FEDERAL BUDGET 2007-08

Macro Economic Aspects

Income Tax Bar Association, Karachi Syed Masoud Ali Naqvi Senior Partner KPMG Taseer Hadi & Co.

Karachi 12 June 2006

Budget at a glance

Budget Estimate 2006-07 Revised Estimate 2006-07 Budget Estimate 2007 08 ---------------------------------(Rupees in billion)----------------------------

Revenue

Tax Revenue - CBR Direct Taxes

Income tax Others

Indirect Taxes

Customs Sales tax Federal excise Others 257.8 14.1 271.9 157.1 341.6 68.1 2.2 569.0

840.9

305.0 15.6 320.6 134.0 311.0 72.0 2.0 519.0

839.6

388.0 20.2 408.2 154.0 375.0 91.0 2.3 622.3

1,030.5 2

Budget at a glance

Revenue

Non Tax Revenue

Less Provincial Share Net Capital Receipts External Receipts Self Financing Provinces Change balance in of PSDP Provincial by cash Privatisation Proceeds Bank Borrowings

Budget Estimate 2006-07 Revised Estimate 2006-07 Budget Estimate 2007-08 ---------------------------------(Rupees in billion)-------------------------------

241.9 1,082.8 378.2 704.6 16.4 239.3 85.6 374.4 1,214.0 390.9 823.1 80.5 276.6 95.5 337.6 1,368.1 465.9 902.2 58.5 258.5 122.7 53.8 75.0 140.1

1,314.8

22.1 75.0 55.2

1,428.0

51.8 75.0 130.9

1,599.6 3

Budget at a glance

Budget Estimate 2006-07 Revised Estimate 2006-07 Budget Estimate 2007-08 ---------------------------------(Rupees in billion)-------------------------------

Expenditure

Current Expenditure

General Public Services Debt Servicing Others Defence Affairs & Services Economic Affairs Others 295.8 208.5 504.3 250.2 74.7 50.6 879.8 389.9 244.9 634.8 252.6 91.2 54.9 1,033.5 437.4 204.5 641.9 275.0 78.9 60.5 1,056.3

Developmental Expenditure

PSDP Others

Total Expenditure

435.0 435.0

1,314.8

394.5 394.5

1,428.0

520.0 23.3 543.3

1,599.6 4

Composition of Sector GDP growth

GDP (Constant Factor Cost) Manufacturing Large scale manufacturing Small scale manufacturing Construction Agriculture Major Crops Minor Crops Livestock Services sector GNP (Constant Factor Cost)

2004-2005

9.0

15.5

19.9

6.3

18.6

6.5

17.7

1.5

2.3

8.5

8.7

(Growth in Percentage) 2005-2006 2006-2007

6.6

7.0

10.0

10.7

8.3

5.7

8.4

8.8

7.7

17.2

2.5

- 4.1

0.4

7.5

9.6

6.4

5.0

7.6

1.1

4.3

8.0

6.9

5

GDP Growth Trend

GDP Grow th Trend

10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 6.5% 4.6% 2.0% 3.1% 4.7% 7.5% 9.0% 6.6% 7.0% 1980s 1990s 00- 01 01- 02 02- 03 03- 04 04- 05 05- 06 06- 07

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Sectoral contribution to GDP growth

Sectoral Contribution to the GDP growth (Percent Point) Agriculture 2005-2006 0.4

2006-2007 1.1

Industry Services Real GDP 1.3

4.9

6.6

1.8

4.1

7.0

7

Inflation

CPI

(Consumer Price Index) Overall inflation Food inflation Non-Food inflation Core inflation

