BUDGET HITS THE POOR AND THE INDUSTRY

SYED FAZL-E-HAIDER
July 06 - 12, 2009

Present government faces severe criticism on the budget it presented last month for the fiscal year 2009-10 starting from July1, from the general masses, importers, exporters, and business community. The budget made on the dictation of the International Monetary Fund (IMF) has hit the poor bringing no relief to the industry, according to the local experts. Officials in Islamabad are pursuing the IMF to relax its condition of a 17 per cent hike in power tariff, which the government is bound to implement.

The power consumers, who are already facing severe power outages, are likely to face 17 percent hike in oil prices after imposition of "carbon surcharge" on petroleum products in place of petroleum development levy (PDL) effective from July1.

Prime Minister Yousuf Raza Gilani-led coalition government is not willing to increase the prices of electricity, as it is not possible for a democratic government to take such unpopular steps particularly when the people are facing high inflation rate and poor law and order situation in the country. The analysts believe that the economic growth revival largely hinges on the performance of the manufacturing sector and security environment in the country, which is currently at war with Taliban insurgents.

The IMF is reportedly pushing the government to withdraw the subsidy being offered to the power consumers and increase the prices of electricity. It has been decided that the prices of electricity would not be raised in six months and the government is trying its best to sustain the IMF pressure. The critics term the budget 2009-10 as anti-people saying it would multiply the miseries of common person urging the government to review withdrawal of subsidies and ensure a proper safety mechanism for poor.

Rich have again escaped taxation while poor were cornered, according to Pakistan Economy Watch (PEW), an independent forum run by a team of experts. The pro-rich budget, according to the PEW, has overburdened masses on the dictation of IMF while some best-loved sectors were supported on the cost of others.

The government has targeted collection from a proposed carbon surcharge on petroleum products at Rs 122 billion in the new financial year budget. The distribution companies will earn an additional Rs35 billion after increase in power tariff. The government will charge rupees eight per liter carbon surcharge on high speed diesel oil (HSDO), Rs 10 per liter on motor spirit (MS), rupees six per liter on kerosene oil and rupees three per liter on light diesel oil (LDO), according to the Finance Bill 2009-10. After imposition of carbon surcharge, the government may deregulate price of all petroleum products and authorize oil-marketing companies (OMCs) to make automatic adjustment in oil prices in line with the global oil prices.

The imposition of a massive carbon tax is likely to cause a surge in the prices of POL and subsequently electricity. It would also become an impediment in the way of revival of industrial growth in the country, as the growth was linked to provision of sustained and quality electricity at competitive rates. In Pakistan, 70 per cent of the energy generated is thermal which is produced from imported POL products and fuel oil. The electricity charges would increase under an automatic tariff adjustment formula and the government would also not offer any subsidy or relief to the people. So, this carbon tax would not only increase the financial miseries of 170 million population, but also apply brakes on the industrial growth, as the input cost of fuel and electricity would increase manifold.

The IMF has however termed imposition of carbon tax in the budget an internal decision of Pakistani authorities that deem it as an easy revenue source, generating more than Rs 130 billion. "We cannot dictate Pakistan to impose tax on any sector. However, revenue generation in Pakistan is by all standards very low," Paul Ross, the IMF's Resident Representative recently told media.

The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry, according to the analysts. The local manufacturers are unhappy with the government for failing to reduce the cost of doing business, seen as the key to industrial revival and for reinstating minimum income tax in the budget 2009-10. They forecast more industrial closures and job losses over the next one year. The budget has little to offer to the textile industry, which earns nearly 60 per cent of export revenue and contributes nine per cent to GDP. No allocation for cash subsidy to the value-added, downstream textile producers has been made in the budget.

The businesspersons stress the need to take measures for restoration of industry demanding withdrawal of surcharge on electricity bills in order to provide some relief to the consumers, as the load shedding irked the whole nation and industry is going to close down due to energy crises.

Officials believe that Rs.646 billion Public Sector Development Programme (PSDP) for fiscal year 2009-10, which is 17 percent larger than the size of PSDP for the last fiscal year would not only re-enforce the move towards economic recovery but also help government achieve or exceed gross domestic product (GDP) growth target of 3.3 percent. Critics 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 was forced to announce a series of changes earlier this week in the new budget, which include the exemption of compressed natural gas (CNG) from the proposed carbon surcharge, increasing an ad hoc allowance for low-paid government employees to 20 per cent from 15 per cent and providing relief to importers and exporters. The government has incorporated 'a large majority' of proposals and recommendations made in the debates in the National Assembly and the Senate. Withholding tax has been lowered to three per cent from four per cent for industrial imports, involving a relief of over Rs5 billion. Income tax collected on export proceeds has been made final discharge of the exporters. Requirement of National Tax Number and Computerized National Identity Card for sales to unregistered purchasers has been withdrawn. The government has agreed to streamline and simplify the procedure relating to resolution of tax disputes. The carbon surcharge on petroleum products other than CNG, as proposed in the budget, will however continue in place of a PDL.

PAKISTAN FEDERAL BUDGET 2009-2010

PROF. DR. KHAWAJA AMJAD SAEED

MASTER CHART

Particulars

Rs b

%

NEEDED

1. Current Expenditure

1,699

68

2. ADP: 2009-2010

783

32

Available

2,482

100

Net Federal Revenue

1,372

55

Shortfall

1,110*

45

.

2,482

100

Financing Pattern

1. External Resources

510

46

2. Capital Receipts (Net)

191

17

3. Self Financing of PSDP by Provinces

173

15

4. Bank Borrowing

144

13

5. Changes in Provincial Cash Balances

73

7

6. Privatization Proceeds

19

2

.

1,110*

100

REVENUE BUDGET

Particulars

Rs b

%

Current Revenue

1. Indirect Taxes

956*

47

Composition

Rs.b

%

Sales Tax

516

54

Custom Duties

167

18

Federal Excise

137

14

Others (+ POL carbon & CNG Surcharge)

136

14

.

956*

100

2. Direct Taxes

557

28

.

1,513

75

3. Non-Tax Revenue

514

25

.

2,027

100

4. Less: Transfer to Provinces

655

.

Net Federal Revenue

1,372

.

Current Expenditure

1. Debt Servicing

780

46

2. General Public Service, Economic Affairs & others

576

34

3. Defence Affairs & Services

343

20

.

1,699

100

4. Less Deficit in Revenue Budget

327

.

.

1,372

.
Annual Development Plan 2009-2010

Particulars

Rs. B

%

Development Expenditure

1. Federal Govt.
(Departments, Autonomous Bodies, Special programs, Special Areas and ERRA")

466

57

2. Provincial ADPs

200

26

3. Other Development Expenditure

157

20

.

803

103

4. Less: Operational Shortfall

(20)

(3)

.

783

100

Financing Pattern

1. External Assistance

510

65

2. Self Financing for PSDP by Provinces

173

22

3. Bank Borrowing

144

19

4. Changes in Provincial Cash Balances

73

9

5. Privatization Proceeds

19

2

6. Internal Resources

(136*)

(17)

.

783

100

Break UP of Internal Resources

1. Deficit in Revenue Budget for 2009-2010

327

.

2. Less: Net Capital Receipts

(191)

.
.

(136*)

.

*Earthquake Rehabilitation & Reconstruction Authority

Source: Computed From: Budget Documents for 2009-2010, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 13,2009.