Pakistan Budget 2005: A review

Senator Dr. Akbar Khawaja - Budget Speech
Delivered on Friday, June 10, 2005
Budget is a statement of priorities. It sets a strategic policy direction for the \r\nactivities of the government. Once again Regime has pledged new \r\npromises. \r\n\r\nBut \r\nwe\'ve yet to see this regime set priorities when it comes to the people of \r\nPakistan.· Its true that Government doesn\'t create wealth. But the \r\nrole of government is to create the kind of conditions where risk-takers \r\nandentrepreneurs can invest and grow and create jobs by hiring new \r\nworkers.",1]


· Budget is a statement of priorities. It sets a strategic policy direction for the activities of the government. Once again Regime has pledged new promises.
But we've yet to see this regime set priorities when it comes to the people of Pakistan.· Its true that Government doesn't create wealth. But the role of government is to create the kind of conditions where risk-takers andentrepreneurs can invest and grow and create jobs by hiring new workers.
· In addition to providing basic necessities and increasing \r\nstandards of living to its citizens, Government has many vital roles in society \r\nincluding assuring stability, peace, equity, and justice.Economic Growth· Although SBP has contradicted PM\'s \r\nclaims of over 8% growth & per capita income.· It sounds good and I \r\nsincerely wish that such trend continues but the fact is that the cushion in \r\neconomic growth indicators is not an outcome of government policies in past few \r\nyears but attributed to external assistance including generous lending, debt \r\nrescheduling by the Paris Club and Int\'l financial institutions and remittances \r\nfrom expatriate Pakistanis.· Off course another factor we saw last year was \r\na change in the calculation of GDP methodology -Base of GDP was changed from \r\n1980-81 to 1999-2000. \r\n\r\nWe \r\nneed to be careful in comparing the growth rates under different base years as \r\nindicated on page 49 of Pakistan Economic Survey.· So, in addition to inflow \r\nof remittances from our expatriates, crucial turning point for the economy was \r\nintervention of the international community -- and especially the United \r\nStates.",1]

· In addition to providing basic necessities and increasing standards of living to its citizens, Government has many vital roles in society including assuring stability, peace, equity, and justice.Economic Growth· Although SBP has contradicted PM's claims of over 8% growth & per capita income.· It sounds good and I sincerely wish that such trend continues but the fact is that the cushion in economic growth indicators is not an outcome of government policies in past few years but attributed to external assistance including generous lending, debt rescheduling by the Paris Club and Int'l financial institutions and remittances from expatriate Pakistanis.· Off course another factor we saw last year was a change in the calculation of GDP methodology -Base of GDP was changed from 1980-81 to 1999-2000.
We need to be careful in comparing the growth rates under different base years as indicated on page 49 of Pakistan Economic Survey.· So, in addition to inflow of remittances from our expatriates, crucial turning point for the economy was intervention of the international community -- and especially the United States.
· Recent growth trend has been mainly dependent upon the external \r\nsector and as external support diminishes, the current economic recovery will \r\nhave to depend more heavily on the strength of the domestic \r\nsector.\r\nBorrowing· General Musharraf tells the Pakistani people \r\nthat we have broken the Kashkol. It is not true, government is still \r\nborrowing, although regime is shying away to give out the real numbers as \r\ndemonstrated in the recent press conference by Mr. Shaukat Aziz\'Advisors · But, \r\nit\'s fact that government has plenty of money because of its earlier savings on \r\ndebt service, and additional borrowings including $1.5 billion last year. \r\nIt is also true that the decision of new NFC award was intentionally delayed to \r\navoid distribution of its due share to provinces in accordance with a new \r\nformula.Agriculture Production· We are \r\nlucky that due to a favorable weather and timely winter rains, provisional \r\nagricultural estimates are very encouraging due to a significant contribution of \r\nrecord crops particularly wheat and cotton.· However minor crops indicated a \r\nmix performance. And wheat import and other agriculture items are still in \r\nthe pipeline.",1]

