1 a new direction or compulsive action federal budget 2008-2009 by syed shabbar zaidi, fca

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A NEW DIRECTION OR COMPULSIVE ACTION

FEDERAL BUDGET 2008-2009

by

Syed Shabbar Zaidi, FCA

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TABLE OF CONTENTS

1. Continuity of thought - Presentations in 2005, 2006 and 2007

2. Economic Justice in An Unfair World

3. The Change … Out of Box

4. Pakistan’s Economic ills

5. Pakistan’s Economic Survey-Do we read and understand it?

6. Poverty and Governance-Will to improve

7. We cannot Print US $

8. Initiatives and New Taxation Measures – Direct Taxes

9. Initiatives and New Taxation Measures – Indirect Taxes

10. New Direction-Manufacturing and Agriculture

11. Value Added Tax and Federation of Pakistan

12. Sustainable Manufacturing Base and Manageable Interest (Discount) Rate

13. Can We Afford It…Import of Biscuits and Children Clothing (Import of Luxury Goods)

14. Under-Invoicing…… Hawala/Exchange Companies/Foreign Currency Account

15. Future of Pakistan’s Economy

16. Conclusion

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CONTINUITY OF THOUGHT - PRESENTATIONS IN 2005, 2006 AND 2007 (1)

• The following slides represent what I said during the post budget seminars in 2005, 2006 and 2007:

• “These indicators reveal that everything on economic side is not alright.

• Pakistan’s economy and its size can not sustain a constant

trade deficit of 13.4 bn US$.

• The interest rate of around 10 per cent seriously affects the investment strategies. Only the countries like Brazil, Russia, Turkey and Venezuela have such high interest rates. Rest of the world is around 5 percent.

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• Increase in consumer prices is a natural phenomenon in this situation. Monetary and fiscal policy can only provide a temporary relief. With these indicators inflation is bound to increase.

• Comparison with China and India is relevant. China is our present and future major trade partner and India and China are competitors in the fields being our forte.

• Notwithstanding the same, on an international comparison the position is not that bad. We are the only few countries having +6.5 per cent GDP growth.

• The conclusion is that we are performing reasonably well, however, now there is no time and space left as a nation to make mistakes and wait for a messiah. There has to be stabilization and national consensus.”

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• The conclusion made at that time was very simple…….We can not live on this trade based economy……….Trade in shares, trade in goods ….trade in properties…….The solutions are manufacturing and agriculture and proper allocation of resources. The time ahead is difficult…………..But do we have choice………..Who will bring change? Change will come if we really believe in ourselves………

• My theme for this year is whether it is New Direction or Compulsive Action ?

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ECONOMIC JUSTICE IN AN UNFAIR WORLD

• “Economics without ethics is a mutilated science ………”

(Washington Gladden)

• “If any norm characterizes international economic relations, it is probably that they should be carried out on a ‘level playing field’. But across a wide range of issue areas, including trade, finance, investment and migration, the economic agents who are involved….including states, firms, labor unions and individuals …..often complain that the global playing field is tilted against them. How to level the field has therefore become a topic of widespread debate, particularly in the context of an international system in which the distribution of wealth and power is highly skewed……..”

(Ethan B Kapstein)

• This is true amongst the nation and people within the nation – Ethics and Level Playing field.

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THE CHANGE …..OUT OF BOX (1)

• “I make these recommendations because the times require something more than business as usual. Much of what is recommended is somewhat out of box. But staying within the box has brought poverty, ignorance, hopelessness, violence, and dictatorship…………………………….. [to far too many Muslims around the world. Staying within the box has set Islam and West on dangerous and unnecessary collusion course.] It is time for new ideas. It is time for creativity. It is time for bold commitment. And it is time for honesty, both among people and between people…………[That is what I have tried to do in these pages]. There has been enough pain. It is time for reconciliation.”

(Page 318…Islam, Democracy and the West) (Shaheed Mohtarma Benazir Bhutto)

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THE CHANGE …..OUT OF BOX (2)

• “There are those who look at things the way they are and ask why…………I dream of things that never were and ask ‘why not’?”

(Robert F Kennedy)

Why Pakistan cannot be a good country to live for our generations?

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PAKISTAN’S ECONOMIC ILLS (1)

• Immediate issues

1. Trade Deficit ………. You cannot live with over US$ 15 trade deficit2. High Interest Rate ………. Against a low rate over the last decade3. Honeymoon for trading ………. Goods, shares, properties, US$ and

morals4. Public Sector Development Programme - Unproductive and not properly

governed5. Overpoliticised media ………. No real debate on economy6. Increase in Consumer Price Index ………. Around 30 percent over the

year7. Increase in input prices for industries 8. Unemployment ………. over 50 percent in real terms 9. Continuity of structural reforms …… FBR, SECP, SBP, NADRA etc ….10.Capacity of Governance

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PAKISTAN’S ECONOMIC ILLS (2)

• Medium & Long Term

1. Security State or an Economic reality…….. What is Pakistan?

2. Inappropriate Investment on Education, Health and General Administration

3. Lack of Consensus on economic issues …….. Water Management, Royalty to Provinces, etc

4. NFC Award – Allocation to Provinces

Does 2008 budget give any direction towards a change …….. yes and no …. If yes then how ?

