Economy of Pakistan

The State of the Economy of Pakistan
T HE S TATE OF THE E CONOMY OF P AKISTAN
E DITOR D R N OOR UL H AQ C O -E DITOR D R A HMAD R ASHID M ALIK A SSISTANT E DITOR N ARGIS Z AHRA
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C ONTENTS
Preface 1. Highlights of the Economic Survey 2008-09 2. A Budget Based on Promises, Assumptions 3. Text of Budget Speech of Minister of State for Finance and Economic Affairs, Hina Rabbani Khar 4. No Real Increase in Defence Budget 5. Agriculture Exempted from Tax, Thanks to Strong Lobbies 6. Budget and our Ground Realities 7. Politics of Poverty 8. Budgeting for Food Security 9. Budget Reforms for Slimmer Government 10. Whose Budget is it Anyway? 11. Analysing Budget 2009-10 12. Annual Jugglery 13. Resource Gap Dashes Hopes for Relief 14. Reflecting the Overindulged Mindset 15. Defence Spending Enhanced 16. Misplaced Priorities 17. Tax Holiday for Feudal Lords 18. Government Announces Relief Measures 19. Pakistans Fragile Economy and its Paradoxes 20. Budget a Non-Event for Industry 21. Regressive Taxation 22. Budget 2010: Treading the Same Path 23. Budget in Tough Times 24. Budget 2009-10: B+ 25. Budgeting Education Priorities 26. Federal Budget 2009-10 27. Betraying the Peasant 28. Caring for the Poor 29. Happy New Financial Year 30. Federal, Provincial Budgets Review 31. Managing Growth with Full Employment
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32. 33. 34. 35. 36. 37. 38. 39. 40. 41.
Where is the Money Going? 2010 - Year of Literacy Carbon Tax and the Court Deteriorating Economic Competitiveness Issues Related to the Precarious Macroeconomic Situation Macro Economic Prospects and Constraints Economically Strong Pakistan Continuing Economic Trends Economic Growth: A Wider Perspective Economic Comeback
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P REFACE
The present democratically elected Government launched its second budget for 2009-2010 and presented it to the Joint Session of the Parliament on 13 June 2009. After a heated debate, the budget was approved unanimously along with procedural and legal amendments on 25 June 2009 with the hope to strengthen the economy. Earlier, Economic Survey 2008-09 was released by Finance Ministry to inform the public about the previous fiscal years economic performance. An overview of the Economic Survey will reveal that structural weaknesses and imbalances in countrys economy have not yet been largely overcome. Reforms are not the final word for resolution of myriad economic woes facing the economic system over the past six decades. Out-of-box, innovative, and non-reforms measures should also be employed upon to expand the economy to several unexplored sectors in order to create additional opportunities and jobs for the growing population. An elected parliament is the best platform to crack down such new opportunities. The present budget is intended to create macro-economic stability in order to pave the way for micro-economic sustainability. The budget is aimed at growth and development as well as welfare of the people on an equitable basis. Owing to a number of domestic factors such as the chronic energy shortage and deteriorating law and order situation, and external factors, principally the global recession, the overall economic performance appears somewhat dismal as the economic growth slow down to 2 percent against 4.1 percent growth to last fiscal year and this years target of 4.5 percent. Macro and micro-economic crises, trade shocks, global recession, and domestic security challenges were the main hurdles in the way to economic growth during the current financial year. In spite of this negative trend, world economic situation remained even worse as global financial crisis badly hit the Group of Eight (G-8) economies including the fast emerging economies of East Asia. Pakistan still made somewhat safe passage with particular emphasis on the banking sector, which performed pretty well compared to the banks in Europe, America, and also in East Asian countries. Therefore, Pakistans financial sector has the capacity to absorb internal and external pressures and to provide a way forward for economic growth.
Typically, as ever, the present budget faced poverty, inflation, subsidy, price hike, agricultural deterioration, social security, and education as serious challenges to the economy. Inflation has badly affected the consumers, especially the poor consumers, that stood around 22.3 percent during July-April 2008-09. Food inflation estimated as high as 26.6 percent. Foreign trade has also suffered. Overall exports recorded a negative growth of 3.0 percent during July-April 2008-09 against the positive growth of 10.2 percent in the corresponding period of last year. Imports registered a negative growth of 9.8 percent in July-April 2009 as compared to the same period of last year. The overall tax collection remained less than expectations and witnessed deceleration in real terms. Efforts have yet not been made to expand the tax net to the agriculture sector and to bring other billionaires from the stocks exchanges into the tax-net. Rs 12.6 billion allocated for agricultural subsidies should help modernise the agriculture to produce competitive crops instead of price hike for essential edible items such as wheat, rice, and sugar. Incentives for small farmers should be announced to overcome the stagnation prevailing in the agricultural sector. Additionally, allocations for defence were modest, which illustrated the Government conviction of not accelerating arms race in the South Asia region and to divert funds for economic and social development in spite of rift with India and terrorism facing the country. On the other, federal and provincial budgetary allocation for education does not exceed to Rs 77 billion which is far from ground realities. A major breakthrough must be initiated in the next fiscal budget to boost the public educational system to new heights especially, at a time when public schools were bombed and destroyed by terrorists in the Malakand Division. On the external side, the country has been locked into debt cycle once again after a short relief; depending on foreign sources to build its foreign currency reserves with a focus shifted again to the International Monetary Fund (IMF) and the newly framed, the Friends of Pakistan forum. The overall foreign direct investment during the first ten months has declined by 42.7 percent and stood at US$ 2.2 billion as against US $ 3.9 billion in the comparable period of last year. Contrary to foreign direct investment, portfolio investment, on the other, has shown a net outflow of US$ 451.5 million as against net flow of US$ 98.9 million during the same period of last year. On the positive note, besides
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portfolio investment, economy has shown some improvement on the income side. Per capita real income has risen from US$ 1042 last year to US$ 1046 in 2008-09, thereby showing marginal increase of 0.3 percent. Foreign remittances have also shown an increase of 20 percent compared to the corresponding period of last year. Apart from the banking performance, per capita increase, portfolio investment, and foreign remittances, as mentioned above, other sectors appear to be on a much serious condition. Nevertheless, with new electricity plants being initiated now and negotiations held with Tajikistan, power shortage will hopefully decrease. Boosting and modernising the textile sector, new textile policy tends to enhance textiles by US$ 25 billion in the next 5 years. As a whole, the on-going war on terror, global financial and economic recession, and structural weaknesses are badly hitting the economy of Pakistan and there is a need to address these issues. If fully realised and exploited, Pakistans economic potentials could convert the country into prosperity. The present volume of IPRI Factfile presents basic information about Economic Survey 2008-9 and Federal Budget 200910, and selected critical analyses from print media to understand the issues related to current state of the economy.
14 August 2009
Dr Ahmad Rashid Malik
H IGHLIGHTS
OF
T HE E CONOMIC S URVEY 2008-09
Growth and Investment

Real GDP grew by 2.0 percent in 2008-09 as against 4.1 percent last year and growth target of 4.5 percent. The modest growth of just 2.0 percent is shared between Commodity Producing Sector (CPS) (0.08 percentage points) and services sector (1.92 percentage points). Within the CPS, agriculture contributed 1.0 percentage point or 50.1 percent to overall GOP growth (a significant increase from its contribution of only 5.0 percent last year) while negative performance of industry dragged growth lower by 0.92 percentage points or 46.1 percent to neutralise positive contribution of agriculture. In the services sector major contributions to GOP growth came from transport, storage & communication (0.3 percentage points or 14.6 percent), wholesale & retail trade (0.7 percentage points or 27.1 percent) and social services (0.8 percentage points or 38.6 percent). Agriculture sector has depicted a stellar growth of 4.7 percent as compared to 1.1 percent witnessed last year and target of 3.5 percent for the year. Major crops accounting for 33.4 percent of agricultural value added registered an impressive growth of 7.7 percent as against a negative growth of 6.4 percent last year and a target of 4.5 percent. The livestock sector grew by 3.7 percent in 2008- 09 as against 4.2 percent last year. Output in the manufacturing sector contracted by 3.3 percent in 2008-09 as compared to expansion of 4.8 percent last year and target of 6.1 percent. Small and medium manufacturing sector maintained its healthy growth of last year at 7.5 percent. Large-scale manufacturing depicted contraction of 7.7 percent as against expansion of 4.0 percent in the last year and 5.5 percent target for the year. The massive contraction is because of acute energy outages, a weak security environment and political disruption in March 2009. The services sector grew by 3.6 percent as against the target of 6.1 percent and by last year's actual growth of 6.6 percent. Value added in the wholesale and retail trade sector grew at 3.1 percent as compared to 5.3 percent last year and target for the year of 5.4 percent. Finance and insurance sector registered negative growth of 1.2 percent in 2008-09. The performance of this sector shows that Pakistan's financial sector is integrated in the world economy and is feeling the heat of the crisis plaguing international financial markets. The Transport,
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Storage and Communication sub-sector depicted a sharp deceleration in growth to 2.9 percent in 2008-09 as compared to 5.7 percent of last year. Pakistan's per capita real income has risen by 2.5 percent in 2008-09 as against 3.4 percent last year. Per capita income in dollar term rose from $ 1042 last year to $ 1046 in 2008-09, thereby showing marginal increase of 0.3 percent. Real private consumption rose by 5.2 percent as against negative growth of 1.3 percent attained last year. However, gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 percent as against the expansion of 3.8 percent in the last fiscal year. Total investment has declined from 22.5 percent of GDP in 2006-07 to 19.7 percent of GDP in 2008- 09. Fixed investment has decreased to 18,1 percent of GDP from 20.4 percent last year. Private sector investment was decelerating persistently since 200405 and its ratio to GDP has declined from 15.7 percent in 2004-05 to 13.2 percent in 2008-09. Public sector investment to GDP ratio which has been depicting a consistent increase from 4.0 percent in 2002-03 to 5.6 percent in 2006-07, declined to 4.9 percent in 2008-09. The national savings rate has declined to 14.4 percent of GOP in 2008-09 as against 13.5 percent of GDP last year. Domestic savings has also declined substantially from 16.3 percent of GDP in 2005-06 to 11.2 percent of GDP in 2008-09. The overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 42.7 percent and stood at $ 2.2 billion as against $3.9 billion in the comparable period of last year. Foreign direct investment (private) showed some resilience and stood at $ 3205.4 million during the first ten months (July-April) of the current fiscal year as against $ 3719.1 million in the same period last year thereby showing a decline of 13.8 percent. Private portfolio investment on the other hand showed a net outflow of $ 451.5 million as against a net inflow of $ 98.9 million during the comparable period of last year. US kept its distinction of being the largest investor in Pakistan with 23.2 percent stake in the FDI. Other big investors originated from Mauritius (10.0 percent), Singapore (7.7 percent), UK (6.9 percent), Switzerland (6.6 percent), UAE (5.3 percent) and Hong Kong (3.9 percent). The communication sector (including Telecom) spearheaded the FDI inflows by accounting for 27.3 percent stake during July-April 200809 followed by financial business (22.4 percent), energy including oil &
gas and power (22.7 percent), and trade (4.9 percent). The current wave of uncertainty in the global demand and economic activity in the country has a major backlash on FDI inflows.
Agriculture
The agriculture growth this year is estimated at 4.7 percent as compared with 1.1 percent during 2007-08. Cotton production at 11,819,000 bates in 2008-09 has increased by 1.4 percent in comparison to 11655,000 bales of last year. Wheat production is estimated at 23.4 million tons in 2008-09 as against 20.9 million tons last year, showing an increase of 11.9 percent. Rice production has increased from 5.6 million tons in 2007-08 to 6.9 million tons in 2008-09, showing a substantial increase of 24.9 percent. Sugarcane production has decreased by 21.7 percent in 2008-09 from 63.9 million tons in last year to 50.0 million tons in 2008-09. Gram production at 760 thousand tons in 2008-09 has increased by 60.0 percent in comparison to 475 thousand of last year. Maize production has increased from 3605 thousand tons in 2007-08 to 4036 thousand tons in 2008-09, showing a increase of 11.9 percent. As regards minor crops, the production of chillies, masoor and potatoes increased by 60.7 percent, 44.Spercent and 0.2 percent respectively .The chillies crop is mainly concentrated in Sindh where timely rain proved very beneficial. The production of mung, mash and onion decreased by 11.4percent, 20.8 percent and 4.6percent respectively. The decrease in these crops is mainly due to reduction of area under such crops as the area of mung, mash and onion decreased by 6percent, 3.lpercent and 13.lpercent respectively. Agriculture credit disbursement of Rs 151.9 billion during July-March 2008-09 is higher by 9.6 percent, as compared to Rs 138.6 billion over last year. The domestic production of fertilisers during the first nine months (July - March 2008-09) of the current fiscal year was up by 3.6 percent as compared with corresponding period last year. On the other hand, the import of fertiliser decreased by 51 percent, the off-take of fertiliser also decreased by 11.9 percent during the same period last year.
Manufacturing
Overall manufacturing posted a negative growth of 3.3 percent during the current fiscal year against the target of 6.1 percent and 4.8 percent of last year. Large-scale manufacturing witnessed a across the board decline of
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7.7 percent during ongoing fiscal year against the growth rate of 5.2 percent last year. Severe energy shortages, deterioration in domestic law and order situation, sharp depreciation m rupee vis--vis US dollar and most importantly, weak external demand on the back of global recession coupled with slowdown in domestic demand are responsible factors for sluggish performance of manufacturing sector. Major items responsible for this negative trend in large scale manufacturing during the current financial year were vegetable ghee (8.2 percent),cooking oil (3.Spercent), beverages(3.7 percent), sugar (26.3percent),tea blended (0.Sopercent), Cotton yarn (0.3 percent) & cotton cloth (0.3percent), petroleum products (9.2 percent), jeeps & cars (48.Opercent), deep freezer (17.7percent), refrigerator (12.2 percent), TV sets (38.8percent), Bicycles (30.4percent), Buses (51.3percent), pig iron (12.4percent), upper leather (7.6percent), nitrogenous fertiliser (0.8percent). Production of a few items depicted increase in their production such as cigarettes (11.4percent), cotton (ginned) (1.4percent), liquids/syrups (1.7percent), phosphatic fertiliser (33.3percent), cement (4.7percent) and coke (51.7percent). The mining and quarrying sector registered a growth of 1.3 percent during the current fiscal year against the target of 4.5 percent and 4.4 percent last year. Government of Pakistan privatised Hazara Phosphate Fertilisers Limited (HPFL) at Rs 1340.02 billion during current fiscal year.
Fiscal Developments
The overall fiscal balance has recovered from a sizeable slippage of 200708 amidst substantial decline in revenues and elimination of some subsidies like on petroleum products. The tax to GDP ratio fluctuated in a narrow band of 10 to 11 percent for almost one decade. In the current fiscal year the potential risk exists of tax-to-GDP ratio below 10 percent of GDP for the first time in the last two decades. In 2008-09 total revenue as percentage of GDP slightly recovered, due to a marginal improvement in non-tax revenues as percent of GDP. Total revenue is expected to reach at Rs 1910 billion, as compared to Rs 1499.5 billion during the 2007-08. The gradual decline in excise duty is attributed to removal of its incidence on selected items. With excise comprising of 9 percent of total FBR revenues, Pakistan's tax revenue-to-GDP stood at around 9 percent
of GDP during 2008-09. The indirect tax-to-GDP ratio stood at around 5 percent, and direct tax-to-GDP ratio at around 4 percent during 2008-09. The FBR revenue collection for the fiscal year 2008-09 was targeted at Rs 1250 billion at the time of presentation of the Federal Budget 200809. Tax collection during the first ten months (July-April) of the current fiscal year amounted to Rs 898.6 billion, which is 17.7 percent higher than the net collection of Rs 763.6 billion in the corresponding period of last year. The net and gross collections have increased by 17.7 and 17.1 percent respectively. Federal excise duty collections registered a vibrant growth of 27.6 percent. On the other hand 47 percent growth in sales tax on domestic economic activity has helped it to grow overall by 22.2 percent. When viewed in the backdrop of 23 percent growth in national income, the growth of 16.9 percent in direct tax looks dismal. The FBR tax collection to GDP ratio is likely to deteriorate around 9 percent of GDP as against the target of bringing it in to the vicinity of 10 percent of GDP. Apart from FBR revenue, the total tax revenue growth also lagged behind the growth in nominal GOP, as it exhibits a decline in tax GDP ratio from 10.3 percent in 2007-08 to around 10 percent in 2008-09. The budgeted total expenditure for the fiscal year 2008-09 was Rs 2391 billion, which is 4.9 percent higher than the last year's revised estimate. Development expenditure (after adjusting for net lending) was targeted at Rs 396 billion in 2008-09 which is up by 7 percent than last year. On the basis of revenue and expenditure projections, the overall fiscal deficit is estimated at Rs 562 billion or 4.3 percent of GOP as against 7.4 percent last year. On the other hand current expenditures were envisaged to remain more or less stagnant at Rs 1876 billion. The stake of federal government in the current expenditure was to the extent of Rs 1359 billion and the remaining Rs 517 billion were earmarked for provincial governments. Interest payments surpassed their budgeted level by a significant margin. A sum of Rs 557 billion was budgeted for interest payments in 2008-09. The year is likely to end with interest payments of Rs 618 billion which are higher by Rs 61 billion over budgeted amount.
Money and Credit

During 2007-08, the SBP continued with tight monetary policy stance, thrice raising the discount rate and increased the Cash Reserve
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requirement (CRR) and Statutory Liquidity Requirement (SLR). During July-May 9, 2008-09, money supply (M2) decline to 4.59 percent against 8.96 percent last year. Net Domestic Assets (NDA) was limited to just Rs 442.1 billion as compared to Rs 655.4 billion in FY08. During FY09 the slow expansion in private sector credit has led to the slower growth in NDA of the banking system. This is shared both by NDA of SBP and the scheduled banks. Net Foreign Assets (NFA) of the banking system recorded a decline of over Rs 227.1 billion during the first ten months of the current fiscal year to May 9th. Government borrowing from the central bank has been dampened since December 2008 in line with the target set under the macroeconomic stabilisation programme as part of the IMF Stand-By Arrangement. Government's budgetary borrowing from the banking system decreased by Rs 339.9 billion during July-May FY09 against an increase of Rs 360.4 billion in the corresponding period of FY08. Credit to private sector grew by Rs 21.8 billion during July-May FY09 as compared to Rs 369.8 billion during the corresponding period last year. The weighted average lending rate has risen by 210 bps during the same period accompanied by 180 bps addition in the deposit rates. During July-December, 208 Khushali Bank, disbursed loans amounting Rs 1,9 billion (December 2008) as compared to Rs 2.6 billion in the same period last year. The share of all other microfinance banks in loan disbursement increased to Rs 2.6 billion (December 2008) from Rs 2.3 billion in July-March FY08. Microfinance Institutions have also disbursed amounting to Rs 10.4 billion as compared to Rs 12.9 billion.
Capital Markets
During the outgoing fiscal year 2008-09, the benchmark stock exchange KSE-100 index demonstrated acute volatility owing to fluctuating outlook on political, macroeconomic and global grounds. The index closed at 7,367.6 points on May 29, 2009, down by 4,921.4 points (or 40 percent) from the end June position of the last year. The KSE management and Securities and Exchange Commission of Pakistan (SECP) together took a number of regulatory actions to mitigate the potential technical risks confronting the equity markets, the most prominent being the imposition of price floor during August 27, 2008 to December 12, 2008.
Aggregate Market Capitalisation declined abruptly by Rs 1,621 billion, from Rs 3,777 billion in June 2008 to Rs 2,156 billion in May 2009. With no fresh merger and acquisition activity in the year 2008-09, the international investors remained keen to increase their ownership share. Foreign portfolio investment stood at a negative US $ 418.4 million during first nine months of the fiscal year 2008-09. Dismal performance owing to a confluence of factors was exhibited by different sectors of the economy and the dull indicators left a weighty impact on the stock market activity during 2008-09. The government carried out three government securities auction in the outgoing fiscal year and managed to issue Rs 48.9 billion of PIBs with 3&5 years due maturities amounting to Rs 16.2 billion, resulting in a surplus issuance of Rs 32.7 billion. The Government of Pakistan issued its first 3-Year Ijara Sukuk Bond in the month of September 2008. So far, three auctions, one in each quarter, have been conducted by the SBP. Collectively, Rs 27.85 billion was mopped up against the total target of Rs 30 billion. The National Savings Schemes (NSS) attracted Rs 173.3 billion in July-March 2008-09. Huge accruals were noticed in the case of Special Savings Certificates, Bahbood Savings Certificates, and Pensioners' Benefit Accounts. The deposit rates on all schemes offered under the NSS umbrella were revised in each quarter o the outgoing fiscal year. Three new floatation (corporate TFCs) were listed on KSE during the period under review. Recent regulations by SECP that emphasise on increasing the minimum capital base and strict requirements for the classification of non-performing loans are anticipated to augment the strength of the Non Banking Finance Companies (NBFCs) sector. Significant progress has been made on capital market reforms, including adoption of international standards and market practices and the streamlining of regulatory infrastructure to enhance surveillance and enforcement.
Inflation
The inflation rate as measured by the changes in Consumer Price Index (CPI) stood at 22.3 percent during the first ten months (July-April) of the current fiscal year, 2008-09, as against 10.3 percent in the comparable period of last year. The food inflation is estimated at 26.6 percent and non-food 19.0 percent, against 15.0 percent and 6.8 percent in the corresponding period
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of last year. The Wholesale Price Index (WPI) during July-April, 2008-09 have increased by 21.4 percent, as against 13.7 percent of last year. The Sensitive Price Indicator (SPI) has recorded an increase of 26.3 percent during July-April, 2008-09, as against 14.1 percent of last year. The increase in inflation rate during the current year 2008-09 is attributable to the increase in food price inflation which has been due to increase in prices of wheat, wheat flour, sugar, milk, poultry, meat, fresh vegetables and fruits.
Trade & Payments

Overall exports recorded a negative growth of 3.0 percent during the first ten months (July-April) o the current fiscal year against positive growth of 10.2 percent in the same period of last year. ln absolute terms, exports have decreased from $ 15,222.9 million to $ 14762.2 million in the period. Imports during the first ten months (July-April) of the current fiscal year (2008-09) decline by 9.8 percent compared with the same period of last year, reaching to $ 28.92 billion. Import compression measures lowering domestic demand coupled with massive fall in international oil prices have started paying dividends and imports witnessed slowdown. Beside that depreciation of rupee had also played a significant role for lower imports during current fiscal year. Imports of the petroleum group registered declining growth of 7.6 percent and reached to $ 8012.7 million. The decline in imports of the petroleum group has been due to massive fall in oil prices in the international market. The imports of telecom decline by 54.8 percent during July-April 2008-09. This is followed by imports of consumer durables group which exhibits negative growth of 16.4 percent~ Petroleum group, Raw Materials and food groups witnessed a negative growth of 7.6 percent, 5.2 percent and 3.1 percent respectively. Import of machinery remained the only group which showed a nominal growth of 0.5 percent during July-April 2008-09. According to data release by SBP, Trade deficit decelerated by 12.3 percent during July-April 2008-09 Pakistan's current account deficit (CAD) moved back o US $ 8.5 billion during Jul-Apr Fiscal Year 2008 09 against US $ 11.2 billion in the comparable period of last year, showing a decline of 23.5 percent. In the month of February 2009, the current account witnessed a surplus of $ 128 million which is first monthly surplus since July 2007. This improvement contributed by deceleration in import growth due to
lower imports in terms of quantity in the back of import compression measures and depreciation in rupee along with massive decrease in imports prices. Increase in workers remittance and reduction in services account deficit leads to improvement of invisible account. Services account deficit shrank by 41.3 percent during Jul-April Fiscal Year 2008-09 to reach $ 3. billion. Financial account contracts from $ 6,224 million to $ 3,476 million during July-April 2008-09 against corresponding period last year. Pakistan has witnessed pressure on ER during July-October 2008-09 when rupee depreciated by 16.3 percent. With signing of Standby arrangements with the IMF, the rupee got back some of its lost value and with substantial import compression, improvement in overall external balance including revival of external inflows from abroad the exchange rate havoured around Rs 80.50 during April 2009. Worker remittances amounted to $ 6355.6 million in July-April 2008-09 as against $ 5319.1 in corresponding period last year, thereby showing an increase of 19.5 percent. Pakistan's total liquid foreign exchange reserves amounted to $ 11.6 billion by the end of May 2009.Of which, reserves held by State Bank of Pakistan stood at $ 8.28 billion and by banks stood at 3.32 billion.
External and Domestic Debt

In relative terms, EDI as percentage of GDP increased from 28.1 percent at end-June 2008 to 30.2 percent by end-March 2009- an increase of 2.1 percentage points. This is the highest ever rise in a single year for almost one decade. A significantly depressed economic growth and massive depreciation of rupee against dollar partially explains this increase in EDL as a percentage of GDP. Given the severity of the crisis in international debt capital markets, and hesitance with respect to investor confidence, Pakistan has not issued any new instruments in 2008-09. Government of Pakistan successfully repaid the maturing $ 500 million Eurobond as well as $ 17 million on account of interest payments. This successful payment laid to rest any fears of Pakistan debt repayment capacity, and shored up investor confidence about Pakistan's ability to successfully manage its outstanding external debt obligations. Total public debt increased by Rs 1367 billion in the first nine months of 2008-09, reaching a total outstanding amount of Rs 7268 billion; an increase of 23.2 percent in nominal terms. The increase in total
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public debt is shared between rupee and foreign currency debt in the ratio of 40:60. The rise in foreign currency debt is mainly because of massive depreciation of the Pak rupee in the first quarter of the fiscal year. As a percentage of GDP, total public debt has decreased to 55.5 percent, a significant reduction from the previous year but still less than the required reduction of 2.5 percent as prescribed by the Fiscal Responsibility and Debt Limitation Act 2005. On the internal front, borrowing from the State Bank of Pakistan continues to fuel increases not only in domestic inflation but also adding to the short-run domestic debt. Net zero borrowing from the SBP at the end of every quarter put restraint on the government's borrowing appetite from the SBP and the government successfully met this target in the last two quarters (October-March). The total domestic debt is positioned at Rs 3758 billion at end-March 2009 which implies net addition of Rs 484 billion in the nine months of the current fiscal year.
Education
Education is extensively regarded as a route to economic prosperity being the key to scientific and technological advancement. Hence, it plays a pivotal role in human capital formation and a necessary tool for sustainable socio-economic growth. Education also combats unemployment, confirms sound foundation of social equity, awareness, tolerance, self esteem and spread of political socialisation and cultural vitality. The overall literacy rate (10 years & above) which was 55 percent in 2006-07 has increased to 56 percent in 2007-08, indicating 1.8 percent increase over the same period last year. Male literacy rate (10 years & above) increased from 67 percent in 2006-07 to 69 percent in 2007-08 while it increased from 42 to 44 percent for female during the same period. Literacy remains higher in urban areas (7lpercent) than in rural areas (49percent) during 2007-08. Province wise literacy data of PSLM (2007-08) shows Punjab to be on the top (59 percent) followed by Sindh (56 percent), NWFP (49 percent) and Balochistan (46 percent). According to the PSLM Survey data 2007-08, the overall school attendance (age 10 years and above) is S8percent (7lpercent for male and 46percent for female) in 2007-08 as compared to S7percent (69percent for male and 44percent for female) in 2006-07.
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According to the Ministry of Education, there are currently 227,243 institutions in the country. The overall enrolment is recorded at 34.49 million with teaching staff of 1.27 million.
Health and Nutrition

At present, there are 948 hospitals, 4794 dispensaries, 5310 basic health units and 908 maternity and child health centers in Pakistan. With availability of 133.956 thousands doctors, 9.012 thousands dentists, 65.387 thousands nurses and 103.037 thousands hospital beds in the country by 2008-09, the population and health facilities ratio works out at 1212 persons per doctors, 18010 persons per dentist, 2400 persons per nurse and 1575 persons per hospital bed which are compared well with the other developing countries. During 2008-09, 35 basic health units and 13 rural health centres have been constructed. While 40 rural health centres and 850 basic health units have been upgraded. Some 4500 doctors, 400 dentists, 3200 nurses and 5000 paramedics have completed their academic courses and 4300 new beds have been added in the hospitals. Some 96 thousands Lady Health Workers (LHWS) have been trained and deployed mostly in the rural areas. Moreover, some 8 million children have been immunised and 24 million packets of ORS distributed. Various health programmes with a special focus on major public health problems have been carried out. These include cancer treatment, AIDS prevention and Malaria Control Programme. The total outlay on health is budgeted at Rs 74.0 billion (Rs 33.0 billion development and Rs 41.10 billion current expenditure) which is equivalent to 0.5 percent of GNP.
Population, Labour Force and Unemployment

The population of Pakistan is 163.76 in 2008-09. At the existing trend, the total population will reach 167 million by the year 2010 and 194 million by 2020 (NIPS). The life expectancy in Pakistan is 64.9 years. About 2.72 million labour force is estimated as un-employed in 2008 with unemployment rate of 5.20 percent. Agriculture remains the dominant source of employment in Pakistan. The share of agriculture in employment has increased from 43.61 percent in 2006-07 to 44.6 percent by the year 2007-08 followed by manufacturing (12.99 percent), trade (14.6 percent), services (13.7percent). To generate employment the government has started Skill Development Councils in order to meet the diversified training needs of
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the industrial and commercial sectors. SME Bank has financed 7,814 Small and Medium Enterprises, disbursing loans amounting to Rs 7,936 million to 54,698 beneficiaries in the country.
Poverty
Economic growth has slowed down considerably during the last three years. The industry and construction sectors have contracted due to the domestic slowdown and energy shortage and also due to global recession. Thus job absorbing capacity of the economy has shrunk. Based on the Federal Bureau of Statistics' PSLM data, the Center for Poverty Reduction and Social Policy Development (CPRSPD), Planning and Development Division estimated a sharp decline in the headcount poverty ratio for 2007-08. However, these findings appear to contradict other assessments conducted subsequently, and which better reflect global and domestic price developments after June 2008. The Report of a UN Inter Agency Assessment Mission fielded during June-July 2008 found that food security in Pakistan in 2007-08 had significantly worsened as a result of food price hike. The total number of households falling into this category was estimated at 7 million. The survey further indicates that more than 40 percent of households reported no change in income in 2008 since the year before. Forty five percent of the population working as employees witnessed decrease in their real wages. The Report shows an increase in the share of severely food insecure population, from 23 percent in 2005-06 to 28 percent in 2008. The Planning Commission's constituted Panel of Economists in its Interim Report based on 2004-05 poverty head count number of 23.9 percent suggested an increase of around 6 points in poverty incidence for the year 2008-09. Similarly, the Task Force on Food Security based on the World Bank estimates of poverty head count ratio of 29.2 percent in 2004-05 estimated that poverty head count increased to 33.8 percent in 2007-08 and 36.1 percent in 2008-09 or about 62 million people in 2008- 09 were below the poverty line. The average projected GDP growth in developing countries in 2009 is now only about a quarter of what was expected before the financial turmoil intensified into a full-blown crisis in the latter half of 2008 and a fifth of that achieved in the period of strong growth up to 2007.
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Transport and Communication

