ISLAMABAD, 25 June — The Pakistan budget for fiscal 2002 provides more incentives for investment and overseas Pakistanis, but further belt-tightening for residents. Finance Minister Shaukat Aziz while presenting the budget for fiscal 2002, that starts July 1, said “without belt-tightening the country cannot get out of its present financial troubles.” No one disagrees. The only point of disagreement, however, is why shouldn’t the elite class, also offer sacrifices rather than only the middle and the lower class? “The new budget aims at containing the fiscal and balance of payments deficits, and help revive the economy,” Aziz says. This, he thinks, should also work toward repaying $37 billion in foreign and Rs. 3.5 trillion in domestic debt.
However, the government must confess, it was unable to turn the economy around in six months as it promised when Gen. Pervez Musharraf took over government Oct. 12, 1998. Failing to do so in the last 20 months, its now hoping to do it by 2004.
The general proclaimed himself as president last Wednesday. His spokesman said, as of now, he plans to continue in this office for five years. The Supreme Court has told the government to hold national elections by October 2002 and return the country to democracy. Will that happen? Will the economy take a turn for the better under these circumstances? However, Aziz says the GDP growth in the drought-stricken outgoing fiscal 2001 that ends June 30, was 2.6 percent — the lowest since 1993 when the country was hit by massive floods. Aziz, in his budget, has set a target of 4.5 percent GDP for fiscal 2002.
The size of the new budget is Rs. 752 billion — nearly Rs. 58 billion higher than last year. Of this, Rs. 491 billion are expected from internal and Rs. 261 billion from external resources.
The villain of the Pakistani economy — debt repayment — will gobble up Rs. 329 billion, the expenditure side of the budget shows. Defense, that continues to take the second biggest bite into the budget, will take away Rs. 131 billion. It has been “kept flat” at last years’ level, in real terms, but without reducing “the level of deterrence,” Aziz says. The civil administration will cost Rs. 80 billion. Development projects will cost Rs. 130 billion.
While the income tax exemption level for individuals has been raised from Rs. 40,000 to 60,000, banks and corporate business will also benefit from reduced levy of income tax. The banks, paying one of the highest income tax rates, have particularly been demanding a tax cut. They get a reduction of 8 percent, as the rate has been lowered from 58 percent to 50 percent. The hoped-for major shift from indirect to direct taxes has not happened substantially. Its evident from the fact that out of Rs. 457 billion of revenues, Rs. 307 billion will come from indirect taxes. Coming on the top of the utility price hikes in fiscal 2001, three to four in each case for electricity, gas, and petroleum, additional 9.2 percent increase in electricity and 20 percent in gas price and 9.4 percent to 14.48 percent in oil, as well as the ongoing predominance of the indirect taxes means that the middle and the lower middle class will continue to suffer.
Tax reliefs and incentives are provided in income tax, customs duties and sales tax. The latter two aim at lowering the cost of production, and thereby, that of finished industrial goods. But, will the government stay its hand in raising the utility prices again and again, in the coming year? These are telling heavily on the industry, and all consumers, and rapidly adding to the cost of production. On this will also depend the future consumer price line, and the prospects of exports.
Incentives are provided for investors including those putting their money in stocks. New products are being developed by the National Investment Trust (NIT) especially for small and medium size investment in the government-backed paper by the overseas Pakistanis who wish to gain upto 12-13 percent annual profit and still stay liquid.
The private sector industry and agriculture will get more bank credit, in order to raise production of these vital sectors. The budget includes benefits for Pakistanis working overseas.
The Board of Investment is also streamlining itself as a facilitator to help expatriate Pakistanis to invest in their homeland. Expats feel insecure and unaware of where and how they can bring in their investment. Aziz says the government is providing special incentives for all three groups of overseas Pakistani, including low-income workers, the middle-income class, and the potential investors.
The Foreign Currency Accounts (FCAs) have been protected under a new law allowing resident and non-resident Pakistanis to maintain such accounts “free from any possibility of freezing or seizure,” Aziz assured.
Duty-free allowance has been increased for Pakistani expatriates from $450 to 700 for those who remit $2,500 to their families in a year. The new allowance for those sending home $10,000 annually will be $1,200. A reduction of customs duties on 4,000 imported items is intended to what Aziz says “generate private business activity, and to discourage smuggling.” Although no new taxes are claimed to have been introduced, but changes in rates and duties will provide the government with an additional Rs. 5.7 billion. It is also claimed, the imposition of a 20 percent import duty on raw materials will have no adverse effect. It is stated to have been levied in consultation with small and medium enterprise owners, as many of these raw materials were also being smuggled.
A project of interest not only to the under-developed Balochistan province, but to the Gulf states, located just across the narrow strip of the Gulf of Oman, is the plan to establish an Export Processing Zone at Gwadar Port, to attract investment.
Large facilities for development of fisheries will also be located there. But all is not honey and roses. The prices of blended and imported tea will rise by Rs. 10 to Rs. 15 a kilogram, as a result of a 5 percent increase in import duty that takes its rate to 30 percent.
Textile industry that brings in $6 billion or 60 percent of all export earnings, says its value-added products have been “ignored” in the budget. Pakistan Cloth Merchants Association has, however, welcomed reduction of import duty on 4,000 out of 6,000 items as it will “increase industrial activity.” Shaikh Manzar Alam, chairman, Korangi Association of Trade and Industry says, the budget does not provide for “ the exchange rate stability as the rupee has lost 20 percent value against the dollar during the current fiscal.” Alam also said raising sales tax from 15 percent to 20 percent on 200 raw materials, and increasing the sales tax from 1.5 percent to 3 percent on sales of goods to unregistered persons will have “a negative impact on the economy.” The budget has been criticized for “focusing on removal of tariff and non-tariff barriers, against imports, ranging from basic raw materials to finished products,” but, “providing nothing to protect the domestic industry.”
Exporters and industrialist now pin their hopes on the governments trade policy for fiscal 2002 that is likely to be unveiled in the next few days, for “ incentives to expand exports and meet challenges of the post-WTO-regime.”
Atiq Mir, convenor, Supreme Council of Traders says, various budgetary provisions will “unleash a new wave of smuggling.” A spokesman for cottage industries said, while small and medium enterprises are “ a top priority for development,” in the budget, it has “neglected the cottage industry” as nothing has been provided for its promotion.
Pakistan Poultry Association has thanked the finance minister for reducing import duty on soybean for chicken feed. Leasing Association of Pakistan said the new incentives and concessions for leasing, will expand the leasing operations.
Haji Taslim Qureshi, chairman, Pakistan Tinplate Merchants Association, appreciated the abolition of the regulatory duty on import of tinplate. But, he said the import duty on tinplate, the main raw material for packaging, should also have been reduced.
Yaqub Karim, chairman Pakistan Soap Manufacturers Association, said laundry soap price will be cut, following a reduction in import duty on its raw material, despite a 5 percent increase in sales tax on the raw material. Syed Jamshed Rizvi, chairman, Association of Builders and Developers, welcomed the budget for a reduction in import duty on construction equipment.
Keeping all this in view, the question now is: will it help the economy turn around? Will it dent the prolonged recessionary situation? Will it bring the economy out of the trough, it has been in since the 1990s?