Impact Ofbudget On Economy

The Income Tax Bar Association - Khi

IMPACT OFBUDGET ON ECONOMY Tuesday, 16 June 2009 – Hotel Regent Plaza, Khi

Budget 2009-2010 at a glance

REVENUE Tax Revenue Direct Taxes Income tax Others Indirect Taxes Customs Sales tax Federal excise Carbon Surcharge on POL/CNG Others

1

(Rupees in Billions) Budget Revised Budget Estimate Estimate Estimate 2008-09 2008-09 2009-10

477.0 19.0 496.0

443.3 17.7 461.0

170.0 472.0 112.0 1.4 755.4 1,251.4

145.0 457.0 116.0 1.4 719.4 1,180.4

       

536.2 21.1 557.3   167.2 515.6 137.4 134.0 1.5 955.7 1,513.0

Budget 2009-2010 at a glance

REVENUE Non Tax Revenue Less Provincial Share Net Capital Receipts External Receipts Self Financing of PSDP by Provinces Change in Provincial cash balance Privatisation Proceeds Bank Borrowings

2

(Rupees in Billions) Budget Revised Budget Estimate Estimate Estimate 2008-09 2008-09 2009-10 427.8 1,679.2 568.3 1,110.9 221.3 300.2 124.2

603.2 1,783,6 559.9 1,223.7 187.2 367.4 123.7

955.7 1,513.0 655.2 1,371.5 190.5 510.4 173.0

78.9

37.7

72.9

25.1 149.0 2,009.8

1.3 146.0 2,087.0

19.3 144.7 2,482.3

Budget 2009-2010 at a glance

EXPENDITURE Current Expenditure General Public Services Debt Servicing Others Defence Affairs & Services Economic Affairs Others Developmental Expenditure PSDP Others Total Expenditure

Budget Estimate 2008-09

619.4 310.1 929.5 296.1 201.1 66.5 1,493.2 472.7 43.9 516.6 2,009.8

(Rupees in Billions) Revised Estimate 2008-09

751.6 381.0 1,132.6 311.3 136.7 68.6 1,649.2   378.9 58.9 437.8 2.087.0

3

Budget Estimate 2009-10

  779.6 409.5 1,189.1 342.9 84.9 82.3 1,699.2   646.0 137.1 783.1 2.482.3

Key objectives for the Budget 2008-09

Restore economic stability through:

 Protect vulnerable groups through targeted program of cash transfers BISF – High inflation  Focus on Agriculture and Manufacturing sectors to enhance productivity and competitiveness Agri = no major change Manufacturing = Declined  Restore Investors confidence Declined

4

 Reduction in Fiscal and Current Account deficits - Fiscal 7.6 – 4.3 - Current 8.5 – 5.1 - Trade 9.3 – 6.5  Rationalization of subsidies Budget 295 billion to 252 billion  Building Foreign exchange reserves US$ 12 billion to US$ 11 billion  Remove key bottlenecks in supportive infrastructure for spurring growth Little progress  Increase social sector allocations to improve social indicators PSDP produced by about 100 bill.  Significant addition to low cost housing for low income groups Little progress

Composition of Sector GDP Growth 2007-08 Economic Survey 07-08 08-09

2008-09

GDP (FC)

5.8

4.1

2.0

GNP (FC)

6.1

4.1

2.6

Commodities Producing Sector

3.2

1.4

0.2

Agriculture

1.5

1.1

4.7

Major Crops

(3.0)

(6.4)

7.7

Minor Crops

4.9

10.9

3.6

Livestock

3.8

4.2

3.7

Manufacturing

5.4

4.8

(3.3)

Large Scale Manufacturing

4.8

4.0

(7.7)

Small Scale

7.5

7.5

7.5

Construction

15.2

(3.9)

(10.8)

(14.7)

(22.0)

(3.7)

Service Sector

8.2

6.6

3.6

Finance and Insurance

17.0

12.9

(1.2)