Pakistan has a road network covering 258,350 kilometers including 176,589 KM of high type roads and 81,761 KM of low type roads. During the out-going fiscal year, the length of the high typed road network increased by 1.3 percent but the length of the low type road network declined by 2.7 percent because most of low type roads have been converted to high type roads. Road density at present is 0.32km/km2. Karachi Port Trust handled a total of 21.4 million tons of cargo during current fiscal year, depicting a growth rate of 44.3 percent. Port Qasim Authority handled 18.01 million tons cargo during the current financial year 2008-09, depicting a shortfall of 9percent over Jul 07- Mar 08 owing to global economic crisis. Pakistan National Shipping Corporation (PNSC) lifted 5762.2 million tons of liquid cargo and 865.0 million tons of dry cargo during the current fiscal year. PIA international passenger traffic, excluding Hajj, registered an increase of 3.5 percent from 3,069,717 passengers during 2008 over 2,964,830 passengers last year despite the seat (capacity) reduction of 2.3 percent. On domestic routes passenger traffic registered an increase of 3.6 percent from 2,239,815 passengers during 2008 over 2,160,589 passengers last year despite the seat (capacity) reduction of 7.4 percent. Telecom sector of Pakistan exhibited positive but slow growth in terms of revenue, subscribers and tele-density. Total tele-density reached 60.6percent during the current year. Cellular Market added 3,422,599 subscribers with average of 0.3 million per month and total subscribers reached 91.4 million. Currently number of cities/towns/villages covered stands at 10,001 while 26,300 cell sites were installed by all cellular operators. Total fixed line subscribers in Pakistan stood at a total of 3.7 million as of March, 2009, yielding total tele-density of 2.3percent. Today there are 384,187 fixed, mobile and WLL payphones available across the country. There are currently 267,180 broadband subscribers showing almost 59percent growth in 6 months time.
Energy
Crude Oil Production of crude oil per day has decrease to 66,531 barrels during JulyMarch 2008 09 from 70,165 barrels per day during the same period last year, showing a decrease of 5.2 percent. On average, the transport sector
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consumes 51.6 percent of the petroleum products, followed by power sector (33.1 percent), industry (10.3 percent), household (1.7 percent), other government (2.1 percent), and agriculture (1.1 percent) during last 10 years i.e. 1998-99 to 2007-08. Natural Gas The average production of natural gas per day stood at 3,986.5 million cubic feet during July-March, 2008-09, as compared to 3,965.9 million cubic feet over the same period last year, showing an increase of 0.5 percent. On average, the power sector consumes 37.2 percent of gas, followed by industrial sector (20.4 percent), fertiliser (19.8 percent), household (16.8 percent), Transport (2.0), commercial sector (2.7 percent) and cement (1.0 percent) during. Electricity The total installed generation capacity has increased to 19754 MW during July-March 200809 from 19566 MW during the same period last year, showing a marginal increase (1.0 percent). Total installed capacity of WAPDA stood at 11,454 MW during July-March 2008-09 of which, hydel accounts for 57.2 percent or 6,555 MW, thermal accounts for 42.8 percent or 4899 MW. The number of villages electrified increased to 133,463 by March 2009 from 126,296 5by March 2009, showing an increase of 5.7 percent. CNG Presently, some 2,700 CNG stations are operating in the country. By March 200 about 2.0 million vehicles were converted to CNG as compared to 1.70 million vehicles during the same period last year, showing an increase of 17.6 percent. With these developments Pakistan has now become the largest CNG using country. Environment Government of Pakistan has declared 2009 as the National Year of Environment. In this regard the current year was kicked off with a Regional level workshop on Climate Change, which was inaugurated by the Prime Minister of Pakistan. The PRSP II released in February 2009, has aligned itself with Millennium Development Goal 7, which is specific to environmental sustainability. Its targets include; integration of the principles of
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sustainable development into country policies and programmes and reversing the loss of environmental resources, such as including: biodiversity conservation, climate change mitigation and adaptation, phasing out ozone depletion substances; sustainable access to safe drinking water, sanitation and hygiene; controlling outdoor and indoor air pollution, reduction of vulnerability to natural disasters, and significant improvement in the lives of squatter settlement dwellers e.g. by providing access to secure tenure. Pakistan has become the largest user of Compressed Natural Gas (CNG) in the world, as per the statistics issued by the International Association of Natural Gas Vehicles (IANGV). Presently, more than 2 million vehicles are using CNG as fuel and 2,760 CNG stations are operational in different parts of the country (as on April 2009). The Ministry in collaboration with UNICEF, Water & Sanitation Programme (World Bank), Water Aid, Rural Support Programme Network (RSPN) etc, launched awareness and training programmes in the year 2008, the International Year of Sanitation (IYS 2008). It is estimated that the country's forest area stood at 5.3 percent during 2007-08. The President of Pakistan launched a Mass A forestation Programme on December 22, 2008. This programme will be spread over a period of five years and shall largely be sponsored by private entrepreneurs for planting trees on state and other suitable lands. The Government in collaboration with various concerned organisations has recently initiated the Technical Advisory Panel (TAP) on Climate Change. The official launch of the TAP was held on February 15, 2008.
Report, Business Recorder (Islamabad), 12 June 2009.
A B UDGET B ASED
ON
P ROMISES , A SSUMPTIONS
The government is set to unveil the consolidated budget on Saturday for the fiscal year 2009-10 with an outlay of over Rs 2.9 trillion based on uncertain external flows, mainly pledges from Friends of Democratic Pakistan (FoDPs), for the social sector spending and from donors and other countries for relief and rehabilitation of the internally displaced persons (IDPs). However, the federal budget is likely to hover around Rs. 2.2 trillion with current expenditures of Rs 1.5 trillion and development expenditures of Rs 261 billion. It will be the first budget based on
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uncertain source of external flows. However, the government is learnt to have increased relaxation in the budget deficit from 4.6 to 4.9 per cent or over 5 to 5.5 per cent, meaning the budget deficit would stand somewhere between Rs. 723 billion and Rs. 798 billion. It will really put a spanner in the government work, as it would be hard to arrange financing for the huge fiscal deficit. In case the government fails in managing the external resources to bridge the gap then it would have to increase its reliance on domestic sources. In this scenario, the government will have no option but to massively borrow from commercial banks at high interest rates, as under the IMF covenants the government cannot borrow from the State Bank. This will retard the central bank to bring down discount rates, which is essentially required to stimulate the almost stalled economic growth. If this horrific scenario continues then the economic activity will not increase and continue to be subjected to high discount rates. Adviser on Finance Shaukat Tarin was of the view the government remained stuck with the fiscal deficit of 3.4 per cent. However, an increase to 4.6 per cent deficit target has been made to spend inflows from FoDPs on the social sector and further relaxation of 4.9 per cent has been made to spend donors amount for IDPs. So here arises a question for the decision-makers: why dont they accept that the budget is purely based on the fiscal deficit of 3.4 per cent, and the allocation for the education or the health sectors will be increased only when inflows from FoDPs will start coming. Otherwise, in the absence of exact knowledge about inflows from FoDPs and donors the allocation for the social sector will create problems for the government, making it unwise to make the budget on assumptions. The outlay for the Public Sector Development Programme (PSDP) will be Rs 621 billion and revenue collection target, Rs. 1.4 trillion. However, the government is likely to revise the revenue target down because the FBR has told the government that collecting over Rs 1.4 trillion will be a gigantic task. The government has withdrawn many exemptions and is also bringing the real estate and the services sectors under the tax net, including imposition of carbon tax on POL products. Different tax measures and carbon tax would bring additional revenue of Rs 160-170 billion to the government which includes Rs 80-90 billion through carbon tax.
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But in case crude oil price surges past $ 75 per barrel in the global market it will be impossible to impose taxes on the POL products, as after July 1 the government will be bound to fully pass on to masses the price fluctuation in oil prices in the world market. The carbon tax will not be a feasible revenue collecting tool in case oil prices go up, rendering the government with huge deficit in its revenue. There should be a rational and intelligent taxation and it should not be done for the sake of increasing the revenue. There are reports that the government intends to levy taxes on computers. If adopted, the measure will hurt the governments own drive to develop quality human resources. Besides, it will deprive the youths of global and quality access to information. The government is going to reduce the central excise duty and rationalise other taxes on the industrial sector to ensure its growth, and to this effect, the government wants to declare the next fiscal year as industrial year. But even then the industry will not be able to grow unless and until the discount rates are brought reasonably down. Although, Shaukat Tarin was of the view the increase in the fiscal deficit up to 4.9 per cent will have no inflationary impact as the expected $2 billion from FoDPs and $550 million from donors will mainly come in terms of grants, but still it remains hypothetical. All pledges as per expectations can never be materialised, and only time will tell if making the budget on assumptions will serve the country or not?
Khalid Mustafa, The News International(Rawalpindi), 13 June 2009.
T EXT OF B UDGET S PEECH OF M INISTER OF S TATE FOR F INANCE AND E CONOMIC A FFAIRS , H INA R ABBANI K HAR
I rise to present the Budget for the Fiscal Year 2009-10 Madam Speaker! 1. I have the honor to be the first woman in the history of Pakistan to present a budget before the august House. It is indeed the privilege of the Pakistan Peoples Party to have given the country its first woman Prime Minister, Mohtarma Benazir Bhutto Shaheed. The Peoples Party also has the singular honour of nominating the first woman Speaker of the National Assembly in Pakistan. These are important milestones in our quest for women empowerment and gender equality.
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2. The efforts of the govt to manage the economic and financial affairs of the country need to be viewed in the context of the prevailing state of security in the country. Pakistan today is not simply a frontline state against the war on terror; in fact we are today fighting insurgency and terrorism within the country. The war on terror has already cost us over $ 35b since 2001-02 in economic costs. We now face the prospect of incurring huge costs on account of counter-insurgency expenditures. We have to meet the maintenance and rehabilitation costs of almost 2.5m brothers, sisters and children displaced as a result of the insurgency. The International community has pledged its support for this human cause. However, your govt is fully conscious of its responsibility and has allocated Rs. 50b, I repeat Rs. 50b, in the budget 2009-10 for the relief, rehabilitation, reconstruction and security of the internally displaced persons. I also take this opportunity to salute the efforts of the people of Pakistan in contributing generously to the relief effort and demonstrating that we are all one and stand united in the face of terrorism. I may also express the gratitude of the govt to all those generous households who have opened their homes and hearts to the displaced people in the true spirit of Islam. 3. Our armed forces are in the forefront of the war against terror and in fighting insurgency in the country. Our western border is most volatile and faces the brunt of insurgency. The President of Pakistan has been pleased to announce an increase in the allowances of the personnel of armed forces deployed in the western theatre, equal to one months basic pay with effect from 1st July, 2009. He has further announced that this benefit be extended to the entire armed forces from 1st January, 2010. The govt is in complete support of the Presidents decision. Today, the nation stands behind our valiant armed forces. No amount of compensation is adequate enough to cover the risk to ones life. I hope this small gesture on the part of the govt helps in building the morale of our jawans and officers in the war against terror. 4. While presenting last years budget the govt had given a detailed account of the economy as was inherited by us from the previous govt. We had highlighted that our economy could not sustain a high level of artificial growth. We had presented that sustainable growth was only possible through investments in the real sectors of the economy that is, agriculture and industry. These, unfortunately, were neglected in the past. Instead growth was fuelled through high consumption and extensive
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luxury imports and those too financed through external borrowings. No wonder the fiscal deficit mounted to 7.6% of GDP, the current account deficit became unmanageable, there was a run on foreign exchange reserves and the stock market crashed. More importantly, inflation started to rise steeply and peaked at 25% in October 2008. In the face of these developments the economy suffered but the poor of Pakistan suffered the most. 5. Surely this state of affairs was intolerable! The govt reacted to this by formulating a Nine-Point Agenda of economic and social recovery. The first pillar of our agenda was to stabilize the economy. As a result of our efforts, the fiscal deficit would decrease by 3.3 percentage points in 2008/09. The current account deficit was brought down from a high of 8.5% in 07-08 to 5.3% of GDP in 2008-09. It is now universally acknowledged that reducing inflation is the best recipe for reducing poverty. Through the efforts of your govt, inflation declined from 25% to 14.4% in May, 2009. Inshallah, it is expected to be in single digit by the end of the next fiscal. 6. While stabilization of the economy was necessary it was achieved at a cost. A tight monetary policy coupled with strict public expenditure management adversely impacted access to capital in the private sector and a reduction in the public sector development programme. The biggest casualty of stabilization was economic growth which declined to around 2%. The contraction in the economy adversely affected growth in manufacturing. However, our pricing policy for Agriculture sector helped this sector in recording a growth of 4.7% in 08-09 as compared to 1.1% in the previous year. The govt was fully conscious that stabilization and a contracting economy would impact the poor adversely. That is why it triggered the 2nd pillar of its nine point agenda that is, social protection. Through the Benazir Income Support Program (BISP) we targeted the poorest of the poor through an income grant of Rs. 1000 per month, allocating Rs. 34b for the programme. In the next financial year we propose to allocate Rs. 70b for BISP to bring over 5m households in the ambit of the programme. 7. Having attained a certain level of stabilization it is now time to move towards growth by targeting the real sector of the economy that is Agriculture and Industry. Beginning with this years budget we propose to announce policies and undertake budgetary and legislative measures which would put our real sectors of the economy onto the path of greater productivity. This paradigm shift would help the country in attaining
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sustainable growth which would help in the reduction of poverty. Madam Speaker, we propose to pursue growth with equity. Madam Speaker, we propose to pursue stabilization with a human face. This govt believes that the focus of govts policy and investment program has to be the well being of the people, especially the poor segments of our society. 8. The govt is managing the affairs of our country within a strategic policy framework expressed in its Nine Point Agenda of economic and social recovery. I take this opportunity to highlight these nine pillars: I. Macroeconomic Stability and Real Sector Growth. II. Protecting the Poor and the Vulnerable. III. Increasing Productivity and Value Addition in Agriculture. IV. Making Industry Internationally Competitive. V. Capital and Finance for Development. VI. Removing Infrastructure Bottlenecks through Public Private Partnerships. VII. Integrated Energy Development Programme. VIII. Human Capital Development for the 21st Century. IX. Governance for a Just and Fair System. 9. The budget 2009-10 has been prepared to obtain the twin purposes of stabilization with a human face and growth with equity. I would wish to clarify as to what stabilization means. Stabilization is essentially an expression which advises households, organizations and govts to live within their means. Surely, this is what we all want. And if additional resources become available we need to use these to obtain the best dividend for our people. As a measure of support towards attaining a reasonable growth target the total expenditure, including Provinces, is estimated at Rs. 2897.4b. The total revenue is estimated at Rs. 2174.9b. The overall fiscal deficit of Rs. 722.5b would be 4.9% of the GDP. This deficit would be met through external financing of Rs 264.9b and domestic financing of Rs. 457.6b. Pakistan is likely to receive external resources equivalent to 1.2% of its GDP (Rs. 178b) from pledges made in the Donors Conference at Tokyo. We further expect resources equivalent to 0.3% of the GDP (Rs. 48b) for expenditure on internally displaced persons. In essence the real deficit would be 3.4% of the GDP. 10. The core budget of the federal govt estimates net revenues of Rs 1377.5b with a current expenditure of Rs 1699.19b. The development expenditure (including Provinces) is estimated at Rs. 783.1b against the revised estimates of Rs. 421.9b, an increase of 85%. This increase is
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unprecedented. The Public Sector Development Programme approved by the National Economic Council is pitched at Rs. 626b in BE 2009-10 against Rs. 359b in RE 2008-09. It is expected that full utilization of the development allocation would strongly assist in revival of growth. 11. May I offer a note of caution at this stage. Pakistan has one of the lowest tax to GDP ratios in the world. In the outgoing year we were only able to attain tax revenues equivalent to 9% of our GDP. We expect to improve our tax to GDP ratio by 0.6% in the next financial year. Allow me to state that if we as a nation do not imbibe the tax culture, if each citizen capable of paying tax does not do so, Pakistan shall never be able to stand on its own feet. It is, therefore, imperative that each one of us as a citizen of this great country meets his or her tax obligation. While govt would be undertaking deep rooted reforms in tax policy and its administration, success of any initiative would hinge on the support given by the entire nation. We have to broaden our tax base; there is no escape from this reality. 12. The govt made a commitment that it would pursue stabilization with a human face. Our tax and duty measures in Budget for Fiscal Year 2009/10 would revolve around the following concepts: Provide protection to the poor and vulnerable against the current economic downturn; Revive manufacturing and industry, especially export-oriented industry; Broaden the tax base instead of overburdening the existing taxpayers; and Restrain unnecessary imports to improve the Balance of Payment position. 13. As a measure to broaden the tax base we had desired that the provinces bring additional services into the net of sales tax. We had also desired that the provinces impose capital gains tax on immovable property. This would have marked a beginning towards further broadening of the tax base. However, the provinces would much rather wish to discuss these issues in meetings of the National Finance Commission. While we respect the decision of the provinces none-the-less measures would be taken in the Budget 2009/10 to bring additional services into the excise net as well as continue with Capital Value Tax. On reaching agreement with the provinces in the NFC discussions, the Capital Value Tax as well as excise on services would be considered for replacement by provincial taxation on these subjects.
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I.
Macro Economic Stability and Real Sector Growth
14. The immediate threat to economic stability and the servicing of international debt obligations were overcome through a homegrown Macroeconomic Stabilization Programme. The Programme has already ensured adjustment in petroleum prices and significant cuts in expenditures to reduce the budgetary deficit; while keeping a tight monetary policy in place. These measures are paying dividends under precarious global and domestic conditions. Recent trends in most macroeconomic variables also suggest that a disciplined implementation of this Programme has started paying off. Madam Speaker! During the Fiscal Year 2009/10 real GDP is expected to grow by 3.3 percent and by 4 and 4.5 percent during Fiscal Years 2010/11 and 2011/12, respectively. This will be contributed by sectoral growth rates of agriculture amounting to 3.8 percent; manufacturing totaling to 1.8 percent; and services contributing 3.9 percent. For Fiscal Year 2009/10 the inflation target is 9.5 percent, which will be brought down to 7 and 6 percent during Fiscal Years 2010/11 and 2011/12, respectively. A targeted decrease in current expenditure to 15.3 percent of GDP in FY 2009/10 and 14.7 percent of GDP in 2010/11, owing to elimination of unproductive subsidies is planned in order to maintain the fiscal deficit at sustainable levels. The Government is going to take all necessary measures to ensure documentation of the economy and broadening of the tax base in order to shift reliance on domestic resource mobilization. Total revenue will grow by 15.7 percent and Federal Board of Revenue collection is projected to grow by 16.8 percent. Tax to GDP ratio will be 9.6 percent, with measures, as against 9 percent during Fiscal Year 2008/09. Revenue as a percentage of GDP is projected at 14.7 percent in Fiscal Year 2009/10 and will increase to 15.1 percent during Fiscal Year 2010/11.
II.
Targeting the Poor and the Vulnerable
15. The previous govt pursued a policy of trickle down, expecting that the benefits of growth would automatically reach the poor. The flaw in this strategy was that the rich became richer and the poor became poorer.
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Our govt is tackling the issue of poverty by launching a frontal attack against it. Our efforts at poverty-reduction aim to eliminate poverty. 16. As a tribute to our leader, Shaheed Mohtarma Benazir Bhutto, who laid down her life for democracy, the introduction of the govts flagship programme, named Benazir Income Support Programme to provide direct cash transfers to the poor, is proof of its commitment to reach out to the most vulnerable to share their burden and ease their misery as much as possible. Following our Quaid, Shaheed Zulfiqar Ali Bhuttos words, The Masses Will Rule. 17. The conception behind the Benazir Income Support Programme was not only providing financial assistance to the needy but also to ensure women empowerment and child care. During Fiscal Year 2008/09, Rs 22b was distributed to 1.8m beneficiaries. During fiscal year 2009/10, it is proposed to increase the allocation of BISP to Rs 70b. Madam Speaker, this would constitute more than 200 percent increase; I repeat more than 200 percent increase over the last years distribution....A programme for the Internally Displaced Persons has also been started by Benazir Income Support Programme wherein the Internally Displaced families are being identified and cash grants are being paid to them on regular basis. 18. In the short to medium term, the Benazir Income Support Programme will also serve as a platform for complementary social assistance programmes, the main being health insurance for the poor and the vulnerable. This will cover full hospitalization, pregnancy, daycare treatment, diagnostic tests and accident compensation for earning members of the family to a maximum limit of Rs 25,000/- per family per year. In addition, cash transfer programmes will be complemented to promote household independence via various poverty exit strategies, which can help to upgrade the poor beneficiaries to the level of selfsufficiency by various means including transition to Conditional Cash Transfers; training and employment of one person per household; and provision of workfare through small public works under a social mobilization programme initiatives. The latter programme is based on the concept of small development schemes for construction of paved streets and water and sanitation facilities at the local level with help of community contribution. 19. I hold out an assurance that the govt is committed to ensuring complete transparency in the management of BISP. A census would be completed within three months in 16 districts of Pakistan as a pilot to
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bench mark incomes. This would be extended to the entire country within the calendar year. The Benazir Income Support cards would serve as vehicles of transparent management and addressing the needs of the vulnerable. 20. The govt also plans to bring in legislation during the next financial year for creating a social security protection programme for the haris. It is the firm resolve of the govt to mainstream the marginalised haris, provide them with social protection available to other labour in the country and to make them proud citizens of Pakistan. 21. The govt also plans to revamp the Ministry of Social Welfare by replacing it by a Ministry of Social Protection and Development in order to provide a common platform for safety nets and enhanced institutional capacity for social service delivery.
Peoples Works Programme

22. This programme covers basic areas like provision of electricity, gas, farm to market roads and water supply. An allocation of Rs 35 billion is proposed in the Fiscal Year 2009/10 for this purpose. This will create sizable employment opportunities and, therefore, will increase the incomes of the less privileged.
Workers Welfare
Madam Speaker! For the Fiscal Year 2009/10, an amount of Rs 10.8 billion has been allocated for different Worker Welfare development schemes in the housing, health, education and technical education sectors. Quota has been abolished with the result that every worker will now be provided marriage grants irrespective of number of daughters. The rate of marriage grant has been increased from Rs 50,000 to Rs 70,000 per daughter. Construction of 9,469 housing units and flats for industrial workers is also proposed. 13 The President of Pakistan has directed to take necessary measures for empowerment of employees of State Owned Enterprises through their representation on the respective Boards by transferring 12 percent shares to employees in order to revamp privatization process.
Microfinance
Microfinance plays a critical role in improving lives of the poor and particularly women.
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The Government has set the target to increase outreach of the microfinance services from 2 million to 3 million borrowers in fiscal year 2009/10.
Housing
Madam Speaker! 23. Our founder leader Shaheed Zulfiqar Ali Bhuttos vision and foresightedness identified four decades ago that housing is the basic necessity and raised the slogan of Roti, Kaprha Aur Makan. 24. We, being the followers of Shaheed Zulfiqar Ali Bhutto, have taken the following initiatives to turn the dream of our leader into a reality. Affordable housing under a phased programme for the lowincome population through community participation and squatter-settlement regulation; and 14 For facilitation of working journalists, the Ministry of Information & Broadcasting managed to reserve a good number of residential plots in Islamabad for them. In this budget, tax credit limit on interest paid on loans for construction of a new house or acquisition off a house is proposed to be enhanced from Rs 500,000 to 750,000.
III.
Increasing Productivity Agriculture
and
Value
Addition
in
Madam Speaker! 25. The Government's agriculture policy is aimed at ensuring food security; generating jobs; and enhancing farm profitability and competitiveness through realizing the existing productivity potential of various crops. The vast and rapidly changing agriculture sector offers enormous opportunities to millions of rural poor to move out of poverty. 26. 'Increasing productivity and value addition in agriculture' will receive high priority. Self-reliance in commodities, food security through improved productivity of crops as well as development of livestock and dairy would be the main pillars of policy. More importantly government would continue to ensure a minimum guaranteed price to the farmers based on international comparisons. The response given by the farmers to the price policy of the government for the wheat crop raises hopes for improved production of other crops. Government 15 would continue
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with this pricing policy. Other areas of support for agriculture and livestock would be through: focusing on research and development, by upgrading existing R&D facilities and initiating the establishment of two world class institutes of research for wheat and cotton; development of new technologies; more productive use of water through precision land leveling and high efficiency irrigation systems; promoting production and export of high value crops; accelerating the move towards high-value activities, such as livestock rearing, dairy production, fisheries, and horticulture; creating necessary infrastructure; and ensuring availability of agricultural credit. Formation of common facilitation centers. encouraging research and extension. In addition: Establishment of ten model agricultural union councils for each major crop across the country will be undertaken; Promotion of model organic farming would be supported. Overall PSDP allocation for Agriculture will be increased by 25 percent from Rs 14.4 billion in Fiscal Year 2008/09 to Rs 18 billion during Fiscal Year 2009/10. An amount of Rs 2.5 billion is proposed for Fiscal Year 2009/10 to ensure food security and productivity enhancement of farmers. Madam Speaker! 27. Interventions made in this light have already started providing dividend in the shape of record production of major food crops like wheat and rice. The policy measures undertaken by the government have led to an estimated transfer of resources of about Rs 294 billion in to the rural economy. Government has made an agreement with Ms Monsanto of United States of America to formally introduce Generally Modified cotton into Pakistan on fast track basis. It has been planned that the farmers will be offered BT cotton hybrids varieties during Fiscal Year 2009/10. It is the vision of the government to treat livestock, agriculture and fisheries as an industry. In this context, the nil customs duty regime on tractors, poultry inputs and cattle feed would be continued in future.
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Water Use Efficiency

Madam Speaker! 28. To boost production of crops and improve water use efficiency, a major initiative of 'National on Farm Water Management Programme' was implemented by the Ministry of Food and Agriculture. 29. Water sector has been allocated Rs 60 billion, which comes to 14 percent of the total federal progamme. A total of 32 small and medium dams, 8 in each province are being financed. Similarly, adequate allocation has been made to projects such as National Programme of Watercourses, irrigation system, rehabilitation, lining of canals, and distribution, etc. Improved water management efforts under the PSDP for Fiscal Year 2009/10 to raise agricultural productivity will involve allocations of: Rs 12 billion for Raising of Mangla Dam including resettlement; Rs 10 billion for the improvement of water courses; and several projects in all the provinces with allocations of Rs 15 billion for canal improvement and rehabilitation of irrigation system Madam Speaker! 30. For Fiscal Year 2009/10 the strategy adopted is to complete ongoing mega projects side by side with construction of small/medium dams. The Government has launched a massive programme of water resource development and is earmarking an amount of Rs 47 billion in the PSDP for Fiscal Year 2009/10. Major water sector irrigation projects being completed in the water sector include raising of Mangla Dam, Gomal Zam, Dam and Satpara Dam. Preparatory works on Basha, Akhori, Mujda, Naigaj Dam have been initiated. Kachi Canal in Balochistan and Rainee Canal in Sindh will be completed in mid 2010. 31. The lining of irrigation channels in saline zones is being undertaken in Punjab, Sindh and NWFP to save the seepage and other losses. A national programme of Small Dams covering all the four provinces is being implemented. A comprehensive plan is also being developed for rainwater harvesting and ground water recharge. Madam Speaker! 32. Development of agriculture infrastructure including warehousing facilities will involve Integrated Agriculture Marketing and Storage
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Infrastructure including feasibility study projects the total cost of which is Rs 37 billion, with Rs 500 million allocated for Fiscal Year 2009/10. 33. To assist small farmers the Government is launching the Benazir Tractor Scheme costing over Rs 4 billion over two years. 34. In order to ensure food security and to improve productivity of small farms, the Government is implementing a phased 'Special Programme for Food Security and Productivity Enhancement of Small Farmers' covering 13,000 villages by the year 2015 starting with 1,012 villages. This programme will be executed in all the four provinces in addition to Azad Jammu & Kashmir, FATA and FANA during the first phase at a cost of Rs 8.013 billion. Madam Speaker! 35. A new Agriculture Model Village Programme has been initiated in 26 villages under the auspices of Zarai Taraqiati Bank Limited. The objective is to organize the farming community at the village level ensuring farmers easy access to agri credit. 36. In Fiscal Year 2009/10 the Government plans to initiate new programmes like commercialization of the seed sector in order to enhance high quality supply through setting up an industry on the concept of Public Private Partnerships and diverting major investments in building and strengthening infrastructure in the sector.
Livestock & Dairy

Madam Speaker! 37. Livestock plays an important role in our economy. The Ministry of Livestock & Dairy Development, created in November, 2008 envisages food security, greater availability of quality products at competitive prices and the promotion of deep sea fishing to enhance foreign exchange earnings to address livelihood concerns of fishermen. A number of initiatives to strengthen livestock sector include: a. Prime Minister's Special Initiative on Livestock; b. livestock production and development for meat production; c. Prime Minister's Special Initiatives for White Revolution, that is, Doodh Darya and Dairy Pakistan projects are serving as a primary vehicle to bring about a white revolution through fundamental changes in the dairy sector; d. National Programme for the control and prevention of Avian Influenza;
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38.
e. upgrading and establishing animal quarantine stations; f. efforts to enter into the halal food market; and g. improving reproductive efficiency of cattle under smallholders system. Projects foreseen during the Fiscal Year 2009/10 include: a. 'Capacity Enhancement of Dairy Products under Public Private Partnership' a project worth Rs 3,500 million, for which Rs 300 million will be allocated during Fiscal Year 2009/10; b. 'Poverty Reduction through Small Holders Live Stock and Dairy Development' worth Rs 3,539.13 million, from which an amount of Rs 400 million will be allocated in Fiscal Year 2009/10; c. More model dairy community, biogas and breeding farms, cooling tanks, rural services providers and pasteurization plants.
Fisheries
Madam Speaker! 39. During the Fiscal Year 2009/10 focus will be on: a. Lifting European Union's ban on fisheries export by upgrading fishing vessels; b. Improvement of infrastructure facilities for value added products; c. Establishing a fisheries training centre at Gawadar; d. Landing sites along the coastal line; e. Reducing post harvest losses through improved fish handling along the food chain and marketing; and establishment of shrimp aquaculture in the country. IV. Making Industry Internationally V. Capital and Finance for Development VI. Removing Infrastructure Bottlenecks Through Public-Private Partnerships Madam Speaker! 40. As a result of international recession, energy shortages, and a contraction in the economy, the industrial sector in Pakistan has been adversely affected. This sector posted a negative 3.3 percent growth in the outgoing year with large scale manufacturing posting a negative 7.7 percent growth. The industrial sector is our engine of production and
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employment. The government proposes to declare fiscal 2009/10 as the year of industrial recovery. Our industry is fragmented and lacks consolidation. It is being provided the following support measures:
Financial Measures
With a view to moving industry towards consolidation and value addition an Export Investment Support Fund, worth Rs. 40 billion has been proposed for FY 2009-10. The government will contribute Rs 10 billion towards this fund; another Rs 10 billion would be contributed by the Export Development Fund; balance Rs 20 billion would be contributed by governmental agencies through mopping up of surpluses in commercial banks. In order to support the SME sector by providing access to credit, a fund worth Rs. 10 billion for Credit Guarantees is going to be established. This fund would be financed by the government and the private sector in the ratio of 50:50 over the next two years. The government has already proposed Rs 2.5 billion in the Budget 2009/10 as its share to the fund. For citizens who lack equity financing, a Venture Capital Fund of Rs 10 billion is also proposed to be established which shall be financed in the same manner as the SME Credit Guarantee Fund. A provision of Rs 2.5 billion has again been proposed for this fund in Budget 2009/10. A new DFI is being created for industrial financing. Industrial clusters are going to be involved for the skill development to ensure ownership, monitoring/oversight and relevance of programs The allocation for M/o Industries will be increased by 335 %, I repeat 335%, from Rs.2.0 billion in FY 2008-09 (R.E) to Rs.8.7 billion in FY 2009-10. The budgetary allocation for Science & Technology has doubled from Rs 1,510 million in FY 2008/09 to Rs 3,140.4 million during FY 2009/10. 41. Government is not going to enhance tax incidence on industry, except tobacco; rather following tax facilitations have been proposed:- o In order to assist automobile manufacturers and their vendor industries a reduction of 5% excise duty on automobiles (CKD) is proposed.
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In order to revive the construction sector a reduction of Rs 200 per ton in the excise duty on cement. This decrease shall be passed on to the consumer. In order to support Textile sector, withdrawal of FED on import and supply of Viscose Staple Fiber (VSF) and zero rating of chemicals used in manufacturing of fire retardant fabrics is proposed. Cellular service providers have been provided the following relief: Elimination of Regulatory Duty of Rs 250/- per set. Reduction in Customs Duty from Rs 500/- per set to Rs 250/- per set. Reduction in Excise Duty from 21 percent to 19 percent. Sim activation charges reduced from Rs 500/- to Rs 250/-. Incentives for documented sector in case of 90% purchases from sales tax registered suppliers. Zero rating duty on exports sector will continue this year as well. To protect the local industry from under invoicing by importers, improvement in Customs valuation and enforcement mechanism would be ensured. Refund procedure would be streamlined - FBR to pay interest on refunds delayed beyond 90 days. To facilitate all tax payers including industry harmonization of tax laws (Sales, Excise, Income, Customs) would be ensured. The limit of credit on donations in case of companies is proposed to be enhanced from 15% to 20%.
Madam Speaker! 42. In order to revive our industrial sector, following additional initiatives have been proposed: Industry would receive priority in allocation of gas and electricity. Cross subsidy in electricity and gas tariffs would be reduced in a phased manner to provide relief to the industry. Large Export Houses would be established to support the export industry. Development of Special Economic Zones and Special Industrial Zones would be fast tracked.
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Market access to USA and EU is being negotiated to provide level playing field to our industry in international market. Corporate Rehabilitation Act (CRA) is being finalized to improve bankruptcy and insolvency regime. Proposals to form Resolution Trust Corporation (RTC) to promote consolidation of industry are being finalized. SECP Reforms like Holding Company Formation facilitation and number of other business environment improvement initiatives are underway to develop competitive markets for the private sector Capital markets are being developed for financing of trade and industry. The Industrial Relations Act 2008 has been passed by the Parliament to improve the labor-owner relationship regime. In order to provide opportunities to the entrepreneurs for expansion as well as assist the government in disposing off public assets, a transparent privatization policy based on Public Private Partnership is being pursued through sale of 26 percent shares to the private sector or allow privatization of management on profit sharing basis. To improve industrial competitiveness implementation of the National Trade Corridors Improvement Program has been launched. To achieve a high quality road and rail network, allocations for National Highway Authority amounted to an increase from Rs.36 billion to Rs.40.2 billion whereas in the case of Pakistan Railways from Rs.6.6 billion to Rs.12.7 billion. Custom duty is proposed to be reduced on a number of items to provide cheaper raw materials to different sectors like poultry, dairy, fish processing and pharmaceuticals. Adequate protection is also proposed to be given to local industry.
VII.
Integrated Energy Development Programme
Madam Speaker! 43. Uninterrupted supply of energy is not only the need of the citizens but of all sectors of the economy. The industrial sector has already been hit very badly in the outgoing financial year. Prime Minster's Economic Advisory Council has developed an integrated energy plan to cater for
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the short, medium and long term energy needs of the country. This is the first ever integrated energy plan of Pakistan as previously energy sector had been dealt in isolation. 44. Government is well aware of the problems that have arisen in the wake of energy crisis in the country. The previous regime's short sighted policies handed over its legacy in the form of abrupt powers shortages, load shedding and unaffordable energy mix. We have taken a number of measures in order to improve energy scenario of the country to give impetus to our agriculture and industrial sector. Madam Speaker! 45. In this light, PSDP allocations for the power sector will be increased by 100 percent, from Rs 11.4 billion in Fiscal Year 2008/09 to Rs 22.8 billion during Fiscal Year 2009/10. 46. The previous Government left a huge backlog of circular debt in the energy sector. A total lack of decision making to address this issue in a timely manner on the part of the previous government has left the present government with a huge challenge. We have not shied away from our responsibility. In this regard the government has taken up the challenge to resolve the issue of circular debt which has reduced the efficiency of the energy sector. In order to improve the liquidity position of the power sector, the Government/specially created holding company: will assume the entire bank loan liabilities of Rs 216 billion and pay the markup on these loans from budgetary resources; has already arranged TFC facilities of Rs 92 billion for PEPCO from banks to discharge its payment obligations towards Independent Power Producers and oil and gas companies; will assist to settle the remaining payables of PEPCO at Rs 61 billion; has decided to pick up the entire past arrears of PEPCO against FATA consumers to the tune of Rs 80 billion and pay the current electricity bill of FATA; and will help PEPCO to clear its outstanding receivables from federal and provincial government departments and entities, mainly KESC and KW&SB. 47. Projects have been undertaken to reinforce the transmission and distribution systems to minimize power losses and outages so as to provide a stable and reliable supply to consumers. Currently 15 Independent Private Power Houses with a total capacity of 2,921
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Megawatts are in different stages of development. Out of these, 9 projects for 1,861 Megawatts will be commissioned in 2009; 4 projects for 776 Megawatts will be completed in 2010; while 2 projects for 284 Megawatts are due for completion in 2011. Madam Speaker! 48. To meet the Government's target of eliminating load shedding by 2009, agreements have been made with 5 rental Power Projects for 800 Megawatts. Work on 16 Hydropower Projects in the private sector with a total capacity of 4,160 Megawatts has been initiated. Two new combined cycle power projects of 500 MW each in the public sector to supplement total capacity are planned at Chichoki Mallian and Nandipur. 49. The Government has also made an elaborate plan for electrification of all villages where electricity can be extended from grid supply. This was achieved in 6,419 new villages last year. 50. Demand side measures including conservation have been initiated including: massive media campaign to raise public awareness; induction of energy saver lamps for peak chopping; and enforcement of Daylight Saving Time during summer. 51. Other major activities proposed to be undertaken in the Fiscal Year 2009/10 include: induction of two hydro projects i.e. Khan Khawar & Jinnah Hydro, with total capacity of 168 Megawatts; setting up call centres in all Distribution Companies to improve customer services; and infrastructure development to reduce energy losses. 52. The PSDP allocation of Rs 4,000 million for FY 2009/10 has been made for the 4,500 Megawatts Diamer Basha Dam Project. Construction of more than 30 small and medium Dams in different provinces has also been funded. 53. In order to ensure transparency in the pricing of petroleum products and to reduce its use as well as assist in the cause of environmental protection, the petroleum development levy is being abolished and replaced by a specific Carbon Surcharge. 54. The government has determined the ideal policy mix for energy needs of Pakistan. These are hydel, coal, wind and solar. A comprehensive renewable energy policy is being formulated. The following steps are being taken in FY 2009-10:-
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A 50 Megawatt Solar Thermal Power Project to be established in Southern Punjab; Development of Wind Farms in areas in addition to Gharo-Keti Bandar, identifying new corridors of available wind potential in Punjab, Balochistan and NWFP. Solar Water Heaters Programme; Production of solar cells and modules up to an annual capacity of 80 Kilowatts; Depreciation allowance for renewable energy being enhanced by 100 percent; Allowance of duty free import of equipment under nine categories of alternate energy being considered.
VIII. Human Development for the 21st Century

