Pakistan’s Federal Budget 2010-11 Analysis – Ahmed Iqbalabadi
Dr. Hafeez Shaikh Presenting Federal Budget 2010-11 at the National Assembly
Pakistan’s budget for year 2010-11 was presented in the National Assembly by Dr. Hafeez Shaikh on Saturday, 5th June 2010. The budget speeches have previously largely been irrelevant as the post budget analysis usually takes a front seat with the autopsy taking place on the posture of the Finance Minister, the “burden on common man”, “lack of relief to the people”, “no let up in perks of the privileged” and even the mistakes of the budget presenter.
What was interesting yesterday was how Dr. Hafeez Shaikh explained the context of the current environment and how the PPP government was coming up with its 3rd budget. The environment he talked about was that of global recession where the unemployment in the US was at a high of about 10.5%, Greece being bailed out by IMF and EU, global giants being wiped out etc to our own challenges of war on terrorism, energy shortages, historic high inflation and also operating under an international framework which requires the government to honor sovereign commitments and protect national credibility. As written a few times by myself, Pakistan has never ever defaulted on its sovereign commitments in face of a lot of question marks on our ability to pay back and negative perceptions about the country. In all, there was no shouting by the opposition during the speech nor was there rhetoric that asked for desk thumping.
Having spent a good amount of time on the context, Dr. Shaikh delineated what the budget was targeting to achieve. The main objectives of the budget are:
- protecting economic recovery
- controlling inflation
- achieving self-reliance through domestic resource mobilization
- targeted social protection regime for poverty reduction
- controlling losses of public sector entities
- reducing unemployment
- improving investment climate
- overcoming energy shortages
Coming to the details of the budget, it is not an expansionary budget but one that is realistic in nature. Size of the budget is PKR 3.259 trillion (USD 38.34 billion) against PKR 2.897 trillion last year. The biggest heads of expenditure are as follows:
- Debt Servicing: PKR 873 billion (USD 10.27 billion) or 26.78% of the total outlay
- Defence: PKR 442 billion (USD 5.2 billion) or 13.56%
- Public Sector Development Program: PKR 663 billion or 20.34%
Against a total outlay of PKR 3.259 trillion, the budget forecasts total revenue at PKR 2.574 trillion, leaving a fiscal deficit of PKR 685 billion which is 4% of the gross domestic product (GDP). It will be met through net external financing of PKR 186 billion, net non-bank borrowing of PKR 332.6 billion and banking borrowing of PKR 166.5 billion.
Another important aspect of the announced budget was the substantial increase of funds to be disbursed to the provinces by the Federal Government. PKR 1.033 trillion will be distributed to the provinces which was PKR 655 billion last year. It was interesting for me to hear “jitna Islamabad kay paas paisa kam hoga utna zaaya honay say bachay ga!”. This is exactly the reason why the PPP government has focused a lot of energies in sorting out the National Finance Commission Award.
Coming to the Revenue side, realistically speaking, though unfortunately, the taxes to be collected are heavily skewed towards the indirect modes of taxation. Out of PKR1.667 trillion, direct taxes are targeted to be PKR 657.7 billion (39.4%) while the indirect taxes of PKR 1.121 trillion shall be 60.6% of the total collection. The composition of indirect taxes is as follows:
- Sales Tax: PKR 675 billion
- Federal excise duty: PKR 153 billion
- Customs duty: PKR181 billion
The government also made a very smart move of deferring the Value Added Taxation (VAT) till 1st October 2010. This will allow the businesses and FBR to prepare for a less difficult move from the GST to VAT regime and more importantly shun chances of unnecessary commotion by people who will be opposed to such a move.
In all I would consider the budget to be realistic in nature. We are, after all, passing through a difficult phase of our existence. We are not being bailed out by other nations and institutions like economically mismanaged states in the Western Europe. Our total budget of USD 38 billion is just 3.9% of the size of the stimulus announced by the EU to bail out the troubled states. Imagine, if we were given an additional USD 38 billion in form of development program managed by the developed economies. They could come in to our country, invest their monies and technologies and try to capture a market that is of 175 million. Imagine the potential we have. How many dams we can make. How many more irrigation canals can be created. How much can we cover our energy shortages. That is our side of the story. Imagine how much wealth they could generate in Pakistan. That is for them to realize and that is what we have to portray.