· Recent growth trend has been mainly dependent upon the external sector and as external support diminishes, the current economic recovery will have to depend more heavily on the strength of the domestic sector.
Borrowing· General Musharraf tells the Pakistani people that we have broken the Kashkol. It is not true, government is still borrowing, although regime is shying away to give out the real numbers as demonstrated in the recent press conference by Mr. Shaukat Aziz'Advisors · But, it's fact that government has plenty of money because of its earlier savings on debt service, and additional borrowings including $1.5 billion last year. It is also true that the decision of new NFC award was intentionally delayed to avoid distribution of its due share to provinces in accordance with a new formula.Agriculture Production· We are lucky that due to a favorable weather and timely winter rains, provisional agricultural estimates are very encouraging due to a significant contribution of record crops particularly wheat and cotton.· However minor crops indicated a mix performance. And wheat import and other agriculture items are still in the pipeline.
· Although current agricultural growth is encouraging with an \r\nexpected growth around 7%, we have left the agricultural sector growth mostly \r\nwith the nature sometime going through drought and sometime availability of the \r\nexcessive water.· The sector is especially important given that almost \r\ntwo-thirds of the population relies on farming incomes. However, the government \r\nhas failed to tackle corruption problems and effect much-needed land \r\nreform.\r\nIndustrial Production· Earlier claims of 15% expected \r\ngrowth in industrial production is down as compared to FY03 and \r\nFY04. There is a decline in large-scale manufacturing but an \r\nincrease in electricity generation and mining sub-sectors. Again rains \r\nwater helped in electricity generation.Increase in mining is due to higher \r\ngas production mainly in Qadirpur and \r\nUch.\r\n",1]

· Although current agricultural growth is encouraging with an expected growth around 7%, we have left the agricultural sector growth mostly with the nature sometime going through drought and sometime availability of the excessive water.· The sector is especially important given that almost two-thirds of the population relies on farming incomes. However, the government has failed to tackle corruption problems and effect much-needed land reform.
Industrial Production· Earlier claims of 15% expected growth in industrial production is down as compared to FY03 and FY04. There is a decline in large-scale manufacturing but an increase in electricity generation and mining sub-sectors. Again rains water helped in electricity generation.Increase in mining is due to higher gas production mainly in Qadirpur and Uch.
Investment Issues· Foreign direct investment (FDI) has \r\nnot been a main driver of economic recovery. Last year, the economy attracted \r\nbarely 900 million dollars and, in 2004-05, FDI is likely to reach no more than \r\n1.2 billion dollars. This poor performance contrasts sharply with foreign \r\ncapital inflows.· Stimulating domestic investment appears the main way \r\nforward but it is dependent upon law and order situation and the restoration of \r\nfiscal stability.· The Workers remittance is also showing some slow trend of \r\n7.3% from 2.8 billion to 3.04 billion comparing the earlier corresponding period \r\nending \r\nMarch.\r\n",1]

Investment Issues· Foreign direct investment (FDI) has not been a main driver of economic recovery. Last year, the economy attracted barely 900 million dollars and, in 2004-05, FDI is likely to reach no more than 1.2 billion dollars. This poor performance contrasts sharply with foreign capital inflows.· Stimulating domestic investment appears the main way forward but it is dependent upon law and order situation and the restoration of fiscal stability.· The Workers remittance is also showing some slow trend of 7.3% from 2.8 billion to 3.04 billion comparing the earlier corresponding period ending March.

Revenue· So there is a new fiscal space but the \r\nbudgetary revenue receipts have not risen as a share of GDP and remains at 13% \r\nof GDP as compared to 14.3% and 15% of GDP in preceding two years. (as \r\nindicated on page 56 of Pakistan Economic Survey)· Revenue administration is \r\nstill weak and compromised by widespread corruption.· It\'s a surprise that \r\nCVT - capital value tax was not changed from 0.01 to 0.02% to help a richer \r\nclass but there was no cushion to a common citizen and sales tax basically \r\ncontinues to be a tax on consumption.· It\'s regrettable that this Regime did \r\nnot want to bring the Real Estate transactions in the tax net to help the Qabza \r\ngroups and interest of the classes it represents.· There could have been \r\nadditional fiscal space to bring this group in the TAX NET but Regime wants to \r\nprotect the real estate mafia. People know well who will be the biggest \r\nbeneficiary of this \r\nscam.\r\nExpenditures· During past year, Rs. 202 billion \r\ndevelopment budget did not bring any tangible benefits to a common \r\ncitizen. Once again Regime has pledged new promises with a new development \r\nbudget of Rs. 272 billion and an additional provisions of 34 billion rupees for \r\nWAPDA and NHA.",1]

