pakistan’s federal budget summary 2014 15 (macro-economics,iqra university)

FINAL REPORTMACRO ECONOMICS

TOPIC: PAKISTAN’S FEDERAL BUDGET SUMMARY 2014-15

GROUP MEMBERS: Mohammad Junaid Mughal Mohammad Yaseen Mohammad Daniyal Asra hadi

“This report contains current budget summary 2014 15 and more details are written in it regarding the Federal Budget Of Pakistan 2014-15.”

Budget 2014-2015

CONTENTS

1. Preface2. What is a Budget3. Importance of Budget4. Federal Budget Of Pakistan 2014-155. Review Of budget 2014-156. Budget At a Glance7. Budget Sectors8. Budget Highlights9. Positve points Of budget10. Negative points of Budget11. Conclusion

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PREFACE:The Budget in Brief presents a summary of the Federal Budget 2014-15.It provides salient information on revenues and expenditures budgeted for Financial Year 2014-15 along with budget estimates and revised estimates for the outgoing Financial Year 2013-14. Detailed information is available in the relevant budget documents. Readers who need a quick overview of the federal budget will find the ‘Budget at a Glance’ given at the end of this document to be of great value.

As in the case of the previous five financial years, indicative ceilings for the current and development budgets were issued to all Principal Accounting Officers of the Federal Government for a three-year Medium Term Budgetary Framework (MTBF), which was introduced in Financial Year 2009-10. The budget estimates for Financial Year 2014-15 were then finalized in consultation with various Federal Ministries as well as Provincial Governments.

Medium Term macroeconomic indicators have also been included in this document to provide the strategic economic perspective which contextualizes the budget 2014-15.

For the convenience of readers, some additional information regarding subsidies, loans and advances, and public sector development programme has been shown separately. After approval by the Parliament, all budget books including the Budget in Brief will be uploaded on the website of the Ministry ofFinance: www.finance.gov.pk.

I hope that this document will prove to be of benefit to all those who seek a simple and clear understanding of Budget 2014-15.

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WHAT IS A BUDGET?Building a budget is the act of combining your income and expenses so that you can decide how much money you are going to spend on one item, how much on another, and so on-before you actually spend the money. Creating a budget doesn’t mean that all of your problems are going to be solved, but it is an important step to determining your financial health and creating financial stability. In other words, the budget is a document that states expenditure and income of the Government for the current financial year and which reflects the direction of Government policies and priorities.

IMPORTANCE OF BUDGET:Budget is important because it:

1. Gives you control over your money. A budget is a way of being intentional about the way you spend and save your money. It is said that with budgeting, you control your money and not your money controls you. Budgeting saves you the stress of suddenly having to adjust to lack of funds because you did not initially plan how to spend them. It also helps you decide if you want to sacrifice short term spending like buying coffee every day in exchange for a long term benefit like a cruise vacation or a new HDTV.

2. Keeps you focused on your money goals. You avoid spending unnecessarily on items and services that do not contribute to attaining your financial goals. If you are working with limited resources, budgeting makes it easier to make ends meet.

3. Makes you aware what is going on with your money – With budgeting, you are clear on what money is coming in, how fast it goes out, and where it is going to. Budgeting saves you from wondering every end of the month where your money went. A budget enables you to know what you can afford, take advantage of buying and investing opportunities, and plan how to lower your debt. It also tells you what is important to you based on how you allocate your funds, how your money is working for you, and how far you are towards reaching your financial goals.

4. Helps you organize your spending and savings – By dividing your money into categories of expenditures and savings, a budget makes you aware which category of expenditure takes which portion of your money. That way, it is easy for you to make adjustments. Budget also serves as a reference for organizing

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your bills, receipts, and financial statements. When all of your financial transactions are organized for tax time or creditor questions, you save time and effort.

5. Makes you decide in advance how your money will work for you.

6. Enables you to save for expected and unexpected costs – Budgeting allows you to plan to set aside money for emergency costs.

7. Enables you to communicate with your significant others about money – If you share your money with your spouse, family, or anyone, a budget can communicate how you use money as a group. This promotes teamwork on working for common financial goals and prevents conflict on how money is used. Creating a budget in tandem with your spouse will avoid conflicts and resolve personal differences on how your money is spent. Budgeting teaches family members spending responsibility and accountability.

