Federal Budget 2011-2012

Govt scores a perfect ‘0’

ISLAMABAD: Pakistan missed all the macroeconomic targets announced in the budget 2010-11 but Finance Minister Dr. Hafeez Sheikh placed the entire blame on the adverse impact of the catastrophic floods, the war on terror, massive hike in oil prices and the energy crisis. The minister presented this fiscal catharsis while releasing the Economic Survey 2010-11 here on Thursday.

Understandably, the minister was not expected to cede gross incompetence and bad governance as two overriding factors responsible for such dismal performance. However, the survey also shared some ‘interesting’ disclosures that appear in direct contradiction to the otherwise dismal scenario.

The survey claims an increase in per capita income up to $1,254 in 2010-11 from $1,073 in 2009-10 by inflating the size of GDP (Gross Domestic Product). These figures appear to contradict the otherwise gloomy economic scenario painted in the same survey with unemployment rate at 5.8 percent and a hike in public debt by Rs1.162 trillion (13.1 percent) to over Rs10 trillion in the first nine months of the current fiscal and a decline in investment to 13.4 percent.

For some reason, the survey is silent on specific poverty figures, but low GDP growth, decrease in income, rise in unemployment, are clear indicators that poverty has swelled to an unmanageable level. Yet, at the same time, it has been claimed in the survey that per capita income has risen to $1,254.

The minister said the GDP growth was estimated at 2.4 percent in the going fiscal against the target of 4.5 percent. Inflation has risen to 14 percent in the first nine months of the ongoing fiscal against the target of nine percent. “The country’s budget deficit, which was fixed in the budget at 4 percent, will now end up at 5.9 percent,” he conceded.

The minister said the main setback to the economy was due to the agriculture sector, which was badly affected by the floods that inflicted a huge loss of $10 billion (Rs. 850 billion) on the economy. “The economy also sustained the huge loss of $67.9 billion because of the impact of the war on terror in the last 10 years,” he said.

The minister, however, argued that the strong performance of the services sector, which grew at 4.1 percent against its target of 5.4 percent, had kept the overall growth within a reasonable range.

Agriculture growth has gone down at 1.2 percent in 2010-11 against the target of 3.8 percent, mainly because of the adverse impact of the floods owing to which the main cash crops has shown 4 percent negative growth.

The investment target has also dwindled from 22.5 percent of the GDP in 2006-07 to 13.4 percent in the ongoing fiscal, from the target of 17.9 percent. The national savings rate has decreased to 13.8 percent of the GDP in 2010-11 against 15.4 percent last year. However, domestic savings also declined substantially from 16.3 percent in 2005-06 to 9.5 percent of the GDP in the current financial year.

The minister said oil prices had emerged as a threat to the macroeconomic framework as during the year, oil prices shot up from $70 per barrel to $125 per barrel. He said the most significant development during the year was the historic performance of the external sector, which is heading to register the surplus of $748 million in the current account.

He said that exports registered a growth of 28 percent in the first 10 months of the current fiscal compared to the corresponding period last year. Crossing the $20 billion mark for the first time, exports are yet to exceed $24 billion. He said that remittances have also recorded a strong performance by crossing the double-digit mark and are set to reach $11.2 billion.

Inflation: The cumulative increase in inflation in July-May 2010-11 stood at the double digit of 14.0 percent as against 11.6 percent in the comparative period of last year. In the survey, it is disclosed that the inflation rate as measured by changes in the Consumer Price Index (CPI) reached a peak of 25.3 percent in August 2008 but eased out since November 2008 with slight variations. However, following massive supply disruptions in the aftermath of devastating floods, food inflation became sole driver of overall CPI.

Foreign Direct Investment (private): The FDI stood at $1.232 billion during July-April 2010-11 as against $1.725 million last year, showing a decline of 29 percent. This is mainly due to the volatile security condition in the country.

External Debt and Liabilities (EDL): External debt stood at $59.5 billion by end-March 2011, up from end-June level of $55.9 billion. The major chunk originates from the translation impact of the weaker dollar against major currencies such as Euro and Yen. The IMF outstanding stock stood at $8.9 billion as against $8.1 billion at end-June 2010. Similarly, the Paris Club debt went up to $15.1 billion as against $14 billion, only on account of translation effect rather than fresh net disbursements.

Agriculture: The agriculture sector recorded modest growth of 1.2 percent in 2010-11. This sector has lost significant growth momentum as its growth slowed down to 2.7 percent in the decade of 2000s as against 4.4 percent in 1990s and 5.4 percent in the 1980s. Major crops remained a victim of natural calamities during the last few years and three out of the last four years witnessed negative growth in the major crop sector. This year major crops showed 4 percent negative growth. However, minor crops grew by 4.8 percent as against negative growth of last two years.