Madam Speaker! 55. 'Human resource development' is a prerequisite for improving all aspects of the quality of life of our citizens. The government is aware that improvement in social indicators needs to be expedited and has, therefore, adopted human resource development as a priority area particularly in education; health; clean drinking water and sanitation; population planning; and gender equality.
Education
Madam Speaker! 56. Significant reforms in education sector include: Strengthening the planning and implementation capacity of the government; Improving utilization of resources by educational institutions; Enhancing governance for greater accountability of education service providers to the community; Capacity building of district and local level institutions; and strengthening the role of communities through school committees. Budget proposal for Fiscal Year 2009/10 Major programmes of the Ministry of Education include:
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(i) Establishment and operation of basic education and community schools in the country; (Rs 2 billion) and (ii) Education for All through providing missing facilities to primary schools. (Rs 2 billion) Development funding to Higher Education Commission is being enhanced by 60% to Rs 22.5 billion in Fiscal Year 2009/10; current budget provision is being enhanced by 26% to Rs 21.5 billion. National Vocational & Technical Education Commission is targeting one million trainees every year in a phased programme. An allocation of Rs 2.2 billion has been provided in FY 2009-10. Skill development (vocational/technical) programmes aimed for labour export market are being planned.
Health
Madam Speaker! 57. The health strategy has been constructed on the key principles of equity, universal access to essential healthcare, timeliness, results, accountability, strong leadership and strategic coordination of the overall effort. The Strategy envisages addressing special needs of the vulnerable population, especially women and children particularly in the rural areas. The health sector continued to remain the focus of attention of the elected Government during Fiscal Year 2008/09 and received a special thrust in terms of enhanced PSDP allocation and initiation of a number of new projects aimed at improving the health of the nation. Allocations for health under the PSDP have increased by 66 percent, from Rs 13.99 billion in Fiscal Year 2008/09 to Rs 23.15 billion during Fiscal Year 2009/10. National programmes for Family Planning and Primary Healthcare; and Expanded Programme of Immunization continue to receive top priority with respective allocations each of Rs 7 billion and Rs 6 billion. The Prime Minster's Emergency Action Plan for disease has been launched and will cost Rs 11 billion in the next five years. A concessionary import duty rate on 35 raw materials used in pharmaceuticals, medicines and diagnostic kits is also being proposed.
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Zero rate sales tax on import and supply of wheelchairs for the special people is proposed. Tobacco taxation is being increased as per World Health Organization recommendations for protecting health of the population.
Clean Drinking Water for All and Environment

Madam Speaker! 58. Clean drinking water is the first line of defense in protecting public health. The Clean Drinking Water Project is a promising initiative for the masses prone to waterborne diseases. The work for installation of filtration plants is going on and about 600 plants have been operationalized till now. 59. It is proposed that 3,500 plants will be installed one in each union council by end of Fiscal Year 2009/10 for which an amount of Rs 6 billion is being allocated. Besides providing safe drinking water, the project will also create sufficient job opportunities contributing to reduction in unemployment. 60. The budget for environmental protection has been increased from Rs 1.14 billion in Fiscal Year 2008/09 to Rs 2.96 billion for Fiscal Year 2009/10. This amount will be spent on forestry; environment friendly public transport and on provision of clean drinking water.
Gender Equality
Madam Speaker! 61. Pakistan has also expressed its commitment to gender equality and equitable development in many international forums and conventions including Convention on the Elimination of all Forms of Discrimination against Women and the Beijing Platform for Action. In order to advance the goal of gender equity in the process of implementing socio-economic policies, the Federal Budget for Fiscal Year 2008/09 showed a hefty increase in budgetary allocations for women specific expenditures amounting to Rs 44.7 billion compared to Rs 7.7 billion during Fiscal Year 2007/08. 62. The Government is committed to maintain gender equality in policies and programmes. It is pertinent to mention that health and education, the two core social sectors, are the main recipients and sources of gender specific allocations, with the Benazir Income Support
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Programme also having emerged as a key source of growth in gender targeted allocations. Targeted and pro-women allocations in the federal budget with the intention to bridge the gap between men and women in acquiring access to basic service is surely a commendable policy. Gender mainstreaming project is being run at the Planning Commission and an engendering budget exercise is being also carried out under the Medium Term Budgeting Framework in the Ministry of Finance.
Human Rights
Madam Speaker! 63. Following the footprints of former Prime Minister, Mohtarma Benazir Bhutto Shaheed's dreams of addressing the problems of the oppressed in Pakistan, for Mohtarma created a wing of Human Rights, we have built upon that and have established a full fledged Ministry of Human Rights. 64. Steps are being taken to establish "Benazir Shaheed Human Rights Fund" and the bill for creation of the National Commission of Human Rights has been tabled on floor of the House. The Board of Governors of the Women Distress and Detention Fund has been reconstituted. The Provinces are being requested to allocate their share in the fund. We have distributed cheques to eligible petitioners out of the Relief and Revolving Fund to redress their grievances. Youth Affairs, Culture and Sports Madam Speaker! 65. Youth is the most important asset of our country, particularly at this stage when we are endeavouring to rapidly modernize and introduce technological innovation. They can play an important role in the decision making process for development of the country. During the fiscal year 2009/10, following initiatives have been envisaged, Different programmes for youth motivation, character building, awareness and integration, and establishment of youth activity centers will be undertaken under the National Youth Policy. Approximately 30,000 educated postgraduates will be offered internships under the National Internship Programme for which the Government has allocated Rs 3.6 billion for Fiscal Year 2009/10.
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A Mobile Youth Computer Literacy and Awareness Programme have been started through Mobile Computer Vans to educate/train the youth of rural areas. Approximately 15,000 volunteers from all walks of life have been registered for community development activities and disaster management. An amount of Rs 450 million for Fiscal Year 2009/10 for cultural development has been allocated which is an enhancement of Rs 186 million over the previous year's allocation. The government is placing special focus on the development of sports in the country. An amount of Rs 583 million has been allocated in PSDP in FY 2009/10 against an allocation of Rs 140 million in RE 2008/09. Government wishes to promote sports with private sector participation to afford the children and youth an opportunity for healthy recreation and sports related employment opportunities.
IX. Governance for a Just and Fair System Madam Speaker! 66. Improved 'Governance' is a must for a just and fair system. The manner in which public institutions and officials acquire and exercise authority to shape public policy and provide public goods and services is at the crux of our agenda. Political instability, corruption, volatile law and order situation and inadequate infrastructure have all left a detrimental impact on Pakistan's business environment. Autonomous institutions are needed, capable of outlasting their creators and resisting capture by individuals lusting for power and money. They must so function as to inspire confidence, which means that they must protect the rights of society against the exercise of arbitrary power. Madam Speaker! 67. To strengthen governance, an additional amount of Rs 500 million was provided to the provincial implementing agencies of the ongoing Access to Justice Programme to support improvements and development measures in Fiscal Year 2008/09. An opportunity has now been created for the people of Pakistan under Access to Justice Programme to build upon the existing framework of reform initiatives for securing immediate
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and visible improvements in the system of justice administration. The initiatives that will be carried out in the near future under this programme include: Establishment of Public Defender and Free Legal Aid System across the country; Establishment of Fast Track and Evening Courts at the federal level and provincial headquarters; and Pro-poor legislation and automation of the justice sector. Madam Speaker! 68. During Fiscal Year 2009/10, greater focus will be on administrative reforms. We have already constituted a Pay and Pension Commission to make recommendations to the government linking compensation with performance. We believe that the compensation package of government servants should be brought close to market salaries in a phased manner. The Pay and Pension Commission is expected to make realistic recommendations regarding the following concepts which we have included in our agenda of governance reforms: Monetizing incentives for civil servants; Making public sector the ultimate choice for talent, in other words 'Employer of choice'; Improved service delivery; Greater transparency and self-accountability; Market-based competitive salary structure. Madam Speaker! 69. We realize that the government servants are not adequately paid. In order to revise the compensation package a Pay and Pension Commission has already be constituted. During the course of the year, we would be benefited by the recommendations of the said Commission. However, to compensate government servants, I have the pleasure to announce: an ad-hoc relief allowance of 15% of pay of serving government servants from 1st 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 1st July 2009, as announced by the President of Pakistan. For the remaining armed forces personnel, allowance equal to one month's initial basic pay will be admissible from 1st January 2010 in line with the Presidential announcement; in
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the interim period, an adhoc relief allowance of 15% of pay will be allowed. This adhoc relief allowance will be withdrawn w.e.f. 31st December 2009. The retired government servants and armed forces personnel will also get 15% increase in their net pension from 1st July 2009. In addition limit for the exemption on Income Tax for salaried male is being enhanced from Rs 180,000 to Rs 200,000 Limit for the exemption on Income Tax for salaried female is being 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 up to Rs 750,000; previously this limit was up to Rs 500,000/-. 71. The government would also take measures during the next financial year to undertake the following actions in its drive towards governance reforms: Public sector enterprises including Pakistan Railways, Pakistan Steel Mills, Pakistan International Airlines and the Power Distribution Companies would undergo financial reforms to improve their management and service delivery. National Savings Organisation and the Federal Bureau of Statistics would move towards becoming corporate entities displaying the highest level of efficiency and service delivery. Madam Speaker! 72. Federal and provincial solidarity is a must in the process of governance reform. Criticism must be genuine and solutions should be just and realistic. The line between government and opposition should not be based on vendetta and abuse, but on a sincere difference in principles.
National Finance Commission

73. The present government has constituted the National Finance Commission which would be convened immediately in the next financial year. It is our belief that decision making on financial matters relating to the distribution of resources between the federation and the provinces need to be addressed in an institutional manner. This notwithstanding, we have made efforts to increase the share of the provinces in the
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divisible pool of taxes along with special grants from the existing 47.5% to 49% during fiscal year 2009-10. On a cumulative basis the provinces would receive federal transfers in excess of Rs 708.1 billion against Rs 600 billion in the last financial year, an increase of 18%. National Assembly Secretariat, Provinces and Parliamentary Affairs and Opposition Madam Speaker! 74. The National Assembly is an important organ of the Federation's consultative process and needs further strengthening. A budget provision of Rs 1.1 billion was approved for the activities of National Assembly Secretariat during the Fiscal Year 2008/09, while for fiscal year 2009/10 an amount of Rs 1.3 billion is being allocated. Other improvements to strengthen the Parliament made during FY 2008/09 include: Sovereignty of the newly elected Parliament has been ensured through discussion and debate on all issues of national importance in the Parliament. The Defence Budget was presented in the Parliament for the first time after 1964. The Prime Minister regularly attends the National Assembly sessions and himself responds to questions, points of orders, motions and other important issues. Formation of Standing Committees in time and in proportion to the political parties' strength in the Parliament. Chairmanship of the Standing Committees has been given to the Opposition according to their strength. Chairmanship of the Public Accounts Committee has been given to the Leader of the Opposition for the first time in the Parliamentary history of Pakistan in line with established traditions of parliamentary democracy in the developed world. Equal distribution of development funds has been made amongst the members of the Parliament irrespective of party affiliations.
Taxation Proposals
Madam Speaker! 75. Allow me to give you the highlights of taxation proposals for the year 2009/10. I have already presented the important fiscal incentives for the different sectors of the economy. Allow me to add that the tax
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measures being proposed by the government are fair and equitable guided by the principle of "ability to pay", set in the context of an economy fighting a war. 76. Excise duty on petroleum products is being levied in the shape of a carbon surcharge which would eliminate the existing petroleum development levy. This would ensure transparency in the pricing of petroleum products, curb consumption, save foreign exchange and reduce carbon emissions. 77. In order to discourage consumption of cigarettes excise duty and sales tax on cigarettes is proposed to be enhanced. This would generate estimated revenues of Rs 15 billion. 78. As a revenue measure and to broaden the tax base, FED in VAT mode is proposed to be levied on the following additional services: Fees charged by banking services. Fees charged by import cargo handlers. Fees charged by stock brokers. Fees charged by insurance companies. Fees charged by electronic media for advertisements. The estimated revenue impact of these measures is Rs 16 billion 79. It is proposed to enhance the rate of withholding tax on imports of commercial nature from 2% to 4%. This measure would result in estimated revenue of Rs 23 billion. 80. Following the policy of broadening the tax base and putting the burden on those who can bear it, it is proposed to enhance the rate of Capital Value Tax on property from 2 to 4 percent. Government intends to adopt effective measures to ensure its collection. It is estimated to generate revenues of Rs 15 billion. 81. To help the internally displaced persons, it is proposed to levy for a single year: A nominal tax of 5% on the tax payable by every individual deriving income above rupees one million. It is further proposed to levy a flat rate of 30% on bonuses earned by individuals in the corporate sector drawing salary exceeding Rupees one million. 82. It is proposed to levy a Minimum Tax under section 113 of the Income Tax Ordinance 2001 on the income of a resident company, provided that this will not be applicable to a company which has declared gross loss before set off of depreciation and other inadmissible expenses under the Ordinance.
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83. To promote documentation of the economy, it is proposed that certain sectors may be pulled out of the presumptive, or final, tax regime. These sectors will now be required to file returns. Phasing out the presumptive tax regime will be an on going process. Madam Speaker! 84. What the nation and the people need now is a guarantee for permanence in policy, permanence in ideology and permanence in approach which cannot be found in elusiveness. Our power is the power of the people. Our founding father, Quaid-e-Azam, Mohammed Ali Jinnah pledged that Pakistan would have a government and a constitution chosen by the people. Mankind has reached great heights by pursuing democratic ideals. Democracy is our polity and all power belongs to the people. Madam Speaker! 85. As Shaheed Zulfiqar Ali Bhutto stated, "A new era is emerging in the political life of the nation. The politicians of Pakistan are facing a crucial new test as destiny stands at the dawn of a New Year. A new look amid a new style will have to emerge. The old ways will no longer appeal to the people. A new all round approach will have to be found in every facet of politics. The hand must reach the ground, the eye must perceive the sub-surface movements and the ear be able to hear the sound of music in the far distance. Crescendos of 'Zindabad' and warm ovations at public meetings are not going to be the final tests of political acumen." 86. Pakistan is a rich country in terms of both natural and human resources. Yet clearly, Pakistan has not fully exploited its potential. In this scenario, the government will ensure that clearer priorities and propoor sectoral programmes are in place that will provide an appropriate strategic framework to effectively reduce poverty. Madam Speaker! 87. "Let us welcome the sound of bells of another year which is likely to bring more hope for all than the one that has ended. Time and with it events are moving faster.....But as a new page is being turned in an old book, let us end on a hopeful note." Pakistan Paindabad!
http://www.finance.gov.pk/finance_federal_budjet.aspx
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N O R EAL I NCREASE
IN
D EFENCE B UDGET
Without jacking up defence spending in real terms despite fighting an insurgency on the western borders of the country, the government on Saturday allocated Rs 342.914 billion for defence for the fiscal 2009-10. The allocation for defence is 10.15 per cent higher as compared to the Rs 311.303 billion revised defence budget for the outgoing fiscal year. As inflation stands at 14 per cent, the defence budget is almost four per cent less than the inflation rate. In the outgoing fiscal, the government originally allocated Rs 296.077 billion. The amount was, however, revised to Rs 311.303 billion. In her budget speech, Minister of State for Finance and Economic Affairs Hina Rabbani Khar said: Our armed forces are in the forefront of the war against terror and in fighting insurgency in the country. Our western border is most volatile and faces the brunt of insurgency. The president has been pleased to announce an increase in the allowances of the personnel of armed forces deployed in the western theatre, equal to one months basic pay with effect from 1st July, 2009. She said the president further announced that this benefit be extended to the entire armed forces from January 1, 2010. Today, the nation stands behind our valiant armed forces. No amount of compensation is adequate enough to cover the risk to ones life. I hope this small gesture on part of the government helps in building the morale of our Jawans and officers in the war against terror. India announced unprecedented 24 per cent increase in defence spending for new fiscal year-the highest since Independence. India took the plea of Mumbai attacks to jack up defence spending.Pakistans defence allocation does not include foreign assistance, which is being dealt with separately outside the budget. Of the total defence outlay, Rs 1.2 billion is allocated for the defence administration. The military defence, however, got Rs 3.41 billion with Rs 115.034 billion for employees-related expenses, Rs 92.210 billion as operating expenses, Rs 107.377 billion for physical assets and Rs 27.495 billion for civil works. Hina Rabbani Khar, however, said that the efforts of the government to manage the economic and financial affairs of the country should be viewed in the context of the prevailing state of security in the country. The war on terror has already cost us over $35 billion since 2001-02. We now face the prospects of incurring huge expenditure on account of counter-insurgency, she added.
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We have to meet the maintenance and rehabilitation cost of almost 2.5 million brothers, sisters and children displaced as a result of the insurgency. The international community has pledged its support for this human cause.However, your government is fully conscious of its responsibility and has allocated Rs 50 billion, I repeat Rs 50 billion, in the budget 2009-10 for the relief, rehabilitation, reconstruction and security of the internally displaced persons, said the minister.
The News International (Rawalpindi), 14 June 2009.
A GRICULTURE E XEMPTED
FROM
T AX
Influential agriculture lobbies, both inside and outside the government machinery, have once again succeeded in pushing the government to exempt the politically-sensitive sector from taxes in the budget for the fiscal 2009-10. The government also announced Rs 12.69 billion subsidy for the sector that would ultimately go into the pockets of landlords. Keeping the sector untaxed indicates that 22 per cent of the GDP would still be out of the tax net and big farmers earning billions of rupees green income would contribute zero to the countrys tax revenues the next year. Minister of State for Finance and Economic Affairs Hina Rabbani Khar, while presenting the Federal Budget 2009-10, announced the overall Public Sector Development Programme (PSDP) allocation for agriculture at Rs 18 billion during the next fiscal that was 25 per cent more than the revised estimates of Rs 14.4 billion in the fiscal 2008-09, while its original allocation in the last years budget was Rs 20.52 billion. She also envisaged that the agriculture sector would grow by 3.8 per cent during the fiscal 2009-10. This will be achieved through increasing productivity and value addition in agriculture, she said. However, a notable feature of the budget 2009-10 is that the government has not announced such visible incentives for the agriculture sector that could benefit the small farmer directly. The government maintained the last years incentive of zero custom duty on tractors, poultry inputs and cattle feed. It is worth mentioning that in Pakistan, there are about 88 per cent farmers having less than 12.5 acres of land, while other 12 per cent are big farmers, holding more than that. The government every year dolling up billions of rupees subsidy on the agriculture sector with a view to support the small farmers and help
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boost their incomes as a result of high production. At the expense of the small farmers, the big farmers were exploiting the government subsidies and earning billions of rupees, while contributing nothing of their incomes to tax revenues. These lobbies are so powerful that at the launch of the Economic Survey 2008-09 the other day, Adviser to the Prime Minister on Finance Shaukat Tarin had to confess that he was ready to tax this sector, but he would be subjected to martyrdom the next day. During the last 62 years, nobody has dared to impose taxes on the agriculture sector because of the strong lobbies in the country. Tarin said the government would levy taxes on the real estate and services sectors. However, two other sectors stock exchanges and agriculture would be included in the tax net next time. Hina Rabbani Khar, presenting the budget 2009-10, said the policy measures taken by the government had led to an estimated transfer of resources of about Rs 294 billion in to the rural economy. The government will formally introduce geneticallymodified cotton into Pakistan on fast-track basis. It has been planned that the farmers will be offered the BT cotton hybrid varieties during the fiscal 2009-10. It is the vision of the government to treat the livestock, agriculture and fisheries sectors as an industry. Hina also announced a proposed amount of Rs 2.5 billion to ensure food security and productivity enhancement of the farmers. She said selfreliance in commodities, food security through improved productivity of crops as well as development of livestock and dairy would be the main pillars of the policy. More importantly, the government would continue to ensure a minimum guaranteed price to the farmers, based on international comparisons.Our pricing policy for the agriculture sector helped this sector in recording a growth of 4.7 per cent in 2008-09 as compared with 1.1 per cent the previous year. Hina said other areas of support for agriculture and livestock would be through focusing on research and development by upgrading the existing R&D facilities and initiating the establishment of two world-class research institutions for wheat and cotton, development of new technologies, more productive use of water through precision land levelling and high efficiency irrigation systems. The government would also focus on promotion, production and export of high-value crops; acceleration of the move towards highvalue activities, such as livestock rearing, dairy production, fisheries and horticulture; creation of necessary infrastructure and insurance of agricredit availability. In 2009-10, the government would establish 10 model
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agricultural union councils for each major crop across the country and support the promotion of model organic farming.
Live Stock and Dairy

No visible incentives were announced in the budget for the livestock and dairy sector. However, for the first time, Rs 2.55 billion were allocated in the PSDP for livestock and dairy development. Projects foreseen during the fiscal 2009-10 include: (a) Capacity Enhancement of Dairy Products under the PublicPrivate Partnership, a project worth Rs 3,500 million, for which Rs 300 million would be allocated during the fiscal 200910. (b) Poverty Reduction through Small Holders Live Stock and Dairy Development, worth Rs 3,539.13 million, from which an amount of Rs 400 million would be allocated in the fiscal under review and more model dairy community, biogas and breeding farms, cooling tanks, rural services providers and pasteurisation plants. Fisheries The government has also announced that during the fiscal 2009-10, focus will be on lifting the European Unions ban on fisheries export by upgrading fishing vessels, improving infrastructure facilities for valueadded products, establishing a fisheries training centre in Gwadar, landing sites along the coastal line, reducing post-harvest losses through improved fish handling along the food chain and marketing and establishing the shrimp aquaculture in the country. It is interesting to note that the government had increased wheat support price from Rs 510 to Rs 625 per 40 kg last year and later, it was raised to Rs 950 per 40 kg. Whereas, the wheat production did not increase during these two years and stood at 23.4 million tonnes in 200809, against 23.3 million tonnes in 2006-07. Independent economists believed that the high wheat price was instrumental in increasing the double-digit food inflation during the fiscal 2008-09. Last year, the total allocation for subsidy on fertilisers increased from Rs 25 billion to Rs 32 billion. Besides, it also completely exempted fertilisers and pesticides from sales tax and other duties on imported and
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local supply of the commodity. Its exemption effect from duties stood at Rs 6 billion.
The News International (Rawalpindi),14 June 2009.
B UDGET
AND
O UR G ROUND R EALITIES
The Budget 2009-10 has an outlay of Rs 2.48 trillion with an anticipated deficit of Rs 722.5 billion or 4.9 percent of GDP, aiming at a growth rate of 3.3 percent of the GDP. A negative reaction to it at the national level has already set in, which is intense despite the fact that this kind of thing happens routinely every year, starting many decades ago when the country first tilted into political instability, bad law and order and terrorism. Budgets have always disappointed everyone and not lived up to their projections. Hence the lack of confidence in budgetary predictions. The deficit has been described as excessively large although, in comparison, Indian budgets have had larger deficits. What is more, external contribution to revenues of the order of US $ 2 billion or so is being doubted, although the Friends of Pakistan have pledged over $ 5.5 billion over the next two years. Mr. Shaukat Tarin, the Finance Advisor, says this is a realistic input, and he may be more right than wrong in view of the concern that the international community is showing in helping us fight the war on terrorism. Of course, if this money is not forthcoming through the year the axe will surely fall on the development outlays and any cuts here will impact job creation, growth and taxes. Therefore, given the state of war between the Taliban and the state, these pledged contributions will be crucial although conditional to Pakistans sustained willingness to fight elements on its territory that threaten the world. Mr. Tarin had promised that he would not pursue those who are already taxed with more taxes but will find new non-payers and bring them into the tax net. But the Budget has only marginally raised the exempted tax ceiling of the middling salaried class while only adding a burden of about 5 percent on the rich for purposes of a one-time contribution to the IDPs fund. But critics feel it has not taken steps to bring more people into the ambit of taxation. This is a perennial flaw. All governments have failed to expand the tax net, and those who tried, as once under General Zia when Mahbub-ul-Haq was finance minister, had to backtrack for political reasons. Mr. Haq had proposed registration of inventories in the marketplace. So what does the government do? It relies
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heavily on indirect taxation that brings in money not after a year but during the currency of the annual budget. The big beef therefore is about the extra levies on oil and gas and the reduction in subsidies to the power sector. Taxing what only the rich consume doesnt bring in the kind of revenues the state needs; unfortunately, you have to squeeze the common man and the rich man both. The middle class and the poor cut back if their demand is elastic but in the case of gas, oil and electricity, the rising rates bring suffering. And that is what the beef is about. The rise in rates after the new levies will be inflationary. It will not only drive the middle class from the petrol and gas pumps, it will ramp up the price of food items and hit the poor in the solar plexus. Employees in the state sector have now started asking for indexing their salaries. Some relief has been granted to them, but after the dust settles on this Budget, their protest will resume, adding to street disturbance as these days improvements are expected because of government apathy only after you hit the street naked, pounding the chest and threatening strikes. Agriculture is still the favourite sector from where growth will be expected. The industry and trade sectors have already registered their disappointment with the budget. But the outrage being expressed by the heavily taxed industrial sector is in connection with the reluctance of the government to tax the agricultural sector. People say the feudal lobby is strong and will not allow the tax. (In fact, the tax is levied but almost not collected.) Since the provinces will collect, there is little responsibility felt by the centre to talk about it. And the feudal lobby is stronger in the provinces than at the centre. The provinces are getting a bit more for their development budgets this year than in the past, and they can pad up their receipts by improving their collections in the real estate sector. Our ground realities deflect attention from pure economics. We are fighting a war in which our army jawans and officers are dying. Our defence budget must not flag. We can win this war if we dont isolate ourselves internationally. It is a double whammy because our ability to finance this war will depend on unity at home and alignment abroad. At home, governance has been abysmal, and economic governance more so, because of the ever-rising corruption quotient. The Budget 2009-10 is like all budgets in the past, unimaginative and disappointing. But we have more unity of purpose this time as we face up to the threat to our very existence.
Editorial, Daily Times (Lahore),15 June 2009.
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P OLITICS
OF
P OVERTY
Politics of poverty Dependence on donors pledges is so pervasive that most television channels now need to run a line asking the nation to pray for the success of the prayer on which the Budget is premised! In the days leading up to the next fiscal years budget, what has been keeping the mandarins of the finance ministry engaged has been another matter- how poor are Pakistanis? By all accounts, and some verified numerical processes of none other than the World Bank, the poverty rate for 2007-8 had been determined at 17 percent. This would have been a six percent reduction in poverty over the 2006-7 performance of the economy when the poverty figure came down from thirties to around 23 percent. Implicit in the fidelity of these figures of poverty was the acknowledgement that the Pakistani economy had indeed done extremely well during the Aziz years. One is forced to differentiate between the Musharraf and the Aziz years, simply because the wheels began to turn better and smoother from 2004 onwards till grinding to a halt in 2008-9, after the advent of real democracy. Give the devil his due. They-the Musharraf-Aziz duo-at least did better on the economy -2005-6 produced the best ever GDP growth-in budgetary terms it was a stellar performance. Immediately after the February 2008 elections, and particularly in the last two months of that financial year, the global pricing regime in commodities went through a tsunami, which actually gathered pace in the second half of 2008, assuming astronomical proportions and robbing central banks of their hard-earned dollars; all this happened under the watch of the democratic government of the PPP. The countrys foreign exchange reserves shrank from the healthiest ever number of around $ 17 billion just before the 2008 elections to as low as $ 3 billion just within a year. That is when Pakistan had to return to IMF care. At the current $ 11 billion reserve mark, certain stability in macroeconomic indicators can be claimed, but the loss of rupee value will perhaps remain irrecoverable. Rupee depreciation coupled with quadrupled commodity prices spurred inflation -at its worst, it stood at 30 percent; it now hovers around 20 percent. This is the background to the poverty issue. What really lies behind this arithmetic of poverty actually has an eye to the future. In a years time, when the 2010-11 budget is to be presented, they will be reviewing the 2009-10 performance and finalising numbers for the year gone by. It is
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then that todays handiwork will become crucial. With the global economy still not out of the woods, trade sufficiently depressed, capital restricted, Pakistans economy on teeters with an on-going insurgency draining resources, the prognosis doesnt seem good. Per capita GDP in real terms, which has slid back already, is likely to go further back; and the IMF terms of engagement will keep the economy on a drip-feed while it tries to wrestle with macro-economic sustainability. Such an environment will only add more numbers to real poverty, adding to the poverty rate in a years time. This is where the differential between the 2008-09 and 2009-10 poverty figures will begin to give expression to the performance perception; and this reality haunts the current political leadership. As an interim, the ministry of finance has asked for a review of poverty figures in the last quarter of the previous fiscal year to look for higher final figures in poverty for the year under review, so that the differential with the likely numbers for 2009-10 does not look too dismal. Same has been the case with the review of annualised GDP numbers for 2007-8, which are now revised from the earlier reported 5.5 percent to 4.1 percent. That doesnt make 2 percent look as bad in comparison. This to me is probably the first time ever that a government is trying to make the countrys economic performance look poorer. Is there a way out? The 2009-10 Budget does not reflect that. Budgets in Pakistan have, for some reason, always been characterised as Houdinis acts; this one is a lot more - as they say in aviation terms - on a wing and a prayer. Dependence on donors pledges is so pervasive that most television channels now need to run a line asking the nation to pray for the success of the prayer on which the Budget is premised! We need to take a leaf from Shaukat Azizs book: the man knew how to make a quick buck (no pun intended). It took the Sri Lankans thirty years to reach a figure of $ 1 billion in the export of tea - their prime and most valued produce. Compare that to the contemporary financial system and you might just raise the figure in a couple of days. In modern economic parlance, this is termed the miracle of globalised service economies. If not for that, Singapore would not be the richest country in Asia in per capita GDP terms; Hong Kong would not be the financial hub that it is when China reacquired Hong Kong from Britain, Hong Kongs reserves were higher than those of mainland China in dollar terms; and the City of London, a separate entity within the London metropolis, would not be the hub of Europes financial system.
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Shaukat Aziz, a banker, knew the value of rotating capital; money in rotation generates wealth, and in turn makes all those coming into contact richer. This opens avenues of investment enabling the shares to reach the wider population. Shaukat Aziz understood this well, and that is why Pakistans services produced this overpowering wave of economic activity; this was what attracted capital from abroad as well as from within. By depressing the services sector over the last year-and-a-half, and by a strange quirk of logic assuming it to be an exclusive process by instead focusing on production alone, the economy has been robbed of support to the services sector, which is 52 percent of the economy in GDP terms. Production is key to the sustainability of the economic core, and must therefore be given its due importance, but do not forget to generate wealth - that is what people wait for and are hoping to realise soon. Whether Keynesian postulates support so, I do not know; but what I do know is that well being is not only having the right amount of wheat and rice in your home, it also, and more so, is reflected in what you drive and what you wear and possess. The 21st century definitions of well being have undergone a sea change, and our economic policies need to reflect that. Sadly, it is not so. Look at India. For years, a 3 percent growth economy, sticking to Nehrus puritan socio-economic values. The only thing missing was that they did not call each other comrade. It was only when the world went flat, to borrow Thomas Friedman, and services ended up being routed to India, mostly back-office work outsourcing they called it and Bangalore became the worlds intellectual back-shop, and money grew, and well-being began to be sensed, that the Mittals returned, the Ambanis became relevant, and the Tatas found rejuvenation. Sentiment is what drives economies. For a long time, they have been calling it the feel-good factor. And what will take you there is capital and its rotation not hoarding money. Produce and production are good sustaining economic values, but it is services that will get you there quicker. We need to re-learn our economics better. That is how the rest of the world made it; with better sense we could too. It has been done before, remember.
Shahzad Chaudhry, Daily Times (Lahore),15 June 2009.
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B UDGETING
FOR
F OOD S ECURITY
Budgets should reflect long-term vision and strategy of governments, rather nations. Unfortunately, they have become an exercise in balancing income and expenditure. Devoid of any vision, the budgetary allocations largely depend on individual politicians and bureaucrats; the most influential get better allocations and some professed priority areas are reduced to mere lip service. Unfortunately, the agriculture seems stuck in the latter category. The food security is dependent on agriculture, so is half of its employment. Most of manufacturing is based on agriculture raw material and 70 per cent exports are derived from the same sector. But still, agriculture suffers from fiscal and planning neglect. It is in a regressive mode for the last many decades. There has neither been any horizontal expansion (new lands coming under cultivation) nor any vertical (per acre yield) growth despite having massive potential on each of the two areas. For the last few decades, its cropping area has been stuck at 550 million acres. It, however, can be expanded by 30 per cent easily if Pakistan can generate water for it by developing water reservoirs on all identified sites. In case of vertical expansion, the situation is not any better. Per acre yields have either been stagnant or going down. For example, per acre cotton yield in 1992-93 stood at 27 maunds but dipped to 19 maunds last year. Wheat production is not any better either, except for the current year and 1999-2000.On the other hand, mouths to feed are increasing; according to the latest survey, the total population stood at 172.8 million in 2008. During 1950-2008, population increased by over fourfold, and urban population expanded by over sevenfold. By the end of this decade, it is expected to be nearly 180 million. The potential for horizontal growth can be gauged from the current culturable waste, which stands at massive 20 million acres. In the Punjab alone, such waste is around four million acres. Compare it with only 67,000 acres in the Indian Punjab, and Pakistans management follies become more evident, along with their cost for the nation. The recent expansion in acreage of wheat crop also underlines the fact how the country is benefiting in one crop at the cost of others and how reducing culturable waste could benefit it. Wheat, normally sown on 20.06 million acres, saw expansion this year to 20.24 million acres and yielded a bumper crop. But, it gobbled up 150,000 acres of canola, 500,000 acres of sunflower, 200,000 acres of vegetables and 150,000 acres of miscellaneous
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crops, including fodder. Though the country benefited on one front, gains could soon be stand neutralised as cost of missing other crops becomes evident. Policy-makers have also not been able to promote multi-cropping, inter-cropping and intensity of the crops. India, next door neighbour, has attained 200 per cent cropping intensity, whereas Pakistan still around 150 per cent. The key to horizontal agriculture expansion is water, which would simply not be there until and unless Pakistan builds more dams, and exploits all available water resources. In 1975, after building Tarbella dam, the water planners had calculated seven per cent annual increase in storage to achieve self-sufficiency in water. By now it should have built six dams of Kalabagh size and should have been in the process of seventh one. It has not built even one so far, reflecting insensitivity or incompetence of the successive governments. The present government has done even worst; instead of even talking about building dams as all previous ones have done, it is abandoning them. Some individuals have decided to abandon Kalabagh, by-passing the parliament. The vertical growth has been more difficult and arduous part. Over the last six decades, the government and its relevant agencies have not been able to educate farmers on crop management issue. The farming practices are still archaic and around 30 per cent of horticulture crops are lost at post-harvest level. Yields of all major cash and food crops are either stagnant or falling. The farmers neither get credit, nor inputs, nor certified seeds, nor water in sufficient quantities, which are essential to break free from current stagnation. If ever the farmers produce a good crop, the marketing system cannot absorb it and price, more often than not, crashes badly. In absence of long-term vision, planning and strategy, production has been fluctuating from one extreme to another. As first step in the coming budget, the government must find ways to turn agriculture into a profitable concern. Recently, addressing a gathering of farmers at Lahore Advisor on Finance and Revenue Shaukat Tarin conceded that agriculture sector cannot be taxed because it was not a profitable business. The coming budget should help correct the terms of trade for farmers and arrest the transfer of resources from rural to urban areas. The government must undertake a spirited effort to develop vision and strategy for the sector by involving all stakeholders.
Ahmad Fraz Khan, Dawn (Islamabad), 15 June 2009.
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B UDGET R EFORMS
FOR
S LIMMER G OVERNMENT
The fiscal position of government is in a great mess and an obstacle to smooth working of the economy. The mess cannot be cleared without far-reaching budgetary reforms, both in terms of management and policy aspects. For a proper grip on public finances, the first requirement is a change in the system of accounting. The existing cash basis of accounting, which can be manipulated by delay in payment and advance receipt, should be replaced by accrual basis. This would bring budget closer to actual use of real resources and its relationship with other economic variables more realistic and meaningful. Cash management is undoubtedly important but it can be a separate exercise. The publication of economic analysis of the budget has been discontinued and needs to be revived to bring out the economic implications of fiscal operations. At present, expenditure is seen in the sense of budget provision for it. How the expenditure is incurred matters little. As a result, the quality of work suffers. To ensure optimum use of resources, a performance evaluation is necessary which will also serve as a basis for reward and punishment of the functionary concerned. The basic American principle of public finance--- It is taxpayers money--- needs to be adopted with the word poor added to make it, Poor taxpayers money. Public money is a sacred trust for which Muslims would be accountable on the Day of Judgment. More important is the policy approach to expenditure. It is an area grossly neglected, the emphasis being on revenue and easy availability of bank borrowing to meet the fiscal deficit. First, the scope of expenditure or functions assumed by government; all sorts of ministries have been created to gain political support or avail of external funds. Sometimes, expenditures are incurred to gain popularity. Hajj pilgrimage is prescribed for those who can afford it. Late General Zia introduced this facility for select persons at the state expense. This, in effect, means that the poor pay through indirect taxes for these trips. There is lot of duplication of agencies. For instance, there was a Registration Department issuing National Identity Cards, but a new National Database and Registration Authority (NADRA) was set up to issue Computerised National Identity Cards. Why the existing Registration Department could not undertake this work? Similar is the case of NAB and anti-corruption departments at various levels. This can
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be a very long list. In short, government, particularly at the federal level, is extremely top heavy and so thinly stretched that it is not able to perform effectively. It is time to trim the government so that it can concentrate on its core functions. There is a strong case for a National Commission to review the scope of government activities and streamline the administrative structure to make the public sector slim, trim and effective. The main function of government is to administer law and order and quick and cheap justice so as to ensure security of peoples life, property and honour. It should provide an enabling environment for initiation of contract, its enforcement and, quick resolution of the dispute so that people may be able to engage themselves in legal and gainful activity. For this, dependable social and economic infrastructure, woefully lacking at the moment, is a must. In the prevailing VIP culture, extravagance and waste are the hallmarks of government expenditure. This is too obvious to be supported by any concrete examples. One clear way of wastage in government expenditure is that assets and facilities are not maintained properly on a regular basis. When things go out of order, instead of repairing and putting them back into service, new assets are acquired or facilities created. The system of remuneration to government employees is an extremely interesting case of confusion worse confounded. There is a Basic Pay supplemented by all sorts of allowances and fringe benefits at certain level, some of them with a ceiling and some without it, some taxable and some tax free. If simplified and made transparent, the system may save real resources, with all benefits monetised and one all embracing payment made by way of remuneration. This can also be fixed in a manner that it may take into account income tax liability and the remuneration is made income tax free. This may not please FBR but would certainly reduce unnecessary work and let FBR concentrate on other non-captive taxable persons and entities, particularly the tax evaders. The proposal is for government servants only. The employees of public sector enterprises who have their own system of remuneration should continue to be paid under the existing system, but their fringe benefits may also be monetised for income tax purposes. In fairness, the rich should pay by way of direct taxes at least as much as what the poor pay as indirect taxes. This means direct taxes on the rich according to their capacity to pay. The present income tax system allows vast exemptions and suffers from the lack of proper
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coverage of the taxable persons. It would be startling, if government were to publish the list of income tax payers. Some time back, it was reported that a billionaire paid Rs459 as annual income tax. Publication of the list of income tax payers on an annual basis would generate social pressure on those who get away by cheating the nation.
Dr Abdul Karim, Dawn (Islamabad),15 June 2009.
W HOSE B UDGET I S I T A NYWAY ?