8. Provides you with an early warning for potential problems – When you budget and take a “big picture” view, you will see potential money problems in advance, and be able to make adjustments before the problem appears.

9. Helps you determine if you can take debt and how much – Taking debt is not necessarily a bad thing if the debt is necessary or you can afford it. Budgeting shows you how much a debt load you can realistically take without being stressed or if taking the debt load is worth it.

10.Enables you to produce extra money – In budgeting, you get to identify and eliminate unnecessary spending like late fees, penalties and interests. These seemingly small saving can add up over time.

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FEDERAL BUDGET PAKISTAN 2014-15Gross revenue receipts of the federal government for 2014-15 are estimated at Rs.3, 945billion compared to the revised figures of Rs.3, 597billion for 2013-14, showing an increase of 10%. We have set an ambitious target for tax collections, as without collecting more taxes we cannot hope to increase development spending that is crucial for economic growth.

REVIEW OF BUDGET 2014-15An annual budget, being a document presenting not only a balance sheet of the central government but also an indicator of its economic policies and priorities, may be gauged considering three Ps: the Performance of the economy during the outgoing fiscal year; the Promises that the budget comes up with and the Prospects that it presents. The federal budget for fiscal year 2014-15 is the second one presented by the current government with just over a year in tenure. This brief review takes into account how the national economy has fared during this regime's first year in power, what are the major challenges facing the national economy as of today, and what do the budgetary measures and proposals mean for the country's economy in days ahead.

Performance - The State Of Affairs Having a detailed look at the Pakistan Economic Survey 2013-14, one finds that the state of national economy remains far from satisfactory. Many of the issues confronting Pakistan economy are perennial, and not necessarily the result of economic management of the year 2013-14. These include: Fiscal Deficit, Debt, Balance of Payments problems, Lack of Capital Formation etc. However, economy has not fared any better in the outgoing fiscal year as well. Economic Survey records the overall GDP growth rate at 4.14% as against the growth of 3.7% during 2012-13. The survey claims that it is the highest growth rate during the past six years. This rate has been realized due mainly to a turnaround in the industrial sector, which grew at 5.84% as against 1.37% in the previous year. The growth in the agriculture sector, however, has been disappointing registering 2.12% as compared to the 2.82% of the previous year. Services sector's growth also slowed down slightly to 4.29% as against 4.85% in the last fiscal year. The overall performance of the economy during the outgoing fiscal was a mixed bag. There were some positive developments but not necessarily depicting any fundamental improvement in the economy. Rupee's slide was contained and Current Account deficit kept at manageable levels, which was possible mainly because of $1.5 ban grants from Saudi Arabia - the price for which remains unknown - and remittances reaching almost $13 billion in first 10 months of the

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outgoing fiscal. Targets were missed; the growth registered at 4.1 % was considerably lower than target of 4.4%; inflation 8.69% (though on-the-ground prices suggest it is higher) missed the target of 8%; national savings fell to 12.9% of GDP as against target of 14% and even less than last year's 13.5%; Current Account Deficit was recorded at $2.1bn as compared to $1.5 during the same period last year. The government was able to auction 3G and 4G spectrum after a long wait; and Pakistan entered the Europe bond market after almost half a decade with encouraging response - the two developments together made some more cash available for the economic managers though the latter is bound to the increase the overall debt burden on the economy. Federal Bureau of Revenue - having never been able to meet its targets - has faltered once again in the outgoing fiscal year. Socio-economic indicators also failed to register any marked improvement. Literacy rate increased only marginally, from 58% to 60%, while per capita income in dollar terms increased by 3.5% (to $1387) that too after the decline in the value of dollar against rupee. While the official figures for poverty have not been released for some years, finance minister himself was quoted as saying recently that almost half of the country's population is living below the poverty line. Unemployment rate is just below 6% according to the Economic Survey, which, does not seem to be depicting the true picture considering the unemployment and underemployment on the ground. This situation of the economy owes a lot to the decade-and-a-half long War on Terror, and the lingering energy crisis that has crippled the economic activities in more ways than one. Are the government figures dependable? Credibility of official data is a major question, however. It is being pointed out by certain circles that to arrive at GDP growth rate of 4.14%, the government has taken into account the Large Scale Manufacturing's (LSM) growth rate of first 9 months of the fiscal 2013-14, which was 5.3%. However, the data for the first ten months of the same fiscal indicates that LSM growth dropped to 4.7%, bringing the overall growth to below 4%, although 4% itself is very low for country such as Pakistan.