Livestock sector: With a 55.1 percent stake in the agriculture sector, it was also impacted by the massive floods and witnessed a marked slowdown, recording growth at 3.7 percent in 2010-11 as against 4.3 percent last year. The fishery sector grew by 1.9 percent as against last year’s growth of 1.4 percent. Forestry has experienced negative growth of 0.4 percent this year as compared to last year’s positive growth of 2.2 percent.

Manufacturing: The performance of the Large Scale Manufacturing (LSM) sector during July-March remained victim of operational constraints on account of energy/gas shortages and devastating effects of the 2010 floods. However, this sector managed to register positive growth of 1.71 percent despite the fact that the momentum in growth was upset in the initial months of the current fiscal year.

External Sector: Phenomenal increase in remittances and robust growth in exports owing to sharp increase in the prices of cotton overshadowed the strong growth in imports, thereby, generating the current account surplus of US$748 million or 0.3 percent of GDP. Overall external account has also shown improvement even when capital and current account receipts have continued to fall in this period. Exports started recovery since January 2010 and grew marginally by 2.7 percent in 2009-10, rising from $19.1 billion of last year to $19.6 billion. However, exports rose by 14.5 percent in the second half (January-June 2010) and by 27.5 percent in the first nine months of the current fiscal year (July-March 2010-11), which reflects enormous pick-up in exports.

Workers’ remittances: Remittances reached a record $9.1 billion mark in the first 10 months (July-April) of 2010-11 as against $7.3 billion in the comparable period of last year, depicting an increase of 23.8 percent. However, the remittances are expected to cross the $11 billion mark this year.

Mining and quarrying: This sector witnessed the second lowest growth in more than a decade and grew by 0.4 percent in 2010-11 as compared to 2.2 percent. The contribution towards the GDP has shrunk considerably at around 2.4 percent from peak 2.7 percent in 2004-05.

Services sector: This sector grew by 4.1 percent against the target of 4.7 percent and actual outcome of 2.9 percent. This sector has made a contribution of 90 percent to the GDP growth.

RGST, Assets Tax coming in taxation proposals
ISLAMABAD: The government plans to impose the RGST, a new Minimum Assets Tax (MAT), tax on all domestic and foreign assets, cut duty on cars, tractors and motorcycles and raise tax exemption limit to Rs350,000 per year, The News has learnt.

These proposals and many others, finalised in the draft budget, will be approved by the federal cabinet on Friday and later presented by the finance minister in the National Assembly.

The News has been able to obtain the copy of the main taxation proposals to be tabled before the cabinet and these show a mix of new taxes and some reliefs. Only minor changes, if any, are expected in the cabinet meeting.

The main taxation proposals are as follows: RGST to be implemented in steps, first with 0, 5 and 16 per cent rates; Minimum Assets Tax on high net worth individuals, including those who are more than self-occupied house owners without exemption; tax on domestic as well as foreign assets; Agriculture Tax (adjustable) after consultation with the provinces and the Ministry of Law.

Defense goods; CNG buses; agricultural machinery, equipment and implements; CNG kit, cylinders, valves; computer software and commercial catalogues tax exemption to be withdrawn and tax imposed at 17%.

Duty on 1,800cc and above (hybrid) luxury cars, arms and ammunition, cigarettes and betel nuts imposed last year, to be withdrawn, including on another set of 390 items (facility to be availed by common importer); Cars and other vehicles (CBU) duty rates to be as follows: 1001cc to 1500cc from 60% slashed to 55%; 1501cc to 1800cc slashed from 75% to 70%; beyond 1800cc (no change); agricultural tractors 15% to 10%; motorcycles from 65% to 60%; CKD kits of cars ad jeeps from 32.5% to 30%; CDK kits of motorcycles from 15% to 10% (all facility to be availed by local producers);

Income-taxable limit of people increased from Rs 300,000 annual to Rs 350,000; Power-generating machinery import duty and sales Tax to be withdrawn; Tax increased to 17% from 16% on fertilizer, machinery, tractors, plant, machinery and pesticides; Exemption withdrawn and 17 percent tax imposed on buses, trucks, dumpers, trailers, prime movers and road tractors; Five percent tax imposed on the zero-rated items like textile; carpets; leather; sports goods and surgical goods; Health, food, education goods to remain exempted; There will be no extension in 15% surcharge on income tax and in special excise duty of 1.5 percent; Customs duty on 22 pharmaceutical raw materials to be slashed from 20% to 5%; Income Tax on non-residents to be 10% and no return-filing is required; Tax to be imposed on income of individuals from government securities at 10%; Dividend income of an asset management company from investment in government securities 40%; income of a banking company as interest on investment in government securities 40% as separate bloc of income.