There is a tradition of labeling budgets soon after presentation. Each budget has its winners and losers. These labels do give a rough and ready idea of who they are in public perception. The Government has given its own label of economic revival with a human face, an adaptation of the UNICEF slogan of adjustment with a human face in the early nineties. Initial reaction of the business community does not see much going for their revival. Beepers of ordinary folks on the channels are a far cry from a human face. For a change, the presentation of the budget did have the face of a woman, but not the kindness. By its very nature, a budget is simply a statement of expenditures and receipts. Indeed the document recognized in law is called just that Annual Budget Statement. But an analysis of who gains from the expenditure and who pays for it should bring forth a certain direction and strategy for change. The past was rightly blamed for making the public wait for the trickle down of growth. For now the people have to wait for the assistance from Friends of Pakistan and others to arrive. Development, as before, will be financed entirely by borrowing. Worse, the current expenditure of the federal government will exceed its net revenue receipts by Rs 328 billion. The core fiscal deficit of 3.1 per cent of GDP agreed with the IMF remains intact. Projects and programmes in education, health, water supply and sanitation will be the add-ons to the deficit if and when the foreign assistance is received. That is why a sum of Rs 157 billion has been given as a newly invented category of Other Development Programme. Even in the normal programme of Rs 656 billion. An operational shortfall of Rs 20 billion (Read no money) is another hole. Recent international financial crisis resulted from special purpose vehicles and derivatives created by bankers in such complex ways that they lost sight of the toxicity being added to the system. As the stewardship of our finances is with international bankers, one hears with
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horror of the fall-back strategy of borrowing from the IMF at standby terms to arrange a kind of bridge finance until the concessional assistance arrives. If this assistance does materialize, its concessionality will be reduced. If it does not, the country will be stuck with the costly IMF loan and harsher conditionality. It is not even clear whether the IMF has the mandate to be drawn into development finance rather than its usual support for the balance of payments. The last G-20 summit did call for IMF to be softer in terms of its conditionality and was provided extra resources too, but what our Citi-banker II has in mind may be an economists nightmare. The Benazir Income Support Programme has been budgeted for, but it is in the nature of providing succour to those who suffering from the failure of the trickle-down effect. Health insurance, income tax relief to men and women and enhanced salaries and pensions also constitute a trickle. However, no real or substantial alternative to the trickle-down strategy has been furnished. The donor-driven PRSP-II and its nine chapters dubbed as nine point agenda is old wine in the old bottle. An approach to a tenth five-year plan calling for investment in the people has been circulated, but it does not find any place in the budget speech. A three-year budgetary framework has been published for the first time. It can become an effective instrument in linking planning and budgeting to avoid the waste of underutilized allocations in a resource-scarce economy. Again, it seems to have the usual go-it-alone flavour than a coordinated effort at outcome-based spending. As a serious undertaking, the three year budgetary framework can make the oversight role of parliament much more effective than it presently is - which is nothing more than a a rubber stamp. The issue is that the budget-makers get all the time to prepare the document but parliament is not allowed the time to debate it threadbare. A three-year budgetary cycle would enable the preparation of the budget by the executive by March, followed by discussion in the relevant parliamentary committees and eventually parliament itself. However, this year will be like any other year, as is clear from the amount of time allowed for parliamentary debate. Non-political regimes keep the people at arms length and announce the budget as close to the end of June as possible. Their main interest is in July 1, the start of he financial year. Political and representative regimes make an attempt to present the budget to parliament early in June. Even a month is too short a time for any meaningful discussion. It is unfortunate that parliament will have only
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two weeks to make any contribution other than the approval of the budget. Expensive and unreliable energy has been a greater factor in the cost of doing business than the high interest rate. Water, with an allocation twice as high, rather than energy is the biggest priority of the PSDP. This means that the burden of dealing with energy crisis is shifted to the private sector. Even here, the preference to rentals over the settling of the circular debt for immediate augmentation of supply last year showed misplaced priorities. The budget now has it mixed up again by emphasizing both of these and commissioning of nine new IPPs in 2009 to add 1,861 MW. The allocation for the Bhasha-Diamer Dam suggests that the work on it is not picking up at sufficient pace. The start in alternative energy is welcome but cannot be relied on for the crisis that looms. Energy conservation, now a growth industry in other countries, is not even mentioned. No major initiative on coal has been indicated either. The budget corrects the neglect suffered by agriculture in the Musharraf-Aziz period, which not only reflects the change in the balance of political power but also the ground reality that quick, low resourceusing growth can come only from agriculture. The sector gets greatest focus of policy incentives and PSDP allocations. Together, agriculture, livestock and water claim the bulk of the PSDP. The sector retains most of its subsidies tube wells, for instance - and enhancement of others, such as the Benazir Tractor Scheme. The sector has also been spared the burden of income tax, despite significant additions to incomes following the rise in wheat support price. Thus the overall GDP growth of 3.3 per cent is sought to be achieved mainly through a push in agriculture to realize a target growth rate of 3.8 per cent. Agriculture growth is more pro-poor than nonagricultural. It should not, however, be forgotten that even agricultural growth may not automatically trickle down to the poor. The adviser on finance started the run-up to the budget by showing his determination to tax the hitherto untaxed sectors. For a moment one thought the time perhaps had come to touch the sacred cows of agricultural incomes, property and capital gains, and services. The best time to tax is when the sector is doing well and the economy on the whole is on the upturn. It is a bad strategy to tax when the going is bad. Anyway, capital gains had already been given an exemption for two years. It took an unusual visit by our foreign minister to his country, in fact his own constituency Multan, to summon a meeting of his Farmers
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Association with the adviser on finance attending, to impress upon the latter the folly and futility of taxing agricultural incomes. The hype on property and services only provided the federal government to collect more from provincial domains by enhancing CVT and the outdated excises. Even the carbon tax is a replacement for PDL, not an environment-friendly innovation. Last but not the least, the budget of 2009-10 reflects the NFC of 1996, as modified by the then president in uniform. To say that a small matter of who should preside over the NFC delayed matters is to miss the whole point. The fear of a stalemate because of the fact that the provinces are sticking to their position, is only part of the explanation. The war on terror, which is now our war too, and its fall out in the form of IDPs and the recurring threat to public security, require centralized control over resources. The excess of current budget over revenues gives only a small indication of things to come. The NFC can wait until then. On the whole, it is a budget oriented towards agriculture, though not necessarily the small farmer and the landless. While it does not make too many people happy, the number of those it makes unhappy is not very large either.
Dr Pervez Tahir, The News International (Rawalpindi), 15 June 2009.
A NALYSING B UDGET 2009-10

The government has presented its second budget in the backdrop of a difficult economic situation. Like the previous fiscal, fiscal year 2008-09 has also been a challenging year. The government was faced with unsustainable fiscal and current-account deficits, rising inflation, rapidly declining foreign-exchange reserves and the rupee coming under severe pressures. The government had two choices to make in the 2008-09 budget either to go for promotion of economic growth and job creation, or for stabilising the macroeconomic situation; that is, reducing fiscal and current account deficits, reducing inflation, building foreign-exchange reserves and stabilising the exchange rate. The government went for the second option, and rightly so, because macroeconomic stability is vital for promoting growth and poverty reduction. Accordingly, the government pursued tight fiscal and monetary policies to reduce aggregate demand, and reduce imports and thus reduce the current-account deficit. The government was pursuing these policies
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when the rest of the world was doing the oppositeexpansionary fiscal and easy monetary policies. The government was, in fact, criticised for pursuing tight fiscal and monetary policies at the cost of slowing economic activity. The critiques were wrong. Pakistan pursued tight policies as it was facing problems of excess demand while rest of the world was facing lack of demand. The policies pursued by the government paid handsome dividends, with budget and current-account deficits being sharply reduced and inflation starting to ease. But it is too early to declare victory. Though macroeconomic imbalances have been reduced to some extent, both budget and currentaccount deficits remain at unsustainable levels and inflation is doubledigit. Meanwhile, world oil prices are on the rise, touching over $ 72 per barrel and projected to reach $ 85 by the end of December. Since the government believes that macroeconomic stabilisation has done its job well and it is the time to go for promotion of growth, it has prepared Budget 2009-10 in such a perspective. The new budget has been presented with a view to promoting growth with equity. An overly expansionary fiscal policy will be pursued in 2009-10 and adequate resources have also been allocated to promote equity to give a human face to them. The government has lost patience. Total consolidated expenditure (including that in the provinces) is estimated at Rs 2,897 billion and total revenue is targeted at Rs 2,175 billion, thus leaving a budget deficit of Rs 722 billion, or 4.9 percent of the projected GDP. Total current expenditure is amounted at Rs 2,104 billion and development expenditure adjusted for net lending amounted to Rs 793 billion. In development expenditure, the much celebrated Public Sector Development Programme (PSDP) the "symbol" of growth and development has been targeted at Rs626 billion an increase of almost 50 percent over last year. Perhaps in the government's view this is going to ignite growth in 2009-10, as if there is a relationship between the PSDP and economic growth. No one should be against the PSDP if its size is consistent with a stable macroeconomic framework. I am afraid that the present size of the PSDP may become the root cause of enhancing macroeconomic imbalance in 2009-10. It is not clear why the Benazir Income Support Programme (BISP) and the allocation for the internally displaced people (IDPs) have been put under the development programme. Development spending is spending which creates assets like schools, colleges, hospitals, roads,
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highways and dams. What assets are these two allocations going to create? These are for social protection and intended to provide relief to deserving people. By definition, these two allocations should have been part of current expenditure. It has unnecessarily raised the size of development expenditure to Rs 793 billion. One reason that I can think of is that the allocations for the BISP and the IDPs have been shifted from current to development expenditure is to meet one element of the Fiscal Responsibility and Debt Limitation Act 2005. The Act had required that revenue deficit should be zero by June 2008, and the government should have maintained a surplus thereafter. This element of the Act was violated in the last two years as the revenue deficit remained in the negative zone. The government accordingly decided to change the definition of development expenditure by shifting the BISP and IDPs relief in it and as such recorded a surplus to the tune of Rs 71 billion in revenue balance in 2009-10. The government could have achieved this target in 2010-11. The financing plan of the Rs 722 billion fiscal deficit is interesting. Financing from external sources amounts to Rs 312 billion and Rs 391 billion is targeted to be financed from domestic sources. Within domestic sources, Rs 145 billion will be financed from banks and the remaining Rs 246 billion from non-bank sources. Privatisation proceeds of Rs 19.0 billion will also be used for financing fiscal deficit. The heavy reliance on external sources (43 percent) to finance the fiscal deficit has become a source of anxiety and a major risk to the new budget. The advisor to the prime minister on finance, Shaukat Tarin, clearly stated in his postbudget press conference that he is confident that Rs 228 billion in external assistance will be coming in 2009-10 to finance the budget deficit (Rs 178 billion from FODP and Rs 50 billion for the IDPs). And if, God forbid, these resources are not forthcoming, then the government will seek further assistance from the IMF to meet the budgetary gap. Why have we undertaken such a massive spending based on either uncertain sources or further borrowing from the IMF? It is strange that the IMF has allowed its resources to be used for budgetary purposes. The IMF is meant to provide balance of payments support to member-countries. This is a major departure from the past as the IMF appears to have changed its religion. We may see inflation becoming a fiscal phenomenon rather than a monetary one, the balance of payments becoming a fiscal rather than a monetary phenomenon from the IMF perspective. In my view, the government should have announced clearly in Budget 2009-10 that its
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fiscal deficit target is 3.4 percent of GDP (or Rs 504 billion), additional spending on physical and human infrastructure would be undertaken as such and when the resources from the FODP and grants for the IDPs be available. The government could have kept the projects ready and as the money started flowing in, and activities on the new projects could have started. In other words, additional spending could have been made conditional on receiving money from external sources. In doing so, the government could have maintained financial discipline in its second budget as well. Nevertheless, the new budget has several positive elements, such as: The allocation of Rs 70 billion to the BISP, Rs 50 billion for the relief and rehabilitation of the IDPs, doubling of the salaries of army personal fighting on the western borders; extending the same benefits to the entire armed forces from January 1, 2010; launching health insurance for the poor and vulnerable; promising to train and employ one person from each poor household, launching of small public works programmes to provide employment; enhancing the allocation for the People's Work Programme; social security protection for haris; widening the scope of the workers' welfare programme; and increasing the outreach of the borrowers for microfinance. These programmes will indeed help in alleviating the sufferings of the poor and vulnerable sections of society. In the real sector, the agriculture and water sectors have received much greater attention, for which the government should be commended. But at the same time, the livestock and dairy sector, which accounts for 50 percent of agriculture, have been ignored. Budget makers make efforts to create a balance between limited resources and unlimited demand. This work demands patience on the part of the budget makers. Have the budget makers lost their patience? Have they succeeded in creating a balance between limited resourced and unlimited demand and expectations? I leave it to the readers to decide.
Dr Ashfaque H Khan, The News International (Rawalpindi),16 June 2009.
A NNUAL J UGGLERY
Every year the government presents budgets claiming that the new budget is people-friendly and will raise the living standard of the poor. The finance minister raises taxes on some items and reduces them on some others. The net outcome of this annual jugglery is that things remain the same and there is hardly any visible change in the life of the
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common man. Revenue collection in Pakistan is not as bad as it is made to look. Pakistan was 65th in the last fiscal year in revenue collection, which is quite impressive in the list of 192 countries. We have been facing deficit budgets not because of supposedly meager revenue collection. In fact, it is government expenditure that every year produces the huge deficit. In other words, a budget deficit occurs when a country spends more money then it takes in. The country that is chronically addicted to overspending in non-developmental sectors had to borrow from the IMF to offset the annual deficit. However, the debt continues to grow because governments are seldom inclined to adopt austerity measures or tight financial controls. In fact, the debt is essentially an accumulation of a country's recurring deficits. Pakistan now owes nearly $ 50 billion to world financial institutions and will be paying Rs 660 billion in debtservicing this fiscal year. It has happened more than once that we had to go back to the lender to borrow more from him to pay off loans taken from him. Budgets are not made entirely on economic basis; they have a political basis as well. Unlike pure economic budgets, they are not entirely designed to allocate resources for best economic use. Consequently, different interests push and pull in an attempt to obtain benefits. That is the reason why our privatisation programme has come to a standstill. The employees of industrial and service units lined up for privatisation are aggressively opposed to the sale of public-sector assets because they fear their jobs would be lost. The result: the government is stuck with units which are operating at great loss. People have to pay Rs 200 billion every year to keep themselves alive. There are many units which have been shut but cannot be dismantled or sold because of political pressure. It is a wrong notion that the tax base here is too narrow. Maybe we lag behind in direct taxes. Well, one cannot expect high collection of income tax when one-third of Pakistanis are living under the poverty line. But in the imposition and collection of indirect taxes we are tops. Here even newborns are taxpayers: they drink taxed milk. The aged continue to pay indirect taxes until death frees them from tax net. It is an unjust tax system where a high proportion of taxes are paid by lower-income groups, or by the poor who hardly have any income. At least, there is exemption in income tax for those who earn less than a certain limit, but there is no such exemption in indirect taxation. The citizen, whether a millionaire or a pauper, pays the indirect tax at the same rate. There is no exemption for the pauper.
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It is difficult to keep track of the nomenclature of indirect taxes. The layman has no way of knowing why a tax is given the name of GST and another is named FED. Let us attempt to find out the number of indirect taxes people are paying: 1) General Sales Tax (GST). 2) Federal Excise Duty (FED). 3) Value Added Tax (VAT). 4) Carbon Tax. 5) PTV Fee. The most unjustified and comical tax belongs to PTV. This tax Rs25 per month -- is collected by the local power company through its electricity bills. It is unjustified because cable operators are also charging for providing PTV channels. It is comical because one has to pay the PTV Fee even if he does not wish to watch PTV. The budget is bound to be rewritten if the Friends of Democratic Pakistan and our Muslim brother countries do not help Pakistan in the rehabilitation of the nearly three million IDPs. If grants are not forthcoming soon, then the government would have to slap more taxes.
Mir Jamilur Rehman, The News International (Rawalpindi),16 June 2009.
R ESOURCE G AP D ASHES H OPES
FOR
R ELIEF
The government unveiled a consolidated budget of Rs 2.897 trillion for 2009-10 on Saturday with a drastic cut in subsidy on electricity and focus on short-term relief for inflation- and conflict-hit people. With a deficit of 4.9 per cent, the budget was unveiled in the National Assembly by Minister of State for Finance Hina Rabbani Khar the deficit, 1.5 per cent is planned to be met from external resources, mainly Friends of Pakistan and money coming for internally displaced persons, which economists think will be unreliable, while the rest will be met from additional taxation and internal sources. Economic experts say it is a highly risky budget as no one is 100 per cent sure that the money would actually come from the countries who have pledged it. At the time of earthquake, friendly countries had pledged $4 billion, which did not fully materialise. They say in case of making budget on uncertain resources, the government will have to borrow money from domestic sources which will put pressure on interest rates. The SBP would not be able to reduce discount rate. Therefore, a high-interest environment will continue having adverse impact on investment and growth. It is believed the budget is neither growth-oriented nor people-friendly. As a commitment with the IMF, drastic cuts have been made in subsidies for power sector, which will result in increase in the electricity tariff.
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The inflation is not going to come down, but it may go further up as the budget document reveals. The replacement of petroleum development levy with carbon tax will increase the price of oil for endconsumers. The massive cut in power subsidies will hit the small provinces harder. Focusing on rural areas, particularly the agriculture sector, the budget ignored to a great extent the revival of the industrial sector because no relief has been announced for the textile sector which has 55 per cent share in export proceeds. The government announced an ad hoc relief allowance of 15 pc of pay of government servants from July 1. An increase equal to one months initial basic pay in the allowance of armed forces deployed on the western front was also announced with effect from July. Retired government servants and armed forces personnel will also get 15 per cent increase in their net pension from July 1.Excise duty on petroleum products will be levied in the shape of a carbon surcharge, which would eliminate the existing petroleum development levy. The total budgetary outlay of Rs 2.897 trillion is almost 27 per cent more than the current years estimate. Budget deficit at Rs 722.5 billion is estimated to be about 24 per cent higher than the current years estimate of Rs 582 billion. As ratio of GDP, the budget deficit will slightly go up to 4.9 per cent against 4.3 per cent during the current year. The 0.6 per cent increase will be met through external financing of Rs 264.9 billion and domestic financing of Rs 457.6 billion. Pakistan is likely to receive external resources equivalent to 1.2pc of its GDP (Rs 178 billion) from pledges made at the Donors Conference in Tokyo.We further expect resources equivalent to 0.3pc of the GDP (Rs 48 billion) for expenditure on internally displaced persons. In essence the real deficit will be 3.4pc of the GDP, the state minister said. The budget estimates net revenues of Rs 1,377.5 billion with a current expenditure of Rs 1,699.19 billion. The development expenditure (including provinces) is estimated at Rs 783.1 billion against the revised current years estimates of Rs 421.9 billion, showing an increase of 85 pc. The Public Sector Development Programme has been doubled to Rs 626 billion against the revised estimates of Rs 359 billion for 2008-09. The current expenditure has been slashed to 68pc as compared to revised estimates of 79pc of the current year. The expenditure on general public services (including debt servicing, transfer of payments and superannuation allowances) is estimated at Rs 1,189 billion -- 70 per cent of the current expenditure. The target for FBR tax revenue has been set at
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Rs 1.372 trillion, almost 16 per cent higher than this years revised estimates of Rs 1.179 trillion. An allocation of Rs 343 billion has been made for defence spending against Rs 311 billion of the current year, showing an increase of about 10.2 per cent. Of the total tax revenue, direct taxes are estimated at Rs 565 billion and indirect taxes at Rs 815 billion. The budget has projected to transfer a total of about Rs 735.130 billion to the provinces as their share of net proceeds of the federal divisible pool and grants, including subventions. The education sector, including higher education, will get Rs 31 billion, which is about 54 per cent higher than current years Rs 20.1 billion. A record Rs 23.2 billion has been earmarked for health sector, up by 66 pc from Rs 13.99 billion of the current fiscal year. It is proposed to increase the allocation of BISP to Rs 70 billion from Rs 34 billion. At a later stage a health insurance of Rs 25,000 per family per year will be provided.
Social Security
The government will enact a legislation in the next fiscal year for creating social security protection programme for the haris. The ministry of social welfare will be replaced by the ministry of social protection and development. An allocation of Rs 35 billion is proposed in the peoples works programme to create sizable employment opportunities to increase the income of the less-privileged. Rs 10.8 billion has been allocated for different workers welfare development schemes in the housing, health, education and technical education sectors. The marriage grant has been increased from Rs 50,000 to Rs 70,000 per daughter. Construction of 9,469 housing units and flats for industrial workers is also proposed. It has been decided to give 12pc shares to employees in the state-owned enterprises to revamp the privatisation process. The outreach of microfinance services will be increased to three million from two million borrowers. The government announced a string of measures for boosting agriculture growth and marketing to increase the supply of food items. The allocation for agriculture sector has been enhanced to Rs 18 billion from Rs 14.4 billion in 2008-09. An amount of Rs 2.5 billion will ensure food security and productivity enhancement of farmers. BT cotton hybrids varieties will be offered to farmers. Livestock, agriculture and fisheries will be treated as industry.
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Water Sector
Rs 60 billion has been allocated for water sector. As many as 32 small and medium dams, eight in each province will be financed. Rs 12 billion has been allocated for the raising of Mangla Dam, including resettlement of displaced people; Rs 10 billion for improvement of water courses and Rs 15 billion for canal improvement and rehabilitation of irrigation system, Rs 500 million for integrated agriculture marketing and storage infrastructure, and Rs 4 billion for the Benazir tractor scheme. A phased special programme for food security and productivity enhancement of small farmers covering 13,000 villages will be implemented by 2015 starting with 1,012 villages in four provinces, Azad Jammu & Kashmir, Fata and Northern Areas during the first phase at a cost of Rs 8.013 billion .An amount of Rs 300 million has been allocated for capacity enhancement of dairy products, Rs 400 million for poverty reduction through small holders livestock and dairy development. Export Investment A Rs 40 billion export investment support fund has been proposed. The government will contribute Rs 10 billion towards this fund; another Rs 10 billion will be contributed by the Export Development Fund; and the balance of Rs 20 billion will be contributed by governmental agencies through mopping up of surpluses in commercial banks. A Rs 10 billion fund for credit guarantees will be established to support the SME sector. The fund will be financed by the government and the private sector in the ratio of 50:50 over the next two years. A Rs 10 billion venture capital fund will be established for which Rs 2.5 billion has been earmarked. A new DFI is being created for industrial financing. Industrial clusters will be involved for skill development to ensure ownership, monitoring/oversight and relevance of programmes. The allocation for power sector has been doubled to Rs 22.8 billion from Rs 11.4 billion in 2008-09. Currently, 15 independent private power houses with a total capacity of 2,921 megawatts are in different stages of development. Out of these, nine projects for 1,861 MW will be commissioned in 2009; four projects for 776 MW will be completed in 2010; while two projects for 284 MW are due for completion in 2011.To eliminate load shedding by the end of 2009, agreements have been reached with five rental power projects for 800 MW. Work on 16 hydropower projects in the private sector with a total capacity of 4,160 MW has been initiated.
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Two new combined cycle power projects of 500 MW each in the public sector to supplement the total capacity are planned at Chichoki Mallian and Nandipur. The government has also made an elaborate plan for electrification of all villages where electricity can be provided from grid supply. This was achieved in 6,419 new villages last year. The induction of Khan Khwar and Jinnah Hydro projects with a total capacity of 168 MW; setting up call centers in all distribution companies to improve customer services and infrastructure development to reduce energy losses will also be initiated. The PSDP allocation of Rs4 billion has been made for the 4,500 MW Diamer-Bhasha Dam project. Construction of more than 30 small and medium dams in different provinces will also been funded. A comprehensive renewable energy policy is being formulated. A 50 MW solar thermal power project will be established in southern Punjab; development of wind farms in areas in addition to Gharo-Keti Bandar, identifying new corridors of available wind potential in Punjab, Balochistan and the NWFP; solar water heaters programme; production of solar cells and modules up to an annual capacity of 80 Kilowatts; depreciation allowance for renewable energy being enhanced by 100 per cent; allowance of duty-free import of equipment under nine categories of alternative energy are being considered. Approximately 30,000 postgraduates will be offered internships under the National Internship Programme for which the government has allocated Rs 3.6 billion. Zero rating duty on exports sector will continue as well. The FBR will pay interest on refunds delayed beyond 90 days. The limit of credit on donations in case of companies enhanced from 15 pc to 20 pc. It is proposed to enhance the rate of withholding tax on imports of commercial nature from two per cent to four per cent. The measure would result in estimated revenue of Rs 23 billion.
Dawn (Islamabad),16 June 2009.
R EFLECTING
THE
O VERINDULGED M INDSET
The budget revealed the continuing disconnect between the rulers and the ruled despite the advent of civilian rule and apparent democracy. Why else would the government have put even more burden on the poor through growing indirect taxation and actions that will make the basics of survival ever more expensive? The carbon surcharge is going to make Pakistanis pay more than any other citizen in the world for POL and
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CNG despite the temporary freeze on POL prices imposed later! But then, Shaukat Tarin is clearly living in his own world with no connect to the reality that is Pakistan. Why else would he have suggested, Marie Antoinette style, that "the masses (he did not say we Pakistanis) should use the fuel efficiently and rationally," including travelling on buses? What a cruel joke, since if there had been a proper public transport system everyone would be using it! But, then, Mr. Tarin, in his tinted-glass, official gas-guzzling vehicle and its escort, would hardly know that there is no proper public transport system; so people are compelled to risk their lives by carrying the whole family on motor bikes, by riding atop overloaded buses, and so on. Tarin's statement only reflected the overindulged decaying mindset of the rulers. After all, why raise the pays of MNAs, MPAs and the cabinet? Even more questionable is the need to have a huge cabinet that really gives little inputs into decision-making at a time of economic crisis. Again, why raise travel allowances of our leaders when they achieve little on their foreign trips that they cannot do through their diplomats or through inviting the foreign leaders to this country? In any case, why not cut the travel allowances and compel the leaders to stay in cheaper accommodation when abroad? Even the hosts are often scandalised by the display of opulence by our leaders in foreign lands. The assumption that this is an agriculture-friendly budget is laughable, since agriculturalists are being deprived of water and basic electricity for 10 to 12 hours a day, so tube wells cannot be used at all. Moreover, water from the canals is still not being distributed fairly and southern Punjab continues to find itself deprived of its share of this water. So, with no water, how will agriculture survive? Would it not have been more rational to divide the power cuts more equitably between the rural and urban areas? As for the increase in the BISP, it will be countered by the increase in cost of living, especially of basic foodstuff, as a result of the indirect taxes and the carbon surcharge despite a temporary retreat on that count two days later. So what "relief" the government is supposedly giving to the poor with one hand, it is taking away with the other. All in all, the budget has no "human face" to redeem it although it has shown the human face of our politicians and their ingrained localism when Ms Khar went on to rubbish the very same economic policies she had supported while a minister in the Shaukat Aziz government! What was truly offensive was Mr. Tarin's arrogant conduct at his press
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conference. But to understand Mr. Tarin, one needs to look closer into where he is coming from. It appears that there is an interesting linkage between our present ruler and Citibank bankers Tarin and Salim Raza, now governor of the State Bank of Pakistan. The linkage is described in detail in "The US Senate's Minority Staff Report for Permanent Subcommittee on Investigations Hearing on Private Banking and Money Laundering: A Case Study of Opportunities and Vulnerabilities," Nov 9, 1999. Amongst other things, the Report makes an interesting reading of the way multinational banks work in developing states. On checking up, it seems that Shaukat Tarin was the Dubai banker not mentioned by name in the Report while Salim Raza is mentioned by name. Now, a man like Mr. Tarin cannot be expected to have a genuine interest in the poor people of Pakistan when he is occupying the position he is in purely as a reward for services rendered earlier. Why blame Tarin, though, when our civilian leadership continues on its merry way, bloated cabinet and all? Bullet-proof cars continue to find space in the budget as do the over-stuffed bureaucracies. Ministers battle each other and their bureaucrats, many of whom are accused of working for "foreign friends" as was revealed by the prime minister's adviser on petroleum and natural resources in connection with the Iran pipeline issue. Fifth columnists loyal to the US and some of our Arab friends are desperately seeking to destroy this strategic agreement, but who will take them to task? No wonder there seems to be no governance at all visible to the person on the street. Nowhere is this more apparent than in relation to the ongoing military operation in Swat, which has now expanded to the FATA area timed with the impending US military surge in Afghanistan. With no political strategy visible, the military is effectively being left on its own to clear and hold areas as well as hunt out the militants, while the civil order continues to abdicate its responsibility. While the military leadership goes to the front to sustain the morale of the soldiers, the political leadership seeks continuing jaunts abroad giving legitimate nightmares to the professional diplomats of our whimsical leader straying off the script. As for the provincial leadership, it is also barely visible in the troubled areas or in "cleared" areas. So the military operations continue with no timelines in the offing, the indiscriminate strategy of heavy bombardment and aerial attacks is also revealing the growing civilian destruction and, despite a self-imposed media censorship, some accounts are filtering through, such as the woeful
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lament of Shahryar Khan of Lakki Marwat. Such accounts will increase over a period of time, especially when one sees no effort by the civil authorities to immediately move in with a well-planned strategy immediately after an area has been "cleared" by the military, so that a conducive environment is created for the displaced Pakistanis to return to their homes at least what is left of them. Now that the state has declared its intent of taking out the TTP leadership, specifically Baitullah Mehsud, a more discriminatory and targeted strategy for FATA relying on more effective human intelligence and local tribal support would not only be more effective in the long run but would have more sustainability and less negative fallout in terms of civilian casualties and material destruction all of which have their own long-term debilitating impact. Already we are seeing the spread of terrorism across the country with an increasing intensity as well. We also need to ensure that the growing number of displaced Pakistanis should not become a tinderbox of ethnic conflicts for the future. After all, it serves no purpose to rid ourselves of one group of brutal militants and their leaders only to find a new breed arising from the disaffected and angered amongst the populace. According to a report doing the rounds on the Internet, more than 130 Pakhtoon students of Sindh University in Jamshoro have had to leave because of violence, abuse and life threats by Sindhi ethnic parties, some of which stormed the Allama Iqbal Hostel where the Pakhtoon students were staying. May 28 was the deadline given to these students to leave. The majority of students who were forced to leave the university were from Swat, Dir and Buner. Meanwhile, as to the puzzling question of why Baitullah Mehsud has survived for as long as he has, could it be old US links, especially through his spokesman Muslim Khan, who spent eight years in the US and still has relatives there? And is there now a deliberate attempt to fan sectarian violence and intra-Muslim hatred within Pakistan through brutal acts of terrorism and threats to Shia imambargahs across the country at the behest of Baitullah Mehsud and his followers similar to what the US did in Iraq? There are strange linkages between our militants, criminal elements and our external detractors who seek to spread instability across the country which is what is happening if we see the situation even in Karachi where the nature of the threat is political fascism rather than religious extremism. We are confronting a multipleheaded monster of terrorism which requires a subtle, multi-faceted strategy, not simply indiscriminate military action being conducted in a
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political void. For the short term, the terrorised population will go along, but in the long run such a strategy, functioning in a political vacuum, cannot be sustained without a growing backlash. With a dysfunctional government, a mindless economic tsar cosseted from the ravages of terrorism and budgetary hardships, the people of Pakistan face a long hot summer filled with mirages of public transport.
Shireen M Mazari ,The News International (Rawalpindi), 17 June, 2009.
D EFENCE S PENDING E NHANCED