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…… Please ensure that stoves remain

alive otherwise we can lead to

drastic results ………

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POVERTY & GOVERNANCE

• Lee Kuan Yew delivered a message on 1st May 1986 “There is no law of nature which provides that the life will get better for Singapore next year. We have to work to make it better”

• The public has to be trained. The tone and tenor can be set by the state. Pakistan has around 25 per cent poverty according to Economic Survey 2007-2008. Government has realized the gravity of the problem and tried to make some interventions.

• To make these interventions a success, the prerequisite of getting accurate data on poverty, giving up the statistical artifacts, abandoning the political rhetoric and leaving short term election oriented project need serious actions.

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…… There should be equal opportunities

to reap the benefits by all ………

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PAKISTAN ECONOMIC SURVEY 2008-2009 – Do we read and understand it ?

• Overview, Page VI

“Major contributors to this year’s services growth include: wholesale and retail trade, banking and insurance, public administration, and defence and social services. All these sectors have posted strong growth in 2007-2008. As stated at the outset, this year’s growth is not broad-based. Infact, three fourth contribution to this year’s growth alone come from the services sector while the remaining one fourth contribution owed to the commodity-producing sector.”

Is it not a blessing in disguise? Can defence be a service sector ?

If we have a growth of around 4 per cent with Agriculture and Manufacturing contributing substantially we will achieve the objectives.

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YOU CANNOT PRINT US$ (1)

• Pakistan as a country is continuously short of US$. At times we rely on US AID (Ayub Khan Age) then Afghan War Support (Zia ul Haq) and then War on Terror Support (Musharraf).

• We do not want Generals to rule, however, we want US$ to support our economy. This contradiction cannot live long.

• In terms of US$ availability, the country is not sustainable. We are too fragile.

• The immediate problem of the country is continuous trade deficit.

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YOU CANNOT PRINT US$ (2)

• This problem has further been aggravated by our Dubai philosophy. The definition of service sector is fundamentally wrong. How can short term trade in stock exchange be termed as “investors” ?

• Federal Budget 2008-2009 has identified the problem. However, it is yet to be seen whether it is a ‘Directional Change’ [I desire it be so] or a ‘Compulsive Action’…Let us hope for the better……….

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INITIATIVES AND NEW TAXATION MEASURES (DIRECT TAXES) (1)

• Branch Profit Tax

• Whitening Scheme

• Non-Residents’ payment

• Seventh Schedule

• Taxation on Real Estate

• AOP & Individuals being withholding agent

Removal of discrimination. Is it required? International practices;

Is it for the past? Do we need anything for the past undisclosed income? ; This will fail conceptually if future whitening is not stopped. We do not see any action against that [Section 111(4) survives];

Exchange companies & Foreign Currency Accounts;

Regressive Amendment;

Step in right direction; Rate too low;

Step in right direction; avoids discrimination.

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INITIATIVES AND NEW TAXATION MEASURES (INDIRECT TAXES) (2)

Sales Tax

1. Increase in rate from 15 to 16 per cent

Federal Excise Duty

1. Increase in rate from 15 to 16 per cent on Excisable Services

2. FED brought in line with sale value

Regressive in nature;

Not required; A compulsion.

A compulsion;

The most important change brought in

law

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NEW DIRECTION – EMPHASIS ON MANUFACTURING & AGRICULTURE (1)

• 72 to 75 percent of our population is employed directly or indirectly in manufacturing or agriculture. The contribution of Agriculture and Manufacturing as a percentage of GDP is continuously dropping…………This means average per capita in these sectors is decreasing.

• Service Sector [incorrectly defined as above] contributes to GDP, however, it provides employment to only 20 to 25 percent of people.

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• The problems in agriculture are:

1. Support prices for products

2. Complete reliance on nature (rains/ storage, etc)

3. Shortage of water

4. Expensive Inputs………..Fertilzers/Electricity/Pesticides

5. Lack of infrastructure……..Storage/Transport/Roads

6. Lack of credit…….[Finance CFS not agriculturist………]

7. Tertiary industries to agriculture……Cattle breeding/ fishing/ forestry, etc.

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• Please understand agriculture….Do not spoil it……….

• Federal Budget has taken some steps in right direction in this regard, however, this policy has to continue forever.

