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Pak budget: old wine in new bottle

Unfortunately in Pakistan, the more things change, the more they remain the same. The announcement of Budget FY00-01 clearly depicts this tendency. Against all expectations, the budget turned out to be more like the ones presented by the previous democratic regimes of Sharif and Benazir.

Benazir during her budget tried to levy more taxes. Sharif presented his first tax-free budget. The military-led government of Musharraf has followed a middle path of financial planning.

This budget is the first by the military government that ousted the democratically elected administration of Nawaz Sharif in a coup last year, and it aims to convince international lenders to resume lending to the country.

The government last Saturday announced the Rs 698 billion ($ 13.4 billion) budget for fiscal 2000-2001. It plans to reduce the deficit to Rs 162 billion, or about 4.6 per cent of Pakistan's gross domestic product. The government estimated the fiscal 2000 deficit at Rs 193 billion.

Pakistani businessmen, analysts and economists expect more mini budgets in the coming months as the military government had not explained from where they will generate revenues to meet the collection target set for new fiscal year.

''The budget document did not explain from where the government will generate Rs 80 billion to meet the collection target,'' said Arif Habib, chairman, Karachi Stock Exchange.

The government has projected gas development surcharge of Rs 15 billion for fiscal 2001. The surcharge includes revenues from the distribution and extraction companies. ''To achieve this target 10 per cent to 15 per cent tariff revision is needed,'' said Mohammad Suhail of IP Securities in Karachi.

''A number of things are missing in the budget specially how the increased revenue will be collected and from where. It looks the power tariff and gas prices were not touched to avoid criticism on budget but they will be increased in near future," said Arshad Arif, head of research at ABN-AMRO Securities.

He said the government finds it easy to increase revenue by imposing 5 per cent surcharge on corporate tax instead of improving tax base and tax machinery.

The revenue collection will see an increase of 22.3 per cent to Rs 435 billion over the last year's estimates of Rs 356 billion.

Finance Minister Shaukat Aziz acknowledged that the defence budget has effectively gone up by about 10 per cent because military pensions will now be drawn from the budget allocations given to the civilian government. Aziz showed defence spending as having been decreased by approximately Rs 10 billion in the federal budget 2000-2001 announced on Saturday. But at a post-budget press conference in Karachi, Aziz admitted that military pensions had been removed from the defence budget. He said this had been done because the pensions had become unwieldy, adding that there was no hidden agenda.

Defence has once again come out on top. Contrary to earlier assertions, Aziz accepted Sunday that the country's defence budget had actually been increased against earlier claims by the government that spending would fall 6.9 per cent in the next fiscal year to Rs 133.5 billion from Rs 143.4 billion. The figures released in the budget on Saturday evening did not include military pensions in the defense budget as had been the practice in previous years.

The largest spending item outside of interest payments on debt was the defense budget which rose 11.3 per cent after some changes in the way it was calculated originally confused spectators on whether it was cut or not.

The finance minister also announced some measures to promote the information technology sector and software development in the country, including a virtual tax-free environment for the next five years.

The measures to promote e-commerce in the country include permission to software companies to maintain 25 per cent of their earnings in foreign currency, to enable them to carry outpurchases of hardware, conduct marketing initiatives and other tools needed to develop the industry.

He also announced the establishment of a special department at the State Bank of Pakistan to deal with e-commerce, loans for software companies on easier terms.

During the announcement of the federal budget, the finance minister said the development of information technology was the third most important priority of the government, after debt servicing and poverty alleviation.

Aziz said that more details would be made available in the information technology action plan, which he said would be announced in July.

Syed Asim Zafar, a director of Shahbaz software exporting company said the country will see an information technology revolution in the coming years. The abolition of customs duty on import of computer parts and other incentives for software exports will jack up the exports which are dormant at present. He added that the exports are peanuts as compared to Indian exports of over $2 billion per annum.

Under a three-year plan, inflation is seen at five per cent while aiming for a four per cent level in the next three years and bring GDP growth to six per cent from 4.5 per cent, while reducing the fiscal deficit to 3.2 per cent. The three-year plan would see Pakistan reduce poverty, become more information technology focused, increase foreign investment, boost exports to bring the current account deficit to 0.5 per cent of GDP from 2.4 per cent in the current fiscal year and have 12 weeks foreign exchange import cover from the current four weeks.

"This is not an unrealistic target, but you can call it optimistic," said Nadeem Naqvi, head of research for International Asset Management Co., an investment firm. Naqvi said the emphasis on collecting taxes from the black economy, which according to the World Bank may be 50 per cent of the total economy, means the government has planned to tap these sources to increase revenue collection.

Former chairman of Karachi Stock Exchange Yasin Lakhani said imposition of five per cent surcharge on corporate firms was a wrong move and would hit business activities.

He said the Karachi stock market's demand for extension of tax on bonus shares, which is due to expire on June 30, 2000, was accepted by the government, but just for one year.

He, however, hailed the abolition of wealth tax and further cut in profit of the National Savings Scheme by 1.5 per cent. "This will channelise funds into the stock market," he said. Overall, Lakhani said, the budget proposals, if followed strictly, would definitely help revive investment confidence, boost exports and expand the tax net.

Dr Akmal Hussain believe that being a revenue-oriented exercise, the federal budget is trading on a knife edge, as economic success comes by enhancing both taxes and private sector investment and reducing dependence on burgeoning foreign loans. He said non-tax revenues have dropped this year, from Rs 131 billion last year to Rs 120 billion this year.

"It looks the budget is a good effort to bring back the economy on track. The most appreciable is the abolishment of wealth tax which has been a demand of the business community for long time," said Mohsin Aziz, chairman, All Pakistan Textile Mills' Association.

He said the move will bring more money in to the economy as there is no fear of tax on wealth.

He said 10 per cent tax credit on importing machinery to expand existing units would go a long way in attracting new investment. "The textile industry as a whole is undergoing radical changes. It has already opened up L/Cs to the tune of $ 400 million under the Balancing Modernisation Replacement, or BMR, scheme.

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