Electricity, Gas Distribution

5

Sectoral Contribution to GDP Growth Sectoral Contributions to the GDP growth (Percent Point) 2006-07

2007-08

2008-09

Agriculture

0.9

0.24

1.00

Industry

2.3

0.45

-0.92

Services

3.6

3.41

1.92

Real GDP

6.8

4.10

2.00

6

7

Inflation 2007-08

2007-08 (Jul-Apr)

2008-09 (Jul-Apr)

Overall inflation

12.0

10.2

22.4

Food inflation

17.6

15.0

26.6

Non-food inflation

7.9

6.8

19.0

Core inflation

8.4

7.5

17.8

SPI (Sensitive Price Index)

16.8

14.1

26.3

WPI (Wholesale Price Index)

16.6

13.7

21.4

8

Savings & Investment

(Percent of GDP) Description

2005-06

2006-07

2007-08

2008-09

Total investment

22.1

22.5

22.0

19.7

Changes in stock

1.6

1.6

1.6

1.6

Gross fixed investment

20.5

20.9

20.4

18.1

- Public Investment

4.8

5.6

6.9

4.9

- Private Investment

15.7

15.9

15.2

13.2

Foreign Savings

3.9

5.1

8.5

5.3

National Savings

18.2

17.4

13.5

14.3

Domestic Savings

16.3

15.6

11.5

11.2

9

Subsidies

 

(Rupees in Billions) Budget Revised Estimates Budget 2008-09 2008-09 2009-10

Current WAPDA

75

93

63

KESC

14

19

4

TCP (Wheat & Sugar)

26

27

30

USC

3

4

4

140

70

15

2

7

4

260

220

120

35

32

10

-

-

2

295

252

132

Oil Refineries / OMC / Others Others Development Import of Fertilizers Benazir Track Support Program Total Subsidies:

Key objectives for the Budget 2009-10

Provide protection to poor and vulnerable against the current economic downturn.

Revive manufacturing and industry, especially export oriented industry.

Key Objectives

Broaden tax base, instead of overburdening the existing tax payer.

Restrain unnecessary imports to improve the Balance of payments position.

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Budget for a Common Man Key Drivers Welfare of the people Reduce unemployment and creation of jobs

Reduce inequity of distribution of

Target reduction of Poverty

Focus on Agriculture value addition, productivity and research

Rationalize subsidies

Skills development

Improve Tax GDP ratio

Direct cash transfers

Enhance social sector allocations

Micro-finance reach

Induce growth of manufacturing sector and productivity improvement Skills Development And Training

Provide quality health and other services at affordable costs

Access to basic needs Inflation target

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Common Man’s Perception of Economic Development  Food at affordable prices  Health support on efficient basis  Housing and shelter  Access to utilities (water, power, gas, telephone) on consistent basis at affordable cost  Education  Good quality at low costs  Aligned to required skills and vocational development demand  Employment opportunities – Massive investment in human capital  Freedom of access to information  Value for contribution to federal, provincial and local revenue  Potential for vertical migration in terms of quality of life and a mechanism to balance consumption and savings  Good governance

12

Common Man’s Perception of Economic Development  Inflation

 Supply side planning and reforms  Balance between consumption and savings  Strengthening of direct government intervention  Import Substitution

 Inequality

 Growth to be inclusive  Ensuring efficiency and productive utilization of PSDP  Accelerated focus on Social sector

 Social Sector

 Reallocation of resources from general administration, defence; etc.  Raise revenue from Financial Services and other Profitable Sector like trading etc. for direct transfer to social sector to be managed by an independent representative body  MDG’s to be real goals rather than compliance of commitments. These goals should be dynamic and progressive

13

Pakistan Economy – SWOT Analysis Strengths  Strategically geo political position post 9/11 inducing active interest of USA and other global powers in safeguarding its stability  Strong large population base with potential to be a sizeable market  Medium term Development framework  IMF stabilization stand by arrangement  Consensus on major political issues including fight against insurgency and extremism  Sustainable external and domestic debt  Most liberal foreign investment regime  Tariff barriers are being reduced

