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The Federal Budget for fiscal 2004-05, presented by Finance Minister Shaukat Aziz in the National Assembly on Saturday, broadly adhered to the course adopted during the Musharraf government. Fears that with elected representatives in government, it would mean a reversion to the pursuit of populist policies at the expense of prudent economic management, have by and large proved to be unfounded.

The economic managers deserve praise as also their colleagues in the Cabinet for staying the course. The macro-economic gains have resulted in the creation of additional fiscal space for utilisation of which the Finance Minister was repeatedly being called upon in various circles, including party-men. In this budget he finally seems to have yielded to this demand and a definite shift is noticeable. Indeed such shift was also needed considering the restlessness within the country with the slow pace of poverty alleviation, the government's claim of a 4.2 percent reduction in poverty levels notwithstanding.

The nature of the Finance Minister's task has, however, changed with the success in meeting the challenges that he faced when he assumed the stewardship of the economy in November 1999. The foremost requirement then was to correct the macroeconomic imbalances and to restore financial discipline, establish credibility of policies pursued and their continuance. Having achieved this, the task before the government now is how to translate whatever gains that have been made into the benefit of the people and at the same time to further build upon the reforms by targeting the weaker links in the economic chain.

The macroeconomic agenda that the government has spelled out for the next 3 years, ie 2004 to 2007, includes increasing GDP to 8% with inflation contained around 5%, an increase in investment to GDP ratio to 20%, reduction in fiscal deficit to 3% of GDP, reduction in current account surplus to a deficit of 1.8% of GDP and maintaining foreign exchange reserves at a minimum equivalent to 28 weeks imports. Given the macroeconomic environment, these are realistic and achievable targets. However, the desirability of converting a current account surplus into a deficit, particularly when the bottlenecks of limitations in absorption capacity and the lack of skilled manpower in the way of development, have been recognised, is incomprehensible. Under the circumstances the surplus current account would have to be tolerated.

Most of the major elements of the Budget were known before its presentation. The PSDP that was approved by NEC and the agricultural package that President Musharraf announced at the Agri convention did reveal the thrust of the Budget as a policy document. The only surprise that would have a significant impact is the levy of 0.1 percent capital value tax on purchase value of shares traded on the stock exchange.

There has been a windfall for investors and speculators on the bourses in recent months, evoking calls for linking the exemption of capital gain tax to a holding period. Instead, the Finance Minister has opted for an indirect tax that would only add to the cost of trading in shares rather than taking a part of the profits made.

This is likely to generate around Rs 7 billion at present level of transactions. The introduction of 'Group Relief' to set off losses between groups, whereby a holding company with 75% of share capital in a subsidiary would help in consolidation of companies, leading to large corporate holdings eligible to access international markets.

The withdrawal of further tax from the GST regime that was the fountainhead of flying invoices is indeed a bold measure because it generated Rs 9 billion in revenue for the exchequer in the current year. There is, however, a feeling that it contributed to return of a larger sum in fraudulent refunds from the exchequer, besides promoting corruption and unnecessary blocking up of liquidity.

The main thrust of the budgetary measures is to create a business and investor friendly environment and to eliminate, whenever possible, irritants in the way of economic activity. Pakistan has long been dubbed a country with a very high cost of doing business. The Budget seeks to remove a host of such irritants. The removal of turnover tax from the GST Scheme, raising of the exemption threshold for Small and Medium Enterprises (SMEs), by ten times is also a part of this effort and would particularly facilitate the setting up of more enterprises provided the commitment by the Finance Minister to check the excesses of provincial authorities becomes a reality.

In his Budget speech last year, the Finance Minister had iterated a phased reduction in excise duty on cement. The indicated reduction has not come about.

Is it because the cement cartel did not pass on the benefit of reduced excise duty to the people by reducing prices? By far the most humane measure is the doubling of investment limit from one million to two million in the Bahbood Savings Certificates/accounts for pensioners, widows and senior citizens, coupled with the removal of the condition of one time investment and the 10 percent withholding tax.

The desire and intent of the legislators to provide relief to the people at large and the poorer sections of society in particular is distinctly discernible in this Budget. The reduction of WAPDA and KESC tariff or a freeze of POL prices despite a rise in international oil market and the declared policy of pass-through, or the reduction in import duty on CBU automobiles.

Despite the committed and declared policy of withdrawing exemptions and avoiding intervention in bank interest rates, the Budget provides for new exemptions and reduction in interest rate on agri-loans. The difference of 5 percent would have to be made good to ADBP from the exchequer.

The limitations to development, namely, lack of infrastructure and inadequate skilled manpower and the need to focus on the development of agriculture and rural areas, have not only been identified but also addressed. In this context, it is only appropriate to plan vocational training centres in the rural areas where 67 percent of the population resides.

This segment of the population also represents majority of the poor and unemployed. It must be said that the temptation or compulsion to yield to populist sentiment has been creditably combined with measures to increase investment and production, remove irritants in the way of development and reduce the cost of doing business, and meet the long neglected need to make water, power and communications affordable for the people.

Copyright Business Recorder, 2004

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