Desperate times call for desperate measures! Pakistan is at the moment engaged in a major war against insurgency; its army and air force are combating an invisible enemy, which lurks in the shadows, has intricate knowledge of the precipitous terrain, strikes with impunity and melts away in the crowd, pretending to be an innocent civilian. To make matters worse, the insurgents are being supported by external forces, which are not only providing logistics but state-of-the-art weaponry, communication equipment and above all intelligence inputs, besides training them in guerrilla warfare. The enemy is retaliating to the action by Pakistan's security forces by assaulting high value targets in the civilian area through suicide and car bombs, causing high casualties, creating harassment, trepidation and fear. To fight this many headed hydra, which according to Greek mythology, when one of its heads was cut off, two new heads appeared - one suicide bomber strikes and many more take its place - all of Pakistan's resources have to be employed by its defence planners to engage in what is being called the "war of its survival." Under these circumstances, Pakistan has had to jack up its defence expenditures from the Rs 296 billion allocated in 2008-09 and the actual spending of Rs 311 billion to Rs 343 billion, which is an increase only by 12 percent over last year. In real terms it is miniscule. According to Minister of State for Finance Hina Rabbani Khar, Pakistan had incurred an economic cost of $35 billion in the war against terror, whereas, US had compensated for the expense by an amount of $10 billion. For the 2008-09 fiscal year, Pakistan had increased defence spending by nearly 7 percent to 296.07 billion rupees ($4.4 billion). In the preceding year Pakistan spent 277.26 billion rupees on defence. Pakistan's defence spending, which was opened for public debate and scrutiny for the first time last year, is not actually India-specific any longer because of the
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enhanced threat from the insurgents. On the other hand, India's defence expenditure for 2009-10 has been hiked to Rs.1.41 trillion as announced by its acting Finance Minister Pranab Mukherjee on February 16, this year. This increase of over 34 percent in India's defence budget is one of the highest in its history of defence spending (the last time the Indian defence budget was increased by over 30 percent was in 1987-88 when allocation was increased by 43.4 percent to Rs 12,512 cores). According to Jane's Intelligence Review, India is likely to spend over $50 billion (about Rs 250,000 crore) on defence acquisitions over the next five years. Among the weapons systems and equipment to be acquired, the big ticket items will include the aircraft carrier INS Vikramaditya (the Admiral Gorshkov), 126 multi-mission, medium-range combat aircraft, six C-130J Hercules transport aircraft for the Special Forces, eight maritime patrol, surveillance and reconnaissance aircraft possibly the Boeing 737 P-8I, six Scorpion submarines, and a large number of main battle tanks, 155 mm towed and self-propelled artillery howitzers, plus equipment for counter-insurgency operations. This does not include the AWACS (airborne warning and control systems and the air-to-air refueling system, which are already in the pipeline. Most of these are meant to augment its "Cold Start Strategy", which is Pakistan specific. Yet Indian media had a heyday looking at Pakistan's defence outlay critically. Zee News, for example ran the headlines: Pak increases defence spending by 15.3 percent; commenting: "Declassifying its defence allocation for the first time in 44 years, Pakistan on Saturday hiked its military spending by a whopping 15.3 percent....Despite a serious financial crunch being faced by Pakistan and increased expenses on antimilitancy operations, top military officials recently ruled out any cuts in India-specific defence spending." Colonel Rahul K Bhonsle's Op-Ed Pakistan's Defence Budget: Misplaced Priorities is dated yet speaks with venom when he claims: "It is popularly believed that while most states have an army, Pakistan Army has a state." He adds: "Pakistan is spending 4.5 percent of the GDP on defence. For a developing country defence spending over and above 3 percent is considered to impinge on development." Come on Colonel Bhonsle, unless we secure our country from threats to our very existence, we cannot talk of development. In Dollar terms, the total defence bill for the 2009-10 financial year beginning will be 4.24 billion dollars, 0.47 billion more than the revised budget of 3.77 billion dollars for the outgoing fiscal. The original defence budget for the previous year was 3.65 billion, which was increased to 3.77
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billion due to increased spending by the armed forces. The increase came as the ongoing war on terrorism took a heavy toll on Pakistan's economy in 2008-09, creating a serious imbalance of payments in November and forcing the government to approach the International Monetary Fund for a 7.6-billion-dollar loan. Pakistan's growth rate grew by only 1.9 percent during this fiscal year as compared to 4.1 percent last year, the worst in the last 30 years. In the first 10 months of the fiscal year, the inflation rate was 22.3 percent, against 10.3 percent in the same period last year, according to the annual economic survey released last week. Foreign investment declined to 2.2 billion dollars as compared to 3.9 billion dollars last year. Pakistan has suffered massive losses both in terms of stagnation of economic growth and increases in defence spending to fight insurgents. In addition to the rise in the defence budget, the government allocated 600 million in the budget for the relief and rehabilitation of some 2.5 million people uprooted by ongoing fighting with the insurgents. Under these circumstances, we should be prepared to tighten our belt to invest in our security rather than cringe and crib because our luxuries are being slashed. As stated in the opening paragraph, desperate times call for desperate measures!
S.M. Hali, The Nation (Islamabad), 17 June 2009.
M ISPLACED P RIORITIES
The federal consolidated budget of Rs 2.897 trillion for FY2009-10 was announced by the minister of state for finance on June 13. The economic growth has been projected at 3.4 percent with fiscal deficit as 4.9 percent of GDP. To meet the budget deficit the government has relied on aid from the 'Friends of Pakistan' consortium and in case of failure either the development expenditures will be slashed or the borrowing from SBP will be the final resort that will give a boost to the soaring inflation. The expectations of the people that the democratically elected government will take effective steps to ease the economic burden on their lives remain unfulfilled. It transpires from the budget that it will add to the woes of the poor and exacerbate their sufferings on the one hand while income inequality gap in society will widen on the other. To begin with, no effort has been made to alter regressive taxation policy by reforming it on modern lines. The ration of direct to indirect taxes has not been changed. In this way the tax-to-GDP ratio, stagnant
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during the previous years, is unlikely to increase. The hike in sales tax with no exemption for essential commodities like food, medicine etc will squeeze the fixed income groups already ground down under intense inflationary pressures. Overdependence on indirect taxes vis--vis reluctance to widen the tax gap leads to erosion of the purchasing power of the low-income groups who have to pay proportionately higher incidence of tax. Agriculture is a dominant sector of our economy as it accounts for the 22 percent share of GDP. But it contributes only 1 percent in the country's revenues and this dismal scenario has been perpetrated in the present budget. Not only the big landlords benefit from subsidised agricultural inputs and easy credit loan schemes but the cultivation intensity has been found inversely proportional to farm size in the absence of tax on agricultural income. The property mafia, stock brokers and big agriculturists retain immunity from taxation as they are able to wield their political clout to influence formulation of tax policy. In view of such circumstances, the revenue targets set by the government seem unrealistic as the situation will be compounded if the sluggish economic growth is not turned around. The lax tax policy benefits the elite class and results into over-exploitation of the existing tax bases without extending tax net to untaxed classes. The ailing industrial sector has been largely ignored and the cosmetic measures to improve its performance will not bear fruit. During last year, the large-scale manufacturing sector has shown negative growth and there are no prospects of change in near future in presence of continuous power outages. The education and health sectors have once again failed to receive their due share and in the present budget. An amount of Rs 36.6 bn has been allocated to both sectors registering an increase of 60 percent as compared to the previous year which pales into insignificance if population growth and inflation hovering around 20 percent are adjusted. Of total amount of Rs 31 bn, a paltry sum earmarked for education, only 25 percent goes to the basic education indicating the authorities' myopic vision of reforming education from above overlooking the significance of a large dropout rate at early stages. It is a pity that education at the primary level remains the most neglected area in the educational system. In respect of agricultural policy, the government has aimed at ensuring food security and enhancing farm profitability but no substantive measure has been announced to achieve these objectives. It is
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no surprise that despite the agrarian base of our economy, we have received more than fair share of food crises at various times. The high prices of agricultural inputs and the absence of modern equipment have resulted into low agricultural production. The present budget has not delineated an agricultural policy framework that seeks to revitalise agricultural sector realising its full potential. The poor farmers have been left rubbing hands as the increase in prices of electricity will increase the cost of production of agricultural outputs. The government must have announced the writing-off of loans of small farmers and taken steps to ensure them fair return of their products. On the whole, the budget is far from 'poor-friendly' and presents claims completely divorced from reality. The myth of macro-stabilisation and its consequent trickle-down affects has shattered and the lot of the poor has not changed. The misplaced priorities coupled with shotgun approach to allocations have worsened the economic crisis confronting the country in recent years.
Nauman Asghar, The Nation (Islamabad), 18 June 2009.
T AX H OLIDAY
FOR
F EUDAL L ORDS
The brave talk of taxing the big landlords who have turned agriculture into industry and are rolling in sugar has turned out to be no more than smoke and mirrors. The government has deprived itself of considerable revenue at times of extreme monetary crunch by continuing to exclude from the taxation net a section of the super rich. It has instead decided to depend on uncertain external financial inflows failing which it says it would knock at the door of the IMF. This could lead the country to accept more crippling conditionalities. The big landlords are a politically powerful group that has withstood demands for genuine and thoroughgoing land reforms and farm tax for the last sixty-two years. It has once again succeeded because of its dominating position in the Assemblies and the Establishment. All major parliamentary parties like the PPP, PML-N, Q League and ANP depend on support from big landowners. As feudal families have been represented in all governments, elected or led by military dictators, they have succeeded in ensuring that no government harms their interests. The tactics they have evolved have really worked. While one family member joins the government, the others support the parties opposing the government. Similarly, as one faction of a party stands by a
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dictator, the other sits in the opposition. It is thus ensured that irrespective of who is in power the interest of the class are preserved. Thus in spite of the two land reforms, one under Ayub and the other under Bhutto, the landlords have managed to keep their hold on land and their grip on politics. Agricultural income could not be taxed under the military rulers who being not accountable to anyone are in a position to take unpopular decisions needed for the good of the country. But military rulers cannot afford to ignore their own peculiar constituency. The army holding over 100,000 acres of agricultural land constitutes a major interest group opposed to farm tax. What is more, over the decades military officers who have been awarded agricultural land have turned into a part of the landlord class, further adding to its political clout. According to Ayesha Siddiqa, agricultural land owned by individual members of the armed forces is approximately 6.8 million acres. This explains why while Zia and Musharraf played with the idea of introducing land reforms both subsequently dropped it on account of the opposition they met from within the military Shaukat Tarin's views about the agricultural tax which he expressed soon after his induction into the administration sent alarming bells ringing among the farmers' lobby. The opposition to the idea started from Punjab where in November last year, the assembly passed a near unanimous resolution against the agricultural tax tabled by a PML-N MPA. Law Minister Rana Aftab and PPP's Raja Riaz infact vied with each other in the resolution's support. Losing self-control, PPP's Nazim Hussain Shah said he was willing to go to jail or face gallows while opposing farm tax. Later in May 2009, the Chamber of Agriculture and Sindh Abadgar Board rejected the tax and termed it illegal and unconstitutional. The leaders of the two major representative organisations of Sindh growers said that the farmer was already heavily taxed. Similarly the resolution passed by the Punjab Assembly claimed that farmers paid a number of direct and indirect taxes and it was therefore injustice to levy farm tax on them. The facts however tell a different story. The current share of agriculture in GDP stands at 20.9 percent but its share in taxes is only 1.2 percent. Compared to it the share of the manufacturing sector in GDP is 18.9 percent while its contribution to taxes is 50.8 percent. The share of agriculture in taxes is derived not from farm income but from land tax levied by the provinces. Even this meager
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contribution is on continuous decline. In 2000-01 tax collection from Sindh Agricultural sector was Rs 444.77 million. In 2001-02 it fell to Rs 397million and in 2002-03 to Rs 251million. Sindh landowners had paid only Rs 7 million till November 2008 while the government target was Rs 336 million. With the big landlords enjoying a tax holiday, and the government unwilling to cut down its expenses, the common man is being fed on empty promises, the emptiest of them being the development budget described as the highest ever. We are told that a part of it would come from the commitments made by the foreign donors. This is risky as the pledges made are rarely fully met, as the example of the commitments made to the earthquake victims would bear out. While the big landlords earn extra billions on account of the rise in wheat procurement prices, the common man is to be the main suffer. The looming massive cut in power subsidy would hit him hard. So would the replacement of petroleum development levy with carbon tax which would increase the price of oil for end consumers. Inflation that hits the poor hardest may further go up. The budget safeguards the interests of rapacious ruling elite while it provides little succour to the poor.
Aziz-ud-din Ahmad, The Nation (Islamabad), 18 June 2009.
G OVERNMENT A NNOUNCES R ELIEF M EASURES

The government on Monday announced a major relief to exporters by declaring income tax collected on export proceeds as final discharge of liability, reduced withholding tax from four to three percent for industrial importers, abolished 'Carbon Surcharge' on CNG, replaced 16 percent sales tax on import of newsprint with five percent customs duty and abolished 20 paisa Federal Excise Duty (FED) on SMS with increase in FED from 19 to 19.5 percent on services provided by cellular companies. Winding up the debate on the federal budget in the House, Minister of State for Finance Hina Rabbani Khar said the government has decided to revise the ad-hoc relief allowance for civil employees in BPS 1-16 from 15 percent to 20 percent. This revision would also be applicable to personnel of the Armed Forces in BPS 1-16 and equivalent who were earlier allowed only a 15 percent increase. Moreover, the ad-hoc relief allowance announced for old pensioners who retired ten years ago or
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earlier is being revised and they would now enjoy the benefit of 20 percent increase in net pensions. Announcing other relief measures for business community through amended Finance Bill (2009-2010), she said that requirement of NTN or CNIC for sales to unregistered purchasers is being withdrawn; similarly, presenting of NTN for opening of bank account is being made voluntary or as per requirement of the bank concerned. Through another amendment in Finance Bill, the difference in the charge of additional tax on delayed payments and compensation on refund is being reduced to three percent from present about 12 percent. The concept of third party audit by established and certified Chartered Accountant companies is being introduced. However, it is being ensured in the concept that it does not result in unnecessary harassment of business concerns. The procedures relating to resolution of tax disputes is being further streamlined and simplified and all such proposals that were considered to be unnecessarily harsh and punitive like conducting raids on business premises without approval of FBR, are being withdrawn. Sharing details of the tax-related amendments in the Finance Bill, she said that it was being proposed to lower the withholding tax from four percent to three percent for industrial imports to provide relief to manufacturers. This involves a relief of over RS five billion to the manufacturing sector and would reduce their cost of production. Income tax collected on export proceeds is being made final discharge of liability of the exporters to facilitate export oriented activities and to enable exporters to compete more effectively in the international market. On the demand of youth and children, additional Federal Excise Duty at the rate of paisa 20 per SMS is being withdrawn. The revenue loss would be compensated by increasing the additional FED on cellular services form 19 percent to 19.5 percent. She also announced that since the government expects to wind up the National Accountability Bureau within the next three months, the budget for NAB is proposed to be reduced to Rs 183 million to cover 3 month's expenditure. The excess amount would be surrendered. The government also announced reconstitution of Seventh National Finance Commission (NFC). The first meeting of the NFC would be convened in July 2009. The NFC deliberations would be completed at the earliest and hopefully within three months of the convening of the first meeting, she added.
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About the budget sessions, she said that the consultative process with the Standing Committees on Finance & Revenues of the National Assembly and the Senate would, in future, begin two months prior to budget presentation. In the next financial year and beyond, the government shall ensure that the budget is presented to the Parliament on or before May 30 to allow larger Parliamentary scrutiny. The government has decided to present the financial and fiscal performance of the government to the Senate Standing Committee on Finance and Revenue and the Standing Committee of the National Assembly on Finance and Revenue for a quarterly review, he informed. The government would ensure that supplementary appropriations are kept to a minimum to cater for unforeseen emergent expenditures. Approval of the National Assembly would be obtained on a quarterly basis in respect of such supplementary appropriations, she added. The Minister said that allocations for health and education would be increased to four percent of the gross domestic production (GDP) next year and some of the recommendations of the pay and pension commission would also be implemented within the next financial year. She said the government was committed to raise allocations for social sector including education and health to six percent of the GDP in three years. The global economic recession and worsening law and order situation have affected our economy but the government due to its tireless efforts overcome these pressures and gain sustainability in the economy and put it on the right track, she added. The Minister said according to IMF report released in April this year 1.3 percent decline to the GDP of the world economy witnessed and its impact was reflected in our economy. The Minister also spoke about the nine-point reform agenda of the government to bring about economic stability in the country by ensuing security to the vulnerable, increase in productivity in agriculture and industrial sectors. Keeping in view the backwardness of Balochistan, She said that the government has increased its development allocations from Rs 42 to Rs 50 billion this year. She said a special grant of Rs nine billion has been allocated by the Prime Minister to the province for their developmental activities. The Minister said the allocations for Fata have been increased from Rs 8.7 billion to Rs 12.9 billion and for Northern Areas from Rs 5.6 to Rs 8.4 billion which would help improve their infrastructure and social
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sector. She said the Prime Minister has announced Rs 6 billion for the NWFP to meet its security needs. She said the difficult decisions taken by the government helped reduced the budget deficit to three percent of the GDP. She said the foreign exchange reserves in October 2008 were only for month exports have risen to four months exports and stood at eleven point four billion dollars in May this year. She said the government has risen the PSDP eighty-five percent to the previous year's development programme, which is a record and would help improve the physical infrastructure and basic amenities of life. She said the government has been able to return back Rs 200 billion to the State Bank. She said the inflation rate in October 2008 stood at 25 percent has now been reduced to 14.4 percent in May this year while food inflation stood at over 32 percent in October 2008 has also been reduced significantly. She said the government has initiated Benazir Income Support Programme to check the poverty and allocations of this programme has been doubled and stood at Rs 70 billion. Referring to Minorities, the Minister said five percent quota for minorities in federal services has been fixed.
Business Recorder (Islamabad), 23 June 2009.
P AKISTAN S F RAGILE E CONOMY
AND I TS
P ARADOXES
All the major macro and micro level indicators of Pakistans economy for the fiscal year 2008-09 lead to one principal conclusion, that Pakistan has a fragile economy and it suffers from numerous built-in paradoxes. The current years developments have shown that the economic fundamentals remain weak, and only serious and well-coordinated efforts can help restore its health and sustainability. The real GDP (gross domestic product) of Pakistan has registered a growth rate of 2.0 per cent in the current year, whereas other countries like India has grown by 7.5 per cent and China has achieved a growth rate of 9.0 per cent. The Hindu growth rate of 2 to 3 per cent, which was the hallmark of the Indian economy for the earlier decade have been replaced by a robust growth rate of 7 to 8 per cent in the last two decades and half. In China the economy had continuously grown by 12 to 13 per cent per annum for many years in the nineties, and the later period. However,
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Chinas economic planners had to devise special measures and strategies to lower the growth rate of the economy, which started getting overheated. Paradoxically, the dismal performance of Pakistan in the current year calls for a rethinking of the development strategies pursued so far and evolving an approach to economic management which can fully meet the contemporary challenges which are multiple in nature and deeprooted at the same time. A clear sign of fragility of Pakistans economy is provided by the negative growth of industries (-3.6 per cent) emerging from large-scale manufacturing (LSM) sector growth (-7.7 per cent), construction (-10.8 per cent) and electricity and gas distribution (-3.7 per cent). Within the LSM, important industries have suffered deceleration in the current year. These industries are petroleum industries, cotton yarn, cotton cloth, sugar, billets/ingots, automobile and electrical industries, such as in the production of electric transformers and refrigerators. An analysis of data on growth rates in GDP along with the growth rates of major sectors such as agriculture, major crops, LSM and services within the 17 years of 1992-93 to 2008-09 exposes the fragile aspects of Pakistans economic fabric. The growth rate indicates that the real GDP of Pakistan grew by 4.5 per cent only on an average annual basis during the last 17 years including the current fiscal year. The average annual growth of agriculture comes to be 3.4 per cent, major crop 2.3 per cent, LSM 5.6 per cent and services sector 5.0 per cent only. These growth rates when compared with the growth rates of competitor countries such as India and China are too low and establish clearly that Pakistan is caught in a vicious circle of underdevelopment and poverty. If a growth rate of less than 3.5 per cent is identified as low, a growth rate of 3.5 to 5 per cent as medium (M) and a growth rate of above 5.0 per cent as high (H), then Pakistan has had a high growth rate only in six years out of total seventeen. Out of those 17 years, only in one year, which was 2004-05, Pakistan registered a robust Chinese-type growth rate of 9 per cent supported with the growth rate in the agricultural sector of 6.5 per cent, major crops 17.7 per cent, LSM growth of 19.9 per cent and in the services sector 8.5 per cent. When taking poverty into consideration, to eliminate it, it is imperative that the economy of Pakistan should maintain a robust growth rate of 8.0 per cent to 9 per cent for a couple of decades so that there is a visible and substantive rise in the per capita
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income of the country, leading to reduction in unemployment and poverty. Data in the table establishes one critical characteristic of fragility of Pakistans economy, which stems from the deterministic role of major crops and agriculture sector in the growth rate of real GDP. For eleven years out of seventeen, the growth rates of major crops, agriculture and the real GDP have behaved in a symbiotic manner, For four specific years out of seventeen, when the major crops registered a low or negative (-) growth rate, both agriculture and GDP growth rates remained depressed. For seven years when the major crops had a high and positive (+) growth rates, the growth rates of agriculture and real GDP were jacked up. However, for six years, this correlation between major crops, agriculture and GDP growth rates did not hold as indicated by the symbol (N) in the table. The performance of Pakistans economy for the year 2008-09, again points out its fragile nature and weak foundations. In this particular year, major crops grew by 7.7 per cent generating a growth rate of 4.7 per cent in the agriculture sector but GDP growth rate was only 2.0 per cent primarily due to 7.7 per cent decline in the large scale manufacturing (LSM) value-added. The growth momentum provided by major crops and agriculture was lost due to extremely poor performance of large-scale manufacturing sector. For quite a few decades, it is the output of cotton, which has cradled the real GDP growth rate so much so that Pakistans economy has been identified as cotton economy or a monocrop economy. This leads to an important result, i.e. if Pakistan has to shed the fragility of its economy, it must be diversified and industrialised on a massive scale. This is what has been spelled out in Planning Commissions Pakistans Vision 2030. Both the public sector and the private sector have to take initiatives towards this end, as it is a critical prerequisite for entering the take-off stage which has eluded Pakistan for the last six decades while India entered this stage as early as the sixties.
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Pakistan: Growth Rates of GDP and Major Sectors

