Pakistan Economy - News & Updates - Archive

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Monday May 22, 2006

KARACHI: " After achieving the economic stability our next focus is on mega projects, infrastructure development, poverty alleviation, job creation and inflation control , said President General Pervez Musharraf.
He was speaking at the inauguration ceremony of KIII Project that will supply 100 MGD additional water to Karachi and is completed before stipulated time with comparatively lesser than estimated costs.

He termed the project as a landmark achievement to meet the development needs of Karachi and an idea example of co-operation between federal, provincial and city government.

Speaking on the occasion, President General Pervez Musharraf said that Karachi is the economic hub of Pakistan and is essentially instrumental to national development and economic growth in Pakistan. Due to this reason, he said federal government is taking keen interest in its development and has ventured into projects like Northern Bypass, four underpasses, Lyari Expressway and KIII.

President Pervez Musharraf said that it is a moment of pride for me to see the timely completion of the projects started by this government. Mentioning about other mega projects, he said that Mirani Dam will be inaugurated in September this year and will irrigate 3500 Acres of land thus will contribute towards the development of the Province. Mangla Dam Upraising Project is also started that will provide 3MAF additional water.

Four underpasses are already launched by the government in Karachi and will be completed in next four months, added President General Pervez Musharraf.

President Pervez Musharraf reiterated his promise of providing electricity and clean drinking water to every household of the country by the end of 2007.

He further said that for the prosperity and development of any country political will and resources are essential and fortunately present government is equipped with both with Rs. 350 billion in its PSDP.

Appreciating the performance of Provincial and city government President Musharraf expressed the hope for continuation of efforts and said that the areas of focus for Sindh should be Road infrastructure, Water & Sewerage System, Electricity and cleanliness to further develop the province that plays the most important part in the economic development of country.

Governor Sindh Dr. Ishrat ul Ibad, Chief Minister Sindh Dr. Arbab Ghulam and City Nazim Karachi, Syed Mustafa Kamal also spoke on the occasion.

 

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Monday, May 22, 2006

* Inaugurates Rs 5.95b water project
* Will announce Vision Pakistan on

KARACHI: President General Pervez Musharraf said on Sunday that the country’s economy had stabilised and he was poised to focus on the major issues of reducing poverty, creating jobs and controlling inflation.

“I am going to give my vision for Pakistan in an address to the nation soon,” declared the president while inaugurating the Rs 5.954 billion K-III additional 100-MGD water supply project for Karachi.

The president termed terrorism and extremism as “Pakistan’s biggest enemies”. “Both these menaces are harmful for Pakistan and need to be eliminated,” he said. He also condoled the Nishtar Park tragedy.

Musharraf said the Pakistan Public Sector Development Programme used to be only Rs 92 to Rs 95 billion and had grown to Rs 250 billion. “The money will be spent on development projects to lead the people to prosperity,” he said. Every house would have electricity, drinking water and natural gas by December 2007 under Vision Pakistan, he added. “I can say with great pride that the projects which I launched in 2000 are now reaching completion and their fruits are reaching the people at the grassroots level.”

The president said that a strategy had been formulated to achieve this objective, and he was working 15 to 16 hours daily to ensure work. “The government initiated projects of Left Bank Outfall Drain (LBOD) and RBOD to tackle water problems,” he said. Water filtration plants would be installed in every village with a population of around 1,000 people by December 2007, he added.

Musharraf said people living in Sindh’s rural areas would get an abundant supply of gas and electricity. He also praised Sindh Governor Dr Ishratul Ebad Khan, Chief Minister Dr Arbab Ghulam Rahim and Karachi Nazim Syed Mustafa Kamal for their cooperation in the water project. He highlighted that the city government had plugged leaks and saved 33 percent of water previously being wasted. The government would root out the “tanker mafia” which was exploiting the situation and making money because of the water shortage, he added.

Musharraf said that work on Mirani Dam had been launched four years back and would be inaugurated by him in September, 2006. “The Mirani Dam will irrigate 35,000 acres of land besides helping in fish production and bring prosperity to the area,” he said. Mangla Dam was also being raised by 30 feet at a cost of Rs 50 to 60 billion and would store 2.9 million acres feet of water which would equal half of Tarbela Dam’s storage capacity, he added.

The president will inaugurate the Marble City Project in Hub today (Monday). Hub Marble City will include setting up new industrial units meant to cut and polish marble to make it import quality.

 

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ISLAMABAD (updated on: May 23, 2006, 21:45 PST): Prime Minister Shaukat Aziz on Tuesday said Pakistan and China were working towards further expansion of co-operation in the peaceful use of nuclear technology for electricity generation.

"A significant area of co-operation between Pakistan and China has been the harnessing of nuclear technology for peaceful purposes under international safeguards - for the production of electricity," he said while inaugurating a day-long seminar organised by Institute of Strategic Studies to mark the 55 years of Pakistan-China relations.

Referring to Chasma-1 and Chashma-11 power plants as a symbol of such co-operation, Prime Minister Aziz said that the two countries were working towards further expanding co-operation in this area.

In his addressed, the Prime Minister traced the historical ties between Pakistan and China, which have stood the test of time and weathered geo-strategic changes at both the global as well as regional level.

"Over the past 55 years, our all-weather and time-tested friendship has become higher than the highest mountains and deeper than the deepest oceans."

"The friendship between our two countries is rooted in our hearts and minds - it is a model for relations between any two countries," he told a distinguished gathering of Pakistani and Chinese scholars and Islamabad-based diplomats of various countries.

Prime Minister Aziz described Pakistan-China defence co-operation as factor for stability in the region.

He recalled the framework agreement on defence co-operation the two countries had signed in February last year that is designed to carry forward traditional co-operation in this area.

This agreement will contribute towards the modernisation of armed forces of the two countries, he added.