• • • • • • • • • • • •

Opportunitie s Capacity constraints with India in IT sector BPO’s potential Telecom and Media revolution Geo political situation Foreign Direct Investment Investment in education and health Lapsing of WTO multi-fibre agreement Global financial crisis Focused skills development to secure dividend from demographic advantage Global intent and support in our fight against extremism IMF stabilization program Friends of Pakistan Forum

14

Weaknesses • Credibility of statistics • Quality of governance • Low Tax / GDP ratio • Incompatible contribution of various sectors of Economy in tax revenue • Inefficiency in utilization of development expenditure • High unproductive non development expenditure • Continued trade and fiscal deficits • Low level of Foreign Currency reserves • Economy vulnerable to external shocks • Dependence on aid and loans from multilateral institutions and bilateral parties • Potential impact of global recession on exports and expats remittances • High cost of doing business • Poor HDI indicators • Decline in trend of Foreign investment • Continued subsidies for loss making public sector enterprises • Inequality in distribution of income • Continued increase in poverty • Fragile political system

Threats • Intensity of war against terror • Issues in Balochistan and Northern Areas • Worsening of situation on Western borders • Anti Pakistan attitude in Afghanistan • Level of corruption • Broadening gap between Rich and Poor • Social unrest • Public discontent with the policies which may threaten reform process • Increasing trend of terrorist activities • Pressure on exchange rates • Soaring core and food inflation • Worsening law and order situation • Large number of IDPs • Increasing oil prices

Pakistan Economy – SWOT Analysis Strengths  Strategically geo political position post 9/11 inducing active interest of USA and other global powers in safeguarding its stability  Strong large population base with potential to be a sizeable market  Medium term Development framework  IMF stabilization stand by arrangement  Consensus on major political issues including fight against insurgency and extremism  Sustainable external and domestic debt  Most liberal foreign investment regime  Tariff barriers are being reduced

15

Pakistan Economy – SWOT Analysis

16

Weaknesses  Credibility of statistics  Quality of governance  Low Tax / GDP ratio  Incompatible contribution of various sectors of Economy in tax revenue  Inefficiency in utilization of development expenditure  High unproductive non development expenditure  Continued trade and fiscal deficits  Low level of Foreign Currency reserves  Economy vulnerable to external shocks  Dependence on aid and loans from multilateral institutions and bilateral parties  Potential impact of global recession on exports and expats remittances  High cost of doing business  Poor HDI indicators  Decline in trend of Foreign investment

Pakistan Economy – SWOT Analysis Opportunities  Capacity constraints with India in IT sector  BPO’s potential  Telecom and Media revolution  Geo political situation  Foreign Direct Investment  Investment in education and health  Lapsing of WTO multi-fibre agreement  Global financial crisis  Focused skills development to secure dividend from demographic advantage  Global intent and support in our fight against extremism  IMF stabilization program  Friends of Pakistan Forum

17

Pakistan Economy – SWOT Analysis Threats  Intensity of war against terror  Issues in Balochistan and Northern Areas  Worsening of situation on Western borders  Anti Pakistan attitude in Afghanistan  Level of corruption  Broadening gap between Rich and Poor  Social unrest  Public discontent with the policies which may threaten reform process  Increasing trend of terrorist activities  Pressure on exchange rates  Soaring core and food inflation  Worsening law and order situation  Large number of IDPs  Increasing oil prices

18

Pakistan Economy – SWOT Analysis Challenges Sustainability of growth momentum Addressing structural problems in energy, agriculture and exports sector Job creation Poverty alleviation Improving social indicators and enhancement of safety nets Strengthening of physical infrastructure Converting the demographic transitions into demographic dividend Leverage the current strategic role in achieving meaningful economic dividends Supply side improvement to match growing domestic demand Achieve political stability and institutional strengthening Harmonious relationship amongst Federation and its units Equitable distribution of resources between Federal, Provincial and Local governments  Revenue generation by provinces  Balanced approach of combination of Fiscal and Monetary Policy measures to combat inflation  Containment of exposure to war on terror            