The rate of tax on cash withdrawal has been reduced from 0.3 percent to 0.2 percent; Investment rebate in initial public offerings-IPO: increase in limit of investments in shares by individuals from 10% to 20%; Increase in tax for new corporate sector tax entity’s credit reduced from 15% to 5%; for investment in shares of IPOs insurance/ takaful and voluntary pension Rs300,000 to Rs500,000 (all these steps taken for promoting investment in banking sector); Regulatory Duty to be imposed on sugar in place of Sales Tax; Extension for facility of minimum tax on turnover to VPS.

Officials elaborated that the new MAT Tax on high net worth people will be extracted on assets out of untaxed income; there will be no exemption except on one self-occupied house. There will be no discretion on valuations and district collector’s assessed rate will be applicable. Tax credit for income tax paid/agriculture tax paid shall be admissible.

The theme of the budget, as per the available document, will be Tax On Property, reviving the economy, and promoting investment, power generation, prizes on sales tax receipts, effective monitoring and risk-based audit, improving tax-compliance, agriculture tax, sales tax on services, and capital formation.

Are we being misled on the $1,254 per capita income?
ISLAMABAD: The economic mandarins of the incumbent regime show the economy to have grown to a little over Rs18,000 billion. This expansion, however, is not due to meaningful growth but primarily because of inflation, which has apparently been factored into recalculating the per capita income as having increased to $1,254 in 2010-11 from $1,073 in the last fiscal year. This appears to be a misleading statistic, to say the least.

“Yes, I agree that the per capita income figure is extremely misleading,” Dr.Ashfaq H Khan, Dean of the Economics Department at the NUST Business School, told The News. “In reality, there is a zero growth in per capita income, as the increased almost at the rate of real GDP growth, which has been estimated at 2.05 percent. This is the main reason that the masses are facing such hardships,” Dr Khan said.

According to Finance Ministry sources, the economic mangers have decided to show the masses the success of their policies by inflating the size of the economy. GDP deflator (this is the ratio of GDP at current market price and GDP at constant market price), which is the broader definition of inflation, has increased by almost 20 percent in fiscal year 2010-11. In other words inflation in Pakistan as defined by changes in GDP deflator stood at about 20 percent. As a result of rise in inflation, the size of the GDP has jumped to 18000 billion rupees 2010-11.

Dividing by the average exchange rate for the year, the size of Pakistan ‘s GDP in dollars terms has surged to slightly over Rs18,000 billion with per capita income surging to $1254.

This rise in per capita income presents, the source said, a misleading picture of the average prosperity of the people of Pakistan. In fact, when adjusted for inflation, the real per capita income has remained constant at last year’s level. “In other words, the living standard of the people of Pakistan has not improved during the outgoing fiscal year 2010-11,” the source said.

Domestic investment, according to the official, is down to a 40-year low at 13.4 percent, which is why the country will not experience GDP growth at a reasonable rate in the next 2 to 3 years, except 2-2.5 percent. “This means that Pakistan ‘s future growth prospects will remain clouded as a result of sharp decline in domestic investment” It may be pointed out that the investment rate was all time high at 22.5 percent in 2006-2007.

The finance ministry official disclosed that the country had experienced a more than 9 percentage point decline in investment in the last 4 years, which did not auger well for future growth prospects. “In the coming years Pakistan ‘s unemployment and poverty will continue to rise with serious social consequences for the country,” the official lamented.

As far as foreign direct investment (FDI) is concerned, the FDI has tumbled by 29 percent to $1.232 billion during July-April 2010-11 as against $1.725 million in last year.

The official also said the average inflation has been at 14 percent. Forty-five months in a row, inflation has been in a double digit which has broken the back of the fixed income group as well as poor and vulnerable sections of society. It is unparalleled in the 64 years of the history of Pakistan that inflation has persisted at a high double digit for so long a period. – Khalid Mustafa

Income equality worsens after better spell
ISLAMABAD: Having no official poverty figures, the Economic Survey 2010-11 released Thursday conceded that income inequality had worsened in Pakistan and that the period of higher growth from 2000 to 2006 had failed to make a distributional impact.

