The Federal Budget unveiled on 12th June for the year 2004-05 signifies a marked shift in policies. Such a shift seemed inevitable given the huge difference in the overall economic scene when the present Finance Minister took over the stewardship of the economy in November 1999 and the developments since then.
The biggest challenge at that time was to correct the growing macro-economic imbalances, restore financial discipline and investors' confidence, develop a proper rapport with the multilateral institutions, arrest the rising trend of inflation, increase the growth rate and reduce the debt burden to sustainable levels.
For all intents and purposes, the country was bankrupt though the international community had not yet declared it as such.
The most unfortunate aspect was that the rulers at that time were not even prepared to mend their ways and continued with their profligacy.
Obviously, the situation has completely changed and the economic policies pursued relentlessly during the past four years and a half have yielded handsome dividends. There is no need to recount the many improvements in almost all areas of the economy because they are well known.
Fiscal deficit, in particular, which was Achilles heel of the economy has been reduced to 3.9 percent of GDP from unsustainable level of 7.0 percent due to consistent belt tightening.
With the consolidation of macro-economic gains and fiscal stability, the Finance Minister was able to loosen the purse strings and he seems to have done it with the right mix of policies which were aimed at fostering growth through investment friendly measures, rationalisation of tariffs, incentives of various kinds to the entrepreneurs, reduction of cost of doing business in the country and unprecedented increase in development expenditures that would take care of improvement of infrastructure and social indicators.
While embarking upon expansionary policy, it was also ensured that fiscal stability was not threatened and the fruits of development are also shared by the poorer sections of the society. During 2004-05, the government has targeted a fiscal deficit of 4 percent of GDP, marginally higher than the estimated out-turn of 3.9 percent in 2003-04.
The numbers in the budget are modest and realisable. The overall size of the budget has been increased by only 4.0 percent to Rs 902.8 billion over the revised estimates of 2003-04.
On the resources side, net revenue receipts have been projected higher only by 1.3 percent at Rs 557 billion while CBR's tax collections have been targeted at Rs 580.0 billion or 13.7 percent higher than last year.
Considering a projected increase of 6.6 percent in GDP, inflation of about 5.0 percent and widening of the tax net together with the tax measures proposed in the budget, the targets appear to be quite realistic. Net capital receipts and change in provincial cash balances are estimated to increase quite sharply but these are generally based on solid evidence.
The estimates for external receipts are more or less in line with the past data. Bank borrowings projected at Rs 45 billion would provide adequate room for expansion in the private sector credit and appears consistent with monetary stability.
On the expenditure side, the current expenditures are projected to be lower by 1.82 percent at Rs 700.8 billion while development expenditures are targeted to increase sharply by 30.8 percent to Rs 202 billion over the revised estimates of 2003-04.
Such a development, particularly a cut in current expenditures, appears extremely healthy on paper but disguises the fact that it was entirely due to an exceptional factor.
Expenditures on "General Public Services" during 2002-03 were sharply up by Rs 70 billion or 19 percent over the budget estimates due to prepayment of expensive foreign debt amounting to $1.17 billion.
Adjusted for the net impact of Rs 70 billion, the revised estimates of current expenditure in 2003-04 would have been lower at Rs 644 billion (very close to the budget estimates of Rs 645 billion) which would have indicated a budgeted increase of 8.9 percent in the current expenditures during 2004-05.
Another aspect which needs to be highlighted is that total resources, excluding external receipts and bank borrowings both in the budgeted and revised estimates during 2003-04, were not sufficient to cover the current expenditures whereas during 2004-05 these resources are projected to exceed current expenditures by a small margin.
Such a trend, if continued, could lower our dependence on foreign sources and bank borrowings to finance development expenditures which would be helpful for the long-term health of the economy.
A look at various measures contained in the budget shows that major policy initiatives have been taken to facilitate and encourage business and industry.
These include the introduction of single sales tax rate of 15 percent, reduction in customs duty on machinery and raw materials, rationalisation of central excise and the directive to the provincial governments to liberalise the working of the industrial sector by removing the intervention of a number of departments such as inspectors of shops, labour and electricity. Besides, the overall tax regime was made "tax-payer friendly" through a number of facilitation arrangements.
In order to meet the challenge of new WTO regime, which would come into effect in January, 2005, the government has allowed liberal import of machinery and given accelerated depreciation allowance.
Reduction in electricity tariff to the tune of 25 paisas and 58 paisas per unit was also made for commercial and industrial consumers to lower the cost of production.
The agriculture sector got the most favourable treatment. A relief of Rs 100 per bag was provided in the price of DAP, agricultural machinery not manufactured locally was exempted from sales tax, customs duty and withholding tax, fixed electricity charges for tubewells in Punjab and Sindh were equalised with those applicable in NWFP and Balochistan, interest rates on agricultural loans were reduced from 14 percent to 9 percent, defaulters would not be put behind the bars, certain concessions were given for the repayment of old loans and the financial institutions would be asked to extend more credit to this sector.
A deliberate effort was made to provide incentives to labour-intensive sectors. A large number of measures were taken to kick-start the housing and construction sector. Various incentives were also offered for SMEs.
This together with increased emphasis on agriculture would generate increased employment opportunities to absorb the new entrants in the labour market.
Proper institutions would also be set up to produce skilled manpower to cater to the demands of the market.
A very important departure from the previous budgets was the offering of a number of concessions to the common man, especially government employees, pensioners, widows and the elderly.
Adhoc relief was provided to the pensioners and employees of the government, net return on Bahbood certificates/accounts was enhanced by exempting them from withholding tax, threshold of income liable to tax was increased from Rs 80,000 to Rs 100,000 and senior citizens were allowed reduction in tax liability by 50 percent upto income limit of Rs 300,000.