19

Pakistan Economy – SWOT Analysis Strengths

20

Weaknesses

 Strategically geo political position post 9/11 inducing active • Credibility of statistics • Quality of governance interest of USA and other global powers in safeguarding its • Low Tax / GDP ratio stability • Incompatible contribution of various sectors of Economy in  Strong large population base with potential to be a sizeable tax revenue market • Inefficiency in utilization of development expenditure • High unproductive non development expenditure  Medium term Development framework • Continued trade and fiscal deficits  IMF stabilization stand by arrangement • Low level of Foreign Currency reserves  Consensus on major political issues including fight against • Economy vulnerable to external shocks insurgency and extremism • Dependence on aid and loans from multilateral institutions and bilateral parties  Sustainable external and domestic debt • Potential impact of global recession on exports and expats  Most liberal foreign investment regime Challenges remittances  Sustainability of growth momentum • High cost of doing business  Tariff barriers are being reduced  Addressing structural problems in energy, agriculture and exports sector • Poor HDI indicators  Job creation • Decline in trend of Foreign investment • Continued subsidies for loss making public sector enterprises  Poverty alleviation • Inequality in distribution of income  Improving social indicators and enhancement of safety nets • Continued increase in poverty  Strengthening of physical infrastructure • Fragile political system  Converting the demographic transitions into demographic dividend  Leverage the current strategic role in achieving meaningful economic dividends  Supply side improvement to match growing domestic demand  Achieve political stability and institutional strengthening Opportunitie  Harmonious relationship amongst Federation Threats and its units s  Equitable distribution of resources between Federal, Provincial and governments • Intensity of war against terror • Capacity constraints with India inLocal IT sector  Revenue generation by provinces • Issues in Balochistan and Northern Areas • BPO’s potential • Fiscal Worsening of situation on Western borders • Telecom and Media revolution  Balanced approach of combination of and Monetary Policy • Anti Pakistan attitude in Afghanistan • Geo political situation measures to combat inflation • Level of corruption • Foreign Direct Investment  Containment of exposure to war on •terror Broadening gap between Rich and Poor • Investment in education and health • Social unrest • Lapsing of WTO multi-fibre agreement • Public discontent with the policies which may threaten reform • Global financial crisis process • Focused skills development to secure dividend from • Increasing trend of terrorist activities demographic • Pressure on exchange rates advantage • Soaring core and food inflation • Global intent and support in our fight against extremism • Worsening law and order situation • IMF stabilization program • Large number of IDPs • Friends of Pakistan Forum • Increasing oil prices

THANK YOU !

Presenter’s contact details SYED MASOUD ALI NAQVI Senior Partner KPMG Taseer Hadi & Co. +92 (21) 568 5847 [email protected] www.kpmg.com.pk

Macro Economic stability & real sector growth  Real GDP is expected to grow by 3.3 percent in 2009-10 and by 4 and 4.5 percent during Fiscal Years 2010-11 and 2011-12  Sectoral growth rates expected - Agriculture - 3.8 percent - Manufacturing - 1.8 percent - Services - 3.9 percent  Inflation target for 2009-10 is 9.5 percent and will be brought down to 7 and 6 percent during Fiscal Years 2010-11 and 2011-12  Current expenditure to decline by 15.3 percent of GDP in FY 2009-10 and 14.7 percent of GDP in 2010-11, owing to elimination of unproductive subsidies  Measures for documentation of the economy and broadening of the tax base  Total revenue to grow by 15.7 percent and FBR collections to grow by 16.8 percent  Tax to GDP ratio will be 9.6 percent (9 percent in 2008-09)  Revenue as a percentage of GDP at 14.7 percent in 2009-10 and will increase

Targeting the poor and vulnerable

Benazir Income Support Programme (BISP)