Prime Minister Aziz particularly mentioned the co-production of JF-17 fighter aircraft and various tanks as the examples of the tangible output of defence co-operation between the two countries.

"A lesser-known but equally important aspect of this co-operation is in the important field of research and development which will lay the groundwork for future co-operation in this field," he added.

The Prime Minister said, Pakistan and China have always pursued their friendship with the objective of mutual benefit and never at the cost of any other country.

"We have not sought hegemony nor shall we accept hegemony from any quarter," he added.

Pak-China friendship, he added, is designed to promote security and co-operation with their neighbours as well as their global partners.

The Prime Minister underlined the need for both the countries to redouble their efforts for the protection and promotion of international peace and security in a multi-polar system confronted with serious challenges such as terrorism, nuclear proliferation, regional conflicts, the energy crisis, environmental degradation.

"As in the past, our present efforts can contribute towards greater security and stability around the world," he said and assured that Pakistan would always stand united with China and that it could continue to count on its steadfast support.

In the political realm, Prime Minister Aziz said Pakistan and China were committed to pursuing relations between each other and with other countries on the basis of the principles

of peaceful co-existence, sovereign equality and non-interference, "We seek mutually beneficial co-operation with all countries and are committed to the peaceful settlement of all disputes and conflicts," he added.

The Prime Minister stated that Pak-China friendship was not designed to be used against any third country.

"We also do not subscribe to the concepts such as balance of power, pre-emption and unilateralism," he said while adding, "we believe in strengthening the United Nations system to address and resolve all regional and global issues, peacefully".

Prime Minister Aziz also foresaw further strengthening of economic co-operation between the two countries in coming years as the two-way trade volume has already surpassed $4 billion mark.

Pakistan and China have already concluded the Early Harvest Programme which is a first step towards the Free Trade Agreement (FTA), which the Prime Minister said the two countries would be signing soon.

"These efforts to promote Chinese investments as well as bilateral trade will give a tremendous boost to our bilateral co-operation," he added.

He said the trade volume between the two countries was rising very impressively and reflected the growth and increasing market size of their economies.

The Prime Minister told the audience that the two countries would soon be undertaking up-gradation of the Karakorum highway that had been built with the Chinese assistance.

The up-gradation will convert the highway into an all-weather corridor to facilitate bilateral trade.

Furthermore, the Prime Minister said, Pakistan was also exploring the feasibility of construction oil and gas pipelines on its coastline to western China that will considerably shorten the distance and time for oil and gas transportation from Gulf to China.

"Setting up of a mega-refinery at Gwadar would further facilitate China's oil imports from our region," he added.

The Prime Minister called for learning from China in the sphere of space technology.

The bilateral agreement in this respect, he added, would greatly benefit Pakistan's capability for the use of space for peaceful purposes. He said China's Schenzou Space Programme provides tremendous opportunities for Pakistan's entry into the realm of outer space.

Prime Minister reiterated Pakistan's strong commitment to re-dedicating to a future partnership between the two countries, even stronger than in the past. "I believe that today there are even greater complementarities and inter-dependencies and energy linkages between an emerging global power like China and a revitalised and repositioned Pakistan," he added.

Prime Minister Aziz expressed the confidence that Pak-China relations would reach even greater heights in the future.

 

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KARACHI (updated on: May 23, 2006, 22:00 PST): Foreign Direct Investment (FDI) in Pakistan reached $3.02 billion in the first 10 months of the 2005/06 fiscal, led by inflows into the communications and energy industries and the financial sector, official figures show.

Data released by State Bank of Pakistan on Tuesday showed FDI for the July-April period rose from $891.5 million in the same period of the 2004/05 (July-June) fiscal year.

The communications sector attracted the most foreign investment in the period, $1.7 billion, followed by $310 million invested in the power industry, $290 million in the financial sector and $243 million in oil and gas exploration.

The sharp rise in investment in communications has mainly stemmed from the sale of a 26 percent stake in Pakistan Telecommunication Co. Ltd. to Dubai-based Emirates Telecommunications (Etislat).

The United Arab Emirates led the list of foreign investors with investment of $1.285 billion in the first 10 months of the year, followed by the United States with $419 million and Saudi Arabia with $274 million.

Inflows from foreign portfolio investment during the period were recorded at $356 million, up from $135.5 million in the first 10 months of 2004/05.

 

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ISLAMABAD (May 23 2006): The Annual Plan Co-ordination Committee (APCC) on late Monday night approved Rs 345 billion Public Sector Development Programme (PSDP) for 2006-07 and recommended it to the National Economic Committee NEC for its nod, at its meeting scheduled for May 31.

According to APCC, Rs 10 billion have been allocated for acquiring land for the new big dams. The provinces will get over Rs 100 billion as their share from NFC award for social sector development.

Planning Commission, Deputy Chairman, Dr Akram Shaikh chaired APCC marathon meeting that lasted for around 12 hours. The representatives of the federal ministries/divisions and provinces presented their requirements from PSDP for the next fiscal year.

A reliable sources told Business Recorder at 12.30 am when the meeting was still in progress that APCC discussed social sector projects of the federal and provincial governments in depth and took a number of key decisions to enhance budget for social sector schemes, besides allocating funds for each ministry, division.

The meeting was told that the major thrust of the next year PSDP would be on water related major schemes, new dams, education, skilled labour and infrastructure related projects to sustain economic growth in the future.

The meeting was presented a province-wise summary of PSDP utilisation for 2004-2005 and 2005-2006. It showed that this year the provinces were released Rs 68 billion, against Rs 54 billion of last year.

The break-up showed that this year Punjab got Rs 32.4 billion against Rs 25.9 billion of last year from PSDP, Sindh was released Rs 14.1 billion, against its share of Rs 9.2 billion in last year PSDP.

