A Reasonable Budget

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Annual Budgets always arouse expectations, the Budget being presented before the National Assembly after four years (and that also with the confrontation over LFO as a backdrop) added to the anticipation. The good thing about the Budget is that no new taxes have been levied, either in THE form of direct taxes or change in administrative/utility prices. This goes towards the business community’s demand of a consistency in government policies. For the first time the government has more or less achieved the target of the tax revenues i.e. Rs.459 billion against the revised Rs.460 billion figure. An important achievement has been that the number of income tax-payers have been rising, now close to 2 million (at one time few years ago it was only 1.1 million). There is some improvement in bringing down the size of fiscal deficit as a percentage of GDP. The advance tax regime for foreign investors is a good initiative, this should be expanded to include the domestic corporate sector.

Incentives to the housing sector gives multiple benefits to Pakistan across the board. Firstly, it provides much needed ownership of housing to our needy citizens, secondly it reinvigorates the economy. Enhanced “housing starts” means that more cement, brick, steel, sand, steel plumbing and electrical material, household gadgets, etc will all be needed. Since almost everything is available or made in Pakistan, jobs will not only be created in construction but the whole lot of support industries will add more and more jobs and turn out additional material resulting in economy of scale and bringing down prices, force-multiplying consumer sales of many household products ie there will be spin-offs in all directions, a very direct infusion to the economy. Banks have to be careful in verifying applications and spreading the installment /mark-up in payable lots, we cannot afford to go down the way the “Savings and Loans” (S&L) schemes did the US, it took a trillion plus US dollars to bail out the banks. Moreover with increases in sales, competition will become intense, thus enhancing the quality of the products. Care also has to be taken of constructing small housing colonies in rural areas to encourage the farmers that their quality of life can be enhanced in their own rural environment rather than move to the comforts of the urban areas and putting pressure on the urban areas, adding to multiple problems because of unemployment including law and order.

While the move to raise pay and allowances of government servants by 15% is welcome, it does not remove the resource gap between the public sector employees and that of private sector of similar qualification and experience. Coupled with the need to “keep up with the Joneses”, this is what leads to the endemic corruption that is pervasive in Pakistan today. No amount of theoretical “national” strategies will end corruption, it will end when the since of deprivation is removed from the public sector employees. A law should be passed that will link inflation to automatic pay increases, this wage-indexation can be done on quarterly, half-yearly or annual basis. The linkage of pay to inflationary increases is only one aspect, long-term job satisfaction can only be achieved by assessing a fair salary and perquisite package that must take into account private sector incentives denied to the public sector. This should include a fair determining of housing and conveyance allowance, it could differ from region to region in the country i.e. what is fair for rents in Lahore may not be enough in Karachi. In short we must be realistic in making public sector jobs not only attractive but also less prone to corrupt practices.

The Rupee counterpart of the re-scheduled debt repayment are being shown as “external receipts” which means the actual deficit is slightly higher and the payment of this Rupee counterpart of debt, which was previously placed with the State Bank has been deferred, cumulatively these are well over Rs.200 billion. The estimated current revenue falls short of current expenditure by a large amount which amounts to public consumption being financed by borrowed resources, this is a phenomenon of the budget which goes back as early as 1984-85. It is futile and totally irrelevant to talk about any turnaround in the Budget till such time that shortfall in revenue budget is removed. There is a mystery about the unallocable provision of Rs.57 billion made in the Budget, very difficult to explain in the absence of footnotes. While the tax revenue targets have been met, there is no proposal to either have fresh tax proposals for the grossly under-taxed areas or improving the efficiency of the system. More specifically income tax from agriculture continues to be a paltry sum. “Services sector” comprising doctors, engineers, lawyers, consultants, advisory services etc etc has not been properly documented. Another area grossly under-taxed is the non-documented sector which constitutes nearly one-third of the economy.

While all the other indicators were good, the shortfall in cotton production is a cause for concern. As an agro-based economy Pakistan still depends in an inordinate way on cotton, cotton textiles etc. the Federal Budget has rightly given incentives to the textile sector but there should be apprehension about the removal of quotas because of the WTO regime coming into existence in 2005, a date not too far away. While there has to be an incentive-oriented package available for textiles it must recognize quality and encourage enhancement of it. If we do not gird up our ranks and confront the situation now, we will be left lagging far behind and the fierce competition from the South-east Asian countries will undercut the main prop of our economy.

There are reports (and the government should be able to come out with the truth) that allocations made for development expenditure has remained unutilized, therefore an enhanced allocation of Rs.160 billion for development expenditure would only be meaningful; only if this amount is actually spent. A good beginning has been made to assign a monitoring of this expenditure on individual projects to the Planning Commission which otherwise has been for a long time more or less standing on the sidelines if not redundant entity.

There are certain things which need to be studied in depth to see whether any improvement is the result of policy changes or some extraneous factors, for instances in the same manner than 9/11 has resulted in increasing our home remittances beyond our expectations. Improvement in trade may have resulted from 9/11 serving as a disincentive to over-invoicing and under-invoicing of external trade thus improving the trade balance. We should study this carefully and not be lulled into complacency by a PR exercise of the Export Promotion Bureau (EPB).

Fiscal Year 2003-2004 will be crucial for the country because the end of the IMF Poverty Reduction and Growth Facility, which has placed many constraints on economic management previously, will fall half-way through the year. This Budget may not have brought much relief but it has not put any new burdens also. The government has promised poverty reduction, employment and price stability é all extremely challenging tasks but not out of our reach because we not only have skilled and unskilled manpower but also the resources to do the tasks. These must be mobilized on a “war footing’ if we are to meet the challenges and compete with the rest of the world, particularly in the region to survive economically as a sovereign entity.

Mr. Ikram Sehgal is Publisher and Managing Editor of Defence Journal (Pakistan).

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