Pakistan’s national budget for fiscal 2003 is investor friendly, allowing several tax breaks, but has levied some new ones in order to meet the challenge of shrinking government revenues.
The new taxes and concessions will leave the government with a net loss of Rs. 0.468 billion. The new budget provides Rs. 742 billion spending in fiscal 2003, down from Rs. 773.3 billion in 2002. Defense spending will be Rs. 146 billion down from the actual of Rs. 151.6 billion in 2002.
But Finance Minister Shaukat Aziz says defense spending will be raised, if so required, and if the military confrontation between India and Pakistan continues. The government projects tax collection in 2003 at Rs. 460 billion up from the actual of Rs. 414 billion in 2002. The budget will be balanced with the help of foreign assistance and domestic borrowing.
Aziz has hammered out a decent budget for fiscal 2003 that starts July 1, in a difficult regional environment where more than a million troops from India and Pakistan are still standing on the borders in an eyeball-to- eyeball confrontation, while South Asia is only slowly moving out of its recession that had started in late 1990s.
But Aziz’s difficulties are compounded and his hopes for the economy’s turnaround dimmed. The less-than-placid domestic environment, no letup in violence and no significant domestic and foreign direct investment arriving added to Aziz’s difficulties. Ironically domestic violence, particularly against foreign personnel and targets, is growing under the nose of a military government at a scale that Pakistan has never seen before. Ironic again is the report on the day Aziz was presenting his budget, which said that in the last five weeks 13,500 foreigners have left Pakistan.
The exodus started after the May 8 bombing in Karachi which claimed lives of French naval technicians, and accelerated following the June 14 explosion in front of the United States Consulate General in Karachi — the nation’s industrial, financial and business hub.
The finance minister, however, is right to claim that he is starting the new fiscal with “an investor friendly budget.” Rather the budget has also somewhat reduced the overall tax burden by a lower maximum tariff, corporate and personal income tax, together with minimizing the discretionary powers of tax officials and personal contact between taxpayer and the tax collector.
In addition, it proposes to eliminate a host of irritants that have continued to keep the cost of doing business high. The cost of business and investment finance has been reduced by restricting government’s demand for bank credit. The State Bank of Pakistan (SBP), the central bank has reduced its discount rate from 14 to nine percent in less than a year, whole Treasury Bill (TB) has also been reduced to bring about an easy monetary situation. The commercial banks have a good deal of liquidity to lend money, while the rate of export finance has been slashed in order to push exports past the stagnant annual volume of $9.0 billion.
The inflation is down to 2.6 percent. It is projected to stay around 4 percent during fiscal 2003. The exchange rate is quite stable, despite minor hiccups at times. The interbank rate of the dollar is around Rs. 60.10, while kerb rate is moving between Rs. 60.20 to Rs. 60.40. The forex reserves are at an all time high of $6.0 billion. “All this points out to an improved enabling environment, necessary for investment promotion,” Aziz says. But, the need of the hour is for President Gen. Pervez Musharraf to stem the tide of violence, protect business people and the common man and help the economy move forward. Is he going to do it — soon — and succeed?
The budget calls itself investor friendly because a number of taxes have been reduced, customs duties curtailed and the maximum tariff rate brought down from 35 to 30 percent, problems about labor benefits payable by employers and other irritants to business have been removed. Corporate taxes and tax payable by private limited companies have been brought down to 35 percent. The banks will pay 47 percent tax on their profit, compared to the existing 50 percent.
Tax-free income of all people has been raised from Rs. 60,000 to Rs. 80,000 which, when other perks are included, will mean that income and benefits totaling Rs. 120,000 will be tax free.
Incentives for the capital market include reduction in withholding tax on commissions and brokerage income from 10 to 5 percent. Withholding tax on interest on securities has been slashed from 30 to 20 percent. Withholding tax on bonus shares has been withdrawn. Withholding tax on income from mutual funds, approved by Security and Exchange Commission of Pakistan, (SECP) has been dropped.
Incentives will also be provided for mergers and amalgamation of companies and factories. These include transfer and carry forward of losses of merged institutions, tax admissibility of expenses on mergers, continued availability of unabsorbed depreciation and admissibility of different tax rates for banking and non-banking operations. Rationtionalization of depreciation allowances, incentives for housing finance and construction, concessions for pension funds, concessions on depreciation for purchase of cars and customs duty rates on 2,500 items have been reduced. Rates for 4,000 items were reduced in fiscal 2002 which had helped reduce the cost of production that helped the local industry and expanded exports.