The world has to realize the difficulty Pakistan is facing and the people of Pakistan have to present these hard facts to the world. We can only progress if we harness our energies towards the betterment of our country and that can only begin to happen when we present a softer and positive image of Pakistan to the world.
At a time when the world’s economic recovery is fragile, it would be too much to expect Pakistan to make huge strides. The shoots of recovery are still not strong enough for us to feel confident. One should not look at whatever little progress we have made so far negatively though, given the circumstances in which Pakistan is operating. With the energy crisis slowing industry, precarious security situation hampering foreign direct investment (FDI), millions being spent on providing compensation and support for the war on terror affectees, and a general focus of the entire state machinery on the terrorist threat added to the usual problems should be enough to expect a bleak economic scenario. If, in comparison to 1.2 percent last year, the GDP growth has been 4.1 percent, it is not entirely disappointing…
http://dailytimes.com.pk/default.asp?page=201066\story_6-6-2010_pg3_1
A budget speech with a difference —Imtiaz Alam
Inflation cannot be brought down simply by fiscal measures, although they are very crucial. Without improving security environment, lowering of interest rates, overcoming the energy crisis, reducing the cost of production and increasing exports, we cannot achieve and sustain a higher growth rate in manufacturing, services and agriculture
I had my doubts that the economist-finance minister would be able to cope with the enormous task of reconciling the political demands with the economic constraints while not letting “modest upturn” slip away from his grip. The budget speech by our new finance minister, Dr Abdul Hafeez Shaikh, was exceptional — realistic, educative and without a rhetoric. Being an able economist he focused on resource mobilisation, reduction in losses, current expenditure and inflation while offering relief and targeted subsidies to those who deserved it most. The real test of the minister was on VAT, which he wisely substituted by reforming the General Sales Tax (GST). Indeed a good beginning in difficult times.
The finance minister was right in demystifying the overwhelming myth of the budget being a panacea of all malaises or an instrument of all miseries. He rightly emphasised the 24 hours for 365 days management of economy encompassing greater areas than covered by the income and expenditure measures in a budget. No doubt, thanks to the belt-tightening measures taken in the last two years, there is some measurable recovery reflected in lowering of inflation from 25 percent to 11.5 percent (July-April), although of late there is upward swing, fiscal and current account deficit, 5.1 percent and 2.8 percent of GDP respectively, and some symptoms of growth in the areas of large scale manufacturing (4.4 percent) and services (4.6 percent). Even if a revised GDP growth rate of 4.1 percent is marginally exaggerated, the fact remains that the outgoing year is better than the last fiscal.
The key objectives set by the finance minister are well directed: a) consolidating recovery while tackling macroeconomic imbalances, security and coping with international financial crisis; b) checking inflation by reducing borrowing and taking other measures; c) self-reliance through resource mobilisation by intelligently reforming the GST as a substitute of VAT by withdrawing exemptions, except education, health, food items and on a business with a turnover of Rs 750,000; d) protecting the poor by expanding Benazir Income Support Programme (BISP), targeting subsidies towards the poor, Rs 25,000 health insurance per poor family, food security for 13,000 villages, Rs 10,000 internship for post-graduates, 100-days job for 200,000 unskilled youth, raising salaries and pensions, etc; e) enabling environment for private investment. A challenging task on whose performance the finance minister and his able team of economic experts will be adjudged by the end of the next fiscal.
Mr Shaikh also dwelt upon the damage being done to the economy by the energy shortages, which is equal to 2 percent of the GDP. The growth rate cannot go up without addressing the energy shortages in the medium and long term. Although the minister quite critically spoke about the haemorrhage being caused by the public sector corporations to the national exchequer to the tune of Rs 235 billion, which is much higher than Rs 165 billion expenditure on civil government, he did not indicate the measures to stem worst mismanagement of PEPCO, KESC, PIA, Pakistan Steel, Railways and other public sector corporations. He must put them in order. The austerity measures, such as freezing the federal government’s expenditure, are not enough. After the adoption of 18th Amendment, all those ministries and divisions that come under the Concurrent List must be abolished and the concerned civil servants sent to the provinces to run the same. Other measures to improve economic governance, like introducing automated system of allocations, are also not enough unless he takes bold measures to reform the Federal Bureau of Revenue (FBR) and public sector corporations.
