When the military took over the reins of government, Pervez Musharraf made no bones about the dismal state of Pakistan’s economy and his government’s intention to bring it out of its stupor.  It certainly seemed as if they meant business. 

            Within a few months, the government’s economic managers introduced several measures to boost revenue collection and jump-start the economy.  However, years of financial mismanagement had taken their toll on the system.  The controversial tax survey failed to yield any substantial result, the rupee declined by more than 20 per cent and exports lagged behind the envisaged target.  The prevailing drought and subsequent decline in agricultural production further weighed down the country’s ailing economy.

            Given the backdrop of Pakistan’s fragile debt situation, the military government’s second budget for fiscal 2001-2002, which totals 751.7 billion rupees, purely concentrates on sustainability.  Pakistan is under extreme pressure from donor agencies due to its 60 billion dollar public debt that includes 37 billion dollars in foreign debt.

            Consequently, debt servicing is to consume the lion’s share of 43.7 per cent or  329 billion rupees while defence spending has been frozen at last year’s figure of 131 billion rupees. 

            The budget has provided measures to achieve the required reduction in fiscal deficit through an increase in revenue collection, while at the same time promising to provide relief to the majority of industries by lowering government revenues, thereby giving the moribund economy a shot in the arm.  However, in order to improve credibility in the eyes of international donor agencies, economic managers may find little room to meet the deficit target while simultaneously keeping the economy on a progressive path.

            Some of the targets set by the government for fiscal 2001-2002, such as an increase by 15 per cent in revenue collection to 457.7 billion rupees (in 2000-2001 the collection would be around 400 billion rupees) and a reduction in fiscal deficit from 5.3 per cent in 2000-2001 to around 4.9 per cent, are fairly ambitious.  These targets have been prescribed by the International Monetary Fund (IMF) in order for Pakistan to be in a position to obtain more funds in future to service its debts.  The achievement of these targets by the government will ultimately be at the expense of development expenditure in the country.

            Pakistan’s economy is in the doldrums because each year the extent of development expenditure commonly known as the Public Sector Development Plan has been curtailed.  This has led to an increase in the poverty ratio and a further decline in infrastructure facilities.

            In his budget speech, Finance Minister Shaukat Aziz said that Pakistan’s economy has had a chequered history over the past three decades.  Massive swings in economic policies – from nationalisation to crony capitalism – have created distortions and set the economy adrift.

            The self-inflicted wounds of this period, which turned into a full-blown malaise in the ’90s, have created a dilemma for the rulers, said Aziz.  While the country has developed an arguably effective indigenous deterrence, its economy is not in consonance with the imperatives of sovereignty.

            According to Aziz, the three main components of a country’s expenditures are debt servicing, defence and establishment costs for running the civil government.  Little is left after meeting these expenditures and, in the short run, there are no viable alternatives to effect savings in these expenditures.

            Financial analysts have expressed various opinions on the budget. Arshad Arif, head of research, First Capital Securities, maintains that by including agriculture in the overall scheme of things, the government has attempted to address the needs of this sector.  According to him, the sustained drought responsible for the dismal performance of agriculture in the previous year has been the central issue around which the policy framework for the agriculture sector in the current budget has been constructed.

            A number of long-term as well as short-term measures have been devised to handle such crises in future.  These measures address four key issues pertaining to the agriculture sector – water shortage, pricing mechanism, export of value-added products and availability of credit.

            Mohammad Sohail, head of research at Invest Capital Securities, contends that the budget may have a positive impact on the banking sector as the government has reduced taxes by eight to 50 per cent.  This measure has been taken largely to rationalise the tax incidence on commercial banks, which are the most heavily taxed financial institutions in the country.

            On the other hand, Badruddin Fakhri, official spokesman of the All Pakistan Cement Manufacturers Association, argues that though the government claims it wants to give a boost to the construction industry, it has disregarded the chronic issues facing the cement sector, which is the industry’s very backbone.  The government should have reduced the excise duty presently at 1,000 rupees per ton as the industry is operating at 40 per cent below its considered capacity.   If it had been reduced, he said, Pakistan would have been in a position to earn foreign exchange by exporting cement.  This sector is suffering huge losses from the prohibitive excise duty as well as the rapid increase in international furnace oil prices.

            The budget also announced several measures for the capital market that in the long run should prove attractive to investors specially the foreign fund houses.   In this regard, capital gain tax exemption for listed companies has been extended for three years.  Bonus shares issued by listed companies would not be treated as income and, to encourage the listing of new companies, the purchase of shares would be tax deductible up to a value of 10 per cent of personal income subject to a maximum of 100,000 rupees. This concession would also be available to those purchasing shares offered to the general public in the course of the privatisation of state-owned companies.

            The budget includes several measures for taxation structure reform which will affect individuals, traders and companies.  However, Raees Ashraf Tar Mohammad, chairman, Pakistan Commodity Traders Association maintains that increase in the tax slab from 1.5 per cent to three per cent if a product is sold to non-registered tax payers would accelerate the pace of corruption.   According to his contention, traders and dealers would conceal their actual sales and in connivance with corrupt officials, doctor their account books.  On the other hand, he said, duty on different items has been reduced despite which the government is hoping to increase revenue collection by 15 per cent in 2001-2002.

            Meanwhile, adds Raees Mohammed, customs duty on tea has been raised by five per cent to 25 per cent.  Given that about 10 to 15 per cent of the commodity enters this country by way of smuggled goods, an even greater quantity of it would now be smuggled in.

            The budget was delivered with the objective of achieving a reduction in the fiscal deficit through increase in revenue collection, and from the macro-perspective it is perfectly in sync with the IMF agenda. However, the implementation of the key reforms will remain an acid test for the government in the forthcoming months.