Review of the Federal Budget 2007-08

Review of the Federal Budget 2007-08

by

Dr. Ashfaque H. Khan

Economic Adviser

The Federal Budget 2007-08 has been presented at a time when Pakistan is in the

midst of its strongest economic expansion phase and is experiencing the longest spell of

its strongest growth in years. With economic growth at 7.0 percent in 2006-07,

Pakistan¡¯s real GDP has grown at an average rate of 7.0 percent per annum during the

last five years and 7.5 percent in the last four years in running. This year¡¯s economic

growth is broad-based as agriculture, manufacturing and services have grown at robust

rates. As a result of strong economic growth on sustained basis, the real per capita

income has grown at an average rate of 5.5 percent per annum during the last four

years, thus giving rise to the real disposable income and supporting consumption boom

in the country. This consumption boom is helping domestic markets to expand and

encouraging private sector to invest more to meet the rising demand. Accordingly,

overall investment increased from 16.6 percent of GDP to 23.0 percent, i.e. 6.4

percentage points increase in the last four years (2004-07) and most importantly, private

investment jumped from 10.9 percent to 16.2 percent ¨C 5.3 percentage points increase in

the same period. This clearly reflects the buoyant mood of local and foreign investors in

Pakistan.

The financial health of the economy has also gained traction in the outgoing

fiscal year. The government has succeeded in achieving fiscal deficit target of 4.2

percent GDP; across all measures of vulnerability to external shocks, Pakistan¡¯s debt

profile has improved significantly; workers¡¯ remittances and foreign investment

reached all time high; foreign exchange reserves have crossed $ 15 billion ¨C the highest

ever in the country¡¯s history; the overall balance of payments is in surplus and so on.

It is in this background that the Federal Budget 2007-08 has been presented with

a view (i) to providing relief to the common man, including government servants,

industrial workers, widows of industrial worker¡¯s etc.; (ii)promoting investment and

sustaining growth momentum; (iii) creating employment opportunities; (iv)

strengthening the country¡¯s physical infrastructure; and (v) improving social indicators.

It would, therefore, be safe to argue that the Federal Budget 2007-08 is peoples¡¯ friendly,

farmers¡¯ friendly and investment friendly. Let me explain these points in ensuing pages.

The total size of the consolidated budget is Rs.1874 billion or 18.8 percent of

GDP and total revenue (consolidated) is estimated at Rs.1476 billion or 14.8 percent of

GDP with overall fiscal deficit is estimated at Rs.398 billion or 4.0 percent of GDP.

Hence, fiscal deficit is projected to decline from 4.2 percent of GDP (including earthquake

spending) to 4.0 percent (including earthquake spending). One critique has recently argued

in news analysis that budget deficit is projected to rise from 3.7 percent to 4.0 percent of

GDP this year. He should correct himself. Let me turn to each objective separately.

2

Relief to the Common Man

The government has been providing relief to the common man in every budget

over the last five years. The relief has been consistent with growing strength of the

economy as well as the availability of fiscal space. Following the tradition, the

government has enhanced the level of relief to the common man because the financial

health of the economy has also improved. Several analysts, both in print and electronic

media, have been complaining for the last several years that government is not

providing relief to the common man despite rising foreign exchange reserves and

growing fiscal space. As stated earlier, the government has been providing relief all

along the years and this year, the level of relief is consistent with growing financial

strength. And yet, the critiques continue to criticize as to why the level of relief has been

enhanced. Some have called this ¡®populist in tone¡¯ and some have dubbed this as ¡®Election

Year Budget¡¯ as if, nowhere in the world, budget is presented during the election year.