Of particular interest to expatriate Pakistanis is reduction of custom duties on new cars imported into Pakistan. Cars upto 1,000cc will pay 75 percent duty down from 100 percent, cars upto 1,500cc will pay 100 percent duty down from 120 percent, cars upto 1,800cc will pay 125 percent duty down from 150 percent, cars over 1,800cc will pay 200 percent duty down from 250 percent and motorcycles will pay 75 percent duty down from 105 percent.
Expatriate Pakistanis’ duty-free baggage allowances has been raised from $700 to 800 for those remitting home over $1,500, and from $1,200 to $1,500 for those remitting over $10,000.
Finance Minister Shaukat Aziz also lauded the role of expatriate Pakistanis in building up the country’s economy. He said: “Fiscal 2002 was a challenging year which the nation faced with determination and fortitude.” It was, he said, in such circumstances that “the most significant support came from the expatriate Pakistanis,” working in Saudi Arabia, Gulf, and North America. “The expatriates,” he said, “doubled their home remittances from $1.1 billion in fiscal 2001 to $2.2 billion in fiscal 2002.”
“This showed their confidence in the future of Pakistan and its economy. They reduced the use of ‘hawala’ and started sending more remittances through normal banking channels. They also started investment in this country where the process of de-dollarization is under way.” The confidence of expatriates and foreign investors in Pakistan was helped buy a comfortable exchange rate, and a stable Pakistani rupee. “In fact the exchange rate was so stable and the rupee became so strong that it had to be checked from rising further because a continuous rise in the value of the rupee against the dollar could have made Pakistani goods more costly to foreign buyers and our exports could have been hurt. Pakistanis working abroad are a great national asset and they played a pivotal role for Pakistan’s economy,” Aziz said. The budget for the new fiscal puts its sights higher for the economy compared to its actual performance in the just-ending fiscal 2002.
Development spending by the government has been raised to Rs. 134 billion. The amount includes 40 percent for education, medicare and poverty alleviation. It will include Rs. 23.7 billion for water and power sector, Rs. 15 billion for highways and roads, Rs. 7.0 billion for railways, and Rs. 39 billion for human development. Depending on grants from friendly countries special development projects totaling Rs. 10 billion will be added to development spending, raising the total to Rs. 144 billion. That should boost economy. Spending in 2002 was Rs. 137 billion.
One of the high priorities has been to contain the budget deficit, as demanded by IMF and other International Financial Institutions (IFIs). The budget deficit for 2002 was 4.9 percent, to be reduced to 4.0 percent in 2003.
The 2003 growth target has been set at 4.5 percent, up from the actual of 3.6 percent in 2002. Despite Sept. 11, “we managed to attain 3.6 percent that is very encouraging compared to other countries of the region including India,” Aziz says. The growth this year was helped by improved performance by agriculture as farm output rose 1.4 percent compared to minus 2.5 percent growth in the drought-stricken 2001. Manufacturing recorded a 4.4 percent growth down from 8 percent in 2001. If there was no effect of the continuing drought, the growth in 2002 would have reached a level of 4.3 percent.
Even though more and more Pakistanis continue to fall below the poverty line, the government claims, the per capita income grew 3.2 percent in 2002. The increase in inflation was contained to 2.5 percent — “the lowest in three decades,” as Aziz claims.
But this is disputed by a large number of independent economists and analysts who watch the price line in food, consumer goods and consumer durables markets. Aziz also maintains, “the government expects inflation will stay below 4 percent in fiscal 2003,” compared to the official estimate of 2.5 percent in 2002.
The balance of payments and forex situation was on the mend during 2002. Islamabad expects this positive trend will continue. The current account balance, for the first time in years, is surplus by $2.0 billion.
The forex reserve stand at $6.12 billion. It includes private dollar deposits of close to a third of the total. The foreign debt has declined from $38 billion to $36.048 billion. There is, apparently, no serious pressure on the exchange rate. Exports have reached $9.0 billion, the same as last year, contrary to apprehensions of a major decline following Sept. 11 situation and the world recession, Aziz says.
As the economy continues to slowly look up, will the new budget, and the incentives it provides, will prove to be a shot in the arm for domestic and foreign private investment?