NWFP and Balochistan were released Rs 14.5 billion and Rs 7 billion against their share of Rs 11.4 billion and Rs 7.6 billion respectively. Balochistan, in addition to its share of Rs 7 billion from PSFP, was released Rs 3 billion under Khushal Pakistan Programme (KPP) Fund.

The meeting was told that PSDP utilisation for the first nine months of the current fiscal year stood around 65 percent. Historically, PSDP utilisation in the past was very low.

Sources said that the highest ever utilisation and timely release of funds for development schemes made the current PSDP different from the previous programmes.

They said that this time the executing agencies were asked to monitor progress of work of their respective schemes for 2005-2006, very closely to ensure that funds were utilised judiciously and without any hassle.

APCCW was informed that a well-thought tight monitoring policy had made the current PSFP different from the previous ones and the same approach would be followed in the future to further improve the utilisation of public sector funds. Sources said that availability of enhanced financial resources prompted the policy makers to go for substantial increase in 2006-2007 PSDP.

They were of the view that more allocations would help the Centre and provinces to go more aggressively for major social sector development programmes and provide the people better facilities to improve their living standards.

 

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ISLAMABAD (May 23 2006): Prime Minister Shaukat Aziz assured on Monday of taking adequate measures for the welfare of the government employees, pensioners, common men and elimination of poverty while compiling the upcoming budget.

"Remarkable raise will be made in the salaries of government employees and pensions and no new tax will be levied on the low salaried class," noted Prime Minister Shaukat Aziz while briefing the central executive committee of the ruling Party Pakistan Muslim League about the outlines of the budget 2006-07.

The government, he said, was cognisant about the price-hike in the country and added that a comprehensive strategy to check menace of the inflation would be unfurled in the budget.

"Any proposal irking a common person has not been entertained while preparing the budget," Shaukat made it clear. The Prime Minister told Leaguers that on the directive of the president price management mechanism would be followed to check the prices further increase and maintain them at one level.

Special measures had been taken in education sector and provision of portable water to the people while compiling the budgetary, the he informed his party men.

Referring to the allocation for the defence, he said the decision to this effect would be taken keeping in view the national security and national interests.

Shaukat said that special funds would be allocated for the rehabilitation of the October 8, 2005 earthquake affectees and reconstruction of the wrecked areas in the ensuing budget. The prime minister felt proudly that government was successful to keep the pace of economic development despite massive natural calamity which hit the northern part of the country.

 

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ISLAMABAD (May 23 2006): The government is likely to increase the minimum wages of unskilled workers from Rs 3000 to Rs 4000, and old age pension from Rs 1000 to 1300 per month, in the next budget.

The amendments to this effect will be made in the 'Minimum Wages for Unskilled Workers Ordinance' and 'Employees Old Age-Benefit Act, respectively through Finance Bill 2006.

Sources told Business Recorder on Monday that the Ministry of Labour and Manpower has forwarded a summary to the Prime Minister Secretariat, proposing the raise in the minimum wages of the unskilled workers and old age pension, keeping in view the unprecedented price hike and inflation.

It is also learnt that the Prime Minster Secretariat has forwarded the proposals to Finance Ministry for incorporating in the Finance Bill 2006.

The proposed increase in the rates of minimum wages as well as minimum pension will give relief to the downtrodden workers and pensioners, who are badly suffered due to the unprecedented increase in the prices of essential commodities.

 

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LAHORE (May 23 2006): The Punjab government is likely to allocate Rs 70 billion for the Annual Development Programme (ADP) of the financial year 2006-07, which will be 32 percent higher than the current year budget of Rs 53 billion.

Well-informed sources told Business Recorder here on Monday that the overall volume of forthcoming budget may cross the figure of Rs 260 billion. In the fiscal year 2006-07, the health sector will be the priority area with the allocation of Rs 5 billion whereas the education sector was given priority in current financial year (2005-06).

According to the sources, in the forthcoming budget, emphasis would be laid on three sectors ie health, education and roads with the allocation of Rs 5 billion for health sector, Rs 15 billion for education sector and Rs 16 billion for roads.

In the coming budget, Rs 4 billion would be reserved for regional development, while local government and rural development will get Rs 2,200 million. The irrigation department will get Rs 10 billion in coming budget, while the agriculture department will have an allocation of Rs 2 billion against the current year allocation of Rs 925 million.

The overall utilisation of funds released under the Annual Development Programme (ADP) 2005-06 was recorded 61.80 percent till March 2006 of total released amount of Rs 44,641.506 million. The highest utilization of ADP was recorded in district governments whereas zero percent utilization was reported in eight departments, including tourism and resort development, food, mines and minerals, transport, urban development, sports and religious affairs, Punjab emergency service, and the Auqaf department till March 2006.

Out of a total allocation of Rs 2,300 million for capacity building of public servants, priority programme and un-funded schemes, not a single penny was utilised and the whole amount was lapsed in March.

In remaining departments, utilisation of ADP was 69.57 percent in agriculture, 28.09 percent in forestry, 47.40 percent in livestock, 60.73 percent in industries, 59.05 percent in Tevta, 64.71 percent in irrigation, 61.49 percent in roads, 92.89 percent in water supply, 56.43 percent in environmental planning, 80.81 percent in buildings, 31.77 percent in access to justice, 79.82 percent in education and training, 24.33 percent in information technology, 17.83 percent in information and culture, 50.98 percent in health, 57.69 percent in social welfare, 37.56 percent in labour and human resources, 16.16 percent in planning and development and 50.88 percent in local government and rural development.

The planning and development surrendered Rs 3 billion from departments and sectors, including agriculture, sports, food, social welfare and mines and minerals where utilisation was low. This amount was re-allocated to various authorities ie Water and Sanitation Agency (Wasa) Lahore, Faisalabad and Multan and Teshil Municipal Administration for the provision of clean drinking water and sewerage facilities to avoid the lapse of funds, sources said.