Whatever relief the government has provided is consistent with stable macroeconomic/

fiscal environment. Relief is not being provided through printing money but from the

resources the government is going to generate from the economy. Despite relief, the

fiscal deficit is targeted at 4.0 percent of GDP ¨C down from 4.2 percent in 2006-07. The

salient features of the relief to the common man are summarized below:-

a) Salary and Pension

− In the last four Budgets of this government, the salary of the government servants was

raised every year. In the Budget 2007-08 the government will provide an increase of

equivalent to 15 percent of pay to all federal government employees ©¤ civilian and

defense employees.

− Pensions of the government servants have also been raised. Those government servants

who retired before July 1, 1997, their pensions are up by 20 percent. Those who retired

after July 1, 1997, their pensions are up by 15 percent.

− Upgradation of employees in BPS-1 to BPS-4 to the next grade; and the upgradation of

the post of clerical/ auditors from BPS-5 to BPS-7; BPS-7 to BPS-9; and from BPS-11 to

BPS-14.

− Upgradation of posts of operational staff in Pakistan Railways and enhancement in the

rates of their operational Duty Allowance. Upgradation of basic scale by one step for all

remaining staff (excluding secretarial) in Railways.

− The Employees Old Age Pension, old or new, has been increased by 15 percent.

− Workers¡¯ minimum pension has been increased from Rs.1300 to Rs.1500 per month.

− In the event of the death of the workers, the grant to their heirs has been increased from

Rs.200,000 to Rs.300,000.

− Earlier, husband or wife both contributing to old age pension were not entitled for the

pension of the deceased pensioners. Now the serving partner will get the pension of the

deceased spouse also.

− The Minimum Wage of the Worker has been increased by 15.0 percent, that is, from

Rs.4000 to Rs.4600 per month.

3

− The contract employees will also be entitled to get share in profit for which, the

Companies Profit / Worker¡¯s Participation Act 1968 is being changed. The difference

between contract and permanent employee is being eliminated. The minimum ceiling is

being revised from Rs.12,000 to Rs.20,000. This measure will benefit the contract

employees.

b) Food Subsidy

− In order to provide relief to the common men the government has increased food subsidy

to Rs. 13 billion. Essential items such as Sugar, Atta, Pulses, Edible Oil/Ghee, medicine

(some basic medicines) and other essential items will be sold at discounted prices through

the Utility Stores. The prices of some of the items which will be sold through the Utility

Stores are given below:

− Gram pulse will be sold at Utility Stores at Rs. 29 per Kg against the average market

price of Rs. 38 per Kg.

− Moong pulse will be sold at Rs. 47 per kg against the average market price of Rs. Rs. 56

per kg.

− Daal Mash will be sold at Rs. 57 per kg at the Utility Stores against the average market

price of Rs. 72 per kg.

− Ghee is currently being sold at Utility Stores at Rs. 67 per kg against the average market

price of Rs. 80 per kg.

− Sugar will be available at Rs. 25 per kg at Utility Stores as against the average price of

Rs. 30 per kg in the open market

− Tea will be sold at Rs. 10 per kg less than the market price at Utility Stores

− The different varieties of Rice will be sold at Rs. 5 per kg less than the market price.

− The number of Utility Stores is currently 1000 in the country. In order to extend the

coverage of the Utility Stores to the Union Council level, the government is opening

5000 more Utility Stores, one in each Union Council, in 4 months time. This will not

only create job opportunities but will enhance the availability of essential commodities at

the door step of the people even at the union council level at an affordable price.

− Under the President¡¯s Initiatives, the launch of Rozgar Scheme has been very successful.

Many young people have already established their businesses with a loan at a fixed

interest rate of 6.0 percent per annum. In the next 5 years, 1.8 million young people will

establish their businesses.

− The President¡¯s Initiative for Urban Clinics has been launched and some 815 medical

clinics are being established in Islamabad, Rawalpindi, Karachi, Lahore, Faisalabad,

Peshawar and Quetta. In every clinic, there will be one doctor, one lady health worker

and one dispenser to provide medical consultation.

− Clean drinking water plant in each Union Council level is being installed. Already 327

plants have been installed in the country.

