June 14 - 20, 20

While presenting the federal budget 2010-11 Dr Hafiz Shaikh admitted a number of inadequacies of the present government and also held the geopolitical condition of the region responsible for Pakistan's ailing economy, he didn't suggest any plan to bring the country out of the mess. He presented many proposals for enhancing revenue collection but completely ignored the capacity of people to pay tax.

An illusion regarding GDP growth rate was created but the simplest fact was ignored that revenue can only be collected when economy is flourishing. The harsh reality is purchasing power of people is eroding fast and the percentage of people living below the poverty line is increasing. The improvement in per capita income is completely misleading because rich are getting richer and poor are getting poorer. Though efforts are being made to prove that inflation is on the decline, prices of items of daily consumption particularly food items are on the rise.

Worst is ongoing load shedding of electricity and gas despite regular hike in tariffs. The policy planners and even the regulatory authorities are protecting the interest of producers and not the consumers. Nepra is fully aware of rampant theft of electricity. Instead of asking the distribution companies to contain theft it keeps on increasing the tariff and that does so retrospectively.

Ogra is also fully aware of high levels of UFG (leakage/theft of gas) of the gas marketing companies but no punitive action is taken against them. However, Ogra is prompt is increasing POL prices only to facilitate the government to maximise collection of levies from gas and petroleum products.

The Finance Minister said the budget would least affect the highly vulnerable groups. However, experts are of the view that the revenue measures proposed in the budget are likely to keep inflation high and erode purchasing power of people. The overwhelming consensus is that inflation rate would not allow the central bank to further reduction the discount rate, in fact they fear hike in the rate.

The government aims at boosting GDP growth rate. However, if load shedding of electricity and gas continues despite hike in tariff economic turnaround would remain a far cry. Experts fear further hike in tariff in the name of passing the full cost to the consumers. If crude oil prices move up it would also provide a reason to increase the tariff. Crude oil prices have already started creeping towards $80/barrel.

Salaried class welcomed increase in exemption in taxable income to Rs300,000 from Rs200,000 but fear with the eroding purchasing power life would turn even more difficult. Bulk of the income of people goes towards food, education and energy expenditure. Salaried class can only benefit when inflation rates come down, which is most unlikely in the foreseeable period. The factors fueling inflation i.e. increase in energy cost and rise in cost of doing business are like to mar the earning potential of the corporate sector. Added to these are fragile law and order situation and ongoing military operation in the northern areas of Pakistan. The cost of operation can further escalate if the government decides to initiate military operation in Southern Punjab.

It may be good that the government intends to allocate higher amount under Benazir Income Support Program. People do not want donations but jobs. New opportunities have to be created by providing incentives for fresh investment. Improvement in capacity utilisation of existing industries and addition of new facilities can help in 1) creating new job opportunities, 2) enhancing revenue collection and 3) producing exportable surplus.

Pakistan has to bridge its trade deficit lest be ready to face further erosion in rupee value. Many of the people fail to understand why rupee is depreciating against dollar when foreign exchange reserves of the country are hovering above $15 million and record remittances are being received. The reason is obvious that the country can not use dollars coming under the IMF program. In fact the inflow is likely to be suspended till introduction of VAT, which the government has deferred till October this year.

Imposition of capital gains tax does not surprise the investors and the proposed rates are in line with experts forecast. However, calculation of the tax will not be easy. Imposition of 10 per cent tax on less than six month holding can bring down the daily trading volume drastically low and affect the income of brokerage houses. The scanty details also do not show how a capital loss would be adjusted.

The proposals being discussed by various sub committees of National Assembly and Senate are creating more confusion. According to media reports a proposal is under discussion for increasing the corporate tax to 40 per cent from prevailing 35 per cent to facilitate the government in enhancing revenue collection. This suggestion has come at a time when the experts were demanding reduction in corporate tax. A reduction in corporate tax for the listed companies was made to provide an incentive to the sponsors to convert their private limited companies into public limited entities. The suggestion aimed at increasing the number of quality listed companies to mobilise fresh capital through capital market.

Though, a lot is being said about austerity drive the actions are contrary. While salaries and perks of government employees both federal and provincial governments have been increased, certain departments have been denied the same. One wonders if the corporate sector would also increase the salaries/perks of its employees by the same percentage.

In a nut shell the incumbent Finance Minister, Dr Hafiz Shaikh has disappointed the nation. The expectation was that he would do 'out of box' thinking but seems overwhelmed by the conditions agreed with the IMF by his predecessor, Shaukat Tareen. There is a word of caution as long as Pakistan continues to follow the IMF recipe it can not come out of the debt trap, but fall in the vicious circle of borrowing. Mr. Minister, people want out of box thinking, show them your charisma rather than regretting the limitations.