Sources said that good utilisation of ADP was witnessed in regional planning with 88.15 percent in Abad, 82.62 percent in Bahawalpur and 80.62 percent in Dera Ghazi Khan rural development.

 

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EDITORIAL (May 23 2006): The federal cabinet's decision to earmark funds in the next year's PSDP to acquire land for five mega water projects, including the Kalabagh Dam, demonstrates the government's firm resolve to go ahead with the dams' construction, consensus or no consensus.

The President has already inaugurated the construction of Diamer-Bhasha Dam. The government is now planning to seek funding for the mega projects as part of its "2016 Water Vision" strategy. The cabinet members are rightly of the view that the projects have already been delayed for too long. Their decision to allocate funds represents the critical next step towards realisation of the goal of building additional water reservoirs in the country.

The government plans to provide constitutional, judicial and administrative guarantees to the opponents of the projects, to allay their reservations and win their support.

Incidentally, the provincial assemblies of Sindh, NWFP, and Balochistan have already passed strongly worded resolutions, voicing their opposition to Kalabagh Dam, the construction of which has been sensibly delayed. The powerful anti-dam lobby in the three smaller provinces had seen the renewed debate as a shrewd move to gauge the depth of their sentiment.

It cannot be denied that Pakistan is caught up in a tightening water and energy squeeze, because of non-construction of additional water reservoirs. As a result, some 35 million acre feet (maf) of water flows down into the sea unutilised each year, which represents a colossal national loss.

This has also frustrated the plans for tapping the country's vast hydel potential. With our GDP growth target set at between 6.5 to 7 percent, increased availability of water and electricity is absolutely essential. And this can be achieved only through construction of additional water reservoirs.

Massive silting at the existing big dams has sharply curtailed their water storage, and hence power generation capacity.

The country's annual energy deficit is projected to be at least 1,000 megawatts from 2007 onwards, while our demand for electricity is growing by six to seven percent per annum under the pressure of rapid industrialisation, and by the year 2012 we will need an additional 5,000 megawatts of electricity. With the steep rise in oil prices, the thermal option has become prohibitive.

This leaves us with the only viable option of hydel power, which is the cheapest source of energy. Solar parks and windmills, etc can act only as supplementary props.

The other major option is coal, which anyway is too cumbersome. Unfortunately, the issue of dams has become so politically charged as to become something like the proverbial "red rag" for the smaller provinces. The reason why successive governments have failed to build a consensus on construction of big water reservoirs, particularly Kalabagh dam, is that they have at times tried to use the divisive potential of the issue to their political advantage, prompting the smaller provinces to further harden their position.

Alternatively, instead of trying to build a consensus through parliament, the ruling elite has sometimes tended to bulldoze it by fiat. This has deepened provincial alienation. The perceived denial to smaller provinces of their rightful share in the federal divisible pool etc is another cause of mounting tension between Punjab and the smaller federating units.

The present government, like its predecessors, has tended to treat the issue of dams purely as a technical matter, deliberately downplaying its political aspect.

This has only fanned inter-provincial antipathy. Instead of bulldozing decisions, the government should take the issue to the parliament, hold a threadbare debate to resolve the differences through compromise, and evolve a national consensus before rushing ahead into the implementation phase.

This is basically a political issue that needs to be handled politically through addressing the smaller federating units' concerns and reservations. Nobody can deny that the dams have to be built for the sake of the country's well-being. Why not do it through national consensus?

 

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Editorial;

By M. Ziauddin

THE next federal budget is likely to propose measures aimed at further fine tuning the monetary and fiscal policies to sustain the high growth trajectory while at the same time keeping the inflationary fires well under control.

It is also likely to propose juxtaposing these measures in order to rationalize the expanding deficits in trade and current account while at the same time keeping flows of industrial input imports unhindered and the revenue incomes increasing.

Finally, since the next general election according to an announcement made recently by the President himself is about two budgets away from today and since both the President and the ruling coalition seem to have already started their poll campaign, there is this further pressure on the policy makers of the incoming budget as well as the one that would be announced in June next year to play to the gallery as well.

They have to come up with measures that would continue to feed the facade of ‘Pakistan shinning’ while at the same time allow the rich who have completely taken over the economic policy making and implementation processes and corporatised the entire economic activity, to continue to fill their coffers at the cost of the poor masses. But then they would need a magic wand to accomplish these inherently ambitious goals because very little attention has been paid to the problems that confront our real economy.

Savings and investment: The foreign-aided boom seems to be tapering off. The official economic managers take a lot of pride in what they call the on- going economic reform and structural adjustment process and to which they attribute all the positive economic indicators achieved in recent years, like the all round higher growth rates, the dramatic increases in revenue collection and exports.

But what they have so far failed to explain is why all these reforms and adjustments have not been able to improve our savings and investment rates and the rate of our incremental capital out- put ratio (ICOR).

The domestic saving rates continue to stagnate at around 13-14 per cent of the GDP on an annual average and the rates of investment have not gone beyond 15-16 per cent, on annual average, during the last seven years. The ICOR has remained between 4-5 all these years.

This is amazing because countries like China and India with each having almost ten times the population of Pakistan and where reforms are still in an infancy stage have a lot better record on this front. China saves almost 50 per cent of its GDP and then invests almost as much annually. In the case of India, these rates are also on the higher side of 25 per cent.

And their ICORs too have improved dramatically. So, for Pakistan to achieve a sustained growth rate of over eight per cent, it needs to target an investment rate of over 30 per cent of the GDP annually over the next 15 years and a savings rate of nearly as much otherwise, the gap between the savings and investment rate would have to be filled with costly loans as foreign private investment appears to be still very shy in the case of Pakistan.

Revenues: The high rate of increases in revenue collection in recent years is attributable to the price driven incomes from the petroleum and gas development surcharges and customs duties.