4

Agriculture

Agriculture continues to be the single largest sector, a dominant driving force for

growth, employing over 43 percent of workforce and the main source of livelihood for

66 percent of the country¡¯s population. As such, agriculture is at the centre of the

national economic policies.

The government has taken revolutionary measures to enhance agricultural

productivity by increasing the subsidy on DAP fertilizer from Rs.400 per bag to Rs.470

per bag. Encouraged by the results of last year subsidy on DAP that helped Pakistan

achieve the highest level of production of wheat crop (over 23.5 million tons), the

government enhanced the level of subsidy to achieve even better results this year.

Through this subsidy the government is encouraging the use of phosphatic and

potassic fertilizer. Last year, the yield per acre increased by almost 10 percent ¨C from

2519 kg/ hectare to 2769 kg/ hectare as a result of the subsidy on these types of

fertilizer. The government has reduced the electricity tariff for the use of agriculture

tube well by 25 percent. These two measures will reduce substantially the cost of

agricultural production, increase the level of incomes of farmers and will help reduce

rural poverty.

Furthermore, the government has allocated almost Rs.16 billion in the Budget for

further development in agriculture. Almost all agricultural implements imported

from outside have already been made zero-rated. The farming community is

delighted over these revolutionary measures but one critique in his recent article

termed these measures as ¡°neutral for the agriculture¡±. The critique must be belonging

to the non-farming community.

Promoting Investment and Growth

In order to further promote industrialization, improve the competitiveness of our

industry and build their capacity the government has taken wide-ranging measures in

the Budget through rationalization of tariff with a view to reducing cost of doing

business.

In doing so, the government has maintained consistency and transparency in

tariff policy. In the Budget 2007-08, the government has reduced duties on raw

material, parts and component of CNG compressors; paper and paperboard;

equipments for alternative renewable energy resources like solar, wind and biotechnology,

transformers, submersible motors electricity meters, switchgears and

electric bulb and tube lights, light engineering products; energy saving lamps and its

raw materials/ parts; footwear, football leather, aviation equipments; gems and

jewelry; furniture, marble and granite, horticulture; surgical equipments / medical

devices etc. Poultry feed items, poultry vitamins, evaporation air cooler, insulated

sandwich panels and silos for storage of poultry have been exempted from duty.

Besides these, hundreds of other measures have been taken to promote

industrialization through improving competitiveness which is difficult to list them

here. These measures are in continuation of consistent tax and tariff reforms which

have been going on for quite sometime.

5

Strengthening of Physical Infrastructure

A strong infrastructure is pre-requisite for country¡¯s development. Investment in

infrastructure directly affects economic growth and reduces poverty. Investment in

infrastructure has been a priority area and the same is true in this year¡¯s Budget. The

Federal Budget 2007-08 has earmarked Rs.520 billion for development program. In

addition, development program worth Rs.204 billion is put outside the budget which

will be undertaken by WAPDA, NHA and other organizations.

Of the total size of the PSDP, Federal PSDP is estimated at Rs.335 billion. Out of

the Federal PSDP, 49.7 percent (Rs.166.5 billion) will be spent on physical

infrastructure. Within infrastructure, water and power including village electrification

receive Rs.84.1 billion or 50.5 percent of total infrastructure spending. This amount is

19.0 percent higher than last year. Allocation to communication including National

Highway Authority, Ports and Shipping and Railways is estimated at Rs.42 billion or

25.2 percent of infrastructure spending. Apart from budgetary spending, Rs.187.5

billion will be spent on power, fuel and transport and communication from outside

the budget. As such, over Rs.354 billion will be spent on infrastructure during 2007-08

which will not only strengthen the country¡¯s infrastructure but also will help in

supporting the on-going growth momentum and reducing poverty.