Year GDP (Fc) 1992-93 .1 1993-94 .4 1994-95 .1 1995-96 .6 1996-97 .7 1997-98 .5 1998-99 .2 1999-00 .9 2000-01 .0 2001-02 .1 2002-03 .7 2003-04 .5 2004-05 .0 2005-06 .8 2006-07 .8 2007-08 .1 2008-09 .0 Avg. 17 .5 3.4 2.3 5.6 5.6 5.0 4.7 7.7 3.7 -7.7 3.6 L N 1.1 -6.4 4.2 4.0 6.6 M N 4.1 7.7 2.8 8.7 7.0 H + 6.3 -3.9 15.8 8.3 6.5 H N 6.5 17.7 2.7 19.9 8.5 H + 2.4 1.7 2.9 18.1 5.8 H N 4.1 6.8 2.6 7.2 5.2 M + 0.1 -2.5 3.7 3.5 4.8 L -2.2 -9.9 3.8 11.0 3.1 L 6.1 15.4 1.9 0.0 4.8 M N 1.9 0.0 3.2 3.6 5.0 M N 4.5 8.3 -0.8 7.6 1.6 M + 0.1 -4.3 4.2 -2.1 3.6 L 11.7 6.0 26.4 3.1 5.0 H + 6.6 8.7 5.5 1.5 4.8 H + 5.2 1.2 6.0 4.3 4.2 M + Agriculture -5.3 Major crops -15.6 LSM Livestock 6.0 Services Growth 4.6 Type of GDP L Correlations
4.1
Notes:
(L)Low (below 3.5 percent), (M)Medium (3.5 to 5 percent) and (H)High (above 5.0 percent),(-)Negative growth of major crops bringing down agriculture and GDP growth rates,(+)Positive growth of major crops associated with higher agriculture and GDP growth rates,(N)No correlations between major crops, agriculture and GDP growth rates. Dr. Aqdas Ali Kazmi, The News International (Rawalpindi), 22 June 2009.
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B UDGET : A N ON -E VENT
FOR I NDUSTRY
The industry is unhappy with the government for failing to reduce the cost of doing business, seen as the key to industrial revival and for reinstating minimum income tax in the federal budget 2009-10. The budget contains nothing substantial for the industry. Things must get worse before they improve, notes Almas Haider, a leading manufacturer based in Lahore. He forecasts more industrial closures and job losses over the next one year. The heavily indebted units incurring losses must close down. The government would spring into action only when things get out of its control, he says. The federal government is looking for moderate economic recovery during the next financial year. It projects gross domestic (GDP) to grow to 3.3 from the current years two per cent. Agricultural growth will slow down to 3.8 from 4.7 per cent. Industry is projected to grow by 1.8 from -3.3 per cent besides some improvement in the services sector. Analysts feel that the GDP growth projection is quite realistic in view of structural rigidities in the economy like energy crunch.The economic growth revival largely hinges on the performance of the manufacturing sector and security environment, Mohammad Imran Khan, a Karachi-based analyst says. The government has announced setting up of a Rs40 billion Export Investment Support Fund (EISF) to rev up industrial production. But it has yet to formulate its modalities.The EISF money is likely to go into long-term projects like the establishment of warehousing facilities, colleges, etc. Allocation of Rs 32 billion for the textile sector in the EISF is not enough. The industry needs immediate, direct support to reduce its cost of doing business, All Pakistan Textile Mills Association (Aptma) chairman Tariq Mahmood argues. Though the budget carries a few steps to slash the cost of car makers and cement producers, it has little to offer to the textile industry, which earns nearly 60 per cent of export revenue and contributes nine per cent to GDP and is the largest single employer of non-farm labour. The value-added, downstream textile producers were expecting cash subsidy in the form of research & development (R&D) allowance. But no allocation is made for that in the budget. Besides, the amount allocated for three per cent subsidy on interest rates for spinning has been cut to Rs 500 million from Rs 810 million. The budget abolishes federal excise duty (FED) on imported viscose staple fibre but it is going to leave negligible impact on the industry. The key issue of 4.5 per cent duty on the import
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of polyester staple fibre to protect local manufacturers continues to plague the spinning industry. The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry, says Imran. He is of the view that structural imbalances including power crunch will continue to hamper efforts for industrial revival. Analysts expect the textile industry to remain under pressure on account of higher cost of business as well as contraction in domestic and global demand. Not only that the government hasnt given the industry, it has reimposed minimum (turnover) tax (0.5 per cent on local sales and one per cent on exports) on all producers no matter whether they are incurring losses or making profit. I will have to pay around Rs 5 to Rs6 million tax although I am accumulating losses and also face harassment at the hands of the tax collectors, says a spinner. The government had removed the condition to pay minimum tax in the outgoing years budget. It has ostensibly been brought back with a view to shore up tax revenue to 9.6 per cent from nine per cent this year. The return of minimum tax amounts to penalising exports, Tariq says. We dont yet know if the government intends to actually help the industry and exporters in the present transition from loss to stabilisation and profitability.He, however, is glad that the government has taken important step to stall smuggling of textiles from China. Ijaz Khokhar, a readymade garments exporter from Sialkot, is critical of the government for failing to stop the rot in the manufacturing. Instead of picking FATAs unpaid electricity bills of Rs80 billion, the government should have pumped this money into the industry and exports for quicker economic revival, he argues. He does not see industrial revival in the short-term and predicts the conditions to worsen in the months to come. There is little likelihood of any increase in exports even next year, says Ijaz. Almas is of the view that interest rates must be reduced to spur industrial growth and overcome the economic woes. You can also control inflation by improving supply side chain, he says. But the industrial revival is not a priority with the government, he complains. Imran says the government would not be able to bring down credit cost substantially because of International Monetary Fund conditions. Leading Lahore-based builder Akber Sheikh does not see the reduction of federal excise on cement by Rs200 per ton to Rs700 to spur construction. Cement producers had already raised their price by Rs15
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per bag in anticipation of this reduction. So what impact will it create even if now they reduce the price by Rs10 per bag?, he asks. But the analysts say the public sector spending on infrastructure development -construction of dam, power projects, buildings, etc, and rehabilitation of internally displaced persons (IDPs) would help spur construction activity and boost industrial growth. Car industry is glad on the fiscal incentives for it. I hope the reduction in car prices will go a long way in stimulating sales. But the government should also have forced assemblers to increase localisation of parts to support the auto vendor, notes Nabeel Hashmi, an auto vendor. Imran says overall the budget has been a non-event for the industry, which requires government help, removal of bottlenecks related to infrastructure, and a long-term policy to make it competitive if it must revive.
Nasir Jamal, Dawn (Islamabad), 22 June 2009.
R EGRESSIVE T AXATION
The Finance Bill seems to have been designed to tax the poor and protect the wealthy. The poor will bear an increased burden of taxes, whereas progressive taxes have not been levied on the rich. It is almost tragic that the elected government also placed its reliance on bureaucrats who are responsible for our existing pathetic politico-economic situation. Tax policy shows no concern whatsoever for redistributive social justice. For achieving the revenue target of Rs 1.5 trillion for fiscal year 2009-10, a resort has been made to regressive taxation: increasing the indirect taxes and making presumptive taxes under the income tax laws more stringent. The lack of political will to tax the rich absentee landlords exposes the tall claims of the so-called pro-people budget, which is the most lamentable aspect of the Finance Bill. PPP should have prepared a sound tax policy through its own party committees after taking a direct input from all the stake-holders. Rather it has just relied on bureaucrats and elitist experts (sic) who stand completely isolated from the masses and who take guidance from foreign donors. They are least concerned about the welfare of common people. There has also been no fundamental tax restructuring. The government has failed to use tax policy as a tool for rapid industrial growth. No effort has been made for achieving judicious balance between
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direct and indirect taxes and diverting the money from unproductive to productive sectors by imposing heavy taxation on idle money and passive investment. Revenues, in addition to finance public funding, are meant for distributive justice, which is an important function of tax policy. Economic justice relates largely to distribution of tax burden and benefits of public expenditure. It is a component of the broader concept of social justice and the tax policy is a democratic way to influence the distribution of income and wealth on desired lines. The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high-income groups, and (c) subsidies (negative taxation) on goods purchased by low-income groups. We are moving from progressive to regressive taxation which is bound to create a wide gap between the have and have-nots. A successful tax system reduces inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. There has been a gradual shift from equitable to highly inequitable taxes and the shift to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. Regressive taxation has pushed more and more people towards poverty line. In the absence of industrial growth, neither the tax-to-GDP ratio can be improved nor economic stability ensured. Now widows, pensioners and senior citizens are asked to pay tax 10 per cent on income earned from National Saving Schemes, whereas the rich property developers are allowed to pass on the burden of presumptive tax to the purchaser. The tax proposals of the present regime are no different from its predecessors in protecting those having monopoly over economic resources. There seems no concern for expanding the tax base on an individuals ability-to-pay, in the form of higher income tax rates for higher income earners, estate duty, and property tax. Rich industrialists and businessmen pay meagre personal taxes but the poor people are compelled to pay 16 per cent sales tax. It is as low as 3-5 per cent in Japan and Singapore which are affluent societies.. The priority of all governmentscivilian or military alikehas been fixing of ambitious tax targets in utter disregard to their impact on lives of common people, productivity and economic growth. The government itself can hardly provide any meaningful tax relief package to
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the common people or to trade and industry [due to huge fiscal deficit]. Nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle in which our policymakers find themselves trapped. They will have to find ways and means to come out of this tangle.
Huzaima Bukhari & Dr Ikramul Haq, Dawn(Islamabad), 22 June 2009.
B UDGET 2010: T READING
THE
S AME P ATH
The most specious defence of budget 2009-10 so far ironically by a leading economist has been that it was a war-time budget and it was not possible to make any significant change in the economic management within the confines of an annual budget. On the contrary, it is in such times that governments can undertake policy paths not treaded before. The Great Recession that the world economy is facing today requires all countries to re-examine the patterns of Pavlovian behaviour at all levels personal, community, corporate and state - that they have become conditioned to change them in keeping with the new and emerging realities. Unfortunately, such a change is hardly evident in the new budget. There was no dearth of rhetoric and pious intentions in the long speech delivered by Ms Khar, perhaps the youngest minister to present the budget in parliament. The most stirring of which was the quotation at the end of her speech from Zulfiqar Ali Bhutto, our founder leader, delivered before she was born, exhorting politicians to adopt A new look amid a new style as the old ways will no longer appeal to the people, even though she had not long ago served in a cabinet post under President Musharraf. However, her speech contained very little that was new and different from the policies of his earlier patrons. Indeed, it was full of excuses why the government was unable to fulfill the promises it made. The reasons No, we cant -- implicit in the speech are several, including policies of the past governments, the need for stabilisation policies, IMF loan conditionalities and, above all, the present rise in military spending and our financial needs for dealing with the problems of the IDPs, most of whom did not need assistance for roti, kapra, makan before. For one component of the PPP slogan, housing, Ms Khars speech did provide a sop.
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Affordable housing under a phased programme for the low-income population through community participation and squatter- settlement regulation; and for facilitation of working journalists, the ministry of information and broadcasting managed to reserve a good number of residential plots in Islamabad for them. With due respect to the journalist community, the latter provision does not redound much to its credit. This years budget is focused on two major problems, not entirely unconnected. The first is the cost of fighting a war against militancy as a part of the tripartite alliance with the US and Afghanistan. The second is the need for foreign aid to finance fiscal and balance of payments deficits, development programme and relief and rehabilitation of the refugees dislocated from the NWFP and FATA. Surprisingly, there is no mention of the equally damaging effects of the insurgency in Balochistan. There has been a considerable debate on the causes and costs of insurgency, as well as the ownership and cost sharing of the war on terror which we got dragged into after the 9/11 attacks. Official estimates put the cost at $ 35 billion or about $ 5 billion per year, whereas the US has paid us less than a quarter of that cost in military aid during the seven year period. Thus we have not been paid on the full-cost basis and the implication is that part of the cost has to be shared if we own the war, at least partly. There is a well-known principle in chinaware shops: if you break it, you own it. Thus the issue of cost-sharing is essentially a political one. There is a broader question about the role foreign aid has played in promoting or inhibiting development in the last six decades and what it should play in the future. Perhaps, at no time in the past, it has formed such a large proportion of total resources, especially the budget, as it is doing now. If a label has to be given to this years budget, it would have to be a foreign aid budget, rather than a poor mans or a businessmans or a farmers budget. Foreign aid has become the tail that wags the dog of the economy. While Pakistan has had a chequered history of foreign aid inflows, it has been among the largest recipients of aid to developing countries. However, the proper treatment of the aid received from the US for the war on terror also needs much more information than is currently available, even to US analysts. A testimony to a US Senate subcommittee in December 2007 gives the following estimated break-down of the amounts received by Pakistan
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as support for its participation in the war on terror. 60 per cent of the US aid has gone toward Coalition Support Funds (CSF) as a repayment rather than assistance; 15 per cent, or close to $ 1.6 billion, has been spent on security assistance, mainly to purchase major weapons systems, such as F-16s. Another 15 per cent has gone toward budget support or direct cash transfers to the government of Pakistan. This money is supposed to provide macroeconomic stability and to free up funds for social spending. The remaining 10 per cent has been used specifically for development and humanitarian assistance. In order to give the parliament the opportunity to debate the proper use of these funds and to exercise its oversight, it seems desirable to integrate them into a unified defence budget, which should provide greater detail than in the summary manner it was presented last year. The funds received in connection with the IDPs relief and rehabilitation, which are the result of the collateral damage of the war, should also be included. Indeed, the parliament may wish to call a separate session to consider the economic and humanitarian consequences of the war, along with the discussion on the defence budget. In this context, it seems odd that the expenditure on IDPs, along with that on Benazir Income Support Programme is being included as part of the development budget. It is indeed stretching the meaning of development a bit far to include what are essentially doles to the poor but the inclusion of IDPS expenditure has no justification at all and should be included in the defence budget. The main reason for this strange categorization, as pointed out by Dr Ashfaque Khan, the former Economic Adviser, is to circumvent the provisions of the Fiscal Responsibility Act which prohibits the government from running a fiscal deficit on current government expenditures. The budgets other proposals, especially on social protection, additional avenues for taxation and governance issues, although wellmeaning, have not been fleshed out in detail and have been eclipsed by the severe resource constraints being faced as a result of the continuing war on terror and its humanitarian fall-out. It is unlikely that the government will have the time and resources to tackle them with the vigour and urgency that they deserve until a paradigm shift away from the elitist and foreign aid-dependent policies is seriously attempted.
S. M. Naseem, Dawn (Islamabad), 22 June 2009.
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B UDGET
IN
T OUGH T IMES
These are extremely difficult times for Pakistan. It is not only the challenge thrown at the state by Islamic extremists that has caused so much anxiety inside and outside the country. Many people that have influence in shaping world politics have called this challenge an existential threat for the country, with highranking US officials issuing the warning that unless Islamabad realises the enormity of the threat extremism poses to the very existence of the country, Pakistan could simply unravel. There is certainly some exaggeration in this assessment; it was made, most probably, to draw the attention of policymakers in Islamabad. It seems to have served that purpose. Last month the military was ordered into Swat and it seems to have taken the area back from the extremists. The armed forces have now been told to go after the leadership of the Taliban. There is a reason why I have begun this article on the budget with a reference to the ongoing struggle between the state and non-state actors and why I said that extremism is not the only problem the country faces. There is also the problem of an economy that has suffered perhaps the most severe shock in the countrys history. The budget is supposed to address that situation and bring the economy back to health-or at least set the stage for its recovery. In an earlier article in this space a few weeks ago I had suggested that the gross domestic product is not likely to grow by more than 2.5 per cent in 200809, half the rate that was then predicted by the government. Now the governments own estimate is that the rate of GDP growth will be only two per cent. I am recalling this in order to underscore an important way in which downturns grip economies. When a decline occurs it usually takes the economy down fast. This is precisely what has happened in Pakistan. When the final numbers for 2008-09 are posted, I will not be surprised if the GDP growth is even lower than the one indicated in the Pakistan Economic Survey 2008-09, released a few days before Hina Rabbani Khar made the budget speech in the National Assembly. In fact, the economy may not show any increase at all. Reviving the economy, therefore, is an urgent task for the government. If it succeeds, this will aid its efforts against extremism. If it fails it will only drive more young people towards extremist causes. This is one reason why the two struggles against extremism and economic
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stagnation are tied so closely together. Failure of one will lead to the failure of the other. Although Ms Khar in her speech tried to draw some cheer from an otherwise cheerless situation, it was a sombre message she communicated to her audience. What she thought should bring comfort to those who were desperate to see Pakistan modernise rather than be shoved back into the Middle Ages was the fact that she was the first woman in the countrys history to present the budget in an Assembly presided over by the first-ever woman to serve as speaker. These are important milestones in our quest for women empowerment and gender equality, she told the Assembly. Does the budget reveal a strategy aimed at economic revival? I believe given the grim situation the country is confronted with, the government has done a credible job of focusing on the right areas. I can identify six of them, two of which I will discuss today and the others later. First, the government has pointed out to the people the enormous cost to the economy of continuing terrorism. This should certainly help in building support for the action by the army. According to Ms Khar, the cost to the economy is of the order of $ 35bn since 2001-02, an average of $6bn a year. And it is increasing. We have to meet the maintenance and rehabilitation costs of almost 2.5 million brothers, sisters and children displaced as a result of the insurgency, she said. The government has allocated $ 6.25bn for relief, rehabilitation, reconstruction and security as part of its relief effort. This is equivalent to 3.4 per cent of GDP. Adding that to the cost of terrorism means that the fight against extremism is costing the country 6.7 per cent of GDP. Commitments from its own resources notwithstanding, the government is banking on receiving a fairly generous amount of assistance from the international community. The message from Islamabad, in other words, is clear. The war against terrorism is not just Pakistans war. It is a war being fought on Pakistani territory on behalf of the world. The country is prepared to sacrifice but it is incumbent upon its many friends to be generous in providing financial assistance. The country did not need foreign soldiers but foreign aid. This indeed was the second message of the speech. Pakistan recognised that it had not done enough to raise domestic resources for investment and growth. In the outgoing year we were only able to attain tax revenues equivalent to nine per cent of our GDP, said Ms Khar. A
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number of actions were indicated that would be taken to remedy the situation but that would take time. Read any speech by a Pakistani finance minister over the last two to three decades and one can find many references to the need to increase the tax base and reform the tax collection system. Many development agencies have written reports on how the tax-to-GDP ratio could be improved. None of this has worked. The trend continues to be downward which means that growth in the economy depends upon the ability to raise resources from outside the country. This is what has produced a roller-coaster ride for the economy. The economy does reasonably well when large amounts of external flows are available. The growth plunges when external savings decline. The fact that this time around the rate of increase in GDP has declined significantly despite the flow of large amounts of foreign money is even more worrying. Some simple arithmetic would illustrate Pakistans dependence on foreign flows. If the war against terrorism is costing the country 6.7 per cent of GDP and if the expenditure on one of the programmes aimed at caring for the poor the Benazir Income Support Programme is to cost 0.6 per cent of GDP, then not much is left with the government only 2.3 per cent of GDP - even if it raises the tax-to-GDP ratio to 9.6 per cent. The situation, in other words, is grim from the perspective of government finance.
Shahid Javed Burki, Dawn (Islamabad), 23 June 2009.
B UDGET 2009-10: B+
Budgets are not high drama; they are an accounting exercise. At best they tinker at the margins to ensure that the economy stays on course. That course is determined by a larger discourse by citizens and their representatives on what kind of society they want in the medium term Given the enormity of the development and security challenges facing us, it is natural to be impatient with the FY2009-10 budget for making few dramatic departures from the past. To be precise, budgets are not high drama; they are an accounting exercise. At best they tinker at the margins to ensure that the economy stays on course. That course is determined by a larger discourse by citizens and their representatives on what kind of society they want in the medium term. In the absence of such a discourse and the clarity that flows from it, columnists have oscillated between assessing the budget from the narrow
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perspective of self-serving lobbies and the pessimistic dismissal of a grand strategist sitting on a pedestal. Neither perspective is useful in analysing the budget. There are two fundamental questions to ask about a budget: what is the overall development strategy that the budget is trying to implement; and will this budget keep us on track for achieving the priorities or derail us? The answers to these questions are to be found in two documents. One is the interim report of the panel of economists set up by the prime minister titled Economic Stabilisation with a Human Face. That report, while focusing on short-term macro-economic stabilisation also sets out the agenda for recovery of growth. The same panel of economists is extending that work to prepare a medium-term programme for development. This programme, in combination with the 9-point agenda of the Economic Advisory Council, constitutes the medium-term development strategy. A quick read of the documents provides some benchmarks for assessing the budget. The first benchmark is embedded in economic stabilisation. Readers will remember the difficult days back in October last year when inflation was galloping, reserves were falling sharply and the Rupee was in a nosedive against other currencies. This had forced us to cut back public expenditure and tighten the money supply. That severe belt-tightening paid off six months later in terms of considerably lower inflation, a more stable Rupee, and improvement in international reserves. The revenue and expenditure measures contained in the 2009-10 budget continue to build on the macro-economic recovery thus laying the foundation for robust growth in the next 12 months. Especially noteworthy is the 55 percent reduction in subsidies: WAPDA subsidy is down to Rs 62 billion from Rs 92 billion and KESC is down to Rs 4 billion from Rs 19 billion. By passing through international prices to consumers, these measures will contribute to increasing supply of energy. A second benchmark for assessing the budget is recovery of the public investment programme to support quick growth after macroeconomic stability has been achieved. On this score also the budget has done well. The economic team successfully negotiated a higher fiscal ceiling with the International Monetary Fund and the public-sector development programme (vital in these days of security-conscious private
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investors) that had been pared down by Rs 130 billion in the last budget is up Rs 230 billion to Rs 646 billion. A third benchmark is the building up of cost-effective social protection with wide coverage, a glaring omission in our strategic thinking in the last sixty years. Not only has the budget allocated substantial addition resources for social protection programmes (Rs 35 billion), it has also announced the setting up of a full-fledged ministry of social protection to integrate the interventions and thus avoid double dipping and waste. The fourth benchmark is the miserably low tax-to-GDP ratio of 9 percent. For a country that needs to do so much to improve health and education services and upgrade its infrastructure while fighting a fullblown insurgency in the border areas that threatens to burst into urban centers, this rate of tax collection is a recipe for failure. It creates dependency on foreign handouts and the consequent loss of sovereignty. But increasing the tax revenue requires a national consensus on how to bring the untaxed into the net. We have to decide whether it is acceptable for a few citizens to carry the entire tax burden while others (those in agriculture, the services and those who have massed huge wealth in the stock market and the urban property sector) get a free ride; and that the top leadership of all major political parties pays little or no tax. In the absence of the debate to forge a consensus on taxes, which must be conducted in drawing rooms, newspapers, on TV screens, at the ballot box and in parliament, budgets made by the ministry of finance technocrats will only tinker at the margins of this vital issue of national survival. As we are now witnessing, even these small measures are withdrawn under pressure.(The carbon tax announced in the budget would clearly have benefited from more debate. Such taxes are meant for restoring the carbon balance, i.e. tax unavoidable release of carbon and spend the resources to reduce the emission of carbon elsewhere; the balance to be achieved is measured in carbon particles rather than in balanced budgets.) The fifth benchmark comprises measures that strengthen the private sector to make it internationally competitive. Three critical interventions here are: improve the energy situation by investing in additional generation capacity; upgrade the national transport corridor; and ensure stable prices. The budget has allocated substantial additional funds for the first two while continued vigilance of the macro-economic balances will ensure price stability.
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I would add a sixth benchmark which is implicit in the development strategy documents mentioned above; that the government use its considerable regulatory power to systematically remove, via the budget, the policy bias against investment in manufactured exports. Currently, the consensus reflected in policy documents prefers consumption over investment. Witness the higher prices charged to industry for power and gas compared to households, the much higher incidence of tax on industry compared to retail trade, the poorer quality of infrastructure for freight compared to passenger traffic, the easier availability of credit to consumers compared to investors. Combine these biases with a chronically over-valued exchange rate and one can see why we have become a bloated society of imported consumption goods a la the Middle East rather than the lean and efficient economy of exportoriented East Asia. Although several small measures in the budget appear to be correcting the policy bias against investment, they do not yet constitute a strategic shift. Overall, I would give the budget a B+; with more discussion and wider ownership this would have been an A.
Ijaz Nabi, Daily Times (Lahore), 25 June 2009.
B UDGETING E DUCATION P RIORITIES

The National Education Policy review process was initiated in January 2006 and it is now June 2009, which means that four budgets have been approved during this period but the process has yet to conclude with the announcement of the new education policy The federal and provincial budgets for 2009-2010 have been presented and we are nowhere close to spending that minimum of 4 percent of GDP on education, recommended by UNESCO all those years ago. Actually, given the state of our education system, we would probably need to spend a whole lot more than that. The federal education budget for 2009-10 at Rs 56 billion, with a large chunk going to the Higher Education Commission (HEC), shows a 36 percent increase over the revised estimates of Rs 41 billion for 2008-09. Budgetary analysis carried out by the Institute of Social and Policy Sciences (ISAPS) and the Campaign for Quality education (CQE) suggests a number of anomalies. Consider, for instance, the expenditure on the Academy for Educational Planning and Management (AEPAM), the premier planning
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and research institution for education at the federal level. Overall allocations for AEPAM have gone up by 21 percent. But, when we disaggregate the amount, it turns out that the salary budget has gone up by 35 percent while non-salary costs have decreased by 6 percent. Only Rs 0.5 million have been allocated for research, survey and exploratory purposes. In terms of the latter, then, donor funding will remain central to the enterprise. Much the same kind of pattern can be seen in the allocation for National Education Management Information System (NEMIS). The salary costs have increased by 20 percent while non-salary costs have actually decreased by 25 percent. Further, as in the last budget, allocations have been made for setting up new cadet colleges, six in number, to the tune of Rs. 130 million. Perhaps some of these funds could have gone to our colleges of general education that suffer from considerable neglect, also by virtue of the fact that they lie outside the ambit of the HEC. While we are ostensibly operating within the framework of the National Education Policy (NEP), there has been consensus over the need to review it for some time now. However, the review process was initiated in January 2006 and it is now June 2009, which means that four budgets have been approved during this period but the process has yet to conclude with the announcement of the new education policy. Meanwhile the data from the National Education Assessment Survey (NEAS) as well the Punjab Examination Commission (PEC) suggests that student achievement levels remain low. Other studies indicate that rote learning is rife in both public as well as private sector schools and that in both cases student learning is well below grade level. And that teacher training, notwithstanding the large sums of money being spent on the exercise, appears to make little difference to student outcomes on a sustained basis. Incidentally, in the provincial budget the allocation for colleges in Punjab is lower at Rs 6 billion compared to Rs 9 billion last year. Perhaps better teacher education (in improved colleges) rather than just training will make more of a difference to student outcomes. In any case, it would be useful by way of balancing and prioritising inputs within a policy framework in Punjab if the PEC student outcomes data could be merged with the schools input data of the Programme Management and Implementation Unit (PMIU). Regardless, it is not only a matter of resources being deployed, scarce as they are, but also the nature of solutions we are seeking. In the
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Punjab education budget of Rs 44 billion for 2009-2010, showing decreased expenditure for school as well as higher education compared to 2008-2009, two allocations in particular are interesting in terms of what they suggest as policy preferences: Rs 4 billion for the Punjab Education Foundation (PEF) and Rs 3 billion for setting up Danish schools. The PEF is an autonomous body that funds low-fee charging private schools which demonstrate a minimum level of quality, relieving parents of the burden of paying fees and at the same time seeking to enhance existing quality levels in the chosen schools. The issue to be considered here is whether public funds should be used to support private education delivery rather than improve public sector education, which is in a state of acute crisis. Though, as mentioned earlier, additional funding is a necessary but by no means sufficient condition for such improvement. As for public sector education, a key initiative of the provincial government is the plan for setting up Aitchesons for the poor, housed in elaborate buildings on very large campuses, in the rural and peri-urban areas for the most disadvantaged sections of society. Rs 3 billion have been allocated in the budget to this end and the process of establishing an autonomous Danish School System and Centers of Excellence Authority is in place. Reportedly, the department was asked to locate state-owned land covering 100-200 acres for such boarding, comprehensively supported, schools in all districts. A number of sites have been identified and the government it seems has already given approval for 47 such schools. At first glance this could appear to be major step forward towards the very laudable objective of equity and educational justice, and for some an appropriate response to the pull of the madrasa system for the poor. But again, one must ask: is this the right way to go about it? For instance, is there any calculation of the recurrent expenditure and its impact, on a continuing basis, on the resources available for the public sector schools in general? This is not at all to argue that there should not be centres of excellence, especially for the poor who are often excluded by the system regardless of merit and ability. But surely there are in every district at least a couple of public sector high schools that have the potential, particularly with respect to the key element of a capable and well-led teaching staff, to develop into such a centre. At least a survey seeking to identify such schools could be undertaken at no great cost. One way or
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another, we have gone the brick and mortar route many times before. And this initiative seems particularly heavy on that score. Abbas Rashid, Daily Times (Lahore), 27 June 2009.
F EDERAL B UDGET 2009-10

As per Pakistan Economic Survey, the economy of Pakistan has witnessed over 200 per cent increase in the price of palm oil; and an increase of 150 per cent in wheat prices, while over 100 per cent increase in the price of oil in the international market. Latest assessments point towards a strong likelihood of a sharp increase in the poverty incidence in Pakistan as a result of unprecedented food inflation and transmission of international energy prices to domestic consumers. The Report of a UN Inter Agency Assessment Mission fielded during June-July 2008 found that food security in Pakistan in 2007-08 had significantly worsened as a result of food price hike. The total number of households falling into this category was estimated to be seven million households or about 45 million people in 2008. The report shows an increase in the share of severely food insecure population, from 23 per cent in 2005-06 to 28 per cent in 2008. The planning commission's constituted panel of economists, in its interim report based on 2004-05 poverty head count suggested an increase of around 6 percentage points in poverty incidence for the year 2008-09. War on terror and increasing the level of corruption in the country is only adding to the hardship of the poor as huge resources are being diverted to unwarranted head of expenditures. According to a study conducted by the Institute of Public Policy of Beacon House National University, economic cost of war on terror has been estimated since 200405 to be $ 31.4 billion, far in excess of what Pakistan is getting from the friendly countries. Huge expenditure on war on terror and rehabilitation of IDPs severely curtail the capacity of the government to address poverty related issues, thus only increasing the number of poor and the deprived. Indirect costs of war on terror includes, drop in investment, inability to proceed with development work, loss of production time, increase in joblessness and logistic costs etc. According to a report of "Transparency International" covering the period up to 17th June 2009, corruption in Pakistan has increased by 400 per cent during the last 3 years. According to its assessment Rs 45 billion went into corruption in
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2006, this amount increased to Rs 195 billion in 2009, only acceleration poverty, hardship and deprivation among a growing number of people. To address the growing poverty level in Pakistan government has assigned due emphasis to the social sector development programme and by promoting the scope of the various safety net programmes. As compared to deep and growing poverty and deprivation levels in Pakistan provisions kept in 2009-10 budgets may not be enough. However, a total of Rs 176 billion are directly related to safety net and poverty related activities including: BISP, IDPs, People's Work Programme, Microfinance, SMEs and Livestock and dairy development are good enough if properly and timely utilised to benefit the poor and the deprived. Moreover, entire PSDP allocation of Rs626 billion is also indirectly related to the employment and poverty related activities. During FY2008-09, Rs 22 billion was distributed to 1.8 million beneficiaries under BISP. During FY2009-10, it is proposed to increase the allocation of BISP to Rs 70 billion to benefit five million families. The government plans to bring in legislation during the next financial year for creating a social security protection programme for the haris. The government also plans to revamp the ministry of social welfare by replacing it by a Ministry of social protection and development in order to provide a common platform for safety nets and enhanced institutional capacity for social service delivery. An allocation of Rs 35 billion is proposed for Peoples' Works Programme in the FY 2009-10 for this purpose. This well creates sizable employment opportunities and, therefore, will increase the incomes of the less privileged. For the FY 2009-10, an amount of Rs 10.8 billion has been allocated for different worker welfare development schemes in the housing, health, education and technical education sectors. The government has set the target to increase of the microfinance services from 2 million to 3 million borrowers in fiscal 2009-10. Increasing productivity and value addition in agriculture will receive high priority. There is a move towards creating self-reliance in commodities, food security through improved productivity of crops as well as development of livestock and dairy. Overall PSDP allocation for agriculture will be increased by 25 per cent from Rs14.4 billion in FY 2008-09 to Rs 18 billion during FY 2009-10. An amount of Rs 2.5 billion is proposed for FY 2009-10 to ensure food security and productivity enhancement of farmers. Poverty reduction through small holders live stock and dairy development worth Rs 3,539 million, from which an
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amount of Rs 400 million will be allocated in FY 2009-10. More model dairy community, biogas and breeding farms; cooling tanks, rural services providers and pasteurization plants are planned. In order to support the SME sector by providing access to credit, a fund worth Rs 10 billion for credit guarantees is going to be established. In addition to increasing the volume and outreach of existing safety net and poverty related programmes, agricultural and industrial productivity should be increased along with overall efficiency in governance and financial management. In order to expand the out-reach of services; the government can involve non-state providers of services also. Infrastructure development and sustainable macroeconomic growth and effective targeting of welfare service become more important and challenging today than it has ever been in the past. The government will have to develop a new set of institutional norms and regulatory frameworks and change the way they have been doing business in the past in order to achieve this important goal. Islam also provide the basic framework of a comprehensive programme of safety net consisting of Pity, Charity and Sadaqat (both compulsory and voluntary), the same need to be promoted wholeheartedly in Pakistan. If all out efforts are made by the government and the private philanthropists the country may ultimately create a fund of up-to one per cent of our current GDP, which will be equivalent to Rs135 billion, out of Charity and Zakats etc
M. Osman Ghani, Dawn (Islamabad), 29 June 2009.
B ETRAYING
THE
P EASANT
Effective, quality and universal public education along with better governance is the least we can give to the peasant, in return what he has done to improve the quality of our lives and the national economy. While many of us sit in air-conditioned offices during the hottest period of the summer, my thoughts go out to the peasants, literally millions of them, working in the fields, sowing and tending crops under the blazing sun with their barely covered sun burnt bodies. Never does their routine of work change with the changing cycles of seasons cool, hot, good or bad. They have to do what they have to do for a living; unending work without much compensation from their lords. The peasantry of Pakistan, from the Northern Areas down to the coastal zones of Sindh, grow everything we have on our dining tables, and feed our textile and many other industries round the year. They contribute a substantial amount of
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their time, energy and, frankly speaking, most of their productive lives to generating our national wealth and keeping the rent-seeking landlords happy and prosperous. What have the lords, the state and society done for the peasants? First, let us talk about the lords. There is socially a dialectic relationship between the lords and the peasants. Lords cannot be lords without a passive, obedient and socially depressed and economically deprived peasant class. In almost every region of Pakistan where we have landowners, and peasants working for them, we have traditional, hierarchical social relations. Much of this hierarchy rests on ownership of land on the one hand and landlessness on the other. The real question is who gets what on account of the ownership of land and work on the land. There may be some regional variation in how the costs and benefits of agricultural produce are distributed between the landowners and the peasants, but those who contribute physical labour, quite often with the entire family men, women and even children working as a team get very little. Peasant families, even when they are overworked, barely get enough to survive and often end up in some kind of debt-trap. Most landlords have never been interested in improving the social and economic conditions of their peasants. Rather, they have obstructed almost every type of development, like education, that could lead to social mobility and economic liberation for the peasants. How have they managed that? The landowners comprise our governing elite at level of the society, from the Union Council to the national parliament. They have the power to ensure that girls schools for peasant families are set up close to them but also function with teachers present and classes held regularly. Unfortunately, that is not the case in most of the areas where we have a small landowning class dominating the social and political scene and lording over a large landless peasantry. The social conditions of the peasant communities are appalling, particularly in rural Sindh and Southern Punjab, domains of large land-owning families. Halfhearted land reforms and the fragmentation of land among successive family members has not eroded either the economic power of these families or their social significance. Landlords are a social class more than an economic class. They have found ample means, mostly through politics and political office, to maintain their hold on their respective areas of influence and have also become more prosperous. Therefore the argument that land holdings have shrunk in size is not valid in proving
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that the social or political influence of the landlords has declined. Yes, the emergence of small land holders has been a positive development in many areas of Pakistan. This group has expanded substantially over the decades as a result of two important developments. A section of them has been allotted government lands under various land distribution schemes. Others have purchased small parcels because of the Dubai factor or due to the social and economic mobility of a member of the family who became a professional or joined government service. And they are the vanguard of modern-day capitalist farmers. But compared to the vast peasantry, the number of small and medium landowners is relatively small. A section of the peasantry has been liberated by slow growth, but that is not enough. State and society cannot leave social development of the peasantry to the laws of nature or to the trickle-down Musharraf-Aziz economy that our elected governments should have thrown out as soon as they left the political scene. Besides economic exploitation of the peasantry, we see the old system of social oppression in place. It is still not uncommon for peasant girls to be kidnapped and forced to satisfy the sexual desires of a member of the local landowning clan. Lacking skills and means, these unfortunate peasants are resigned to their fate and are never able to move out. What has the state done for the peasants; what can it do? True land reforms could have brought about a social revolution like the one small landowners are bringing about in central Punjab. The small landowner has become socially and economic independent and has opened many opportunities for quality education and thus greater social and economic mobility. Many families in Southern Punjab that have slowly entered this class are the beneficiaries of the Ayub Khan and, to some extent, Zulfiqar Ali Bhutto land reforms. We know the reasons why land reforms are not possible. Military rulers could do it because they were not socially or institutionally bound to the landowning class. The current crop of leaders from all parties, except the urban MQM, has its social and thus political roots in land ownership. Why would these leaders destroy their own social and political base? But there are a lot more positive things that the state can do for the peasants without land reforms. First, we need to do something about the state of governance. The failure of governance that has pushed Pakistan to the top ten failed states index hurts the peasantry the most. All rentseeking elements of the state, from the local policeman to higher ranking government officials, suck the blood of the peasantry like wild leeches
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and nobody really comes to their rescue. None of the major or minor political parties is organised at the local level, has any dedicated local cadre to organise the peasantry or works toward their welfare. And unfortunately whatever peasant movements we had in the sixties and seventies have declined in their ideological appeal and scope of activities. Education is the key to the liberation of the peasantry. Failure in delivering this basic social service, and others like health, is keeping the peasantry bound in tradition and in the unfailing service of the lords. Effective, quality and universal public education along with better governance is the least we can give to the peasant, in return what he has done to improve the quality of our lives and the national economy.
Rasul Bakhsh Rais , Daily Times (Lahore), 30 June 2009.
C ARING
FOR THE
P OOR
How would Pakistan care for its poor whose number is increasing at an alarming rate? With very little GDP growth in 2008-09, there may not be any increase in income per head of the population. We know from the empirical work done at some development institutions that the GDP must increase at a rate equal to twice the rate of increase of population for the incidence of poverty to remain unchanged. For the incidence to decline, GDP increase has to be higher, perhaps as much as three times the rate of population growth. It needs to be even higher when income distribution is inequitable, as is the case in Pakistan. For Pakistan this translates into a growth rate of six to seven per cent a year. The economy is failing in this respect. This means that the dismal performance of the economy in 2008-09 must have added to the number of people living in poverty. The incidence may have increased from 50 million to 55 million. As was indicated in the budget for 2009-10, only a small increase in GDP is likely in 2009-10 and for a couple of years after that. If these estimates hold, there will be a further growth in the number of poor, perhaps by 10 per cent a year. This rate of increase is more than five times the increase in population which means that the proportion of poor in the population will increase significantly. The increase will be even higher in the less developed parts of the country. This is clearly an untenable situation, which could have severe political and social consequences. A rising incidence of poverty means a higher rate of unemployment, particularly in the countrys large cities.
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In Pakistans case, there is a very young population the median age now is 18.2 years. This means a very large number of young people are without productive jobs. The problem Pakistan faces today has two dimensions. The state needs to assist the poor to meet their basic needs. And it needs to engage the youth in productive work. How does the government plan to address the problem? An answer was provided in the budget. Islamabad is adding additional resources to a number of programmes aimed at alleviating poverty as well as providing relief to the poor. Much of the effort will be focused on a relatively new mechanism created by the present government and called the Benazir Income Support Programme (BISP). Under this, the government is providing direct cash transfers to the poor. This is in keeping with the approach developed in institutions such as the World Bank that favour cash payments rather than subsidies directed at the poor. Development institutions have learnt through experience that subsidies, more often than not, dont reach the intended beneficiaries. In countries such as Pakistan, where the state is weak, there are enormous leakages in such programmes. Cash transfers can be better monitored. The component of conditional cash transfers is being added to the BISP, I suspect at the urging of the World Bank that has tried this approach in several countries in the Middle East that have fallen behind the rest of the developing world in terms of human development. The idea is to provide cash to families in return for taking action such as sending girls to school; keeping children in school for periods that are long enough not only for them to learn to read and write but also to make them responsible citizens; and immunising children against communicable diseases. There is one additional advantage to adopting this approach. It encourages people to use the private sector for obtaining some of the services on which cash flows are conditioned. In this the burden is not placed on the public sector which is very weak in countries such as Pakistan. Some of this has already begun to happen. Over the last couple of decades, the private sector has become actively involved in the sectors of education and health which were previously the concerns of the state. While much of this is being done for profit, there is also the active involvement of the non-government sector in education and health. Even when the private sector is doing this for generating incomes for itself, it is not targeting its activities at the relatively well-to-do. Since
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the poor even in the vey poor areas are prepared to pay for health and education, the private sector is bringing services to them. The conditional cash programme the government is now including in its on-going efforts will provide the poor additional income to spend on these services. This will encourage further private enterprise in the social sectors. The government is making a very large commitment to the BISP. During fiscal year 2008-09, Rs 22bn was distributed to 1.8 million families, said Ms Hina Rabbani Khar, state minister for finance, in the budget speech. During fiscal year 2009-10, it is proposed to increase the allocation to BISP to Rs 70bn ...this would constitute more than a 200 per cent increase and five million families would benefit. Each eligible family would receive, on average, Rs 14,000 of cash in 2009-10. This is 14.5 per cent more than the Rs 12,222 provided in the previous year. As is the experience in other parts of the world where such programmes have been tried they are popular in Latin America and the Middle East care needs to be taken to ensure that money reaches the right pockets. A number of targeting mechanisms have been tried and some of them have worked. Those that have succeeded are based on good information about the poor. This is done by building what are called poverty maps based on censuses and household surveys. The government seems to be moving in that direction. According to Ms Khar, a census would be completed within three months in 16 districts of Pakistan as a pilot to benchmark incomes. This would be extended to the entire country within the calendar year. The Benazir Income Support cards would serve as vehicles of transparent management and addressing the needs of the vulnerable. The government has also indicated the willingness to commit resources to public works programmes in both rural and urban areas in order to provide temporary relief to the urban unemployed. These programmes work well when there is good oversight. In Pakistans case this could be provided by the local government institutions. All these are palliatives, however. The real solution to the poverty problem lies in getting the poor engaged productively in the economy as wage earners and that will need both a high rate of GDP growth as well as the development of labour-intensive sectors of the economy.
Shahid Javed Burki, Dawn (Islamabad), 30 June 2009.
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H APPY N EW F INANCIAL Y EAR

