A NEW DIRECTION OR COMPULSIVE ACTION FEDERAL BUDGET 20082009 by

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A NEW DIRECTION OR COMPULSIVE ACTION FEDERAL
BUDGET 2008-2009by

• Syed Shabbar Zaidi, FCA

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TABLE OF CONTENTS

• Continuity of thought - Presentations in 2005,
  2006 and 2007
• Economic Justice in An Unfair World
• The Change Out of Box
• Pakistans Economic ills
• Pakistans Economic Survey-Do we read and
  understand it?
• Poverty and Governance-Will to improve
• We cannot Print US
• Initiatives and New Taxation Measures Direct
  Taxes
• Initiatives and New Taxation Measures Indirect
  Taxes
• New Direction-Manufacturing and Agriculture

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CONTINUITY OF THOUGHT - PRESENTATIONS IN 2005,
2006 AND 2007 (1)

• The following slides represent what I said during
  the post budget seminars in 2005, 2006 and 2007
• These indicators reveal that everything on
  economic side is not alright.
• Pakistans economy and its size can not sustain a
  constant trade deficit of 13.4 bn US.
• The interest rate of around 10 per cent seriously
  affects the investment strategies. Only the
  countries like Brazil, Russia, Turkey and
  Venezuela have such high interest rates. Rest of
  the world is around 5 percent.

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CONTINUITY OF THOUGHT - PRESENTATIONS IN 2005,
2006 AND 2007 (2)

• Increase in consumer prices is a natural
  phenomenon in this situation. Monetary and fiscal
  policy can only provide a temporary relief. With
  these indicators inflation is bound to increase.
• Comparison with China and India is relevant.
  China is our present and future major trade
  partner and India and China are competitors in
  the fields being our forte.
• Notwithstanding the same, on an international
  comparison the position is not that bad. We are
  the only few countries having 6.5 per cent GDP
  growth.
• The conclusion is that we are performing
  reasonably well, however, now there is no time
  and space left as a nation to make mistakes and
  wait for a messiah. There has to be stabilization
  and national consensus.

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CONTINUITY OF THOUGHT - PRESENTATIONS IN 2005,
2006 AND 2007 (3)

• The conclusion made at that time was very
  simple.We can not live on this trade based
  economy.Trade in shares, trade in goods
  .trade in properties.The solutions are
  manufacturing and agriculture and proper
  allocation of resources. The time ahead is
  difficult..But do we have choice..Who will
  bring change? Change will come if we really
  believe in ourselves
• My theme for this year is whether it is New
  Direction or Compulsive Action ?

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ECONOMIC JUSTICE IN AN UNFAIR WORLD

• Economics without ethics is a mutilated science
  
• (Washington Gladden)
• If any norm characterizes international economic
  relations, it is probably that they should be
  carried out on a level playing field. But
  across a wide range of issue areas, including
  trade, finance, investment and migration, the
  economic agents who are involved.including
  states, firms, labor unions and individuals
  ..often complain that the global playing field
  is tilted against them. How to level the field
  has therefore become a topic of widespread
  debate, particularly in the context of an
  international system in which the distribution of
  wealth and power is highly skewed..
• 
  (Ethan B Kapstein)
• This is true amongst the nation and people within
  the nation Ethics and Level Playing field.

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THE CHANGE ..OUT OF BOX (1)

• I make these recommendations because the times
  require something more than business as usual.
  Much of what is recommended is somewhat out of
  box. But staying within the box has brought
  poverty, ignorance, hopelessness, violence, and
  dictatorship.. to far too many
  Muslims around the world. Staying within the box
  has set Islam and West on dangerous and
  unnecessary collusion course. It is time for new
  ideas. It is time for creativity. It is time for
  bold commitment. And it is time for honesty, both
  among people and between peopleThat is what
  I have tried to do in these pages. There has
  been enough pain. It is time for reconciliation.
• (Page 318Islam, Democracy and the West)
• (Shaheed
  Mohtarma Benazir Bhutto)

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THE CHANGE ..OUT OF BOX (2)

• There are those who look at things the way they
  are and ask whyI dream of things that never
  were and ask why not?
• (Robert F Kennedy)
• Why Pakistan cannot be a good country to live for
  our generations?

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PAKISTANS ECONOMIC ILLS (1)

• Immediate issues
• Trade Deficit . You cannot live with over US
  15 trade deficit
• High Interest Rate . Against a low rate over
  the last decade
• Honeymoon for trading . Goods, shares,
  properties, US and morals
• Public Sector Development Programme -
  Unproductive and not properly governed
• Overpoliticised media . No real debate on
  economy
• Increase in Consumer Price Index . Around 30
  percent over the year
• Increase in input prices for industries
• Unemployment . over 50 percent in real terms
• Continuity of structural reforms FBR, SECP,
  SBP, NADRA etc .
• Capacity of Governance

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PAKISTANS ECONOMIC ILLS (2)

• Medium Long Term
• Security State or an Economic reality.. What is
  Pakistan?
• Inappropriate Investment on Education, Health and
  General Administration
• Lack of Consensus on economic issues .. Water
  Management, Royalty to Provinces, etc
• NFC Award Allocation to Provinces
• Does 2008 budget give any direction towards a
  change .. yes and no . If yes then how ?