SPI

(Sensitive Price Index) WPI 2005-2006 7.9

6.9

8.6

7.5

10.1

7.0

July / April 2006-2007 7.9

10.2

6.2

6.0

6.9

11.1

8

Domestic Debt

Outstanding Domestic Debt

Permanent Debt Floating Debt Unfunded Debt

2002 2003 2004 2005 2006 2007

424.8

468.8

570.0

526.2

514.9

540.2

557.8

516.3

542.9

778.2

940.2

1086.5

792.1

909.5

899.2

854.0

859.2

896.6

Total

% of GDP

1774.7

1894.5

2012.2

2158.4

2314.3

2523.4

40.3

39.3

35.7

32.8

30 28.4

9

Domestic Debt

Domestic Debt as % of GDP 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 43.4% 99-00 43.2% 00-01 40.3% 01-02 39.3% 02-03 35.7% 03-04 32.8% 04-05 30.0% 05-06 28.4% 06-07 10

Interest Payments

As percentage of Total Revenue Tax Revenue Total Expenditure Current Expenditure GDP 1999-2000 2004-2005 2005-2006 2006-2007 41.0

51.8

29.6

33.5

5.5

20.0

27.3

16.1

19.1

2.7

18.3

24.9

14.3

18.3

2.6

17.1

22.4

12.9

17.9

2.3

11

Savings & Investment

Description Total Investment Changes in Stock Gross Fixed Investment - Public Investment - Private Investment Foreign Savings 2001-02 2002-03 2003-04 2004-05 2005-06 (P) 2006-07 16.8

1.3

16.9

1.7

16.6

1.6

19.1

1.6

21.7

15 23.0

1.5

15.5

4.2

11.3

15.3

4.0

11.3

15.0

4.0

10.9

17.5

4.3

13.1

29.1

4.7

15.4

21.4

5.2

16.2

-1.9

-3.8

-1.3

1.6

4.5

5.0

National Savings Domestic Savings 18.6

18.1

20.8

17.6

17.9

15.7

17 15.4

17.2

15.3

18.0

16.1

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Trends in External Debt & Debt Burden

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Pakistan Economy – SWOT Analysis

Strengths

              4-5 years of strong growth has led to higher medium term growth path Resilience against shock and extra ordinary jerks Rise in per capita income for US $ 503 in 2002 to US $ 925 in 2006 2007 Robust Consumer spending Substantial increase in private sector credit Balance between fiscal deficit and growth Medium Term Development Framework Maintenance of external and domestic debt within limit Reach to Global Capital Markets Geo political situation post 9/11 Stable exchange rate Higher foreign direct investment Reduction in poverty level Tighter monetary policy to moderate inflationary pressure        

Opportunities

Capacity constraints with India in IT sector Recent investment in IT sector BPO’s potential Telecom and Media revolution Geo political situation Foreign Direct Investment Investment in education and health Lapsing of WTO multi-fibre agreemen

Weaknesses

  Credibility of statistics Sharp increase in prices of food items  Incompatible contributions of various sectors of economy in tax revenue.      Inefficiency in utilisation of development expenditure  High administrative costs       Perception gap between economic manager and people at large Quality of governance Record trade deficit Concentration of export in restricted items and markets High cost of doing business Lack of focus on agriculture sector Political instability Shortage of skilled workforce Energy crisis Poor HDI indicators

Threats

           Political uncertainty and current judicial crisis Issues in Balochistan and Northern Areas Worsening of situation on Western borders Anti Pakistan attitude in Afghanistan Election 2007 Level of corruption Broadening gap between Rich and Poor Social unrest Public discontent with the policies which may threaten reform process Persistent high global oil prices Increasing trend of terrorist activities

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Pakistan Economy – SWOT Analysis Strengths

              4-5 years of strong growth has led to higher medium term growth path Resilience against shock and extra ordinary jerks Rise in per capita income for US $ 503 in 2002 to US $ 925 in 2006-2007 Robust Consumer spending Substantial increase in private sector credit Balance between fiscal deficit and growth Medium Term Development Framework Maintenance of external and domestic debt within limit Reach to Global Capital Markets Geo political situation post 9/11 Stable exchange rate Higher foreign direct investment Reduction in poverty level Tighter monetary policy to moderate inflationary pressure