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• Manufacturing

• Manufacturing in Pakistan is faced with the problems:

1. Lack of Support versus Trade on Policy Side (Fiscal Regimes)

2. Expensive inputs (Cost of Raw Materials)

3. Under-invoiced imports

4. Availability of financing at cheaper rate [Subsidized rate or market mechanism]

5. Availability of skilled labour

6. Continued availability of power

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NEW DIRECTION – MANUFACTURING & AGRICULTURE (5)

• In the budget we don’t find concrete action. The solutions are:

1. Industrial Development Fund (Electricity & Infrastructure) of around Rs 50 billion

2. Financing at a lower rate [Not above 8 to 9 per cent]

3. Immediate withdrawal of WWF and WPPF

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VALUE ADDED TAX & FEDERATION OF PAKISTAN – NFC AWARD

• No country in the world with a VAT system can arrange the same on Provincial Basis.

• The fundamental error of taxes on VAT basis and the concurrent list as per Constitution of Pakistan needs to be adjusted.

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SUSTAINABLE MANUFACTURING BASE & MANAGEABLE INTEREST RATE

The manufacturing base is eroding seriously due to high input pricing; no protection against imports, including under invoicing; and improper ‘cascading’. All these aspects have been identified as an issue in the Budget Documents, however, the question is the availability of the infrastructure for correction .

Interest Rate escalation from 10.50 to 12 per cent at the initial stage is counter productive for industry. We would have to think ‘out of box’ to provide funds to industry at around 8 to 9 per cent; If this lower rate is available for Trading, CFS and Property, then the objective will be lost - This is a major job for the future monetary policy.

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CAN WE AFFORD IT – IMPORT OF BISCUITS & CHILDREN CLOTHING (1)

• The most important directional change is increase in Duty upto 35 per cent on 300 ‘Luxury Items’. We cannot afford to:

• Pay US$ for import of Biscuits and Children clothing etc. etc. etc.; and

• Our local industry suffers due to this consumerism.

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CAN WE AFFORD IT – IMPORT OF BISCUITS & CHILDREN CLOTHING (2)

• Duty imposed on:

• Dairy products, fruits, chewing gum, chocolate, processed food, fruit juices and aerated waters

• Ceramic products

• Air conditioners / refrigerators & electric fans

• Toasters, microwave ovens and cooking range

• Televisions

• Furniture and lighting equipment

• Cosmetics

• Sulphonic acid

• CKD / SKD of sewing machines

• Cars / jeeps above 1800 cc

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UNDER-INVOICING TRADE CYCLE (1)

Purchase of CurrencyOpen Market (Exchange

Companies) / Foreign Currency Accounts

PakistaniImporter

Pakistani Market

ForeignExporter

(1) Import of Goods [Invoiced Sales Price US$ 2. Actual Price say US$ 5]

(3) Receives Rs 375 out of which Rs 136 [US$2] has been paid through L/C remaining US$ 3 to be paid through undocumented Sources

(2) Supply of goods Say US$ 5.50 = Rs 375

(4) Payment to Foreign Exporter

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UNDER-INVOICING TRADE CYCLE (2)

• Effects

• US$ 3 does not form part of economy.

• Taxes are deducted and collected at US$ 2 or Rs 126 only

• Hard earned Foreign Exchange remittance from exports and services are used for financing undocumented economy.

• This policy crime has been identified. Relevant amendments made in the respective laws. Now the issue is governance and management. If we can achieve positive results this will be a blessing for the economy.

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FUTURE OF PAKISTAN’S ECONOMY – THE BITTER SIDE

• The current economic trend is leading to:

• End of honey moon for Banking Sector – Pressure on spreads and probability of bad debts;

• Pressure on consumerism – expensive cars, mobile; electrical equipments, etc.;

• Pressure on Consumer Prices for Food items due to the increase in prices for flour, rice, etc.;

• Increase in electricity rates; • Increase in charges for other utilities; and • Decrease in demand for exports due to pressure of US and

European Economies.

Result: This will lead to inflation and move towards “Recession” [Stagflation]. This should not happen.

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FUTURE OF PAKISTAN’S ECONOMY – POSITIVE SIDE

• On the positive side, reliance on agriculture and manufacturing will improve ‘Employment levels’ and bring a larger segment of people above the poverty line. We do not have any other choice.

• Pressure will be inflicted on those where reliance is on ‘Services Sector’.

• Nevertheless the value addition in agriculture and manufacturing can only arise, where there is investment in ‘Human Capital’ on long term basis.

Are we ready for it ? In my view…No. Do we have choices …. No.

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….. A heavy stone to handle …..

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… But hope should not die ….. This is a great country. We will make it admirable …

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CONCLUSION

• Budget for 2008-2009 has made some positive directional changes, however, this country can only prosper if we realize that Pakistan is an economic reality not a security state…