Transcript Post Budget Seminar-kTBA 17th, June, 2008

A NEW DIRECTION OR
COMPULSIVE ACTION
FEDERAL BUDGET 2008-2009
by
Syed Shabbar Zaidi, FCA
1
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
2
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.
3
CONTINUITY OF THOUGHT - PRESENTATIONS IN
2005, 2006 AND 2007 (2)
• 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.”
4
CONTINUITY OF THOUGHT - PRESENTATIONS IN
2005, 2006 AND 2007 (3)
• 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 ?
5
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.
6
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)
7
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?
8
PAKISTAN’S ECONOMIC ILLS (1)
•
Immediate issues
1. Trade Deficit ………. You cannot live with over US$ 15 trade deficit
2. High Interest Rate ………. Against a low rate over the last decade
3. Honeymoon for trading ………. Goods, shares, properties, US$ and
morals
4. Public Sector Development Programme - Unproductive and not properly
governed
5. Overpoliticised media ………. No real debate on economy
6. Increase in Consumer Price Index ………. Around 30 percent over the
year
7. 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
9
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 ?
10
11
…… Please ensure that stoves remain
alive otherwise we can lead to
drastic results ………
12
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.
13
14
…… There should be equal opportunities
to reap the benefits by all ………
15
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.
16
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.
17
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……….
18
19
20
INITIATIVES AND NEW TAXATION MEASURES
(DIRECT TAXES) (1)
•
Branch Profit Tax
Removal of discrimination. Is
required? International practices;
•
Whitening Scheme
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];
•
Non-Residents’ payment
Exchange
companies
Currency Accounts;
•
Seventh Schedule
Regressive Amendment;
•
Taxation on Real Estate
Step in right direction; Rate too low;
•
AOP & Individuals being
withholding agent
Step
in
right
discrimination.
&
direction;
it
Foreign
avoids
21
INITIATIVES AND NEW TAXATION MEASURES
(INDIRECT TAXES) (2)
Sales Tax
1.
Increase in rate from 15 to 16
per cent
Regressive in nature;
Not required; A compulsion.
Federal Excise Duty
1.
Increase in rate from 15 to 16
per cent on Excisable Services
2.
FED brought in line with sale
value
A compulsion;
The most important change brought in
law
22
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.
23
NEW DIRECTION – EMPHASIS ON
MANUFACTURING & AGRICULTURE (2)
•
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.
24
NEW DIRECTION – EMPHASIS ON
MANUFACTURING & AGRICULTURE (3)
•
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.
25
NEW DIRECTION – EMPHASIS ON
MANUFACTURING & AGRICULTURE (4)
•
Manufacturing
•
Manufacturing in Pakistan is faced with the problems:
1.
2.
3.
4.
5.
6.
Lack of Support versus Trade on Policy Side
(Fiscal Regimes)
Expensive inputs (Cost of Raw Materials)
Under-invoiced imports
Availability of financing at cheaper rate [Subsidized
rate or market mechanism]
Availability of skilled labour
Continued availability of power
26
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
27
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.
28
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.
29
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.
30
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
31
UNDER-INVOICING TRADE CYCLE (1)
Purchase of Currency
Open Market (Exchange
Companies) / Foreign
Currency Accounts
(1) Import of Goods [Invoiced
Sales Price US$ 2. Actual
Price say US$ 5]
Foreign
Exporter
(4) Payment to
Foreign Exporter
Pakistani
Importer
(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
Pakistani
Market
32
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.
33
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.
34
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 …..
37
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… But hope should not die ….. This is a great
country. We will make it admirable …
39
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…
40
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