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A NEW DIRECTION OR COMPULSIVE ACTION FEDERAL BUDGET 20082009 by

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Title: A NEW DIRECTION OR COMPULSIVE ACTION FEDERAL BUDGET 20082009 by


1
A NEW DIRECTION OR COMPULSIVE ACTION FEDERAL
BUDGET 2008-2009by
  • Syed Shabbar Zaidi, FCA

2
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

3
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.

4
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.

5
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 ?

6
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.

7
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)

8
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?

9
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

10
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 ?

11
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12
  • Please ensure that stoves remain
  • alive otherwise we can lead to
  • drastic results

13
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.

14
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15
  • There should be equal opportunities
  • to reap the benefits by all

16
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.

17
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.

18
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.

19
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21
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.

22
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

23
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.

24
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.

25
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.

26
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

27
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

28
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.

29
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.

30
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.

31
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

32
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
33
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.

34
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.

35
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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37
  • .. A heavy stone to handle ..

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39
  • But hope should not die .. This is a great
    country. We will make it admirable

40
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

41
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