Although setting a target of keeping fiscal deficit at 4 percent of the GDP seems to be ambitious, it will depend mainly on expanding the GST in collaboration with the provinces, strictly restraining domestic and external borrowing for budgetary support and controlling the losses of public sector corporations. Similarly, inflation cannot be brought down simply by fiscal measures, although they are very crucial. Without improving security environment, lowering of interest rates, overcoming the energy crisis, reducing the cost of production and increasing exports, we cannot achieve and sustain a higher growth rate in manufacturing, services and agriculture. Price-drive incentive for agriculture is also not a sustainable impetus; it should be supplemented by measures to increase per acre yield and other agro-related businesses, such as dairy production, horticulture, etc.
Most remarkably, the government has stood its ground to introduce VAT. The finance minister outmanoeuvred the critics by keeping GST at a reduced aggregate rate of 15 percent while withdrawing all exceptions, except on items and services essential for the people. He rightly took the necessary time for its implementation and to bring the provinces on board. No doubt this budget reflects a most significant devolution of financial resources to the provinces, which has brought the provincial government under greater fiscal responsibility. If the provinces do not improve their governance, use resources prudently and efficiently with right priorities the objective of devolution to benefit the people will be lost. The people and the media must watch out for provincial budgets and their allocations. After the substantial transfers to the agriculture through higher support prices, this is the time to introduce the agricultural tax. This will be a great opportunity for Punjab Chief Minister Shahbaz Sharif to set the ball of agro tax rolling for other chief ministers to follow.
The measures announced by the finance minister are very much within the parameters of structural adjustments in the fiscal sphere and as emphasised by the IMF and rightly so from the perspective of a lender. They help to keep us live within our means, which we are not accustomed to. But unless we address a low economic equilibrium and restructure the basic structure of our productive sectors and nature of exports we will not get out of the trap of low growth and macroeconomic imbalances. Ignored for too long, our human resources and physical infrastructures need to be improved and developed. Greater focus must be centred on the human resource development through better, meaningful, scientific and useful education and by providing skills to the young labour force. Much is being said about the scarcity of water and energy, not much is being done for conservation and reduction in waste and losses.
No doubt the finance minister has a tremendous task at his hand and he needs to improve things in all spheres of our economic life with the help of leading economists who are part of his team. But he must focus on six areas: a) energy; b) reforms of public sector corporations to eliminate the losses; c) substantially promoting investment and raising tax-GDP ratio; d) human resource development at a mass scale and qualitatively; e) poverty alleviation through employment generation, better education and healthcare (expansion and diversification of Benazir Income Support Programme); and f) reduction of defence expenditure and debt-GDP ratio. Rest will follow.
Imtiaz Alam is Editor South Asian Journal. He can be reached at imtiazalampak@yahoo.com
http://dailytimes.com.pk/default.asp?page=201066\story_6-6-2010_pg3_4
The budget is rich oriented neglecting the real poor people’s pathos.
Highlight of this year budget is the record increase of provinces quota . many people feared when NFC award announced that it would be almost impossible for federal govt to allocate the huge amount of money to province . there is now huge responsibility on provincial government’s shoulders. lets hope the provinces successfully handle this increase responsibility .
its a balance budget , our fm is really smart guy i hope very soon economic condition is stable and more investment opportunities chances through effort discover. future is depend our best future planning our weak areas are lake of national sprite we need for worked hard our country perceptions ,image building, investment friendly nations,peaceful nations, promotion of culture ,democrats ,secular,improve of quality productions, proper marketing ,good presentation respect all religions and good relations of neighbors then we convert weaknesses to strengthener we are stand on developed countries and we have achieved a easily goals .
Those Media channels, especially Geo News, where their anchors were saying shit about the budget in favor of the poor people of Pakistan, and that the government has raised the taxes and all should first pay the due sales tax withheld by them to the FBR so that government may give subsidies and start development projects for the poor people they falsely claim to represent.
Geo is a big time tax chor!
this is totally one side budget.the poor people as well as midle class people of pakistan strongly reject this differece.
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