Improving Social Indicators

Pakistan has impressive record of respectable economic growth but its social

indicators lag behind countries with comparable per capita income. In recent years,

Pakistan has made substantial progress in improving its social indicators. For

example, Pakistan¡¯s literacy rate has improved from 45 percent in 2000-01 to 54

percent in 2005-06; gross enrolment at primary level (5-9 years) improved from 72

percent to 87 percent in the same period; infant mortality is down from 82 to 70, and

total fertility rate has declined from 4.5 to 3.8 during 1998-99 to 2005-06.

Notwithstanding these improvements in recent years, much more needs to be done to

align Pakistan¡¯s social indicator with its growth potential. It is in this perspective that

the government is allocating more resources to education and health. It is important to

note that education and health are provincial subjects and bulks of expenditure on these two

items come from Provincial Governments¡¯ Budgets. In the Federal Budget 2007-08, the

government has allocated Rs.24.5 billion on education, including higher education,

which is up by 21.3 percent over last year. This is only the development budget on

education while non-development (salary of the teachers etc.) budget is several times

higher than the development one. Interestingly, one critique in his recent article

sarcastically remarked that education budget is 6.5 percent of defense budget. For

such type of critique it is reminded that Rs.24.5 billion is only development budget of

the federal government while bulk of expenditure on education comes from

provincial governments. In the year 2006-07, the total public sector expenditure on

education was Rs.211 billion which was 84 percent of defense spending. In 2000-01,

the education budget was 58 percent of defense spending which has increased to 84

percent in 2006-07 ¨C a 26.0 percentage points increase in 7 years. We encourage

6

criticism but the fact should be right. The total expenditure (development and nondevelopment)

on higher education amounted to Rs.33.8 billion in 2007-08, of which,

development budget is amounted to Rs.18 billion. It has grown at the compound rate

of 35 percent per annum since 2000-01. The development budget on the other hand,

increased from Rs.337 million in 2000-01 to Rs.18 billion in 2007-08 ¨C over 50 times

increase in 8 years. I hope the critique would know the facts and before writing next

time he/ she should be careful. Allocation to health and population (development

budget only) amounted to Rs.18.6 billion which is up by 24 percent from last year. Once

again, it is reminded that expenditure on health is a provincial subject and bulk of its

allocation will come from provincial budgets.

Housing Initiatives

− Housing schemes for poor is being launched. Land will be provided on official rate by

district/ provincial governments. This scheme is expected to provide 250,000 units and

shall benefit more 1.5 million families in all provinces.

− A scheme is under preparation for construction of 37000 apartments for low paid federal

government employees.

− The government has instructed the CDA to develop a Sector of 3 and 5 marla plots for

low paid employees.

− In addition, in Sector I-15 in Islamabad, 5500 plots and 8500 apartments will be reserved

for low income employees

Let me conclude by saying that Pakistan of today is different from Pakistan of

yester years. Pakistan has emerged on the radar screen of the global economy. It has

positioned itself as one of the fastest growing economies in the Asian region. Some 15-

20 years ago, China, Singapore, Korea, Hong Kong and Malaysia used to figure in

Asian region as emerging economies. Today, it is China, India, Pakistan and Vietnam

that figure in Asian horizon. What a change in just 8 years. Let us accept this change

and be proud of our success. As a nation we must learn to celebrate our success. This

does not mean that we do not have any challenge. There is no economy in the world ¨C

how strong it may be ¨C that do not suffer from one challenge to another. Although we

have made great strides over the last eight years, we are fully aware that we have

work to do for better tomorrow.

-----------------------------------------------------------
N A D E E M M A L I K
CNBC PAKISTAN
BUREAU CHIEF
ISLAMABAD
0321-5117511

nadeem.malik@hotmail.com

16^th Floor, Saudi Pak Tower, 61-A Jinnah Avenue, Islamabad. 051-2800113-14, Fax: 051-2800118

 

---

FREE pop-up blocking with the new MSN Toolbar MSN Toolbar Get it now!