The other chunk in the quantum jump in the collection comes from the coercive system of withholding tax (mostly under the head of sales tax). And while all the indirect taxes whose rates and incidence keep on jumping, have been allowed to impact severely on the poor despite all the reforms, no attempt has so far been made by the CBR either to expand the tax base or the income tax net. It has not even succeeded in persuading the rich to declare correct amounts of their incomes.

If one goes through the list of various categories of income tax payers, he will be shocked to know that the richest earn no more Rs.25,000 per month!

This incongruity is evidenced by the sale last month of over 40 pieces of German sports car costing an average of Rs6 million a piece. And a couple of our rich have also brought Porsche Cayman S for over Rs10 million a piece.

During this very month, the efficient economic managers pushed an essential food item like sugar out of the reach of the poor by letting the so-called ‘market forces’ to escalate the prices of this commodity beyond Rs40 per kilo. But in the process it has also allowed the mill owners, many of whom sit in the cabinet making economic policies to pocket billions of unearned incomes, which will not come under the purview of taxable income.

Poverty: During the last drought cycle and when the government was still focusing on reducing the budgetary deficit by tightening the leash on expenditure under pressure from the IMF, almost 35 per cent of the population had fallen below the poverty line.

In the interim period following the injection of massive concessional assistance from outside, there has been a statistical improvement of five per cent or so in the situation. Still the level of poverty continues to hover around 30 per cent and not 25 per cent as has been claimed by the government in recent weeks.

The reason for this discrepancy is the government’s own attempts at fudging the poverty figures. It had used a figure of 32 per cent for the base year (2001) instead of the actual 35 per cent and now therefore it is forced to come up with an unrealistic figure of 25 per cent.

An exaggerated estimate of livestock population has also been used by this government year after year to window dress its overall growth figures, which it is likely to repeat again this year as the agriculture sector is likely to show a growth rate of no more than zero per cent.

Poverty has been variously defined. But those who do not have any landed asset, lack education (knowledge) and no access to the other assets do remain perpetually poor. In Pakistan, at least about 80 per cent of the population falls into this category.

So, no matter what you do to lessen poverty, you simply cannot succeed if you do not do realistic land reforms, promote the culture of lawful housing mortgage system, provide universal primary education to your population and disarm the warlords.

Pakistan spends far less than its South Asian neighbours on education do. Its annual education budget is only 2.3 per cent of the GDP while most low income countries spend on an average about 3.4 per cent.

 

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The budgets for education and other social sectors has not only remained abysmally low all these years, but the rate of budgetary releases by the finance ministry to the relevant agencies of these sectors too has been very slow. The rate of utilisation by these agencies too has been too laggard.

Casino culture: If you are not saving and investing enough and if your incremental capital output ratio has also not improved and your real income from revenues is stagnating then how is it that you have continued to show very high growth rates in recent years? The answer is simple. All the existing productive capacities have been used in this period helped mostly by the financial space created by the bounties of 9/11 and the surplus output has been consumed by the expanded market space made available in the rich markets because of the same reason.

One would have thought that the fiscal space which was made available to the present government and the expanded markets given to our exporters during this period would have been utilized sensibly by the official economic managers to present budgets aimed at expanding the real economy and its ability to generate increased savings to not only accelerate investment but also reduce dependence on foreign assistance. This seems to have not happened. Instead, the successive budgets have encouraged the casino culture.

Stock and land prices have been skyrocketing adding artificial wealth to the GDP and allowing the casino owners—the stock brokers—to make a killing both when there is a bull run or when the bears take over the market.

In the last seven years these brokers have floated their own investment banks and have also gone and purchased state-owned enterprises. The element of conflict of interest in this does not appear to bother the official economic managers.

Privatisation: The shortfall in income against expenditure is now being attempted to be covered by selling the family silver. Here the term family silver is being used for those enterprises which were originally floated by the state itself and not nationlised units.

Take for instance, the privatization of the PTCL. This utility has been sold by one government to another (as the Etisalat is owned by the UAE government and the process is called privatisation.

The Steel Mills, the mother of all the industries has been sold to a consortium in which the major share- holders are foreigners and the Pakistani shareholder is a stockbroker.

The majority shareholder among the new owners of KESC is a foreigner. Two of the major banks, the UBL and the HBL have been sold, again to foreigners. This amounts to undermining Pakistan’s economic sovereignty itself and making the country’s economy vulnerable to the whims of the foreign investors.

Not only this, the government’s policy of privatisation and selling off its family silver without first putting proper regulatory bodies in place has encouraged emergence of cartels (sugar, cement etc.) pushing up the prices and adding an unnecessary and uncalled for component to the rate of inflation.

The liberalisation of oil market without subjecting it to a regulatory system has also given rise to an oil cartel, which alleged to have pocketed Rs4.5 billion of unearned profit in the last couple of years.

Trade and current account deficits: And there is also the challenge of expanding trade and current account deficit which the budget makers will be facing this year. The exporters have made the most of the all the market access that we have so far received from the rich countries by way of a pay-off for joining them in the war against terror. And in the process, they have also exhausted all the idle manufacturing capacity. Now, in order to increase exports further, they would need to install new capacities and also find new markets.

But there is no sign of such a thing happening. And the expanding trade gap is being presently attempted to be covered by the using the $5 billion or so annual flows of remittances and the proceeds from privatisation. And what would happen once all the family silver is sold?

Luxury imports: There is certainly a lot of room to bring imports under control. But the appetite of the rich for expensive consumerism seems to have become inexhaustible and since they belong to the ruling elite who make economic policies, there is hardly any possibility of curbing expensive imports, especially of costly cars and fancy cell phones.

Shockingly, a number of plans are on anvil to ‘set up’ manufacturing units of new models of cars like Renault, Chrysler Daimler and Black Cabs etc.

But all of these brands are likely to be imported in assembled form or knocked down condition (CKDs of any model can be assembled in the available facilities that can be rented at economic rates) for at least three years on the plea that it would take as many years to put up a requisite plant.