Revenue· So there is a new fiscal space but the budgetary revenue receipts have not risen as a share of GDP and remains at 13% of GDP as compared to 14.3% and 15% of GDP in preceding two years. (as indicated on page 56 of Pakistan Economic Survey)· Revenue administration is still weak and compromised by widespread corruption.· It's a surprise that CVT - capital value tax was not changed from 0.01 to 0.02% to help a richer class but there was no cushion to a common citizen and sales tax basically continues to be a tax on consumption.· It's regrettable that this Regime did not want to bring the Real Estate transactions in the tax net to help the Qabza groups and interest of the classes it represents.· There could have been additional fiscal space to bring this group in the TAX NET but Regime wants to protect the real estate mafia. People know well who will be the biggest beneficiary of this scam.
Expenditures· During past year, Rs. 202 billion development budget did not bring any tangible benefits to a common citizen. Once again Regime has pledged new promises with a new development budget of Rs. 272 billion and an additional provisions of 34 billion rupees for WAPDA and NHA.

· This amount is in addition to budgetary allocation for \r\nsubsidies as indicated on page 28 of Federal Budget in Brief. \r\nDespite restructuring of Wapda, KESC, and distribution companies, subsidies for \r\nthe losses of public enterprises are major burden on the national budget.· \r\nRespective government units must be accountable for the inefficiencies of these \r\ninstitutions.Defence· The budget projects \r\na higher defence spending and trend in the past three years indicates an \r\noverspending by defence administration without following the budgetary \r\nthresholds. Funds were taken out from the allocation of development expenditures \r\nto defence with revisions in respective budgets at the last minute.· Mr. \r\nChairman, You may recall that Defence budget in FY 2002-03 was increased with a \r\njustification of additional expenditures for movement of army personnel - which \r\nis still being carried over for the past three years.· In FY 2000-01, the \r\npension of the retired army personnel of Rs. 38 billion was transferred from \r\ndefence expenditure to civil expenditure.Masked \r\nAllocations - Hidden· Mr. Shaukat Aziz, being a member of the board \r\nof directors of NCHD should avoid allocating additional PSDP funds of Rs. 500 \r\nmillion. There is also a clear conflict of interest by the Chairman of \r\nNCHD who have collected millions of dollars for NCHD but funds were parked at \r\nhis personal NGO, Human Development Fund.· I demand a full audit of HD Funds \r\nby the Auditor General of Pakistan and an immediate transfer of these PHDFunds \r\nto \r\nNCHD.\r\n",1]

· This amount is in addition to budgetary allocation for subsidies as indicated on page 28 of Federal Budget in Brief. Despite restructuring of Wapda, KESC, and distribution companies, subsidies for the losses of public enterprises are major burden on the national budget.· Respective government units must be accountable for the inefficiencies of these institutions.Defence· The budget projects a higher defence spending and trend in the past three years indicates an overspending by defence administration without following the budgetary thresholds. Funds were taken out from the allocation of development expenditures to defence with revisions in respective budgets at the last minute.· Mr. Chairman, You may recall that Defence budget in FY 2002-03 was increased with a justification of additional expenditures for movement of army personnel - which is still being carried over for the past three years.· In FY 2000-01, the pension of the retired army personnel of Rs. 38 billion was transferred from defence expenditure to civil expenditure.Masked Allocations - Hidden· Mr. Shaukat Aziz, being a member of the board of directors of NCHD should avoid allocating additional PSDP funds of Rs. 500 million. There is also a clear conflict of interest by the Chairman of NCHD who have collected millions of dollars for NCHD but funds were parked at his personal NGO, Human Development Fund.· I demand a full audit of HD Funds by the Auditor General of Pakistan and an immediate transfer of these PHDFunds to NCHD.

Deficits· The deficits are not coming down. The trade \r\ndeficits are getting bigger.· There is a net Accounts deficit of $7.6 \r\nbillion in first 9 months ending March, reflecting a decline in trade balance \r\n($3.5 billion) with a low exports compared to jumpy imports, decline in business \r\nservices component (net deficit -- $2.4 billion) and an overall decline in the \r\ninvestment income component (i.e. $1.7 billion deficit)· The deficit of $7.6 \r\nbillion is being offset by $6.3 billion mainly by remittances, FCAs and other \r\nprivate transfers leaving a negative current account balance of $1.33 billion as \r\ncompared to $2 billion last corresponding period. Adjusted current account \r\ndeficit may further increase by the end of June.· Are we better off today in \r\ntrade or fiscal balance than last year, answer is no. That mean some thing \r\nis not right in our trade policy.Fiscal deficit is also projected to \r\nincrease 3% of GDP to 3.8% of GDP. Sustaining the past improvement remains a \r\nchallenge and the Government is already projecting a slowdown in economic \r\ngrowth.\r\n",1]