“The work on Household Income Expenditure Survey (HIES) component of Pakistan Social and Living Standards Measurement (PSLM) Survey 2010-11 is going on and latest poverty figures will be made available by the next financial year,” Secretary Finance Dr Waqar Masood said during the press conference on the occasion of launching the Economic Survey 2010-11 here Thursday.

According to the Economic Survey, Gini coefficient and the ratio of the highest to the lowest consumption quintiles are used to measure the incidence of income inequality and results showed that income inequality had aggravated in the country. The Survey reveals that during the said period, both the Gini coefficient and share of the income of highest to bottom quintiles had increased, suggesting that income inequality had worsened. Combining this with data of headcounts, it can be inferred that due to good growth performance during the period 2000-2006, the number of poor had declined but economicc growth had failed to make a distributional impact in Pakistan.

In the rural areas, the Gini coefficient declined from 0.25 in 2004-05 to 0.24 in 2005-06 and again increased to 0.25 in the year 2007-08; whereas in urban areas, inequality increased from 0.32 in 2001-02 to 0.33 during the year 2004-05; and further increased to 0.34 during the year 2005-06. However, it registered a decline from 0.34 in 2005-06 to 0.32 for the year 2007-08.

Importantly, urban income inequality increased faster than overall inequality during 2005-06. The trends of consumption expenditure share by quintiles for Pakistan are as follows: The ratio of the highest to lowest quintile, which measures the gap between the rich and the poor, deteriorated from 4.15 in 2004-05 to 4.2 in 2005-06 at the national level, indicating a shifting of resources from poor to rich. However, the ratio declined to 4.0 during the year 2007-08.

The Economic Survey also states that growth is an essential but not sufficient condition for poverty reduction. It says the rural-urban gap has widened in Pakistan since 1992-3 with the rise in poverty incidence.

The floods of 2010, the Economic Survey states, have had a long-lasting impact on the socio-economic development of the country as nearly 20 million people were impacted by damage to economic activity. The floods have caused a significant loss to poverty reduction efforts and have increased poverty and vulnerability of affected populations.

The analysis reveals that the areas affected by floods were consistently lagging behind in terms of educational indicators as compared to the areas unaffected by floods. The loss to infrastructure and livelihood sources will aggravate their situation further. Until the restoration of normalcy in these areas, economic activity will be hampered by the aftereffects of floods.

The vulnerability of the population of affected areas against natural shocks of this intensity was very low even before the floods and this has complicated the situation. Even before floods, immunisation, access to drinking water, and access to sanitation in flood affected areas had been relatively poor as compared to areas unaffected by floods in 2010.

After the floods of 2010, much of the critical infrastructure was destroyed putting an additional constraint on the delivery of social services due to which Pakistan’s progress towards achieving the Millennium Development Goals (MDGs) further decelerated.

PM tells finance team‘Budget should be people-friendly’
ISLAMABAD: Prime Minister Syed Yusuf Raza Gilani Thursday directed the government’s economic team that the forthcoming budget for the financial year 2011-12 should be people-friendly and aim to provide relief to the common man.

The prime minister was chairing a special pre-budget meeting of his economic team at the PM House. He directed the team to take appropriate measures in the budget to ensure economic growth, leading to reduction in inflation, increase in investment and creation of jobs.

While elaborating on his vision and the priorities of the government, the prime minister stressed on adopting austerity measures with a focus on development efforts. Earlier, the minister for finance briefed the meeting on salient features of budget 2011-12. Secretary Finance reviewed last year’s budget and also explained the economic strategy adopted in the upcoming budget 2011-12, while Chairman FBR deliberated upon available options to expand the tax base and achieve the revenue targets.

The meeting was attended by Leader of the House in Senate, Syed Nayyar Hussain Bukhari, Minister for Finance, Dr Abdul Hafeez Shaikh, Minister for Law and Justice, Senator Maula Bakhsh Chandio, Minister of State for Foreign Affairs, Hina Rabbani Khar, Minister for Religious Affairs and Chief Whip, Syed Khurshid Ahmad Shah, Chairman Planning Commission, Dr Nadeemul Haq, Governor State Bank, Shahid Hafeez Kardar, secretaries Finance, EAD, Planning and Development, Cabinet, chairman FBR and other senior officials.

15pc raise expected in govt employees’ salaries
ISLAMABAD: Finance Minister Dr Hafeez Sheikh will announce good news during his budget speech today (Friday) in the National Assembly. He is expected to announce 15 percent raise in the salaries and pension of government employees. According to sources, there is a proposal of raising taxable income for salaried and non-salaried class from Rs300,000 to Rs350,000. This will benefit 700,000 persons.