Social safety net was widened by providing more funds for Food Support, Tameer-e-Pakistan, Zakat programmes etc.
All these measures are in addition to the sharp increase of over 31 percent to Rs 202 billion proposed for PSDP which would also contribute greatly to the objectives set forth in the budget.
The financial estimates and the measures proposed in the budget clearly indicate the fact that the Finance Minister has largely made the right moves and responded quite well to the emerging situation.
The challenge before him, at this point of time, was to promote investment and accelerate economic growth, create more employment opportunities, provide relief to the common man and the poor, improve social indicators and strengthen the country's infrastructure.
The fiscal measures proposed in the budget are clearly geared to meet these objectives. However, there are two points which need to be made obvious and are relevant to the context.
Firstly, governments, like charitable institutions, are not in the business of directly distributing money or other necessities of life but could only promote an environment which facilitates economic activity, and generates employment according to the capacity of those capable and willing to work and thus alleviate poverty by making use of the opportunities made available.
Secondly, the government has to prioritise expenditures and live within the available means. To spend in excess of resources is a sure way to invite trouble. Judged from this criterion, the Finance Minister has made a good use of the nation's purse according to the present priorities of the country.
Developed countries have excellent infrastructure and proper social safety nets because of mobilisation of higher level of resources over a long period of time.
However, there is certain level of over-optimism and glaring weaknesses in the budget.
Encouraged by the recent gains in macro-economic indicators, the agenda spelled out for the next three years ie from 2004 to 2007 includes increasing GDP to 8 percent with inflation contained around 5 percent, rise in investment to GDP ratio to 20 percent, reduction in fiscal deficit to 3 percent of GDP, reduction in the current account surplus to a deficit of 1.8 percent of GDP and maintaining foreign exchange reserves at a minimum of equivalent to 28 weeks of imports. Such an agenda is not consistent with reality.
Realisation of 8 percent growth in GDP on a sustained basis would require a higher rate of investment than 20 percent which, given the expected rate of savings in the economy and the reluctance of foreign investors to supplement our investment efforts due to growing lawlessness and terrorism in the country, seems impossible to achieve.
It is thus obvious that if the expected GDP growth does not stand a chance to materialise, all other variables would be adversely affected.
Why the government wants to have deficit current account and reduce the level of reserves is also not understandable.
Such a policy could only be useful for the country if the resources so released are used in an optimal fashion and increases productive capacity of the economy to more than compensate the debt servicing liability incurred in the process.
The experience in Pakistan has shown that inflow of resources from abroad usually adds to debt liabilities without corresponding increase in productivity. Also, an impression has been created within and outside the government circles that our foreign exchange reserves are at exceptionally high levels.
This is not true when we consider the size of our economy and its external sector and also look at the reserve position of other countries.
In fact, we have progressed from a precarious position to a normal one and this should not be a cause of much concern.
The Finance Minister talked about the government plans of second generation of reforms a number of times in his budget speech without proper elaboration. Institutional strengthening, good governance, etc which would form part of such a strategy seem to be moving in the reverse gear.
In fact, we also seem to be backtracking from the first generation of reforms. For instance, the government has announced a drastic cut in the lending rate of Zarai Bank and SME Bank.
This is against the banking sector reforms which stipulate that the rates would be market oriented and determined by the respective boards of the financial institutions.
The repeated interventions of the government in the affairs of the Zarai Bank has made it a sick institution, unable to mobilise resources in a big way or pay its liabilities to the State Bank.
The government has offered a settlement scheme at very commercial terms to the borrowers having arrears since December, 2000.
The power of Zarai Bank to recover its dues as arrears of land revenue has also been withdrawn. Such a step would send a very wrong signal and simply means saddening the honest borrowers and rewarding the defaulters.
To withdraw some of the powers of the Zarai Bank to recover loans would further worsen its recovery ratios and financial position. It would have been better for the government to let its preferences known and ask the State Bank and the relevant financial institutions to work out a strategy within the given parameters.
Also, all exemptions were to be withdrawn but the government has moved in the opposite direction by exempting Behbood Certificates from withholding tax.
Some of the other measures also do not go properly. For instance, the government has increased the pensions of all government servants at a uniform rate.
This would widen the disparities in pensions instead of narrowing which is the declared policy of the government.
Difference between the persons retired before 1994 and getting pensions of Rs 1,000 and Rs 10,000 would increase from Rs 9,000 to Rs 10,440.
The incentive package given to the agricultural sector is highly attractive and would cost about Rs 68 billion but mention of agricultural tax has been totally omitted. At least rich landlords should have been subjected to taxes at normal rates.
When the Federal Government can direct the provincial governments to remove intervention of a number of departments for the smooth functioning of business and industry, a similar step could have been taken to promote equity in taxation by subjecting all the sectors of the economy at a uniform rate.
The behaviour of government in levying capital value tax (CVT) on shares traded at the stock exchanges of the country is bizarre.
In the first place, it would have been more appropriate to impose CVT on the gains rather than the value of shares.
However, if it was decided to levy such a tax for the ease of collection and the huge amount likely to be received, the government then should have the courage to implement the proposal.
Alternatively, the proposal could have been withdrawn or amended after a serious debate in the parliament which was the right forum to do it.
There are clear signals from the government now that it is prepared to bend backwards to please the angry members of the bourses by holding negotiations with them.
This is no way to restore the writ and run the affairs of the government. The episode would teach another lesson to the fiscal policy wizards of the country. Don't try to impose taxes on the groups who can mount an agitation.
The poor harmless lambs, unable to unite and resist, are a better bet to carry the oppressive load.