Immediate and persistent attention to addressing political issues and socio-economic problems will make it possible for the political forces to continue supporting the current civilian-military efforts to eliminate religious extremism and terrorism. The new financial year, beginning July 1, was marked by street protests in many cities, including Islamabad, Karachi and Lahore, against electricity outages ranging from 12 to 18 hours a day. Over and above this are unscheduled electricity suspensions that cause more disruption in business and commercial activity. These protests are expected to intensify because electricity outages have seriously depressed commercial and industrial activity all over Pakistan. Job losses at the lowest and middle levels are high. It is annoying to watch the top management of power companies sermonising on TV channels on the gap between supply and demand due to increased consumerism, excessive use of air conditioners and carelessness in the use of electricity. What they need to address is their failure to plan for increased demand, and who is to be held responsible for this negligence: WAPDA, the federal government, or private power production companies. Iran has agreed to provide 1000 megawatts of power but it is not known if Pakistan is installing transmission lines on its side of the Pakistan-Iran border. The electoral triumph of the Pakistan Peoples Party in the February 2008 elections created the hope that the new government would work towards easing economic pressures on the common people. It was expected that the government would take steps to increase employment opportunities, curb inflation and price hike of essential items, and spend more on education and healthcare. These expectations did not materialise and the lower and middle classes found themselves struggling harder to cope with inflation. At times the government appeared helpless to control shortages, which were often caused by manipulation of supplies by vested interests. On July 1, the government increased the price of petroleum products by imposing a so-called carbon tax. Interest rates on national saving schemes were reduced. The price of gas for domestic consumers was reduced slightly, which was understandable because consumption of gas goes down drastically in the summer. Earlier in the winter months, when demand was high, gas prices were increased.
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The government is toying with the idea of increasing electricity rates at a time when the people are protesting power shortages in the streets. Initially the government wanted to increase the price of electricity from July 1. However, good sense prevailed and the matter was put on hold. The raise in the price of petrol and other oil products has negative implications for other sectors of the economy. The current petrol price is fixed at Rs 62.13 per litre. The retailers add 9 to 15 paisas to the price. Over one-fourth of the price goes to government in the shape of different taxes and levies. Profits of companies and retailers, and transportation costs, are in addition to the governments share. These developments have diluted the impact of the governments decision to raise salaries and provide financial assistance of Rs 1000 per month to the poorest families through the Benazir Income Support Programme. Not many people talk of these relief measures because the current economic issues, especially electricity outages, have overwhelmed them. The most perturbing development is that socio-economic disparities have increased rapidly in the recent past. The gap between the highest income groups and the lowest income groups has widened. Compared to five years ago, there are more people in government and semigovernment institutions (bureaucrats and others) now whose monthly income and perks amount to one hundred thousand rupees or above. If you include non-government sectors, this number goes up many times. The number of people below the poverty line or in the low income bracket has increased over the same period. Consequently, the affluence of a small section of the population is in sharp contrast to the poverty and under-development of large percentage of citizens. These inequities are the most serious threat to Pakistans internal harmony and stability. The people who are at the periphery of the political system have little stake in the existing power arrangements. Their alienation turns them into sympathisers or supporters of militant Islamic and sectarian groups. The government needs to review the perks and benefits (legal and acquired through influence and connections) of the senior-most officials to address the disparity issue and to assure the people that it really cares for them. The excessive use of official transport should be discouraged, especially for personal and family use. The unnecessary use of air conditioners in government or semi-government offices needs to be
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discouraged. Many officers in Grade 18 now have now air conditioners in their offices. Some top officials either get a monthly petrol quota or there is no limit on the use of petrol. This should be reduced by 25 percent. These savings should be used in the education and healthcare sectors. The future of the present coalition, especially the PPP, depends on how it addresses the economic predicament of the common people and how far it can work towards narrowing socio-economic inequities. The domestic situation has remained manageable so far for five major reasons. First, the main opposition party, the PMLN, does not want to challenge the government on economic issues. These issues have more potential for popular mobilisation than the restoration of the judiciary, as invoked in March this year. Second, the growing threat of religious extremism and militancy, and the on-going army operations in Swat and South Waziristan against the Taliban have also discouraged the political forces from challenging the government. The major political forces are unanimous in supporting army action on a priority basis. Other issues have been pushed back. Third, foreign economic assistance has enabled the government to cope with the injurious consequences of terrorism and eased some economic pressure. The new budget cannot meet its targets without foreign economic assistance. Fourth, this years agricultural output has been good, which helps improve the rural economy and secures against shortages of agricultural commodities, especially wheat, this year. The government needs to pay more attention to agriculture so that food items are do not need to be imported. Fifth, foreign remittances by Pakistanis living abroad help the government and their families. This additional income contributes to the capacity of these families to cope with price hikes and maintain a life style that they cannot afford if they live on their income from within Pakistan. This dampens revolutionary zeal among the middle and lower strata of the society. These factors give breathing space to the government while addressing economic issues, especially the growing gap classes. However, it is in the governments interest to address these issues at the earliest. The key question is whether the government can improve governance and political management. It is in these areas that the governments performance has been poor, if not abysmal. Some political problems have
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aggravated because the presidency often prefers loyalty over professionalism for key appointments and shows lukewarm interest in quickly resolving political problems in consultation with the opposition. Immediate and persistent attention to addressing political issues and socio-economic problems will make it possible for the political forces to continue supporting the current civilian-military efforts to eliminate religious extremism and terrorism.
Dr Hasan-Askari Rizvi, Daily Times (Lahore), 5 July 2009.
F EDERAL , P ROVINCIAL B UDGETS R EVIEW

A profound look at the fiscal budgets for the federating provinces and the federal budget reveals a close link between the two in respect of the provincial government's attempt to prepare budgets beyond the fiscal space and allocate funds to help marginal segments of the society. None of the provinces except the NWFP has levied new taxes to bridge the fiscal deficit. They, like the federal government whose fiscal management for the current fiscal year is largely dependent on foreign loans and financial assistance, are dependent on grants and funds that are to be provided from the federal divisible pool under the NFC award. The federal government plans to spend Rs 200 billion of PSDP for provinces. All the provinces except Punjab have expressed their reservations about the existing NFC award. Budgetary outlays of provinces depict the financial health and state of provincial economies. They are at variance for reasons at an uneven level of economic development, size of population, area and availability of funds for fiscal management. The wide variance of economic development among the provinces is partially attributed to unjust distribution of funds from the divisible pool and lack of practicing economic federalism in letter and spirit. A brief resume about the fiscal budgets of the provinces would highlight some of the challenging fiscal issues that are faced by the provinces and the limitations that existing federal tax revenue collection imposes on them to manage their finances.
Punjab's Budget
The provincial budget envisages an outlay of Rs 489.873 billion. Income is estimated to be Rs 423.511 billion, 8.6 per cent higher than the current year's estimates of Rs 369.896 billion. The province expects to get a major chunk of its finances, Rs 321.0 billion from the federal divisible pool, Rs
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4.625 billion in direct transfers and Rs 11.122 billion in federal grants. The gap of Rs 86.74 billion will be raised from provincial resources that include raising Rs 49.647 billion in tax revenue and Rs 37.093 billion in non-tax revenue. Analysts have expressed doubts about the provincial government's ability to raise such a huge amount as it did meet the tax revenue target of Rs 40.362 billion and instead could collect Rs 28.141 billion during outgoing fiscal year. The provincial government envisages spending Rs 175 billion on ADP from savings of Rs 135 billion, federal grants of Rs 2.558 billion and foreign assistance of Rs 10.471 billion. The budget document shows a wide gap of Rs 26.25 billion to finance the ADP. The provincial government would fill the gap through commercial borrowing that would be expensive or through bilateral and multilateral lenders with the help of the federal government. Thus, it would take long time to get requisite financial assistance from the lenders. On the face of it, it seems to be a far fetched idea. The government has presented a development oriented budget with political overtones. If this is the case, possibility of less development expenditure can not be ruled out as has happened during the outgoing fiscal year wherein: the government has spent 80 per cent of revised development expenditure of Rs 155 billion. There is yet another catch about the availability of funds from the federal government. It has projected a high target of Rs 1.372 trillion for tax revenue collection that would be difficult to meet in view of multiple problems being encountered by the economy. In case of a short fall of federal tax revenue collection, the NFC award to the provinces would be reduced as has happened during the outgoing fiscal year. Punjab would be the most affected because of its high share in the NFC award. The provincial budget caters for a pro-poor subsidy of Rs 30 billion that includes subsidy of Rs 7.5 billion for providing subsidized cheap bread (sasti roti) to the poor and low income group, Rs 2.0 billion for small farmers to purchase tractors, Rs 2.0 billion for construction of apartments in the slum areas and enhancement of existing pro-poor medical facilities in district level hospitals. It has been heard that the allocation of funds for development has not been done judiciously and Southern Punjab, contrary to the expectations of the people has been allocated less development funds than required.
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Sindh's Budget
The budget estimates show a total outlay of Rs 327 billion with no additional taxes against revenue of Rs 310 billion, showing a deficit of Rs16.8 billion. The deficit is to be met through a number of austerity measures and improvement of revenue collection. Expenditure is projected to be Rs 213.4 billion and is 15.0 per cent higher than revised estimate of Rs 185 billion for outgoing fiscal year. The provincial administration is depending on funds from the federal divisible pool under the NFC award and grant in aid to the tune of Rs 125 billion that would be 12.7 per cent more than the allocation during the outgoing fiscal year and other various grants from the federal government. Overall, the federal transfers are estimated at Rs 204.6 billion against revised the estimates of Rs183.2 billion for the outgoing fiscal year. The budget outlay envisages an ADP of Rs 90 billion, Rs 12.0 billion more than the ADP of the outgoing fiscal year. The province would get 16.6 billion under the federal PSDP, Rs 4.4 billion under foreign project assistance and drought an emergency relief assistance of Rs 893 million. The provincial government is likely to generate Rs 39 billion, 29.0 per cent higher than the revised estimate of outgoing fiscal year from its own resources. The budget has a visible thrust towards women empowerment and aims to help the marginalised segments of the society. A programme of cash award to poor people is predicted at an estimated cost of Rs 4.0 billion and a school nutrition programme is likely to start to encourage enrolment of students at an estimated cost of Rs 2.0 billion. Substantial allocations have been made to improve logistics support for the police force and social sector development but keeping in view constraints of financial resources, increase in allocation of funds is bare minimum and would hardly suffice.
NWFP Budget
The provincial government unveiled a deficit budget of Rs 214.181 billion with ADP of Rs 51.156 billion. Revenue receipt is estimated to be Rs 211.114 billion and the deficit is estimated at Rs 6.699 billion. Revenue receipts are 40.0 per cent higher than of last fiscal year. Over all revenue receipt is projected to be Rs 113.688 billion including Rs 67.808 billion from the federal divisible pool, Rs 7.549 billion from royalty and gas and oil production, Rs 14.822 billion as special grant from the federal
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government and Rs 6.0 billion as capped proceeds on account of net hydel profit. NWFP is the only province that has levied professional tax on restaurants, caterers, wedding halls and chartered accountant firms and has also increased some of the already existing taxes to bridge fiscal deficit by generating tax revenue of Rs 1.317 billion. The provincial government's share in over all revenue will be Rs 7.537 billion showing an increase of 17.0 per cent over the share of last fiscal year. The province is also expected to get Rs 97.244 billion from the federal and foreign lenders and donors on account of capital and development receipts because of peculiar security and rehabilitation needs arising due to insurgency going on in the tribal belt areas of the province. The provincial budget is based on quite optimistic expectations of capital inflows from the federal government, foreign donors and generating its own revenue. It is optimistic because in last fiscal year's outlay was projected at Rs 170.904 billion but stood at Rs 159.451 billion because of lower than expected transfers from the federal government. The budget was projected surplus but there was a deficit of Rs 9.149 billion. The situation could not be different during current fiscal year keeping in view too much dependence of the federal government on foreign loans and financial assistance, poor law and order situation and insurgency going on in the province.
Balochistan Budget
Outlay of tax free provincial budget is Rs 74.247 with a deficit of Rs 8.332 billion to be met by the federal government and province's own resources. The federal government would provide Rs 3.0 billion for budgetary support, Rs 3.0 billion for public representatives support programme and remaining deficit of Rs 2.332 billion would be met from province's own resources. Rs 18.536 billion has been allocated for development. It includes foreign assistance of Rs 5.107 billion. Over all revenue receipt is estimated at Rs 59.054 billion to which the federal government will contribute Rs 55.408 billion under different grants and direct transfers. Province's tax and non-tax revenue is estimated at Rs 1.32 billion and 2.512 billion respectively. Total estimated receipts are Rs 2.38 billion less than they were for outgoing fiscal year. The cash starved and highly politically volatile province whose more than 50.0 per cent population is living below poverty level has, an ADP of Rs 18.536 billion only primarily distortions in the NFC award. It
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is totally inadequate to give impetus to development through the provincial budget to combat high level of poverty. It is good that the federal government is changing its development strategy and is to spend Rs 71.0 billion under PSDP. It has also accepted responsibility of an overdraft of Rs 4.2 billion with the SBP incurred during last fiscal year.
Conclusion
The provincial budgets are largely dependent on the inflow of funds from the federal government. Their fiscal resources are comparatively quite meager. NWFP and Balochistan are in the grip of insurgency that has affected business and trading activities negatively. This is yet another compulsive factor that has inhibited them to generate tax-revenue to produce funds in order to address issues of poverty, health care and employment. But, the provinces despite their limited fiscal space have tried to address multiple problems that their economies and people face. It necessitates using their limited resources as judiciously as could be possible. It also enhances responsibility of the federal government for the inflow of funds to the provinces.
M. Sharif, The News International (Rawalpindi), 6 July 2009.
M ANAGING G ROWTH
WITH
F ULL E MPLOYMENT
The common man is badly hit by high prices and rising unemployment following a dramatic drop in economic growth. Inflation and joblessness directly impact on his livelihood. If prices go up, his purchasing power falls. He is most vulnerable to price hikes. If he is unemployed, there is no source of income or independent livelihood. Things become worse when an educated youth cannot find a job The investment made on his education becomes unproductive. High employment and low wages are squeezing the consumers purse and also the size of the domestic market. Unemployment for the poor is worse than low incomes eroded by high prices even in normal times, business houses tend to shed labour while upgrading technology and skills under the prevalent flexible labour policy or when shedding their fat. They do not offer life- time career. The government focuses on physical and social infrastructure projects that provide temporary jobs. There is no growth strategy to provide full employment. There is no concept of common good in government policies formulated under deep external influences apart from offering doles to the most vulnerable. It is
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time to provide the common man an enabling environment to fend for himself. If millions remain unemployed, their labour cannot be put into productive use, national wealth cannot be multiplied quickly and the national economy suffers. Labour, an asset, turns into a liability. under present economic model. Economic strategies that do not envisage full employment, particularly in developing countries with scarce capital and surplus labour, cannot achieve sustainable growth. In the current global crisis of capital, it is the human skills that have a key role to play, with ideas and creativity in all spheres and at all levels of economic activity. With full employment and better income distribution, Pakistan could be a big prosperous market for goods and services produced within the country. It means focusing on labourintensive projects and producing primarily for domestic market. Poverty offers economic agents a massive potential for economic development. The current policy package links interest and exchange rates to the inflation rate. High inflation rate translated into higher interest and lower exchange rates discourages investment and production. Depreciation of rupee encourages cheaper exports for foreign buyers and costlier imports for local consumers. It depresses domestic demand in order to create more surplus for exports at the cost of domestic consumption. It makes the market shrink for domestic production. While with right policies, increased production that provides full employment, should increase supply and stabilise prices. There is no system better than full employment to distribute incomes. While there can be no two opinions about the importance of macroeconomic stability, views can differ on how to go about it. The recourse to IMF credit helps fire fighting and its programme gives a semblance of stability for a while, only to be eroded by economic recovery. Only stability generated from increased production can be durable as evident in case of China. No doubt imbalances occur in the process of economic growth but they become chronic when they remain unattended and not corrected promptly. In the recent years, fiscal trade and current account deficits were allowed to fester in the pursuit of consumerism, mercantilism and casino games. This benefited a renter class. It was a deliberate attempt to put the country back under the IMF programme. The outcome was: high interest rates, huge depreciation of rupee, sharp decline in investment, underutilisation of industrial capacity and dramatic fall in growth rate. If a
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country is under the IMF programme, the message sent across the world is that it is in trouble. It scares away foreign investors. Instead of raising domestic resources , policy makers borrow from the IMF. This reduces the space for sovereign decision-making and genuine reforms to shore up the economy. As a lender, the fund prescriptions are aimed at improving balance of payment. The macro-economic stability is achieved at the cost of economic growth. Other issues are of no consequence to the fund. And the price is paid by the common man. Not too long ago, economists used to say that rising production increases supply of goods and services and helps bring price stability. Now consumers are told that growth breeds a high rate of inflation. This is the outcome of the Anglo-Saxon financial model that has dominated the global financial market for the past few decades and is now crumbling under its own weight. It is a hurdle in turning money into productive capital and misdirects cash towards speculative activity. Moreover, the growth under this model spurs imports, widens trade and current account deficits and creates an unfavourable balance of payments. This growth has not come about by boosting domestic savings, investment, production and exports. Rather, it is artificially stimulated by external capital and financial inflows. A major drawback in foreign debt-driven economic growth is that it stalls the need for basic reforms that could help remove structural imbalances, holding back sustainable economic and social progress. Foreign money protects the status quo by being an alternative option. So, there is no need to tax farm incomes even when the governments policies have resulted this year in transferring an extra Rs 294 billion to the rural economy. Speculative investment enjoys a tax holiday while manufacturing, an engine of economic growth, provides over 60 per cent of the tax revenue. The government needs revenue badly to undertake a massive development programme to shore up economy and provide jobs. But the tax- to- GDP ratio is constantly declining and tax revenue is down to nine per cent of the GDP. Even when the economic growth was high in recent years, the tax-to-GDP ratio was on the decline. The efficiency of the tax administration is at the lowest ebb. Tax collection is over-centralised with two tiers of the government at the provincial and district levels dependent on the federal government for 90-100 per cent of their revenues. In an environment of poor governance, the federating
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units and the districts are accountable to an inefficient administrative setup at the federal level rather than to the tax payers for whose benefit they are supposed to work and to whom they should be accountable. Officials in Islamabad accuse the provincial governments of being inefficient and incompetent while they themselves fail to deliver. The centralisation of tax collection and distribution is politically motivated and cannot resolve issues in a complex and diversified economy. The unitary system of tax collection and distribution needs to be abolished. The over-centralised system denies fiscal autonomy to provinces and the districts. The system is not accountable to taxpayers, nor to the beneficiaries whom it claims to serve from the revenues raised from taxes. Over 80 per cent of tax revenue comes from indirect taxes if withholding tax, passed on to the consumers as an expense, is included. But the axe falls on development programme, particularly in the social sector, in case of financial constraints, that too in an age where human resource development, rather than capital, is the first pre-requisite to modernise the economy. The regressive taxation system works against the common citizen.
Mahmud Ahmed, Dawn (Islamabad), 6 July 2009.
W HERE
IS THE
M ONEY G OING ?
According to one estimate, nearly 75 percent of the people of this country live on less than $2 a day. The gap between the rich and the poor is widening as the prices go up. Utilities like gas and electricity are becoming unaffordable even for the shrinking middle class. The Supreme Court(SC) has criticised the cavalier attitude of the government as electric prices go up. Taking suo moto notice of the increase in electricity charges in spite of unprecedented power outages across the country, the court has stayed any further increase until they have decided the issue. World Bank has just reported that prices of electricity in Pakistan are 60 percent higher than those in India and 45 percent higher than in Bangladesh. They have regretted that National Electricity Price Regulatory Authority (NEPRA) is a retirement cushion for superannuating officers. The SC too has berated the arbitrary manner in which NEPRA treats its duties. Besides this, the prices of diesel and petrol have also gone sky high, although they are going down in the international markets. And that has also affected the prices of other goods creating a surge in general inflation.
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In the absence of a decent mass transit system in the cities, and a corrupt and ineffective regulatory mechanism over the mafia controlled local transport that does exist, public transport fares are too high for daily commuters, mostly domestic servants and other daily workers who are hopelessly cash strapped. Here too the SC has come to the rescue of the consumer and stopped the recently imposed carbon tax on motor fuel. On the other hand, law and order has spun out of control. The government and the media focused on terrorism, street crimes, the bane of everyday life here, are going up. Police resources diverted to VIP protection, roadblocks and other security duties, their capacity to prevent and detect day to day crime has diminished. Killings and kidnapping for ransom, theft and car snatching are becoming frequent in big cities and theft and burglaries remain undetected. At a time like this when the government should be concentrating on law and order and the fallout of IDPs due to the military action in the North, resources are being frittered away in road construction and such other projects without a credible environmental impact assessment (EIA). Obviously, this is so because of a significant margin of corruption in the construction industry. Billions of dollars have come into this country from the US and other donor countries, mostly for adding to its coercive capacity against terrorism. But where is this money going, no one is really clear because the common man remains unable to make both ends meet, constantly short changed in this country by the government. The only area where expenditure is visible on a massively wasteful scale is the government. None of them shows the slightest awareness of how poor this country is and how carefully its resources should be utilised. The government, for example, seems to have a lot of money for foreign tours and top of the line staff cars for the Cabinet and senior officials; but hardly spends on as vital a sector for development as 'education'. A 'public enemy' budget for 2009-10 has just been passed by the Parliament. I'm not an expert but know as a consumer that the prices are shooting up. The PM's secretariat budget has doubled and so has that of the president's secretariat. Why this is happening in the presence of dozens of ministries, most of them white elephants, is incomprehensible, to say the least. An example of where the money is going is the National Assembly that costs the people dearly to maintain. It has 342 members in all. Zia
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placed five million rupees at the disposal of each MNA ostensibly for development in their constituencies. Increased from time to time, this amount stood at the high figure of 10 million each. But our dapper PM has (post budget) of increased it to 20 million rupees per MNA because, good boys and girls all, they passed the budget unanimously. This is political bribery at its most blatant and yet another answer to where the money is going. And anybody who thinks this amount of Rs 6,840 million will be spent on anything resembling development, needs to have his head examined. Life for most people here will remain squalid.
Wajahat Latif, The Nation (Islamabad) 10 July 2009.
2010 - Y EAR
OF
L ITERACY
Prime Minister Gillani, is reported by the print and electronic media, to have announced, in a meeting held in the PM's Secretariat on Thursday last that 2010 is declared as the year of literacy by the government. It means a lot. For the last 62 years, the subject of education has received little attention from both the government and private sector. In spite of tall claims from the concerned quarters, the truth of the matter is quite otherwise. The allocation of the GDP in the annual budget over the years tells a painfully sad story. It has now become almost boring to repeat that, even at best, this figure has never gone beyond 2.8 percent of the GDP, this includes the health sector also. The figures in the current budget, have further dipped which have caused deep concern all round. The Pakistan National Forum and the Avicenna Education Movement have drawn the attention of all concerned through seminars and other mediums to urgently take notice of the worsening state of education in general and literacy in particular resulting in the present state of the nation, which cannot be described as a happy one or anywhere near the satisfactory mark. The PM's apparent focus on literacy by declaring the year 2010 towards special national endeavour in this sector is, therefore, a most welcome cool breeze in an otherwise scorching desert. Permit me to submit, Mr. Prime Minister, that the common man has by and large lost faith in mere declarations. For example, Article 37(B) of the constitution declares that "the state shall be responsible for the eradication of illiteracy and provision of free and compulsory education up to secondary level within minimum possible time." About 62 years have passed since that
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solemn constitutional directive, but no government - dictatorial or democratic - has ever honoured this constitutional commitment. The government again signed a declaration at Dakar in Senegal in 2003 that Pakistan shall leave no stone unturned to achieve 85 percent literacy rate by 2015. Now we are heading towards the end of 2009 but are we anywhere near achieving the committed target? No way sir! I have no desire to open the Pandora box to list the causes of many national failures. Let's take the PM's declaration of 2010 as year of literacy more seriously than the government's treatment of similar declarations in the past. I happened to be visiting Islamabad to attend scheduled meetings in the PM's Secretariat, the Ministry of Education, and the Planning Commission. And was very happy to find all senior policy makers in the domain of education and literacy enthralled by the PM's personal interest of according high priority to literacy. However I found little evidence of any serious homework to achieve the final goal by 2020 or 2030. The year 2010 may well be a good and well planned starting point selecting the numerous sectors to reach the final goal, which is quite a long way to go. This needs a grand strategy to cover the vast area of bringing nearly 6 crores of illiterate Pakistanis in the fold of literacy, for which the present structure and resources of the education department are far from adequate. According to a well-calculated research the estimated population of Pakistan at the present rate of growth, is likely to hit the figure of 250 million by 2030. I'm not sure whether the planners at the central or provincial level has given a serious thought to meet the challenge of the population explosion towards the close of the first quarter of the 21st century. My focus in this column is limited to literacy alone with reference to 2010 as the year of literacy. It must not be restricted to the mere fanfare of literacy walks, seminars and workshops participated by and splashed on print as well as electronic media. The year of literacy has to be more positive, purposeful and resultoriented then the past. A new vibrating edifice of literacy based on the hopes and aspirations of the new generation to establish a modern democratic Islamic welfare state as per the vision of Iqbal and Quaid is the only medium which can blaze the trail towards our ultimate goals.
Ikramullah, The Nation (Islamabad), 12 July 2009.
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C ARBON T AX
AND THE
C OURT
The court was entitled to put on hold the imposition of carbon tax because the government failed to demonstrate that it was providing petroleum products free of lead or carbon dioxide and consequential pollution free atmosphere to all citizens A three-member Supreme Court bench headed by Chief Justice Iftikhar Chaudhry created a crisis-like situation through its order in the carbon tax case. Whereas the people rejoiced at the order, the government was terribly upset by it. President Zardari then issued an ordinance by virtue of which he has re-imposed the petroleum development levy, which the carbon tax had come to replace. It too has been challenged in the Supreme Court. The government has refrained from criticising the court. However its apologists have subjected it to severe attack. They believe that Chief Justice Iftikhar Chaudhry is playing populist politics, oblivious of the irreparable damage that the courts order may cause to a country that is already on the verge of bankruptcy. They contend that through the order the court has not only violated the principle of separation of powers but also usurped the powers of legislature. In their view, unelected judges are not entitled to overrule policy choices of duly elected representatives in the absence of a real conflict with the Constitution. What the detractors of Chief Justice Chaudhry are saying is that the Supreme Court under his stewardship is exceeding its powers or in legal parlance indulging in judicial activism. To address this issue, a word about judicial activism is in order. The term was introduced by Arthur Schlesinger in 1947. However, the concept can be traced to the 1804 Marbury v. Madison case where Chief Justice Marshall of the US Supreme Court declared a federal order unconstitutional. By doing so, he established the principles of judicial review and judicial activism. The former principle signifies that the court is entitled to sit in judgment on an act of parliament or an executive order in light of the Constitution. The latter principle means that judges, while interpreting the Constitution, should reach beyond it to achieve results that are consistent with contemporary conditions and values. US history is replete with cases of judicial activism both negative and positive. A negative example is the 1857 Dred Scott case where the US Supreme Court ruled that blacks were not equal to whites and that the rights guaranteed under the Constitution were not available to them.
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A positive example on the other hand is the judgment in the1954 Brown case where, rejecting the earlier principle of separate but equal between blacks and whites decided in the Plessey v. Ferguson case, the US Supreme Court disallowed racial segregation in public schools and public facilities. Incidentally, the result achieved in this case was due to Chief Justice Earl Warren who, like Iftikhar Chaudhry, was imbued with a mission to do justice. The high water mark of judicial activism in the US however was reached when the Supreme Court struck down several progressive legislative measures called the New Deal that President Roosevelt had got introduced to tackle the situation arising out of the Great Depression. Judicial activism has found favour in the subcontinent as well. In India, the judiciary has used it principally through public interest litigation. The high visibility example of it is the judgment that the Indian Supreme Court took some years ago when, acting suo moto, it gave a deadline to the authorities to convert all public transport vehicles in Delhi from petrol to gas. Amasingly, the latter has also struck down Constitutional amendments on a number of occasions. An interesting decision that stands out is the Andhra Pradesh High Court verdict in Satyanarayana v. NT Rama Rao case where it held that the executive is accountable to the public through the instrumentality of the judiciary. No wonder judicial activism has come in for flak from the executive. For example, the speaker of the Lok Sabha not long ago was so miffed by the courts concern for the monkey menace in Delhi that he described judicial activism as an attack on parliamentary democracy and reminded judiciary to stay within the constitutional framework. In Pakistan, judicial activism is not new. Its antecedents go back to judgments by CJs Afzal Zullah, Nasim Hasan Shah and Sajjad Ali Shah, who used public interest litigation to promote it. However, it was Iftikhar Chaudhry whose name came to be closely associated with it as borne out by landmark judgments in cases such as the Pakistan Steel Mills, the New Murree Development Project, conversion of public parks into commercial ventures and missing persons. Justice Chaudhry was so enamoured by it that the international judicial conference, which was held when he was CJ to mark the 50th anniversary celebrations of the Supreme Court, declared 2006 the year of judicial activism. President Musharraf subsequently accused him of interfering in executive functions and government policy. On November
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3, 2007, when he proclaimed emergency by virtue of which he suspended fundamental rights, he invoked Chief Justice Iftikhar Chaudhrys judicial activism, among others, to justify it. Now examining the charges leveled against Chief Justice Iftikhar Chaudhry, for some critics judicial review is nothing but judicial activism by another name. They disapprove of it on the ground that it violates the principle of separation of powers. Consequently, they contend that the court was not entitled to question the carbon tax. In their view, the courts order is all the more reprehensible because the legislature which is sovereign and represents the will of the people had adopted it unanimously as part of the budget, or that it was in the nature of a finance matter in which the court has no expertise. Both arguments appear to be flawed because irrespective of the size of the majority with which a certain piece of legislation is adopted by a sovereign parliament representing the will of the people or the financial character of the law in question, the court enjoys competence to examine its vires against the Rosetta stone of the Constitution. Consequently, the court was entitled to put on hold the imposition of carbon tax because the government failed to demonstrate that it was providing petroleum products free of lead or carbon dioxide and consequential pollution free atmosphere to all citizens. The government apparently accepted this argument. The problem arose when the court invoked articles 4 and 9 of the Constitution as well as the provision on social justice in the preamble of the Constitution to justify its order. For some critics the court should have given priority to the question of economic survivability of the state over fundamental rights of citizens while for others it misinterpreted the Constitutional provisions on fundamental rights. In their opinion, by failing to do so it is not only on a collision course with other two organs of the state but also putting the economic existence of the state in jeopardy. Irrespective of the merit of this argument, the court appears to find in articles 184, 187 and 199 of the Constitution justification to act in cases of public importance involving fundamental rights. What we need to understand is that Chief Justice Iftikhar Chaudhry is, rightly or wrongly, pursuing a mission to render justice to the people as testified by his track record in his earlier incarnation as the CJ. Following his restoration which came about in the teeth of fierce opposition from the establishment, the US and almost the entire political class of Pakistan,
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this mission appears to be all the more compelling because he essentially owes his restoration to the people of Pakistan. What we forget is that the restoration was nothing short of a quiet revolution. The CJ appears determined to carry this revolution forward irrespective of the cost. In this backdrop, the advice to all and sundry is: fasten your seat belts, we are entering a high turbulence zone.
Ijaz Hussain, Daily Times (Lahore),15 July 2009.
D ETERIORATING E CONOMIC C OMPETITIVENESS

While there is not a great deal of academic interest in Pakistan, its economy is being studied and analysed by a number of multinational institutions. The World Bank continues to issue reports on the countrys macroeconomic situation and on some of the more important sectors of the economy. The Investment Climate Assessment, 2009 is one of the recent World Bank efforts focusing on some of the salient features of the countrys industrial economy. The most recent entry into this genre of reports about the prospects of the economy is the State of Pakistans Competitiveness Report, 2009 launched by in the United States by Shaukat Tareen, Pakistans de facto finance minister. The report should be of tremendous interest to the policy makers since it presents the picture in Pakistan in the context of a comparative country framework. Not unlike the World Bank report on investment climate, the Competitiveness Report by the Islamabad - based Competitiveness Support Fund, has both, good and bad news about the economy. It uses the methodology developed over the years by the World Economic Forum, a prominent international institution, perhaps best known for its annual meeting in Davos, Switzerland. WEF also publishes comprehensive reports on competitiveness, trade, information technology, gender and tourism. The Global Competitiveness Report published by the institution is, the most widely read and respected ranking of the competitiveness of the countries since its inception 30 years ago. The most recent report examined 134 countries across 113 different macroeconomic and microeconomic indicators. The indicators are grouped into what the World Economic Forum calls, the pillars. The assessment about the performance, of the countries is based on hard quantitative data and
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surveys. Last year 12,297 business leaders were surveyed across the developing world. The bad news for Pakistan is that its overall ranking has slipped by nine places, from 92nd out of 131 countries included in the assessment in 2007-08, to 101st out of 134 countries examined in 2008-09. What is even more troubling is the fact that this slippage has occurred across the entire spectrum of indicators. Deterioration has occurred in all the categories into which the 12 pillars are grouped. These are basic requirements, efficiency enhancers and innovation and sophistication. In terms of Pakistans place in the array of countries, the most significant slippage has occurred in the area of financial market sophistication where the countrys position has dropped by 23 places. In goods market efficiency the country is down by 18 places; in macroeconomic stability by 15 places; in innovation by 13 places; and in both infrastructure and technological achievement by 11 places each. Not surprisingly, the least amount of slippage has occurred in market size where Pakistan has dropped by one place. This indicator is based on the size of the population. Another way of reading the results is to look at those pillars of competitiveness in which Pakistans place is even worse than its overall rank. These are four of these.. Again, not surprisingly, the country does very poorly in the area of higher education and training where it ranks 123rd among the 134 countries included in the analysis. Labour market efficiency, with a rank of 121st is the next worst followed by macroeconomic strategy and health and primary education where the rank for both is 116th. In what lends importance to this work is that it provides a rich array of public policy tools, Islamabad could use to place Pakistans economic performance on to a higher plane. In that context the 2009 report includes information from some other areas surveyed by the World Economic Forum. These include the Global Enabling Trade Report, where Pakistan ranks 84th out of 118 countries included in the survey. In terms of the indicators used in this analysis, Pakistan has the worst ranking the 100th in what the authors call the proclivity to trade. This measures the importance, both public policy makers and the entrepreneurial class attach to trade. The best reading in this area is regulatory environment in which the country ranks 40th.
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The Global Information Technology Report is the second World Economic Forum document from which the authors of the 2009 report get their information. Here Pakistan ranks 98th among the 134 countries included in the survey. The troubling feature of this report is the sharp decline in Pakistans rank over the last three years, from 67th in 2005-06 to 98th in 2008-09. The number of countries examined increased by 19 in the three year period which means that Pakistans drop of 31 places cannot be explained entirely by the expansion in the size of the universe surveyed. According to the report, the deterioration in Pakistans relative position was led largely by steep falls in the indicators relating to the governments use of technology (a drop of 23 places), business readiness (a drop of 15) and political and regulatory environment (a drop of 14). Compared to last year, all indicators declined except the individual usage indicator which increased by nine ranks. The news for Pakistan gets really bad when the 2009 report brings in information from the Global Gender Report. The assessment is even worse than what the development community believes is happening in Pakistan.. . According to the report, despite the notable example of women playing leadership roles, the World Economic Forums hard data and surveys show that Pakistans ranks 127th out of 130 countries. Discrimination against women is across many fronts, particularly in education, health care and economic participation and opportunity. In the education of women enrollment in primary education _ Pakistan now ranks 127th out of 130 countries; in terms of womens life expectancy the rank is 129th and in economic participations and opportunity, it is 128th.Culture is an important contributor to womens backwardness but it is not the only reason. Poor policy has played a significant contribution. In the report on the budget for 2009-10, Hina Rabbani Khar pointed with some pride in her budget speech to the fact that she was the first woman to take on that task in Pakistans history and she was doing it in front of the first female speaker of the national assembly. Women were doing relatively well in the political field but that presence had not translated effectively into public policy for importing womens wellbeing. The broad conclusion one reaches from the findings in these important reports is that Pakistan has to do hard work across a wide front to improve the competitiveness of the economy.
Shahid Javed Burki, Dawn (Islamabad),17 July 2009.
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I SSUES R ELATED
TO THE
P RECARIOUS M ACROECONOMIC
S ITUATION
With the beginning of the current fiscal year precarious issues of macroeconomic stability such as reducing inflation and fiscal deficit have taken a central place in the national debate. The governments bid to generate Rs 122 billion by imposing carbon tax in the finance bill of 200910 is a misnomer. It hardly aims at improving environmental conditions; its focus is to generate more revenue on one hand and improve tax-toGDP ratio by around 0.5 per cent on other. This is mostly to cater for the projected fiscal deficit of Rs 722 billion. As the government is under pressure from the International Monetary Fund (IMF) to improve performance of the economy during first quarter of the current fiscal year, the IMF has already put a hold on the release of the third tranche of $ 850 million till its next review in September 09. The IMF wants the government to meet the bench marks that were mutually agreed under the Macro-Economic Framework Policy (MEFP). The decision to increase prices of various petroleum products has sparked public protests, fuelled inflation and exposed governments vulnerability to its own decision making when it changed its stance from imposing carbon tax to levying PDL (petroleum development levy) through a presidential ordinance on 9 July 2009, as the decision to impose carbon tax was put on hold by the Supreme Court a day before. The increase in the prices of petroleum products with the 17.5 per cent withdrawal in the subsidy of electricity in the beginning of current fiscal year and the governments inability to end power outages has damaged the economy. It has exposed illusive macroeconomic stability that the government and the State Bank of Pakistan (SBP) claim to have achieved within the seven months of signing the IMF bail out package. Are there any solutions to really improve macroeconomic stability that can sustain and pave way for economic consolidation?
Background of Critical Issues