And for setting up these plants, the well-connected sponsors are being allotted huge plots of land (at least about ten times more in size than the actual requirement) at throwaway prices. This is called foreign investment.

Foreign investment: So far, not a single penny has been received by way of foreign investment which, could help add to our export capacity. The government seems all set to sign a Bilateral Investment Treaty with the US hoping that the American private investor would bring in billions once such a treaty is signed. This is highly doubtful. But even if they do bring in some millions, the attached conditions would perhaps be too costly.

According to one of the conditions under these terms if an investment fails because of the failure to do business with the local private sector partner or the under the rules and laws of the land, the government of Pakistan would be required to pay to the foreign investor for the loss of potential profits! So look before you leap.

 

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WHAT was unthinkable in the 1990s is happening in Punjab these days. Awash with surplus money, the provincial financial managers are considering enhancing development spending under the annual development plan (ADP) to a record Rs80 billion or even more in the budget 2006-2007. This is a sharp jump from the Rs53 billion provincial ADP 2005-06.

Funds are pouring in from all sides – in the form of increased federal transfers as well as in the shape of soft loans from multilateral donors like the Asian Development Bank and the World Bank.

“We are thinking on the lines of raising ADP spending to between Rs80 billion and Rs90 billion, if possible. Besides, the budgetary allocation for maintenance of the existing infrastructure, which is part of the revenue expenditure, will also rise substantially. We believe that the money spent on the maintenance of the infrastructure is part of development expenditure. Thus, total development spending is going to get an unprecedented boost in the budget for the next fiscal,” senior Punjab finance department officials say.

Compared with total annual development expenditure hovering around Rs9-10 billion during the better part of the 1990s, financed mostly through expensive loans from the central government, the province has finally come to a stage where it can allocate huge resources for development from its own pocket or soft loans obtained from international donors for budgetary support.

A comparative study of the ADB allocations shows that development expenditure in the province has grown from 16.73 per cent as percentage of the total provincial revenue receipts of Rs120.313 billion in 2001-02 to 23.62 per cent as percentage of the total revenue receipts of Rs224.409 billion during current fiscal. The size of the provincial ADP has increased from Rs20.130 billion to a hefty Rs53 billion.

The first major push to development spending was given in 2003-04 when the allocation for provincial ADP was raised to Rs30.5 billion or 20.42 per cent of the total revenue receipts of Rs149.346 billion from Rs20.750 billion or 15.87 per cent of the revenue receipts the previous year.

The second push came in the budget for current fiscal year as the provincial ADP grew in size to Rs53 billion or by around 47 per cent from Rs34.440 billion or 18.94 per cent of total revenue receipts of Rs181.826 billion in 2004-05. Officials say the actual provincial development spending last fiscal stood at slightly over Rs42 billion, and it is likely to touch the figure of Rs62 billion or so by the end of this fiscal year.

Two factors have contributed to the phenomenal growth in the provincial development spending from Rs17 billion in 2000-01 to the projected Rs80 billion or more during the next financial year: a) continuing increase in the total federal transfers – share in the divisible pool, straight transfers and other federal grants, over the last five years or more; the size of federal transfers is expected to grow to Rs165.513 billion during the outgoing year from Rs99.977 billion in 2001-02; b) willingness of the multilateral donors to lend to the province soft-term credit for budgetary support instead of advancing project-based loans— for carrying out governance reforms in social, financial and economic sectors; these loans have so far been used by the provincial government to retire a major chunk of its costly federal loans that is said to have created fiscal space for diverting greater resources to development.

As the things stand, the provincial share in the federal divisible pool and other federal transfers will be upped further during the next fiscal year under the interim National Finance Commission (NFC) Award announced by the President towards the end of 2005, allowing the province to allocate more funds for its development programme.

Besides, the provincial government is considering the option of obtaining more soft loans from the ADB and the World Bank for financing large infrastructure projects in its major urban centres under its public private partnership initiative.

Hence, the provincial authorities are not worried about the availability of resources for their development programme at least for the time being.

“Today the economy is doing exceptionally well. Tax collection by the Central Board of Revenue (CBR) is exceeding the budgetary targets each year, making greater financial resources available to the provinces from the divisible pool. But what will happen if, God forbid, the CBR’s tax collection falls short of the targets in any given year as was the case during the 1980s and 1990s? The provincial share (from the divisible pool) would drop again. And the first casualty of such a happening is going to be the development budgets of the provinces,” the officials say.

In what is termed to be a highly centralised tax structure, the federating units are heavily dependent on federal transfers under the NFC award. Compared to other three provinces, Punjab is in an even more precarious situation because a major part of federal funds coming to it comprise transfers from the divisible pool.

“Other provinces can make up for the loss in their share from the divisible pool with funds given to them in the form of straight transfers, subventions and other grants. In case of Punjab, the share of funds coming in the shape of straight transfers and other grants is minimal. So if the size of the divisible pool shrinks, Punjab will be hit the most,” the officials say.

What is the solution to such a scenario? “Substantial increase in the province’s own tax resources,” the officials reply.

Historically, the share of provincial own taxes in Punjab’s total revenue receipts has been hovering between 9-11 per cent. Compared to this the funds received by the province in the form of federal transfers have normally formed 80 per cent of its total revenue receipts.

The outgoing year has been a little different from the previous ones as federal transfers, unlike past years, form 73.75 per cent of the province’s total revenue receipts. However, this is more because of a quantum jump in non-tax revenue (estimated to stand around Rs33.124 billion as compared to Rs15.673 billion the previous year) the province has managed to generate rather than due to increase in provincial tax revenues.

On the other hand, tax receipts of Rs25.771 billion for the outgoing fiscal year are estimated to make just 11.48 per cent of the total revenue receipts of Rs224.409 billion of the province. It shows that province’s own tax revenue as percentage of its total revenue receipts has increased slightly by 1.7 per cent over the budgetary estimates of the fiscal 2001-02. In terms of rupees, there has been an increase of Rs14 billion in the provincial own tax revenue during the same period.