15

Pakistan Economy – SWOT Analysis Weaknesses

                Credibility of statistics Continued sharp increase in prices of food items Incompetent contribution of various sectors of economy in tax revenue Inefficiency in utilisation of development expenditure High administrative costs Quality of governance Record trade deficit Concentration of export in restricted items and markets High cost of doing business Lack of focus on agriculture sector Political instability Shortage of skilled workforce Energy crisis Poor HDI indicators Increasing trade and current account deficit Combined subsidies to loss making public sector companies

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Pakistan Economy – SWOT Analysis Opportunities

        Capacity constraints with India in IT sector Recent investment in IT sector BPO’s potential Telecom and Media revolution Geo political situation Foreign Direct Investment Investment in education and health Lapsing of WTO multi-fibre agreement

17

Pakistan Economy – SWOT Analysis Threats

         Political uncertainty and current judicial crisis Issues in Balochistan and Northern Areas Worsening of situation on Western borders Anti Pakistan attitude in Afghanistan Election 2007 Level of corruption Broadening gap between Rich and Poor Social unrest Public discontent with the policies which may threaten reform process  Persistent high global oil prices  Increasing trend of terrorist activities

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Pakistan Economy – SWOT Analysis

Challenges

         

Sustainability of growth momentum Job creation Poverty alleviation Improving social indicators Strengthening of physical infra-structure Conversion of the demographic transitions into demographic dividend Supply side improvement to match growing domestic demand Achieving political stability Harmonious relationship amongst Federation and its units Equitable distribution of resources between federal, provincial & local governments Revenue generation by provinces 19

Pakistan Economy – SWOT Analysis

                     

Strengths Weaknesses

4-5 years of strong growth has led to higher medium term growth path Resilience against shock and extra ordinary jerks Rise in per capita income for US $ 503 in 2002 to US $ 925 in 2006-2007 Robust Consumer spending Substantial increase in private sector credit Balance between fiscal deficit and growth Medium Term Development Framework Maintenance of external and domestic debt within limit Reach to Global Capital Markets Geo political situation post 9/11 Stable exchange rate

Opportunities

           Job creation Achieving political stability

Challenges

Sustainability of growth momentum Strengthening of physical infra-structure Conversion of the demographic transitions into demographic dividend Supply side improvement to match growing domestic demand Harmonious relationship amongst Federation and its units Revenue generation by provinces              Credibility of statistics Sharp increase in prices of food items Incompatible contributions of various sectors of economy in tax revenue.  Inefficiency in utilisation of development expenditure  High administrative costs Perception gap between economic manager and people at large Quality of governance Record trade deficit Concentration of export in restricted items and markets High cost of doing business Lack of focus on agriculture sector Political instability Shortage of skilled workforce Energy crisis Poor HDI indicators Equitable distribution of resources between federal, provincial and local governments

Threats

Capacity constraints with India in IT sector Recent investment in IT sector BPO’s potential Telecom and Media revolution Geo political situation Foreign Direct Investment Investment in education and health Lapsing of WTO multi-fibre agreemen          Political uncertainty and current judicial crisis Issues in Balochistan and Northern Areas Worsening of situation on Western borders Anti Pakistan attitude in Afghanistan Election 2007 Level of corruption Broadening gap between Rich and Poor Social unrest Public discontent with the policies which may threaten reform process   Persistent high global oil prices Increasing trend of terrorist activities

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PUBLIC SECTOR DEVELOPMENT PROGRAMME

Federal PSDP

Federal Ministries Special Areas Special Programs Corporations Provincial PSDP Earthquake Rehabilitation Outside PSDP

2006-2007

171 17 34 48

270

115 50

435

36

451 2007-2008

232 20 34 49

335

150 35

520

204

724 21

SECTORAL DISTRIBUTION AND SHARE OF PSDP

FEDERAL GOVERNMENT

Infra-structure Social Sector Others Operational Shortfall July-April utilization May-June

Expected June upto 30 2006-2007

132 131 7

270

20

250

170 76

246 %

49 48.4

2.6

100

68 30

98 2007-2008

167 156 12

335

35

300 %

49.7

46.6

3.7

100 22

INFRA STRUCTURE - 2007-2008

Water Power PAEC Communications Railways Others 64 21 12 30 12

139

28

167 23

SOCIAL SECTOR - 2007-2008

Special Program KPF&KP Finance Education HEC Health I. T. & Telecom S. & T.