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• Please ensure that stoves remain
• alive otherwise we can lead to
• drastic results

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POVERTY GOVERNANCE

• Lee Kuan Yew delivered a message on 1st May 1986
  There is no law of nature which provides that
  the life will get better for Singapore next year.
  We have to work to make it better
• The public has to be trained. The tone and tenor
  can be set by the state. Pakistan has around 25
  per cent poverty according to Economic Survey
  2007-2008. Government has realized the gravity of
  the problem and tried to make some interventions.
  
• To make these interventions a success, the
  prerequisite of getting accurate data on poverty,
  giving up the statistical artifacts, abandoning
  the political rhetoric and leaving short term
  election oriented project need serious actions.

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• There should be equal opportunities
• to reap the benefits by all

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PAKISTAN ECONOMIC SURVEY 2008-2009 Do we read
and understand it ?

• Overview, Page VI
• Major contributors to this years services
  growth include wholesale and retail trade,
  banking and insurance, public administration, and
  defence and social services. All these sectors
  have posted strong growth in 2007-2008. As stated
  at the outset, this years growth is not
  broad-based. Infact, three fourth contribution to
  this years growth alone come from the services
  sector while the remaining one fourth
  contribution owed to the commodity-producing
  sector.
• Is it not a blessing in disguise? Can defence be
  a service sector ?
• If we have a growth of around 4 per cent with
  Agriculture and Manufacturing contributing
  substantially we will achieve the objectives.

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YOU CANNOT PRINT US (1)

• Pakistan as a country is continuously short of
  US. At times we rely on US AID (Ayub Khan Age)
  then Afghan War Support (Zia ul Haq) and then War
  on Terror Support (Musharraf).
• We do not want Generals to rule, however, we want
  US to support our economy. This contradiction
  cannot live long.
• In terms of US availability, the country is not
  sustainable. We are too fragile.
• The immediate problem of the country is
  continuous trade deficit.

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YOU CANNOT PRINT US (2)

• This problem has further been aggravated by our
  Dubai philosophy. The definition of service
  sector is fundamentally wrong. How can short term
  trade in stock exchange be termed as investors
  ?
• Federal Budget 2008-2009 has identified the
  problem. However, it is yet to be seen whether it
  is a Directional Change I desire it be so or
  a Compulsive ActionLet us hope for the
  better.

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INITIATIVES AND NEW TAXATION MEASURES (DIRECT
TAXES) (1)

• Branch Profit Tax
• Whitening Scheme
• Non-Residents payment
• Seventh Schedule
• Taxation on Real Estate
• AOP Individuals being withholding agent

• Removal of discrimination. Is it required?
  International practices
• Is it for the past? Do we need anything for the
  past undisclosed income? This will fail
  conceptually if future whitening is not stopped.
  We do not see any action against that Section
  111(4) survives
• Exchange companies Foreign Currency Accounts
• Regressive Amendment
• Step in right direction Rate too low
• Step in right direction avoids discrimination.

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INITIATIVES AND NEW TAXATION MEASURES (INDIRECT
TAXES) (2)

• Sales Tax
• Increase in rate from 15 to 16 per cent
• Federal Excise Duty
• Increase in rate from 15 to 16 per cent on
  Excisable Services
• FED brought in line with sale value

• Regressive in nature
• Not required A compulsion.
• A compulsion
• The most important change brought in law

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NEW DIRECTION EMPHASIS ON MANUFACTURING
AGRICULTURE (1)

• 72 to 75 percent of our population is employed
  directly or indirectly in manufacturing or
  agriculture. The contribution of Agriculture and
  Manufacturing as a percentage of GDP is
  continuously droppingThis means average per
  capita in these sectors is decreasing.
• Service Sector incorrectly defined as above
  contributes to GDP, however, it provides
  employment to only 20 to 25 percent of people.

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NEW DIRECTION EMPHASIS ON MANUFACTURING
AGRICULTURE (2)

• The problems in agriculture are
• Support prices for products
• Complete reliance on nature (rains/ storage, etc)
• Shortage of water
• Expensive Inputs..Fertilzers/Electricity/Pestic
  ides
• Lack of infrastructure..Storage/Transport/Roads
• Lack of credit.Finance CFS not
  agriculturist
• Tertiary industries to agricultureCattle
  breeding/ fishing/ forestry, etc.

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NEW DIRECTION EMPHASIS ON MANUFACTURING
AGRICULTURE (3)

• Please understand agriculture.Do not spoil
  it.
• Federal Budget has taken some steps in right
  direction in this regard, however, this policy
  has to continue forever.