The IMF bail out package of $ 7.6 billion was granted in November 08, primarily to overcome the fiscal and current account deficit, beef up plummeted forex reserves and improve the over all state of the economy within a period of around two years. It was a tough economic agenda that demanded hard economic decisions and judicious implementation. A clear road map was laid down: improve macroeconomic indicators such
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as fiscal and current account deficits, inflation and tax-to-GDP ratio by the end of last fiscal year and utilise current fiscal year for economic consolidation. The government after resuming power in March 08 initially moved fast to correct fiscal loopholes that were created in 2007 and early 2008. It removed the subsidy on petroleum products and power tariffs that distorted the fiscal balance. The previous and interim governments had resorted to indiscrete borrowing from the SBP to the tune of Rs688 billion during FY 07-08. It pushed fiscal deficit to 7.2 per cent by end of fiscal year 2007-08. Forex reserves that had touched more than $ 16.0 billion mark by end of FY 07 depleted fast during the second half of FY08 and subsequently because of the increase in prices of oil, food and other commercial items in international market, to around $ 6.0 billion by end of first quarter of last fiscal year. The government looked around to friends for capital inflows to boost a sagging economy but ultimately contended with IMF credit facility of $ 7.6 billion in November, 08 on terms that looked paradoxical such as increasing interest rate primarily to reduce inflation when the globally interest rates nose dived. The governments diverted its focus to achieve three bench marks of reducing inflation to 12.5 per cent, fiscal deficit to 4.2 per cent and achieving economic growth of 3.5 per cent by the end of FY 09. Independent analysts were sceptical about the governments strategy of trying to reach above stated targets on a few accounts of high inflation rates that had persisted for a period of time. These analysts were also sceptical about the global economic crisis that would restrict exports, power crisis faced by the country that would constrict economic growth and high interest rates that would discourage investment. The economys performance during last fiscal year fell short of the targets. This has raised certain subtle questions about the vulnerability of whatever macroeconomic stability was achieved between November 08 and June 09. Export target was missed by $ 4.5 billion ($ 16.49 billion compared to $ 20.914 billion for FY 2007-08), inflation remained stubborn at 15 per cent according to official version., fiscal deficit target was achieved only by drastically reducing the public development expenditure and economic growth was recorded as 2 per cent of the GDP primarily because of the 4.7 per cent growth in the agriculture sector. The industrial sector registered a negative growth of 8 per cent and FDI was reduced by 31 per cent, to $ 3.7 billion, compared to FDI that the country attracted during FY 07-08. Tax revenue target of Rs 1.3 trillion
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remained out of reach for the FBR. The government remained heavily depended on the IMF, World Bank (WB), Asian Development Bank (ADB) and the US for capital inflows. Thus, the governments strategy of improving macroeconomic stability on borrowed money is not without its own blues. The fall in prices of oil, food and other commercial commodities and a 21 per cent increase in remittances ($ 7.811 billion during last fiscal year over the previous year) proved a blessing in disguise for the economy. It helped in reducing the current account deficit to $ 8.11 billion during the 11 months of the last fiscal year. The increase in remittances also helped in beefing up forex reserves that have increased to $ 12.22 billion. The governments decision to levy the regulatory duty on 350 items slowed down imports which helped in reducing trade deficit.
Critical Issues of Macroeconomic Stability

The most critical issue of macroeconomic stability is about generating tax revenue of Rs 1.5 trillion. Carbon tax or PDL is at the centre of public debate because the government is not having enough fiscal space to carry on fiscal management according to budget estimates. It has approached the IMF for yet another credit facility of $ 4 billion notwithstanding the fact that foreign debt has already increased to more than $ 50 billion, domestic debt has increased to Rs 3.8 trillion and debt servicing is to cost public exchequer Rs 778 billion. The second issue is about achieving a growth rate of 3.3 per cent. It is deeply linked with an expenditure of Rs 642 billion under PSDP (public sector development programme) whose count down to reduce by Rs 50 billion has already started in order to withholding 17.5 per cent subsidy on electricity till December, 09. The measure agreed by the IMF would cater for Rs 66 billion, the estimated amount of subsidy from 1st July to December 2009. The government plans to withdraw subsidy gradually within second-half of current fiscal year and has emphatically announced that the power crisis would be resolved by end of December 09. It has projected a fiscal deficit of Rs 722 billion in the budget estimates that includes heavy expenditure for IDPs and direct financial support to vulnerable segments of society under BISP (Benazir income support programme) and welfare schemes for the workers. The projected fiscal deficit is to be met through foreign inflows of around Rs 264 billion and tax revenue collection of Rs 1.5 trillion. The government cannot afford not to impose additional tax of Rs 122 billion because it would
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increase fiscal deficit by Rs 122 billion. The question then is, from where can the government generate such a vast amount? It has limited options given its present mindset of maintaining status quo and not to radicalise tax collection and tax levying system. It has preferred not to tax agriincome, increase tax-to-GDP ratio, reduce non-development expenditure, reduce size of the federal cabinet and cut down lavish state expenditure on foreign trips. The fear is that in case tax revenue collection fell short of the target, the government would once again resort to reducing PSDP expenditure and dish out less money to the provinces from the federal divisible pool. This would adversely affect provinces fiscal management.
Conclusion
The government needs to rethink about its strategy of economic revival. A strategy based on borrowed money is hardly working either to the satisfaction of people or lenders. The first and foremost essential step is to levy taxes on incomes of all sorts according to the paying capacity of individuals. It has to be followed by accepting the fact by the ruling elite and affluent segments of society that the nation is passing through troubled times of fiscal management and they need to make sacrifices. It needs to curtail public expenditure and judicious use of public and private money at all levels.
M. Sharif, The News International (Rawalpindi), 20 July 2009.
M ACROECONOMIC P ROSPECTS
AND
C ONSTRAINTS
The post budget macro-economic prospects are not so good. The GDP target has been revised again. High inflation ratio, increasing poverty (40 per cent or 65 million people are living under the poverty line), limited opportunities of unemployment will increase (mainly due to slashing of PSDPs. It is feared that urban unemployment will also increase sharply in cities like Karachi, Lahore, Rawalpindi/Islamabad and Peshawar) and deteriorating law and order especially in Northern Areas and FATA have already lessened the chances of stable and sustainable socio-economic prosperity. The government is also trying its level best to broaden the tax-to-GDP ratio but all its efforts are not amounting to much.
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Carbon Tax Row

The imposition of carbon tax, Supreme Courts decision against it and then promulgation of petroleum development levy (Amendment) Ordinance-2009 has not helped the situation very much. The government badly needs extra Rs 122 billion to reduce the budgetary deficit. So, the surcharge on POL has been changed with petroleum levy. The revised prices are given below as. (see table-1)
Tax-to-GDP Ratio
In the opinion of many economists, the government would have to renegotiate tax collection target with the IMF even after the imposition of PDL. Since the revenue collected through the PDL is non-tax revenue, so it is doubtful that the government may not meet the tax collection target for the current fiscal year. The government has set a tax-to-GDP target of 9.6 per cent for the fiscal year 2009-10. The PDL would have added Rs 122 billion in the tax income of the government. Moreover, the total revenue target for the current fiscal year is Rs 2.17 trillion. Tax revenue targeted is at Rs 1.5 trillion.
Governments Point of View

According to the state minister for finance and economic affairs Pakistan cannot lower its budgetary deficit and if the government would not levy certain taxes, it would limit the development and growth and increase our budgetary deficits. According to the current Pakistan Survey 2008 the taxto GDP ratio is lowest in the world hovering around nine per cent of the GDP and with this low revenue collection. She further briefed that POL prices in India are taxed and they comprised above 50 per cent of the sale price while in the advance countries, the governments are collecting 60 to 80 per cent but in Pakistan the POL products only contribute 45 per cent of the taxes in the price.
Honey Moon Period of Oil Refineries

Despite the economic recession and financial shortage in the country, the oil refineries and oil marketing companies are making unthinkable profits. According to the Rana Bhagwandas judicial commissions report the governments revenue from the oil sector crossed Rs 1 trillion between 2001 and 2008 while the net profit of one oil refinery in 2007-8 rose by 3,516 per cent over 2001-2 figures. The detail is given below as:
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Oil Refinery Pakistan Refinery Attock Petroleum Shell Pakistan Pakistan State Oil Chevron Pakistan
Increase in profit (%.) 1580 1398 483 440 170
Furthermore the commission suggested withdrawal of 16 per cent GST levied on the import of LPG to create equilibrium between supply and demand, especially in winter. So, it is better for the government to reduce/slash the profit margins of the OMC and give some meaningful relief to people of Pakistan.
Fear of High Ratios of Inflation

Although there is a declining trends in the overall inflation ratios but due to newly PDL it is feared that new surge in price hike may happen very soon. According to the FBS the consumer price index inflation for JuneJuly 2008-09 has surged by 20.77 per cent as compared to the same period of last year. Inflation showed substantial decline of 13.13 per cent in the CPI in June 2008-09 over 21.35 per cent for the same month last year. The SPI and WPI also decreased to 10.80 per cent and 4.15 per cent respectively in June over 30.02 per cent and 30.62 percent for the same month of last year. Furthermore, food inflation has come down to 10.50 per cent in June. But it is estimated that the inflation target is set in single digit for the next fiscal year may not be achievable.
Increase in Foreign Exchange Reserves

According to the latest SBP report the total liquid foreign exchange reserves has reached to $ 12,269.8 million on the week ended July 4, 2009. According to the State Bank of Pakistan, foreign exchange reserves held by the State Bank were $ 8,963.8 million while net foreign exchange reserves held by banks other than SBP were $ 3,306.0 million. It is good sign and it has multiplier effects.
Low Ratios of FDIs

According to the federal investment ministry the country would achieve $ 10 billion investment target by the year-end. The ministry has already attracted investment of $ 5 billion so far. Pakistan is a growing economy having vast investment opportunities with lucrative returns and due to
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the economic prudence and business-friendly policies the government has attracted potential investors. The telecommunication, water and power, gas exploration are the priority sectors of attracting FDIs. But according to ADB report the inflows of FDI is till very low as compare to other regional countries. So, government should take all possible measures to attract more and more inflows of FDI and joint ventures.
Possible Policies
(a) Many countries in the Middle East have achieved sustainable economic growth and social development by spending three to four per cent of GDP on social safety nets during periods of economic stagnation. So, we badly need to start social development program. (b) Simplicity should be the mantra of the government at every level. The principles of financial discipline, crisis management, good governance, maximum utilisation of available resources, nourishing of local talent & wisdom, accountability and transparency should be followed. (c) Larger funds for education and primary. (d) The size of the federal government and ministries need to be reduced, non-development public expenditure will need to be drastically curtailed (e) Networking of micro-credit banks and institutions to be established as did by Bangladesh, Uzbekistan, Kenya to overcome rural poverty and generate more employment. Petroleum Products Motor Spirit HOBC Kerosene Oil Light Diesel Oil Increase (in Rs.) 11.60 per litre 16.24 per litre 6.96 per litre 3.48 per litr Revised Price (in Rs.) 62.13 per litre 78.78 per litre 59.35 per litre 54.94 per litre
Source: Oil and Gas Regulatory Authority (July 2009). According to the Ogra these prices are fixed according to the formula as prescribed in the Presidential Ordinance Petroleum Development Levy (Amendment) Ordinance-2009 instead of carbon surcharge. Mehmood-ul-Hassan Khan, The News International, (Rawalpindi), 20 July 2009.
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E CONOMICALLY S TRONG P AKISTAN

Every patriotic Pakistani of this sacred soil would agree that New Delhi and Islamabad never had or will ever have friendly relations with each other. There are several reasons for such low state of relations between the two neighbouring countries. One being that since the partition, the Indian leadership has not been able to reconcile with the idea of a Muslim State in its neighbourhood. Be it Kashmir issue, UN Resolutions for granting the right of selfdetermination to the Kashmiris, Liaqat-Nehru Pact, Indus Water Treaty or any other step taken to normalise the relations between the two countries the result has never been positive in any manner whatsoever. There have been rounds and rounds of talks at various levels for resolving the Kashmir issue but the lingering problem is still far from being resolved as New Delhi keeps harping on the slogan that "Kashmir is our integral part" (Utoot Ang). India would never avoid holding dialogues and conferences even on Kashmir but at the same time would not budge even an inch from its oft-stated stance over the disputed territory. Those who have and are presently advocating friendly relations between India and Pakistan are living in a fool's paradise. It is important to understand that good relations between two countries can only be maintained through mutual respect and regard for each others freedom and sovereignty. It is also a matter of bitter record that though the US has been and is a so-called ally of Pakistan but Washington has all along been inclined mostly towards India. They accepted India as an atomic power way back in 1974 but still have not conceded to the idea of Pakistan, an Islamic country, becoming an atomic power. So Pakistanis, better be true sons and daughters of the soil irrespective of being Muslims and belonging to other religions. First and foremost, be united and integrated and build an economically strong Pakistan. It is only then India and the other countries would be forced to show due regard and reverence for your sovereignty, freedom and independence. Keep the green and white national flag flying high and still higher and become proud Pakistanis.
Tanvir Zahid, The Nation (Islamabad), 21 July 2009.
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C ONTINUING E CONOMIC T RENDS

The trends that emerged in the economy in the last fiscal year look set to continue through this year. This is because most key trends were the offshoots of structural weaknesses or strengths, though they did reflect to some extent the effects of global recession. Fiscal year 2009 closed as one of the most troubled years, dragging down the economic growth rate to just two per cent from the revised 4.1 per cent in FY08. Our external sector came under pressure right in the first quarter as an increase in world fuel oil prices and a financial crisis in the US exposed our structural weaknesses e.g. concentration of exports in little-diversified, low value-added items and limited outreach to global markets. In the second quarter, we began experiencing an overall economic slow down as by then the American economy had plunged into a fullscale recession, impacting on exports and foreign investments.. Fiscal deficit ballooned to 4.9 of GDP against the revised target of 4.3 per cent. Pakistan has a history of its current expenses exceeding current incomes due to a slow growth in tax revenue, not well-targeted subsidies, ineffective controls, oversized government, reckless spending, corruption and lack of good governance. But in FY 09 the war against extremism in NWFP and resultant displacement of 2.5 million people plus a slow down in domestic economy made things worse. The government could have introduced agricultural income tax in this years budget but it failed to do so for political consideration for the 63rd consecutive year. This is an example of how structural issues remain unresolved. Inflation remained high in the first half of the last fiscal year making it difficult for the government to offer fiscal stimuli to revive the economy as the rest of the world was doing. The central bank fighting a double-digit inflation waited till the second half of the fiscal year to soften its monetary policy stance after noticing a gradual decline in inflation. The government expects that CPI inflation, after peaking around 20.8 per cent in FY09 would decline to 9.5 per cent this year. But that seems a difficult task in view of the IMF pressure for eliminating power subsidies, continuing business malpractices like hoarding, cartel making broken supply chain of commodities and the over-pricing. A semi-regulated financial sector remained largely unaffected by global financial crisis. But our banking sector did see a fall in demand for consumer credit and a buildup in non-performing loans. The government continued to borrow heavily from the central bank for
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most part of the last fiscal year fuelling inflation but the trend reversed towards the end of the year. Meanwhile, the private sectors bank borrowing slumped, due to higher interest rates, a decline in foreign and domestic demand and an acute shortage of electricity that hit production activity. In the ten months of FY 09, large-scale industries reported a decline of 8.24 per cent . In the current fiscal year a moderate growth in LSM can be expected due to low base effect, anticipated partial revival of the global economy and the steps announced in this years budget for boosting industrial activities. The trade policy for the current fiscal year, likely to be announced shortly is expected to provide some impetus. Besides, a further easing of the SBP monetary policy this month would address the issue of costlier finance. However, the government must ensure least-interrupted supply of electricity to industrial units without which their production levels would remain low. In FY 09, growing trade and current account deficits had a draw down on foreign exchange reserves that fell over 40 per cent within the first quarter to $ 6.7 billion.. This compelled Pakistan to seek a $ 7.6 billion IMF standby loan. A partial release of this loan, cut in imports and billions of dollars provided friendly countries brought back the reserves to $ 11 billion plus towards the year-end. Now Pakistan has sought an additional $ 4 billion from the IMF to use it if the Friends of Pakistan fail to fulfill their promise of providing five billion dollars .Chances are that Pakistan would not only secure the third tranche of the IMF standby loan but the Fund would also make available the requested additional $ 4 billion. However, the increase in foreign debt and the resultant rise in foreign debt servicing would keep the external sector under stress. In the last fiscal year, trade deficit shrank considerably but at $ 17 billion it was still very high just a little less than the total export bill for the year. (See chart). Exports declined 6.7 per cent partly due to a narrow export base and partly as a result of the recession. And imports fell 12.9 per cent as income levels of households and corporate declined, slashing the domestic demand. Home remittances, however, grew 21 per cent to $ 7.8 billion in continuation of the trend seen since 9/11. A close destination-wise study of remittances removes the fear that this high growth may be a one-time phenomenon. It is true that a fraction of the Pakistanis working in the UAE and Saudi Arabiamost of them labourers did loose their jobs due
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to slowdown of construction industry in these countries. But generally speaking, Pakistanis abroad have braved the recession and the remittances in this fiscal year are set to grow. The growth rate, however, would depend on the pace of recovery taking place in the recession-hit countries. In the last fiscal year, the rupee depreciated 19.5 per cent against the dollar making imports costlier and thus stoking inflation and increasing the cost of production. During the current fiscal year also, the rupee may remain under pressure, senior bankers say.
Mohiuddin Aazim, Dawn (Islamabad), 27 July 2009.
E CONOMIC
P AKISTAN E CONOMY G ROWTH : A W IDER P ERSPECTIVE
Economic growth commonly measured by an increase in the real income per capita of a country is a complex phenomenon. Its complexity stems from its multiple dimensions related to multifarious determinants, diverse sources and numerous uses. Different countries have achieved different growth rates in different time periods using different growth strategies. Thus the diagnosis of crosscountry and time-related differences in economic performance involves the study of growth strategies adopted by various countries over time. In other words, how much growth is achieved by a country for how long, using which strategies, emerging from which sectors and is shared by whom? - are all inter-related questions which have to be studied simultaneously for diagnosing the nature and structure of economic growth. A review of literature on economic growth along with the growth experiences across the globe would suggest that within the dynamic framework, growth performance of a country can be analysed using ten criteria of assessment namely the criteria of sustainability, balance, optimality, equity, self-sufficiency, diversification, externality, efficiency, stability and structuralism. A brief discussion of these criteria and their applicability is taken up with a view to understanding the growth process across countries in a holistic manner. Taking the criterion of sustainability, at the first instance, economic growth experienced by different countries can be classified into two categories-the sustainable and the unsustainable. The former can be identified as the one which is self-sustaining; it is environment-friendly and is based on 'normal' use of natural and mineral resources of a
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country. The unsustainable growth, on the other hand is not only erratic; it is environmentally degrading and is associated with 'abnormal' exploitation of natural wealth such as forests, rivers and minerals as well as the man-made infrastructure. When applied to the economic growth of Pakistan, it does not meet the sustainability criteria as Pakistan's growth is accompanied with unsustainable pressures of population growth, urbanisation, rapid deforestation and depreciation of infrastructure as well as the increasing pollution in the areas. The application of the second criterion namely the criterion of balance helps in identifying whether economic growth experienced by a country is balanced or unbalanced. Economic growth is considered to be balanced when various regions comprising a country, it's rural-urban and its male-female populations or its major sectors such as agriculture and industry are 'evenly' and 'fairly' developed. The unbalanced growth has the opposite characteristics. This is reflected in wide disparities in the levels of economic development- regions-wise, rural-urban wise, genderwise and sector-wise. When applied to the economic development of Pakistan, this criterion would establish that the economy of Pakistan continues to suffer from 'dualism' as certain regions, sub-sectors and segments of population remain grossly under-developed while other regions, sectors, and segments of population show the opposite picture. The rural sectors and female population of Pakistan have not been brought into the mainstream of economic growth achieved since independence. According to the third criterion namely the criterion of optimality, it is imperative that the private and public sectors of an economy must be playing their optimal roles to generate synergies of partnership and to ensure the maximum level of employment and output given the factor endowment and human resource base of the country. In the modern world, the doctrinaire adherence either to the Platonic-cum-Marxian type centralised communistic state or the Aristotelian-cum-Smithsonian type laissez-faire economy has fairly waned. At the same time, there is a general acceptance of economic planning as an essential tool of national development which is being used to realise the full potential and contribution of the private sector to economic growth. The state intervention is at present considered to be a 'sine qua non' for correcting a host of 'market failures' which are common and endemic both in the developed and the developing countries. Given the resurgence of the philosophy of economic neo-
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liberalism, which sells under the new rubric of "Beyond Planning and Mercantilism", the fact remains that even in the most liberalised economies of world, economic planning either in the explicit form or in an implicit guise continues to determine numerous variables of the economy such as savings, investment, money supply, prices, exports, imports, exchange rate and GDP growth. In case of Pakistan, both the public and the private sectors have played a sub-optimal role in economic development of the country and have commonly failed to help realise the full potential of the society. Whereas the public sector has been constrained by insufficient resources, inefficiencies, wastage and corruption, the private sector has suffered from inertia, lack of Keynesian "animal spirits" and excessive propensity for profiteering. At the same time, a lack of vision and foresight has afflicted both the sectors for many decades with serious consequences for the process of economic growth. The criterion of equity, the fourth in our analysis, focuses on the distributional and welfare aspects of growth. If economic growth leads to greater skewness in income and wealth distribution and a large portion of the population finds it further down in the scale of living standards, such growth would be classified as anti-poor. The objective of economic growth should not be the "immiserisation" of the masses rather an increase in their levels of sustenance should be the primary goal of development. For that reason, there has been widespread disillusionment with the "trickle-down" theory which stipulates that benefits of economic growth will automatically filter down to the poorest of the society. Even the "trickle-down" effect of economic growth would be neutralised if the taxation system in place is regressive with the major share of the tax revenues being contributed by indirect taxes. Furthermore, if economic growth synchronises with lax monetary policy and high inflationary pressures, the poor sections of the society would suffer the most. Hence the analysis of economic growth needs an integrated approach which takes into account the impact of fiscal, monetary and trade policies for assessing the overall implications of economic growth. For evaluating the long-run growth of a country, the fifth criterion i.e. the criterion of self-sufficiency is extremely relevant. Self-sufficiency in the present context refers to the level of domestic resource mobilisation to finance the gross investment in the country which is the main determinant of economic growth. If a country continues to finance its private and public investment from the domestic and foreign loans, the
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resultant growth could be identified as the "borrowed growth". A large number of developing countries for the last half a century have resorted to heavy dependence on external "aid" and are now badly caught in the "debt trap". Under such a predicament, these countries need to borrow more to service their earlier debts. At the same time, external borrowing brings into the country the 'borrowed technologies' and 'borrowed strategies'. As a consequence, the country quite often loses its autonomy in policy making. The sixth criterion for assessing the growth process of a country is labeled as criterion of diversification. In a large number of developing countries in Asia and Africa, growth is critically dependent upon the production of one or two raw products such as rubber, cotton, jute, cocoa, coffee, tea etc. In these cases, deterioration of barter and income terms of trade is universal and these countries fail to mobilise sufficient resources for long-term development. Interpreted in terms of Prebisch's centre-periphery topology, these mono-crop economies only serve as the source of raw materials for the industrial countries which form the 'centre' of the global economy. Despite registering a growth rate of about 5.0 per cent per annum on an average basis during the last 60 years, Pakistan's economy is not sufficiently diversified and the dictum that the cotton output has cradled Pakistan's GDP growth, as one World Bank economist put it, holds even today. Without diversification, Pakistan economy would be confronted with serious challenges of globalization which have emerged with the signing of Uruguay Round Agreements (URA) and are being implemented by World Trade Organisation (WTO) as a successor body to GATT 1947. The Uruguay Round consists of 14 agreements, 27 decisions and declarations, 8 understandings and one special arrangement namely the Trade Policy Review Mechanism (TPRM). The Uruguay Round is affecting all sectors of the economy such as agriculture, manufacturing and services and only the diversified and technologically strong economies would be able to withstand the growing pressures of competition and liberalisation under the WTO. The seventh criterion for analysing the structure of economic growth is labeled as the criterion of "externality". Under this criterion, the possible implications of economic growth on the external sector of the country concerned are diagnosed, which include the sub-components of balance of payments such as exports, imports, invisibles, amortisation etc. If growth in the real GDP leads to widening of trade deficit or the
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current account deficit, ultimately it puts pressures on the foreign exchange reserves of the country. In this case, assets may be created through the process of economic growth but at the same the creation of external sector liabilities due to say excessive imports could drastically reduce the benefits of economic growth. The eighth criterion of growth assessment is that of efficiency. According to this criterion, different countries achieve different levels of output with the same level of factor inputs. The efficiency factor is commonly measured by the parameters of Incremental Capital Output Ratio (ICOR) which indicates the additional investment required to generate one unit of output and labour-output ratio i.e. additional labour needed to create one unit of output. A lower value of these parameters indicates the relative efficiency of factor use. The efficiencies of capital and labour can be estimated by using the well-known Cobb-Douglas type of production function. The main determinants of efficiency are the capacity utilisation, skills and training of the work force, the management techniques and the nature of technology. Even though all these factors are important for enhancing efficiency of factors of production, the role of technology in augmenting the factor productivity is now considered as the most critical. In his well-known "Model of Exogenous Growth", Robert Solow has assigned a key role to technology as a determinant of efficiency, labour productivity and the rate of savings in an economy. Dani Rodrik, Professor of International Political Economy at John F. Kennedy School of Government of Harvard University, in his recent research studies covering 140 countries has measured the relative shares of capital, labour and total factor productivity or (TFP) which is an indicator of the technology factor, and found out that in the industrial countries, a major contribution to economic growth comes from TFP rather than factor accumulation. In countries like Germany, UK, France, Japan, Brazil, the contribution of TFP has varied from 25 per cent to 50 per cent. In case of Pakistan, the share of TFP has been almost negligible which suggests that Pakistan's growth performance has not synchronised with any technological advancement. The future growth strategies therefore must incorporate specific policy measures to increase the technology contents in growth and exports. If the economic growth is volatile and excessively fluctuating, it renders policy making extremely difficult. Therefore, the criteria of stability the ninth in our analysis can be applied to assess the inherent
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variability of economic growth and its potential effects at the microeconomic and macroeconomic levels. Another aspect of stability is the relative fluctuations occurring in the price level and exchange rate levels in the wake of an economy which is growing at a variable rate. In other words, if high growth rates occur along with high inflation rates or large depreciation of the domestic currency, the growth benefits could be neutralised. The tenth criterion for evaluating the quality of economic growth can be identified as the criterion of structuralism. The dynamic of economic growth requires that the structure of economies should be changing with lower shares for agriculture and with rising shares of the industrial sectors as well as services sector. It has been historically experienced across the globe that as the countries move from the Traditional Stage to the Transitional Stage, Take-off, and drive to maturity and to mass consumption as defined by W.W. Rostow, the economies undergo some structural changes reflected in a higher share of manufacturing and higher level of productivity etc. Therefore it is vital that economic growth should be followed by structural transformation because without such a transformation, the economy remains week and vulnerable to external shocks. The conclusion of the discussion is that economic growth can be diagnosed in terms of quantitative as well as qualitative criteria. When evaluated against these criteria, Pakistan's historical growth experience does not appear to be favourable. Despite reasonable growth rate achieved in the last six decades, the country continues to suffer from numerous gaps such as the poverty gap, human development gap, trade gap, saving-investment gap, technology gap and so on. It appears that it will still take years for Pakistan to enter the take-off stage.
Dr. Aqdas Ali Kazmi ,The News International (Rawalpindi), 27 July 2009.
E CONOMIC C OMEBACK
These are trying times for Pakistan. Besides the chaotic socio-political issues that plague Pakistan, the citizens of this state had to suffer a depressing environment. The most important factor in Pakistan today is its economy and even though the world is in recession, the signs of recovery are beginning to show themselves for Pakistan. To accurately judge Pakistan's recovery the nature of its economy must be first understood. Historically speaking, Pakistan has a purely
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political economy. It flourishes only when our interests are in line with that of the West (primarily the US) and our economy suffers whenever we go against their interests or are isolated. This is the dominant trend in Pakistani history, during Ayub Khan's rule, when the US was developing Pakistan and Iran as allies against the Soviet Union and India and Pakistan was providing the US with airbases from which to launch its U2 spy planes deep into the Soviet territory. Aid flowed into Pakistan and Industries flourished. Then during the Zia era, Pakistan was a frontline state in the 10year war against the Soviet Union in Afghanistan. The Americans knew that only through Pakistan they can effectively organize, train supply and aid the forces against the Soviet Union. Pakistan in turn received billions of dollars in aid, was encouraged to develop its security apparatus and the Pakistani nuclear programme was overlooked by then President Ronald Reagan. The Pakistani economy grew constantly ignoring the war in the north. Following the October 1999 military coup Clinton refused to shake hands with Musharaf. Soon after 9/11 the US under Bush Pakistani cooperation against the Taliban and Pakistan in return required US aid. It once again led to a boom in the Pakistani economy especially in the Stock Exchange and Real Estate markets. Now the same dynamics of this tested relationship are about to come into play. The new US administration under President Obama has actively begun to assist Pakistan on various issues. This Aid is already being dispersed to Pakistan and will continue to be a primary source of income. This is aimed at making Pakistan effectively combat terrorism. The War on Terror is undeniably a Pakistani war. We cannot run away from our responsibility. The militancy threatens our culture, our ideology and our way of life. Though our nuclear programme still is unacceptable to Israel and India, perhaps to a lesser degree even to the US. The US has little choice but to prevent the destabilization of Pakistan. Any attempt to take over Pakistan's nuclear assets is just too risky given the current regional situation. US interests are in a stable but not strong Pakistan as opposed to China. The latter want a strong Pakistan to act as a counterweight against India. So there should be no doubt that China will develop Pakistan where the US hesitates. If recent statements out of the US executive are to be taken seriously then it can be seen that Pakistan is no
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longer on the periphery of the US foreign policy but at the core that is now to be fully focused. The Flight of capital from Pakistan has been halted by the destructive conditions of global markets (especially the West and Dubai) and remittances and immigration from OSPs have increased. The promise of building Reconstruction Opportunity Zones is being fulfilled; the electricity crisis is about to be resolved. So when the pledged Aid arrives it will act as a catalyst to start the shattered Pakistani economy. The forecast may seem entirely overoptimistic. However it is a short-term forecast. In a country as unstable as Pakistan, it is impossible to make a long term forecast. Pakistan still has so many problems and inherent shortcomings to overcome and terrorist organization maintain the power to use suicide bombings. However all historical indicators show that in the short- term Pakistani economy and people will bounce back stronger and more resilient than ever before.
Imtiaz Rafi Butt, The Nation (Islamabad), 29 July 2009.

Economy of Pakistan

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The State of the Economy of Pakistan

T HE S TATE OF THE E CONOMY OF P AKISTAN

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The State of the Economy of Pakistan

The State of the Economy of Pakistan

Dr Ahmad Rashid Malik

The State of the Economy of Pakistan

T HE E CONOMIC S URVEY 2008-09

Growth and Investment

The State of the Economy of Pakistan

The State of the Economy of Pakistan

Money and Credit

The State of the Economy of Pakistan

Trade & Payments

The State of the Economy of Pakistan

External and Domestic Debt

The State of the Economy of Pakistan

Health and Nutrition

Population, Labour Force and Unemployment

The State of the Economy of Pakistan

Transport and Communication

The State of the Economy of Pakistan

The State of the Economy of Pakistan

The State of the Economy of Pakistan

The State of the Economy of Pakistan

Macro Economic Stability and Real Sector Growth

Targeting the Poor and the Vulnerable

The State of the Economy of Pakistan

Peoples Works Programme

The State of the Economy of Pakistan

Increasing Productivity Agriculture

The State of the Economy of Pakistan

Water Use Efficiency

Livestock & Dairy

The State of the Economy of Pakistan

The State of the Economy of Pakistan

Integrated Energy Development Programme

The State of the Economy of Pakistan

The State of the Economy of Pakistan

VIII. Human Development for the 21st Century

The State of the Economy of Pakistan

Clean Drinking Water for All and Environment

The State of the Economy of Pakistan

The State of the Economy of Pakistan

National Finance Commission

The State of the Economy of Pakistan

The State of the Economy of Pakistan

The State of the Economy of Pakistan

Live Stock and Dairy

The State of the Economy of Pakistan

The State of the Economy of Pakistan

The State of the Economy of Pakistan

The State of the Economy of Pakistan

The State of the Economy of Pakistan

W HOSE B UDGET I S I T A NYWAY ?

The State of the Economy of Pakistan

The State of the Economy of Pakistan

A NALYSING B UDGET 2009-10

The State of the Economy of Pakistan

The State of the Economy of Pakistan

R ESOURCE G AP D ASHES H OPES

The State of the Economy of Pakistan

The State of the Economy of Pakistan