Population Welfare K. A. & N. A.

Sub & Frontier Planning Commission Others 8 14 19

156

34 17 7 18 14 3 4 4 14

24

Common Man’s Perception of Economic Development

Food at affordable prices Health support on efficient basis Housing and shelter Access to utilities (water, power, gas, telephone) on consistent basis at affordable cost Education

 

Good quality at low costs Aligned to required skills and vocational development demand Employment opportunities – Massive investment in human capital Law and order , security and access to justice Freedom of access to information Value for contribution to federal, provincial and local revenue Potential for vertical migration in terms of quality of life and a mechanism to balance consumption and savings Good governance 25

KEY TARGETS FOR POLICY MAKERS Inflation Inequality

   

Supply side planning and reforms Balance between consumption and savings Strengthening of direct government intervention Import substitutions

  

Growth to be inclusive Ensuring efficiency and productive utilization of PSDP Accelerated focus on Social sector

Social Sector

  

Reallocation of resources from general administration, defence; etc.

Raise revenue from Financial Services and other Profitable Sector like trading etc. for direct transfer to social sector to be managed by an independent representative body MDG’s to be real goals rather than compliance of committments. These goals should be dynamic and progressive 26

KEY TARGETS FOR POLICY MAKERS Manufacturing



Sector

Focused planning for identified capacities in the sector of competitive advantage to match demand and preferential treatment for specified sectors for:



Interest



Utility costs



Taxation

Agriculture Sector

 

Live stock to be doubled in 5 years Planned approach for both major and minor crops

Skills Development and HRD



Huge capital investment by public and private sector to leverage the potential of knowledge economy

Transperency and unbiased accountability Discouraging Elite Culture

27

Way Forward

Political consensus on leading National Economic imperatives Agricultural sector- 22 percent GDP 45 percent labour

       

Strategy for major crops to achieve higher quality, improved yield per acre, seeds development and stronger research and technological support Strategy for minor crops to meet local demand and lower dependence on imports Development and higher allocation for water resources, storage and equitable distribution Targeted Agricultural financing Exploiting the benefit of corporate farming Investment on infra-structure and communication to have efficient supply chain management Development of cultivable waste land Balanced application of Fertilizer and Pesticides 28

Way Forward Agro based industry and Live Stock sector Ventures.49 Percent of agriculture 11 percent GDP

 

Identification and encouraging small and medium size Agro based industries around rural areas Stronger focus on Live Stock sector and to encourage global players to participate in Joint

Manufacturing Sector

  

Identification of capacity demand for economically viable competitive advantageous units Import substitution be the key strategy for manufacturing sector

• • • •

Preferential treatment Interest Tax Research & Development Utility costs 29

Way Forward Venture Capital & Private equity to focus on:

    

Nano technology I. T. based units (Software and Hardware) Bio technology Research & Development of chemical entities in pharmaceutical sector Dairy and poultry industry

Infra-structure Development

   

Water Resources Power generation and distribution Communications Railways 30

Way Forward All the above are lagging well behind the required infra-structure support to commensurate with the demand and growth imperatives.

Water and power resources are substantially inadequate, inefficient and incompatible and this require a high priority for allocation of resources and its efficient and expeditious utilization

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MISSION

Our beloved country Islamic Republic of Pakistan has been a gift to us from its Founder and has sustained all external shocks and self destructive internal strife which is a blessing of Almighty. We all owe a debt to this country which despite constraints has given us a lot.

Let us now pledge to be unanimous in making it a country of choice for all ‘Y’ and ‘Z’ generations, who do have unlimited energy potential provided we are free and do justice to them.

Pakistan should have quality growth with a motto of a market based economy with a balanced focus on social welfare and community development.

All sectors of population participates and benefit from such development.

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Thank you

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Presenter’s contact details

SYED MASOUD ALI NAQVI KPMG Taseer Hadi & Co.

+92 (21) 568 5847 [email protected]

www.kpmg.com.pk

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