Over the years, the desperation of the provincial authorities to raise the share of the province’s own tax revenue has resulted in the multiplicity of inefficient and low-revenue generating taxes. This multiplicity of taxes not only failed to improve revenue generation, but also engendered problems for taxpayers who had to deal with numerous departments and tax officials and government inspectors that hit the growth of private sector in the province.

At one point in time, there were 36 different provincial taxes and levies. The number was slashed to nine in 2001-02 with a view to facilitating the taxpayers as well as to improving the efficiency of tax collectors.

Still, the provincial finance managers strongly believe that Punjab can bring down the number of existing taxes, especially of indirect, inefficient taxes, to just 2-3 and raise revenues substantially provided the federal government allows the provinces to impose sales tax on services.

“The salvation of provinces lies in the levy of sales tax on services. It is going to be the most robust tax in the future. The services sector is the single largest sector. In case of Punjab it contributes over 52 per cent to the provincial GDP of around $60 billion. So you can imagine the huge potential of generating revenues by taxing this sector,” the officials say.

Both Punjab and Sindh, having largest services sector base in the country, are trying to convince Islamabad to let them tax the services because it would not only boost their own revenues to new levels but also help simplify their tax regimes and make them far more efficient and taxpayer friendly.

At present, the provinces are allowed to tax only six services like hotels, marriage halls, laundries, etc at different rates, which generate very little revenue after a lot of effort.

All the major, revenue generating services like telecommunication, banking, carriage of goods by rail or air, etc remain with the central government which has imposed central excise duty (CED), a federal levy which is shared by the provinces as part of the federal divisible pool, on them.

As a consequence of CED on these services, the provinces cannot impose sales tax on them as the law prohibits taxing goods and services already under excise. “The centre’s reluctance to allow the provinces tax their services sectors is nothing but a manifestation of the rigid and highly centralized federal system in Pakistan.

The issue of provincial sales tax on services, I’d say, is an issue of provincial autonomy,” says an economist. As the federal government is adamant on keeping the “right” of taxing the services sector to itself on one pretext or the other despite its being the provincial prerogative, it remains a formidable challenge for Punjab and Sindh to substantially enhance their own tax resource, and decrease their dependence on what many dub as federal dole for development and other expenditure.

 

[Neo]

Editorial;

By Sultan Ahmad

THIS is the ideal time for the policymakers in a developing country like Pakistan to formulate the next year’s budget. The fiscal environment is so helpful.

A high economic growth rate of 8.4 per cent achieved last year has been followed by expected between 6-7 per cent this year. The substantial increase in investment and production makes the tax target easy and tax paying in moderation less painful.

When the industry is expanding fast, exports are soaring and the service sector flourishing with new products and services for the well-to-do, that is the time for larger tax collection.

And when tax payment is being made less vexatious and smoother through the ‘universal self-assessment’ that is the time to expect larger revenue. When the stock exchange is booming and real estate price is hitting the skies along with the vastly expanding services, that is the environment for higher tax collection.

But there is one snag in the rosy tax revenue scenario. The next year is an election year and president Musharraf does not want to displease the voters. In fact, he wants to make as many concessions to the voters as possible through his promise of water, power and gas for all by 2008 and if possible by the end of next year.

So, it is said, there are to be no new taxes and instead there will be moderate tax relief, particularly for the salaried class who have not been enjoying any tax reduction at the lower level for some years.

Simultaneously, there are reports saying that the tax collectors have been directed to explore avenues for new taxes and how to collect them to finance the development plans. That may mean the tax sources identified like the capital gains tax and a tax on real estate profits may not be enforced next year.

The taxpaying is to be made easy through the working of the ‘universal self-assessment’ scheme and by setting up 12 more taxation offices.

The issue is not of identifying large and new sources for mobilising revenues, but a decision to tax the obvious sources, for example, agriculture whose support prices are raised constantly. It is a political decision to be taken on a political level, says the chairman of the Central Board of Revenue Abdullah Yousaf.

He has been silent at various seminars on having a substantial share of very large profits in the stock exchange or profiting by the capital gains on the stock exchange as the law giving exemption from the tax is valid until 2007. When it comes to the large fortunes made through the real estate, all he is doing is to document the transactions and make a proper database.

The CBR chief is confident of adding 20 per cent more to the number of taxpayers and collecting at least 20 per cent more revenues. In fact, the figure of 22 per cent is now being mentioned. He wants to make the tax-GDP ratio respectable instead of at 10.1 per cent of the GDP, the lowest in the region.

But when it comes to giving tax relief to the salaried class, the revenue loss will be low, and there can be a large loss in the number of taxpayers, which is now about 1.3 million. That has stood in the way of tax concessions for the salaried at the base level.

One of the objectives of the government is lowering the cost of business, something that the World Bank, Asian Development Bank and foreign investors have been urging. This is imperative to encourage foreign and domestic investment.

The new budget has to provide for two or three large increases in spending. The defence expenditure may rise to 10 to 15 per cent over the current years to Rs223.5 billion, primarily to acquire more sophisticated equipment like F-16‘S from the US and JF-17 from China. The second increase is to be to provide for higher pensions including military pension.

The allocation for education is to be raised to four per cent of the GDP from over two per cent.

There has been speculation in regard to pay increases along with reduction in the taxes on salaries and a flat tax on salaries. What will ultimately come through the budget remains to be seen.

Mr Abdullah Yousaf is confident the current year’s budgeted target of Rs690 billion tax revenues would be met which encourages him to set the next year’s target at a around Rs840 billion.

All that has encouraged the government to fix Rs342 billion as the target for the public sector development programme. Of course, without adequate infrastructure, the progress of other development schemes will be slow.