Deficits· The deficits are not coming down. The trade deficits are getting bigger.· There is a net Accounts deficit of $7.6 billion in first 9 months ending March, reflecting a decline in trade balance ($3.5 billion) with a low exports compared to jumpy imports, decline in business services component (net deficit -- $2.4 billion) and an overall decline in the investment income component (i.e. $1.7 billion deficit)· The deficit of $7.6 billion is being offset by $6.3 billion mainly by remittances, FCAs and other private transfers leaving a negative current account balance of $1.33 billion as compared to $2 billion last corresponding period. Adjusted current account deficit may further increase by the end of June.· Are we better off today in trade or fiscal balance than last year, answer is no. That mean some thing is not right in our trade policy.Fiscal deficit is also projected to increase 3% of GDP to 3.8% of GDP. Sustaining the past improvement remains a challenge and the Government is already projecting a slowdown in economic growth.
Inflation· Rising CPI to 10.3 percent with Inflation \r\nrunning at its highest annual rate since 1997 can not be masked by Prime \r\nMinister\'s economic team. Inflation has been doubled within 6 months and \r\ninflation for food items is further up to 13 percent.· We should take a \r\npause about the credibility of this statistics. Although, in reality prices of \r\nbasic necessities have almost doubled since the overthrow of the PPP government \r\nin November 1996.· Last month, International Financial institutions have \r\nwarned Pakistan to improve its monetary policy and control its high rate of \r\ninflation to avoid systemic risk on government\'s claims of economic \r\ngrowth.\r\n",1]

Inflation· Rising CPI to 10.3 percent with Inflation running at its highest annual rate since 1997 can not be masked by Prime Minister's economic team. Inflation has been doubled within 6 months and inflation for food items is further up to 13 percent.· We should take a pause about the credibility of this statistics. Although, in reality prices of basic necessities have almost doubled since the overthrow of the PPP government in November 1996.· Last month, International Financial institutions have warned Pakistan to improve its monetary policy and control its high rate of inflation to avoid systemic risk on government's claims of economic growth.

Poverty and Unemployment· Despite government\'s claims \r\nof economic growth and external assistance to the military regime in past few \r\nyears, joblessness and increasing poverty pose serious challenges to the \r\ncountry.· Regime has failed to make any inroads in cracking down on \r\npoverty.Another concern is that resources targeted for poverty do not \r\nnecessarily reach those for whom they are intended and there is bureaucratic \r\nwastage.· After the scams of cooperative savings scandals and getting their \r\nloans written off by the State Bank of Pakistan, loan defaulters and corrupts \r\nofficials are targeting to chew up safety nets intended for poor such as Baitul \r\nMall and Zakat funds.· Poor of poor is suffering a lot. Interest rates \r\nfor industrialists and rich borrowers is under 10 percent but micro-financing \r\nintended for poor, Khushali Bank is still charging 21 percent interest for the \r\nmost secure short-term loans to \r\npoor.\r\nBudget Controls and Corruption· As we enter the new \r\nbudget year, Government at all levels need improved oversight and effective \r\ncontrol procedures to enhance productivity and increase accountability.",1]

Poverty and Unemployment· Despite government's claims of economic growth and external assistance to the military regime in past few years, joblessness and increasing poverty pose serious challenges to the country.· Regime has failed to make any inroads in cracking down on poverty.Another concern is that resources targeted for poverty do not necessarily reach those for whom they are intended and there is bureaucratic wastage.· After the scams of cooperative savings scandals and getting their loans written off by the State Bank of Pakistan, loan defaulters and corrupts officials are targeting to chew up safety nets intended for poor such as Baitul Mall and Zakat funds.· Poor of poor is suffering a lot. Interest rates for industrialists and rich borrowers is under 10 percent but micro-financing intended for poor, Khushali Bank is still charging 21 percent interest for the most secure short-term loans to poor.
Budget Controls and Corruption· As we enter the new budget year, Government at all levels need improved oversight and effective control procedures to enhance productivity and increase accountability.

