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Pakistan Budget Seen Lackluster: WSJ

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ISLAMABAD: U.S. newspaper Wall street Journal has reviewed Pakistan’s budget announced on June 3, 2011. Saying Pakistan unveiled its budget for the year beginning July 1 but failed to take drastic steps to raise taxes on the country’s elite, a move that the U.S., the International Monetary Fund and other donors say is needed to slash an unsustainable budget deficit.

Finance Minister Abdul Hafeez Shaikh forecast a budget deficit of 4%, down from 6% in the current fiscal year, with economic growth rising to 4.2% versus 2.5%. In the most noteworthy new measure, Mr. Shaikh said the government was ending sales-tax exemptions on about 500 items, which will bring in fresh revenues of about 200 billion Pakistani rupees.
But Mr. Sheikh at the same time reduced the general sales tax to 16% from 17% and failed to bring in bold new measures to increase the state’s haul of income tax from the country’s wealthiest citizens, according to The Wall Street Journal.
“This is a business-as-usual budget. I was expecting it to be a reformist budget,” said Ashfaque Khan, dean of the National University of Sciences and Technology Business School in Islamabad.

Pakistan’s elite pay some of the lowest taxes anywhere in the world, with the country’s tax receipts amounting to only 9% of gross domestic product, while it continues to depend on loans from the U.S. and multilateral donors to plug its large fiscal deficit.

U.S. Secretary of State Hillary Clinton, urged by the IMF, has publicly called on Pakistan in the past year to raise taxes on its richest citizens. The IMF itself has since last year withheld the disbursement of $3.5 billion in funding for Pakistan he final tranche in a $11.3 billion loan package due to failures to significantly raise taxes. The IMF has urged Pakistan to reform its sales tax to include services but this hasn’t happened. The World Bank and the Asian Development Bank also have suspended budget-support funding which amounts to about $1 billion.

Mr. Shaikh failed to announce any new measures to tax agricultural income, which remains exempt. The government says the issue falls under the purview of provincial governments. Many of Pakistan’s richest people are feudal landlords who made their fortunes from agriculture. Mr. Shaikh, who was booed by the opposition, which at moments almost drowned out the delivery of his budget speech, said the government had identified 2.3 million wealthy citizens who currently pay no tax and whom it will pursue. He gave no further details.

“Pakistanis’ revealed preference is not to pay taxes,” says a foreign donor based in Islamabad. “People here need to understand how far behind they’re slipping in economic terms.” To fund its gaping budget deficit, the state has in the past year increasingly relied on borrowing from the central bank, essentially printing money and stoking inflation to 13%. Mr. Shaikh said the government had recently cut back on borrowing from the central bank and would aim to get inflation back to single digits.

“The fiscal situation is a big concern,” said Asif Ali, head of research at the state-owned National Bank of Pakistan, the country’s largest commercial lender. Pakistan’s failure to raise taxes has left it reliant on debt, with about a quarter of budget revenue going to service interest payments on borrowings. That means there is less money to spend on health and education, expenditures needed to help stem the pull of an Islamist insurgency in poor areas, foreign donors say.
By borrowing so heavily from its own banking system, the government has choked off the supply of credit to private businesses. Foreign investors already nervous because of the precarious security situation in Pakistan have largely shunned the country.

That has stunted economic growth, estimated at 2.5% for the year ending June 30, which is insufficient to create enough jobs for the two million new job seekers coming onto the market each year. The IMF says the country needs 8% annual economic growth to create enough work. India’s economy, by comparison, in the year ended March 31 grew 8.5%.

For now, Pakistan is unlikely to plunge back into a balance-of-payments crisis of the kind that forced it to call in the IMF in November 2008. That’s because exports are doing well, fueled by high global agriculture prices for crops like cotton. The country is running a small current-account surplus, compared to its usual deficit. The currency, the Pakistani rupee, has been stable for the past few months and Pakistan’s foreign-exchange reserves are about $14 billion, or enough to cover four months of imports.

Still, oil-price rises this year is likely to increase Pakistan’s import costs in the months ahead, which could send the current-account back into deficit. The poor state of government finances, if unchecked, could further undermine foreign confidence in months ahead, donors and analysts say.-Online

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