The enhanced PSDP allocation will take the public sector development expenditure to four per cent of the GDP from 3.8 per cent, which is still low for a country of 160 million people.

Meanwhile, we are given some optimistic projections. Inflation, which was 11.2 per cent last year, is stated to be at eight per cent now and will be 6.5 per cent next year and six per cent thereafter. Normally, inflation projections do not reflect ground realities or the figure is under-stated.

The unemployment is stated to be 6.5 per cent compared to 7.7 percent. Official claims that the total number of unemployed in the country now is 3.3 million, which makes us far better than many European countries.

But the biggest challenge is from having to mobilise $25 billion for the five dams, which have been approved. The money has to be found long before 2015 when they are expected to be ready and are able to produce power as well.

While the poor are promised better times after the budget and relief for the low income groups, and flat tax for the salaried, they are immediately hit hard by the 100 per cent rise in sugar and the soaring price of lentil.

And they are afflicted in cities like Karachi with endless breakdown of electricity supply and frequent load shedding. They find it difficult to believe that the budget would change all that.

Even if the government’s policies change and fiscal levies become liberal, the primitive distribution system will neutralise the benefits of the change in official policies and procedures. Imagine that in spite of all the vegetable supplies supposed to have come from India, a kilo of green lemons cost Rs30. And a medium size candle costs Rs10 each. The whole system has to be reorganised if the common man has to have any relief through the budget. The budget would not be a magic wand despite the alluring promises made for political reasons.

Inflation is sought be contained through a rather tight monetary policy. Commercial banks have given loans of Rs366 billion to the private sector in the first 10 months of this financial year against Rs363.7 billion in the same period last year.

Simultaneously, the home remittances of overseas Pakistanis increased by five per cent in the first 10 months of the year and reached $3.6 billion. And during the recent Pakistan Development Forum meeting in Islamabad, foreign delegates voiced their unhappiness over the manner the large remittances were spent on large non-productive items.

Clearly, too much money is afloat and the consumption is increasing and people with surplus money are pushing up the consumption. And home remittances are not taxable either so the government has to think of other ways of combating the inflation.

While it is easy to frame a budget in such economic conditions, politically the task is made more complex with too many claimants wanting too much of a share of the modest resources.

 

[Neo]

ISLAMABAD, May 22: The export of textile products increased by 18.89 per cent to $8.022 billion during the July-April period of the current fiscal year compared to $6.747 billion the same period last year. The Federal Bureau of Statistics (FBS) figures on Monday showed that the export of textile products rose by 16.20 per cent to $821.401 million in April 2006 as against $706.901 million the same month last year.

Similarly, the export of readymade garments surged 29.30 per cent to $1.098 billion during the July-April period compared to $0.849 billion the same period last year.

The export of cotton yarn and cotton cloth rose by 32.09pc and 16.31pc to $1.122 billion and $1.746 billion respectively during the July-April period as against $0.849 billion and $1.501 billion the same period of last year.

Knitwear and bedwear exports increased by 5.10pc and 50.88pc to $1.396 billion and $1.657 billion respectively during the period compared to $1.328 billion and $1.098 billion the same period last year. The export of towels showed an increase of 12.02 per cent to $472.713 million.

However, the export of made-up articles including other textile declined by 12.21 per cent to $341.919 million during the period under review; art, silk and synthetic textile down by 34.45pc to $164.763 million, canvas and tarpulin declined by 60.91 per cent to $22.385 million over the same period of last year.

The export of auto parts increased by 39.93pc, footwear 7.65pc, chemical and pharmaceutical products by 4.23pc, gems 7.40pc and engineering goods 13.92pc during the period under review over the same period last year. However, the export of molasses also fell by 34.44pc, furniture 16.70pc and jewellery 40.12pc.

The export of primary commodities registered an overall growth of 18.89 per cent during the July-April period over the same period last year. These included export of rice which surged 26.40pc, fish and fish preparations 35.31pc, spices 63.46pc.

 

[Neo]

GADANI, May 22: Inaugurating a ‘marble city’ here on Monday President General Pervez Musharraf assured the manufacturers that the marble industry would be fully promoted. “Mining of marble be undertaken by utilising the latest techniques to avoid wastages,” the president said while speaking at the ceremony, which was also attended by the Balochistan Governor Owais Ahmed Ghani, Chief Minister Jam Muhammad Yousuf, Sindh Chief Minister Dr Arbab Ghulam Rahim, and federal and provincial ministers, senators, MNAs, MPAs and elite of the area.

“Marble is our asset and by developing it we can earn money and foreign exchange as well by exporting it,” he said adding that the promotion of the industry would not only be beneficial for the area and this province but would also lead to economic uplift of the poor.

The president noted that four units were in production at the facility and said the expatriate Pakistanis from USA, Japan, Spain and the UAE had shown the spirit of patriotism and had come here to serve the country and its people. They are contributing to the socio-economic development of the local population, he added.

Gen Musharraf said that about 300 units would be established in the marble city and some 600 acres of land had been allotted. He said the establishment of 300 units would help create jobs for thousands of people, reduce poverty and lead to progress.

He noted that the usage of old techniques of mining resulted in some 70 per cent of wastage as the explosives were used for the purpose. He called for using modern techniques in mining of marble.

The president emphasized that the cutting and polishing of marble should also be done in the best possible manner.

He assured the marble units’ owners that the government would extend its full assistance in this respect and the ministry of industries was also contemplating certain steps to help the marble industry

The president further assured that the equipment would also be imported as there was no dearth of money in the government’s exchequer.

He said it was not like the past when the exchequer was empty and those, who were then in the government, were fooling people by raising in empty slogans.

President Musharraf said that the present government had the will, the commitment and the determination to carryout the policies and it had the required money in t

The president made it clear that the job would have to be performed by the people in the industry and the government would serve as a facilitator.