-Rs. 70 billion from Rs. 22 billion -Social assistance Program – Health Insurance up to Rs. 25,000 per family -Poverty exit strategy, training and employment, social mobilization program -Transparency to be enhanced -Plan to have Social Security Protection Program

People Works Program

Rs. 35 billion to create employment opportunities

Targeting the poor and vulnerable Workers Welfare

Microfinance Housing

- Rs. 10.8 billion for workers welfare development schemes - Marriage grant enhanced from Rs. 50,000 to Rs. 70,000 - Cash back of 9,469 housing units / flats for workers Plan to increase outreach from 2 million to 3 million houses - Low income population community participation and squatter settlement regulation - Allocation of flats in Islamabad for working journalists - Tax credit for loans increased from Rs. 500,000 to Rs. 750,000

Agriculture–Increasing Productivity and Value Addition  Upgrade existing R&D facilities and set up two world class research institutes for wheat and cotton  Development of new technologies  Productive use of water through precision land leveling and high efficiency irrigation systems  Promote production and export of high value crops  Focus on live stock rearing, dairy production, fisheries and horticulture  Creating necessary infrastructure  Ensure availability of Agriculture credit  Common facilitation centers  Ten model agricultural union councils for each major crop across country

Agriculture–Increasing Productivity and Value Addition  Allocation in PSDP increased from Rs. 14.4 billion to Rs. 18 billion  Rs. 2.5 billion proposed for food security and productivity enhancement of farmers  Plan to treat livestock, Agriculture and fisheries as an industry  Agreement with Monsanto of US to introduce genetically modified cotton  Farmers will be offered BT cotton hybrids varieties  National on Farm Water Management Program implemented  Water sector Rs. 60 billion - 32 small and medium Dams - 12 billion for raising of Mangla Dam including resettlement - Rs. 10 billion for improvement of water courses - Rs. 15 billion for canal improvement and rehabilitation of irrigation system  Benazir Tractor scheme - Rs. 4 billion over two years

Agriculture–Increasing Productivity and Value Addition  Capacity Enhancement of Dairy Products under Public Private Partnership’ a project worth Rs 3.5 billion (Rs.300 million in 2009-10)  Poverty Reduction through Small Holders Live Stock and Dairy Development’ worth Rs 3.5 billion (Rs 400 million in 2009-10)  More model dairy community, biogas and breeding farms, cooling tanks, rural services providers and pasteurization plants  Focus on fisheries - lifting European Union’s ban on fisheries export by upgrading fishing vessels - improvement of infrastructure facilities for value added products - establishing a fisheries training centre at Gawadar - landing sites along the coastal line - reducing post harvest losses through improved fish handling along the food chain and marketing

Industry  Export Investment Support Fund of Rs. 40 billion - Government – Rs. 10 billion - Export Development Fund – Rs. 10 billion - Government agencies – Rs. 20 billion  Fund for credit guarantee for SME sector – Private Public partnership (Rs. 2.5 billion from Government in 2009-10)  Venture Capital Fund – Private Public partnership  Create new DFI for industrial financing  Industrial clusters for skill development  Allocation of M/o industries from Rs. 2 billion to Rs. 8.7 billion  Allocation for science and technology from Rs. 1.5 billion to

Industry Automobile Construction Textile

Cellular service providers

Reduction of 5% FED FED on cement reduced by Rs. 200 per ton - Withdrawal of FED on import and supply of Viscose Staple Fiber (VSF) - Zero rating of chemicals used in manufacture of Fire retardant fabrics - Regulatory Duty of Rs. 250 per set eliminated - Reduction in Customs Duty from Rs. 500 per set to Rs 250 per set - FED reduced from 21 percent to 19 percent - Sim activation charges reduced from Rs. 500 to Rs. 250

Industry  Priority allocation of gas and electricity  Cross subsidy in electricity and gas tariffs would be reduced in a phased manner  Large Export Houses to be established  Special Economic Zones and Special Industrial Zones to be fast tracked  Corporate Rehabilitation Act (CRA) to improve bankruptcy and insolvency regime  Resolution Trust Corporation (RTC) to promote consolidation of industry  Transparent privatization policy based on Public Private Partnership  National Trade Corridors Improvement Program launched  Enhanced allocation for infrastructure development  Custom duty reduced on raw materials for poultry, dairy,