Inadequate budget controls and corruption is the greatest obstacle to social \r\ndevelopment. Budget 2005-06 must address remedies to the increasing poverty and \r\nrapid increase in inflation in the economy.· Citizens have been concerned \r\nabout the poor quality of public sector development spending and dissatisfied \r\nwith the pace of implementation of development projects.· There has been \r\nstrong dissatisfaction in the general public, especially the poor, with the \r\nquality and quantity of public services received. Service delivery remains very \r\nweak because of rampant corruption and capacity constraints.· The extent of \r\nthe embezzlement of public funds at provincial and district levels is going \r\nunchecked. Some Burecrats and Nazims are emerging as new \r\nbillionaires. The Auditor General\'s office should investigate allegations \r\nof fraud and corruption under the devolutionsetup.

NFC Award· It is regrettable that despite setting \r\nperformance targets for the individual cabinet members last year, the Ministry \r\nof Finance has failed for the last three years to have a consensus among \r\nprovinces on the NFC Award.· Provinces are losing faith in the federation\'s \r\nrole as funds in the "divisible pool" are being misused without any audit \r\ntrails. Due to delay in NFC Award, revenue and expenditures estimates are \r\nsuffering.· Federation is charging 17-18% interest rates on development \r\nloans - provinces want to finance from other sources at lower rates but they are \r\nnot independent. Is it a true fiscal \r\ndecentralization.\r\n",1]

· Inadequate budget controls and corruption is the greatest obstacle to social development. Budget 2005-06 must address remedies to the increasing poverty and rapid increase in inflation in the economy.· Citizens have been concerned about the poor quality of public sector development spending and dissatisfied with the pace of implementation of development projects.· There has been strong dissatisfaction in the general public, especially the poor, with the quality and quantity of public services received. Service delivery remains very weak because of rampant corruption and capacity constraints.· The extent of the embezzlement of public funds at provincial and district levels is going unchecked. Some Burecrats and Nazims are emerging as new billionaires. The Auditor General's office should investigate allegations of fraud and corruption under the devolutionsetup.NFC Award· It is regrettable that despite setting performance targets for the individual cabinet members last year, the Ministry of Finance has failed for the last three years to have a consensus among provinces on the NFC Award.· Provinces are losing faith in the federation's role as funds in the "divisible pool" are being misused without any audit trails. Due to delay in NFC Award, revenue and expenditures estimates are suffering.· Federation is charging 17-18% interest rates on development loans - provinces want to finance from other sources at lower rates but they are not independent. Is it a true fiscal decentralization.

Governance· We need to have a closer look on government \r\nclaims of good governance. We need to see whether Regime is managing our \r\neconomic and social resources with rule of law, accountability, transparency, \r\nand citizen participation.· Investors remain discouraged by widespread \r\ncorruption in the judicial system. There have been transparency \r\nconcerns in the Privatization of KESC and number of banks.· Law and order \r\nsituation and internal security has deteriorated significantly. Democratic \r\nand liberal political parties are being crushed under the slogan of \'war on \r\nterror\' that remains a significant deterrent to \r\ninvestment.\r\n",1]

Governance· We need to have a closer look on government claims of good governance. We need to see whether Regime is managing our economic and social resources with rule of law, accountability, transparency, and citizen participation.· Investors remain discouraged by widespread corruption in the judicial system. There have been transparency concerns in the Privatization of KESC and number of banks.· Law and order situation and internal security has deteriorated significantly. Democratic and liberal political parties are being crushed under the slogan of 'war on terror' that remains a significant deterrent to investment.
Conclusion· Our economy is not meeting its full \r\npotential to create new jobs at a faster rate. The current donor-induced \r\ngrowth needs to be sustained over the long term if the government is to succeed \r\nin its goal of reducing long-term poverty.· Bottom line is that the common \r\ncitizen is facing severe hardship in gaining access to basic necessities under \r\ncrippling price hike. There is no economic recovery for working poor \r\nor for those seeking jobs so that they can feed and clothe their \r\nfamilies.\r\n",1]

Conclusion· Our economy is not meeting its full potential to create new jobs at a faster rate. The current donor-induced growth needs to be sustained over the long term if the government is to succeed in its goal of reducing long-term poverty.· Bottom line is that the common citizen is facing severe hardship in gaining access to basic necessities under crippling price hike. There is no economic recovery for working poor or for those seeking jobs so that they can feed and clothe their families.