utilized and vigilantly monitored to accomplish the public welfare task. It is required to mitigate the pain and revive public trust in the capability of the government to function as being people's representative. In addition, it must alleviate poverty, create employment opportunities, stimulate growth, curtail unproductive expenditure, repair the broken economy, and provide relief to the poor.

However, successful revitalization of growth hinges on two variables: foreign assistance and collection of targeted tax revenue. Pre-empting possible delays in external flows, Pakistan has asked the International Monetary Fund (IMF) for a $4 billion stand-by loan to finance the yawning budget gap in the year 2009-10 in case multilateral donors fail to release the pledged amount.