News Column

Pakistan budget receives flak at home and overseas

June 9, 2014

Business happy, others not due to govt's unkept promises

Business appears to be happy, others are not because of Nawaz Sharif government's many unkept promises as the national budget for fiscal year 2014-15 was just unveiled last week.

Sharif, however, says "the people are in favour of my government's agenda of economic development and raising their living standards. No compromise will be made in implementing this agenda. The new budget will not spur inflation, but will rather boost investment, promote development, and ease people's hardship".

The budget does provide incentives for FDI inflows and domestic investment, cheaper export credit, tax-breaks for industry particularly textiles, slightly reduced corporate taxes, cheaper telephone services, raised government employees salaries and pensions, improved workers' minimum wages, and cuts on tax on tractors and farm machinery.

What makes the masses unhappy? On the reverse side of the coin, the budget raises prices and taxes on electricity, air travel, cigarettes, cooking oil, cement, construction, steel, real estate sales, autos, CNG for autos and taxis, and wedding halls and entertainment.

The government, and its Finance Minister Ishaq Dar close relation of Sharif claim their "huge success" in salvaging the economy. The economy was left in near-shambles, by the previousPakistan Peoples Party government led by former President Asif Ali Zardari.

But the common man wants Sharif-Dar team, to "do more". People demand an end to the rising inflation, high cost of food, and reversing prolonged electricity outages that have shut thousands of factories and made millions jobless.

They want elimination of thousands of terrorists indulging in kidnapping of hundreds of professionals and medical doctors, businessmen and children and demanding millions of Rupee in extortion money. The business and law and order environment has forced dozens of business families to migrate to Dubai, Singapore, Canada and elsewhere abroad.

The fiscal year 2014-15 budget encompasses a total outlay of Rs4,302 billion. The fiscal year will see a budget deficit of 4.9 per cent. It forecasts a GDP growth of 5.1 per cent, up from four per cent in fiscal year 2013-14. It is projected to go up to 7.1 per cent by fiscal year 2016-17 if all goes well. The inflation will ne in a single digit around up to 9.5 per cent, but many analysts say it will rise to 10 per cent plus. They question a number of governments' GDP, inflation, tax collection and other statistics as "fudged" the same trick which has been used by most of the past administrations.

Bulk of the growth is projected to come out of Rs806 billion official development funding. The non-development spending is topped by payment of debt servicing dues of Rs1,325 billion. It will be followed by Rs700 billion defense spending, as the country is engaged in large anti-terror military operations.

Dar hopes to foot this huge bill by enhanced tax collection projected at Rs3,129 billion. Add to that Rs816 billion as non-tax revenues and sale of good and services by the government.

Terming twin deficits fiscal and current account as "major ills of the economy", Dar urged the people to "wait for relief in coming years as a result of a trickle-down effect of the measures being taken by the government to fix the economy".

Tax collection in fiscal year 2013-14 had the target of Rs2.275 trillion, but the actual collection in the first 10 months of fiscal year 2014 was only Rs1.744 trillion. New taxes in fiscal year 2014-15 will bring in Rs231.1 billion.

Analysts consider the fiscal year 2014-15 tax projections to be "ambitious" keeping in view the fact even the tax-collectors of the Federal Bureau of Revenue (FBR)have just been found to have on its payrolls around 1,200 senior executives who pay no tax. Add to that the huge reported corruption in which the FBR is involved. In these pr-budget days, this FBR scandal as caused a huge embarrassment to Dar who also heads this department.

The fiscal year 2014-15 budget is 7.9 per cent bigger in volume, as compared to fiscal year 2014 which was also presented by Dar, days after Sharif's Pakistan Muslim League (Nawaz) had swept into power, as the single largest party, in the May 11,2013 national Parliamentary elections.

The FDI inflows will be encouraged in all the sectors. FDI investment in manufacturing industries, housing and construction, the corporate tax has been reduced to 20 per cent , if the investment is made in a new industrial plant or factory or a housing plan to be completed by the end of fiscal year 2017. The government expects the forex reserves to cross $ 15 billion by December this year.

The proposed capital gains tax which was to go up from 10 to 17.5 per cent, has been raised only to 12.5 per cent, on Securities retained for up to 12 months. It will be 10 per cent for Securities retained for one to two years. Overall, the budget reduced the general corporate tax by one percent from 34o to 33 per cent.

The telecom sector will pay 18.5 per cent as Federal Excise Duty, as compared to 19.5 per cent in the past, in order to encourage the spread of telecomm services.

After years of hedging, the government has decided to establish an Export-Import Bank (EXIM Bank) with an authorised capital of Rs100 billion. Its initial paid-up capital will be Rs10 billion. EXIM Bank will massively boost exports, slash the cost of exporting and ensure export credit risks.

The export refinance facility of the State Bank of Pakistan, or SBP, the central bank, will cut down its mark up or interest rate from the existing 9.4 per cent to 7.5 per cent. It will reduce the financing cost for exporters by two per cent and bring the rate down as it exists in countries that compete against Pakistan in foreign markets.

The budget encourages export of textiles which are more than half of the country's overall annual exports. Tax on garments, made-ups and processed fabrics has been reduced between one to four percent. Textile machinery will be importable at the reduced interest rate of nine per cent.

While the government is glorifiscal yearing itself for the budget, the main Opposition in the Parliament is highly critical. Syed Khurshid Shah, Leader of the Opposition, and head of the Pakistan Peoples Party in the National Assembly, said, "the budget aims at promotion and protection of the capitalists and businessmen's interests. It carries no good new for the masses. Big figures are shown but the fact is that the government has miserably failed to achieve its fiscal year 2014 targets. The government claims to have controlled inflation, whereas even the prices of onions, tomatoes, potatoes and other commodities are too costly. Even bananas today are selling at Rs200 a dozen."

Dar said: "At $2 a day income, 90 million Pakistanis out of a total population of 180 million are living below the poverty line. The government is very much concerned about it as this class needs utmost attention."

Ismail Suttar, vice-president of the Federation of Pakistan Chambers of Commerce and Industry, said: "The federal budget for fiscal year 2015 is a difficult one but the incentives given to the export sector are a welcome step and may help in accelerating exports from Pakistan."

The Overseas Investors Chamber of Commerce and Industry, and OICCI, representing all the foreign investors in Pakistan has welcomed the new budget.

"The tangible incentives proposed in the budget are a step towards fiscal consolidation. The incentives proposed in the budget, especially those for the textile sector and new FDI inflows into manufacturing and construction industries are seen by the PICCI as a credible effort by the government to revive economic growth together with ongoing fiscal consolidation," said Asad Jafar, OICCI President.

Dr Mohammad Yaqub, a former governor of SBP and director IMF, questions many of Dar's facts and openly accuses him of fudging. He says "the most disappointing part of the Finance Minister's budget speech was his setting lofty targets with no coherent macroeconomic policy framework to back them up. He has relied on two things to make the economic situation look better than it is dubious accounting, gimmickry and a massive effort to obtain foreign loans and grants and use them to cover up failures in undertaking structural reforms. It is important, we bring out the contrast between the fiction produced by the Finance Minister in his budget speech and the ground realities of the structural macroeconomic imbalances that remain deeply entrenched".

One can breath a long sigh. But, this is the environment, and the sentiment, with which Pakistan starts its new fiscal fiscal year 2015 on July1, 2014.

Views expressed by the author are his own and do not reflect the newspaper's policy.

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Source: Khaleej Times (United Arab Emirates)

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