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NEW DIRECTION EMPHASIS ON MANUFACTURING
AGRICULTURE (4)

• Manufacturing
• Manufacturing in Pakistan is faced with the
  problems
• Lack of Support versus Trade on Policy Side
  (Fiscal Regimes)
• Expensive inputs (Cost of Raw Materials)
• Under-invoiced imports
• Availability of financing at cheaper rate
  Subsidized rate or market mechanism
• Availability of skilled labour
• Continued availability of power

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NEW DIRECTION MANUFACTURING AGRICULTURE (5)

• In the budget we dont find concrete action. The
  solutions are
• Industrial Development Fund (Electricity
  Infrastructure) of around Rs 50 billion
• Financing at a lower rate Not above 8 to 9 per
  cent
• Immediate withdrawal of WWF and WPPF

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VALUE ADDED TAX FEDERATION OF PAKISTAN NFC
AWARD

• No country in the world with a VAT system can
  arrange the same on Provincial Basis.
• The fundamental error of taxes on VAT basis and
  the concurrent list as per Constitution of
  Pakistan needs to be adjusted.

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SUSTAINABLE MANUFACTURING BASE MANAGEABLE
INTEREST RATE

• The manufacturing base is eroding seriously due
  to high input pricing no protection against
  imports, including under invoicing and improper
  cascading. All these aspects have been
  identified as an issue in the Budget Documents,
  however, the question is the availability of the
  infrastructure for correction .
• Interest Rate escalation from 10.50 to 12 per
  cent at the initial stage is counter productive
  for industry. We would have to think out of box
  to provide funds to industry at around 8 to 9 per
  cent If this lower rate is available for
  Trading, CFS and Property, then the objective
  will be lost - This is a major job for the future
  monetary policy.

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CAN WE AFFORD IT IMPORT OF BISCUITS CHILDREN
CLOTHING (1)

• The most important directional change is increase
  in Duty upto 35 per cent on 300 Luxury Items.
  We cannot afford to
• Pay US for import of Biscuits and Children
  clothing etc. etc. etc. and
• Our local industry suffers due to this
  consumerism.

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CAN WE AFFORD IT IMPORT OF BISCUITS CHILDREN
CLOTHING (2)

• Duty imposed on
• Dairy products, fruits, chewing gum, chocolate,
  processed food, fruit juices and aerated waters
• Ceramic products
• Air conditioners / refrigerators electric fans
• Toasters, microwave ovens and cooking range
• Televisions
• Furniture and lighting equipment
• Cosmetics
• Sulphonic acid
• CKD / SKD of sewing machines
• Cars / jeeps above 1800 cc

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UNDER-INVOICING TRADE CYCLE (1)
Purchase of Currency Open Market (Exchange
Companies) / Foreign Currency Accounts
(4) Payment to Foreign Exporter
(1) Import of Goods Invoiced Sales
Price US 2. Actual Price say US 5
Pakistani Importer
Foreign Exporter
(3) Receives Rs 375 out of which Rs 136
US2 has been paid through L/C
remaining US 3 to be paid through
undocumented Sources
(2) Supply of goods Say US 5.50
Rs 375
Pakistani Market
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UNDER-INVOICING TRADE CYCLE (2)

• Effects
• US 3 does not form part of economy.
• Taxes are deducted and collected at US 2 or Rs
  126 only
• Hard earned Foreign Exchange remittance from
  exports and services are used for financing
  undocumented economy.
• This policy crime has been identified. Relevant
  amendments made in the respective laws. Now the
  issue is governance and management. If we can
  achieve positive results this will be a blessing
  for the economy.

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FUTURE OF PAKISTANS ECONOMY THE BITTER SIDE

• The current economic trend is leading to
• End of honey moon for Banking Sector Pressure
  on spreads and probability of bad debts
• Pressure on consumerism expensive cars, mobile
  electrical equipments, etc.
• Pressure on Consumer Prices for Food items due to
  the increase in prices for flour, rice, etc.
• Increase in electricity rates
• Increase in charges for other utilities and
• Decrease in demand for exports due to pressure of
  US and European Economies.
• Result This will lead to inflation and move
  towards Recession
• Stagflation. This should not happen.

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FUTURE OF PAKISTANS ECONOMY POSITIVE SIDE

• On the positive side, reliance on agriculture and
  manufacturing will improve Employment levels
  and bring a larger segment of people above the
  poverty line. We do not have any other choice.
• Pressure will be inflicted on those where
  reliance is on Services Sector.
• Nevertheless the value addition in agriculture
  and manufacturing can only arise, where there is
  investment in Human Capital on long term basis.
• Are we ready for it ? In my viewNo. Do we
  have choices . No.

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• .. A heavy stone to handle ..

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• But hope should not die .. This is a great
  country. We will make it admirable

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CONCLUSION

• Budget for 2008-2009 has made some positive
  directional changes, however, this country can
  only prosper if we realize that Pakistan is an
  economic reality not a security state

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