Industry  PSDP for energy sector increased from Rs. 11.4 billion to Rs. 22.8 billion  Circular debt of energy sector being reduced to create liquidity for power sector  Projects for transmission and distribution system are being undertaken – 15 IPPS with capacity of 2,921 Megawatts (13 to be completed by 2010)  Five rental power projects for 800 Megawatts  16 Hydro power projects with capacity of 4,160 Megawatts initiated  Plan for electrification of all villages  Conservation measures are also being undertaken  Ideal policy mix for hydel, coal, wind and solar power

Human Resource Development  Establishment and operation of basic education and community schools (Rs. 2 billion)  Education for All - through providing missing facilities to primary schools (Rs 2 billion)  Development funding to Higher Education Commission enhanced to Rs 22.5 billion (60% increase) in 2009-10; current budget provision also enhanced by 26% to Rs. 21.5 billion  National Vocational & Technical Education Commission to target one million trainees every year in a phased programme (Rs. 2.2 billion in 2009-10)  Skill development (vocational/technical) programmes aimed for labour export market are being planned

Health  PSDP increased by 66 percent, from Rs. 13.99 billion in 2008-09 to Rs. 23.15 billion in 2009-10  Family Planning and Primary Healthcare and Immunization programmes with allocations of Rs. 7 billion and Rs. 6 billion respectively  The Prime Minster’s Emergency Action Plan for disease launched (Rs. 11 billion in the next five years)  Concessionary import duty rate on 35 raw materials used in pharmaceuticals, medicines and diagnostic kits  Zero rate sales tax on import and supply of wheelchairs for the special people  Tobacco taxation is being increased as per WHO recommendations

Youth Affairs, Culture and Sports  Different programmes for youth motivation, character building, awareness and integration, and establishment of youth activity centers - under the National Youth Policy  Approximately 30,000 educated postgraduates will be offered internships under the National Internship Programme (Rs 3.6 billion in 2009-10)  A Mobile Youth Computer Literacy and Awareness Programme launched  Approximately 15,000 volunteers registered for community development activities and disaster management  Rs 450 million in 2009-10 for cultural development (Rs 186 million over the previous year)  Special focus on the development of sports - Rs 583 million allocated in 2009-10 (Rs 140 million in 2008-09

Governance of Just and Fair system  Establishment of Public Defender and Free Legal Aid System  Establishment of Fast Track and Evening Courts at the federal level and provincial headquarters  Pro-poor legislation and automation of the justice sector  Monetizing incentives for civil servants  Making public sector ‘Employer of choice’  Improved service delivery  Greater transparency and self-accountability  Market-based competitive salary structure

Governance of Just and Fair system  An ad-hoc relief allowance of 15% of pay for serving government servants from 1 July 2009  An increase in the allowance of armed forces deployed on the western front equal to one month’s initial basic pay with effect from 1 July 2009  For the remaining armed forces personnel, allowance equal to one month’s initial basic pay will be admissible from 1 January 2010 and in the interim period, an adhoc relief allowance of 15% of pay  The retired government servants and armed forces personnel will also get 15% increase in their net pension from 1 July 2009  Limit for the exemption on Income Tax for salaried male enhanced from Rs 180,000 to Rs 200,000

Governance of Just and Fair system  Limit for the exemption on Income Tax for salaried female enhanced from Rs 240,000 to Rs 260,000  Senior citizens will now enjoy 50 percent relief in their tax liability in case of income upto Rs 750,000; previously this limit was upto Rs 500,000  Reform process for Public sector enterprises including Pakistan Railways, Pakistan Steel Mills, Pakistan International Airlines and the Power Distribution Companies  Corporate status for National Savings Organisation and the Federal Bureau of Statistics