The Governor of the State Bank of Pakistan, Dr Ishrat Husain, has said that mere growth can not help in eliminating poverty, but long-term reforms and good governance in civil institutions delivering services to the poor can lead to lowering the poverty level from the present 33 percent to 15 percent.
Delivering the keynote address here on Wednesday at the 'Budget Breakfast Forum' of the Institute of Bankers Pakistan (IBP), he said that second-generation reforms should be aimed at capacity-building of the civil institutions, like health, education, police and local government, and make them accountable through good economic governance.
He praised the banking sector for providing loans to the SMEs and low-income groups which increased the purchasing power of the middle class. The small farmers purchased seeds, fertiliser and other inputs to increase their farm production, which was reflected in record production of cotton. He expressed hope that with the existing policy the number of small bank borrowers would increase from the present 3 million to 6 million.
Dr Ishrat said that allocations were not the real hurdle in eliminating poverty but the institutions were not delivering the service to the deserving people. "I have seen modern school buildings in villages without any activity due to lack of teachers. In government hospitals doctors do not attend to the poor patients," he said.
Talking about fiscal deficit he said that in the past, debt ratio was 100 percent of GDP, which has considerably declined now. The defence expenditures, which formed 40 to 50 percent of the budget earlier, had been contained up to 18.5 percent. The development expenditures have been increased to Rs 272 million against Rs 193 million reserved for defence.
About the proposed 0.1 percent tax on withdrawals of Rs 25,000 and above from banks he said that this had been done to discourage cash transactions and to promote documentation. He said that the corporate tax rate had been reduced from 58 percent to 30 percent. This would benefit the banks, as their tax rates would be at par with public limited companies.
About suitability of the new budget to the present economic framework, the State Bank Governor said that the strategy formulated in 1999 to bring down poverty rate from 33 percent to 15 percent by 2015 had four major objectives including achievement of a growth rate ranging from 6 to 8 percent. The growth rate can be varied next year, depending on climatic conditions and international factors.
Another objective of the strategy is to continue structural reforms of the institutions so that leakages could be stopped and the benefits of growth filter down to the poor.
He said that corruption on top levels had been eliminated, but was rampant at the middle and lower levels.
He referred to the one-village-one-product under the Khushhal Pakistan Programme and said that villagers would have to decide about their priorities and chose between electricity, gas, water and roads. The funds allocated to the village would be first spent on the first choice.
He called for extending the micro-credit programme to at least one million families providing them loans of up to Rs 25,000 without any collateral. The rate of recovery in small loans is over 95 percent.
He said that private organisations would have to raise the minimum wages from Rs 2500 to Rs 3000.
He said that the traders or farmers or self-employed persons would not be affected by higher inflation because they would pass on its impact to the consumers through increasing their items' prices.
Similarly, he said, the increase in salaries would not affect the corporate sector whose average income had been 43 percent.
He described the banking sector lending significant in economic growth, which extended $12 million credit to the private sector for increasing productivity.
Responding to the criticism from some quarters on macro-economic growth achieved during past three years he said that growth had provided jobs to people and increased their income. Higher inflation rate with more jobs and higher income was better than low inflation without jobs or income, he added.
He said that at the start of economic reforms the government had no fiscal space as the debt-GDP ratio was 100 percent, which was later reduced to 66 percent, and then to 25 percent, which helped the country to achieve economic sovereignty. The growth enabled the government to spend Rs 100 billion in the public sector and Rs 272 billion on social sector, he said.
About increase in current account deficit Dr Ishrat said that import of machinery, raw material and capital goods had increased by 41 percent which had propelled the deficit to 1.3 percent of GDP. The import of raw material and machinery would increase productivity and exports, which would end imbalance between imports and exports, he added.
He said that the biggest achievement of the new budget was relieving the exporters from sales tax refund, which consumed a lot of their energy and time to get the money back. The elimination of the sales tax regime was the single largest demand of the export sector.
Another achievement of the budget was to rid the country of smuggling of polyester cloth by ignoring the guarantee provided to ICI against import of PTA and MEG, raw materials used in manufacture of polyester fibre.
A former Secretary, Finance, Aftab Ahmad Khan, expressed concern over the rising inflation, and called for bringing it down to 5 percent with a sustainable growth rate of 8 percent through aggressive tax reforms expanding the tax net and elimination of corruption.
He described the budget a friendly document for all sectors of life and stressed the need to tackle the problem of inflation on war footing by creating more jobs, raising incomes and increasing exports.
The Chief Compliance Officer and Company Secretary of Union Bank Ltd, Liaqat Ali, said that the problem of inflation could be tackled by lowering tax rates and expanding the tax net. He described the law and order situation in Karachi as a cause of concern for the business community.
He suggested that banks paying advance tax should be exempted from withholding tax as it would increase the incidence of refunds. He also called for an end to double taxation on bank employees' allowances and charging tax from employers on the same account.
He said that excise duty at the rate of 7.5 percent on opening of L/Cs had been withdrawn.
Earlier Chief Executive of IBP, Muhammad Saleem Umer, welcomed the guests.
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