May 3 - 16, 2010

The annual exercise for making the next year (2010-11) federal budget is going on these days in Islamabad. Addressing the first meeting of the panel of economist headed by Dr Hafiz Shaikh, prime minister Yousuf Raza Gillani directed them that the next budget should be a pro-poor and relief oriented in line with the commitment of the government to the hard-pressed people of Pakistan. Welcoming the participants of the meeting to the PM House last week, the prime minister acknowledged that he knew that under the given circumstances he was assigning to them a difficult exercise but at the same was confident that with their long experience and expertise they would find a way out.

The budget making for the next year has become even more challenging than the 7th NFC award.

"The 7th NFC award was a historic challenge which was successfully met with hard work and dedication of government and political parties. To make a pro-poor budget is another historic challenge before which you have to meet through your dedicated efforts," he remarked.

The prime minister gave this sermon to his panel of experts perhaps to soften the growing wrath of the masses suffering under soaring inflation.

The IMF is insisting on the imposition of value added tax in the next budget if Pakistan wants to avail the continuation of its bailout package. The IMF is now delaying the release of the last installment of $1.2 billion under the current package expiring in June this year. The VAT has to be imposed from July 2010.

Last year feudal-dominated National Assembly and the Senate unanimously rejected the proposal moved by Shaukat Tarin a banker and seasoned economist working as a financial advisor, to bring income from agriculture under tax net to meet the shortfall of revenues resulting in an increase in the budget deficit violating the conditions laid down in IMF package.

Instead of forcing the big landlords, one of the wealthiest segment of our population enjoying total tax exemption, a criminal act by any standard, agreed to impose VAT from July 2010 to generate an additional revenues of about Rs400 million.

Imposition of proposed value added tax has created a stir among the business community which warns that it would not only create deep distress for business community, but it would also result in further increase in the prices of consumer items which would affect the public already agitating against the soaring inflation in the country.

The proposed VAT appears to duplicate the general sales tax enlarging its scope to even cover packed wheat, rice wheat flour, cement block and numerable of other items of daily use.

Well known economist, Dr Shahid Hassan Siddiqi, commenting on the proposed anti public move revealed that the ministry of finance and State Bank of Pakistan in a letter to IMF in November 2008 had committed to enforce VAT from July 1, 2010. It was perhaps not realised that such a tax can only be enforced with the prior approval of the parliament and the four provincial assemblies.

The perusal of the draft bill of VAT reveals that for all practical purposes it wants to tax Roti, Kapara aur Makan. How ignorant and detached from realities this government is can be judged from the fact that no body remembers the commitment made to IMF while deciding NFC award in which general sales tax (proposed to be replaced by the VAT) has been transferred to the province.

The new team of economic managers after Tarin resignation presented some new proposals for additional revenue generation in place of VAT to the IMF which visited Pakistan last week.

The team flatly refused to accept the revised plan instead of VAT. The IMF staff mission, headed by Director for Middle East and Central Asia, Adnan Mazari, who will fight Pakistan's case in the IMF's executive board meeting, also gave a loud message to Pakistani officials during his talks with the economic managers of the country that VAT implementation was mandatory in case Pakistan wanted to remain within the Stand By Arrangement programme of the IMF. Adnan Mazari also apprehended that if Pakistan fails to come up with a tough roadmap to implement the VAT with political backing of the top leadership of the country, then in the board meeting he will face the music and may also lose his job. Adnan Mazari is the person who gave Pakistan the required solace and widened the budget deficit target to 5.1 per cent from 4.9 per cent during the Dubai talks. Now his credibility is at stake if the incumbent regime fails to implement the VAT.

The exercise for making the next year budget is going on in an auto pilot mode as the country economic mangers have yet to receive policy guidelines from the political leadership about its priorities. What the prime minister said to his team of economic experts can only be described as his wish only rather than any guideline. However, it is amply clear that the budget makers this year are faced with a most difficult situation. There are however clear indications that the Public Sector Development Programme (PSDP) would remain more or less frozen at the drastically cut level during the current year, if not further curtailed. For instance, the PSDP target set at Rs446 billion in the 2009-10 budget has been slashed to Rs250 billion. As a result, many projects that were planned had to be dropped.

It is yet to be seen how the federal and provincial governments grapple with transfer of responsibilities from the centre to the federating units as concurrent list stands abolished and increase in federal revenues from about Rs686 billion in the current year to Rs900 billion next year.

The implementation of the federal cabinet decision taken about four months back to curtail current expenditure through rationalisation of various ministries and divisions perks and privileges of the president, prime minister and the ministers is still a far cry. The huge pilferage and losses estimated to around Rs1000 billion in public sectors corporations would continue.

On the other hand rising poverty, increasing unemployment, soaring inflation of food and kitchen items, increasing energy gaps and faltering investors' confidence would need special attention in order to ensure a reasonable living standard of 180 million population.

How the government responds to these challenges will be known in the next year budget.