Premise - What The Budget Offers For The Economy: Considering the above-stated overall picture of the economy, it becomes important to assess the overall direction of the budgetary approach of the government; as to what extent do the measures and proposals of the budget target to reduce the economic woes of the country and put the economy on a sustainable track.Budget 2014-15 at a Glance: The total size of the budget 2014-15 is 7.9% higher than the size of budget estimates for 2013-14 with total outlay of Rs 4,302 bn and federal resource/expenditure balanced at Rs 3936 bn. Revenue estimates are estimated at Rs 2225 bn, up 16% from the budget estimates of outgoing fiscal year. Estimated external resources of Rs 869 billion are 50.7% higher than the budget estimates for 2013-14. The share of current expenditure has increased once again to 80.5%; up from the 78.8% estimated for the budget estimates of the outgoing financial year. Federal Public Sector Development Program is budgeted at Rs

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525 billion, while Rs 650 of the PSDP has been allocated for the provinces. (Figures 1 gives the percentage distribution of overall allocations of the expenditure for year 2014-15.)

An Analysis Of Some Budgetary Measures And Proposals: Federal budget and the Finance Bill of every financial year contain wide ranging proposals and measures both at macro and micro levels. The following discussion presents an analysis only of some of the major announcements and measures brought forth in the budget that relate to the overall approach viz-a-viz management of the national economy and dealing with the key economic and socio-economic challenges. Talking about the overall approach, dealing with the energy crisis becomes imminent and the foremost priority. The government has allocated Rs 200 billion in the Public Sector Development Program for the Power Sector. This indeed is a sizeable amount; and a large number of projects being undertaken with this amount can bring positive results. However, there is nothing new in the Power Sector for the fiscal year 2014-15 and an overwhelming chunk of the amount is for the ongoing projects. Only Rs 5 billion are earmarked for the new schemes of the Power Sector. Compared to it, more than 57 bn rupees have been allocated for the new sachems in the communication infrastructure - including a staggering amount of Rs 30 billion for Lahore-Karachi motorway - as part of the long-term plan of China Pakistan Economic Corridor. The point here is not to criticize the allocation for the communications' infrastructure, but the question is that of priorities: what the country's economy needs the most, motorways or energy? Another major point to note in the overall approach is continued dependence, to a disturbing extent, on the borrowed resources. The target for domestic bank borrowing has been decreased significantly, from Rs 376 bn (RE 2013-14) to Rs 227.9 billion. This reduction is expected to positively impact inflation. However, it remains to be seen if the domestic borrowing can actually be kept to this limit because the government was able to contain it to Rs 376 billion (less than the half of target of Rs 974 bn) due to inflow of Coalition Support Fund, the Saudi support and the auction of 3G/4G. This cushion may not be available this year. Moreover, the estimate of external resources for this year is Rs 868 billion, significantly higher than 576 bn initial estimates for FY 2013-14, which actually turned out to settle at Rs 714 bn in the revised estimates for the outgoing fiscal year. This trend indicates that the actual borrowing may be higher than the present estimates. The country is already paying a very heavy price of past years' dependence on borrowed resources. Almost one third of the total national expenditure is consumed by the interest payments in addition to a small portion of the principal amount.

Dependence on borrowed resources can be reduced if the economy generates enough indigenous resources. Tax to GDP ratio, presently at around 9%, has been a major weakness. The approach for a country like Pakistan should be to enhance this ratio with

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burden falling more on the affluent segments of society. However, in this connection, no meaningful measure has been proposed to tax the higher incomes and wealth - be it the property transactions, gains from the fast emerging stock markets, the long-awaited agri income tax or due taxes on the luxurious lifestyles. The burden of indirect taxes on the poor segments of society is bone-breaking primarily with very high GST and a host of other taxes/duties. The budget does not bring any change in this status quo in the prevailing taxation regime. While the government's desire to document the informal economy is welcome, it needs to be realized that the real issue viz-a-viz collection of tax is corruption and lack of trust in the government and its performance. Enhanced trust in the government will certainly move more people to be part of the national development.

There are some points in the budget, which are seen as 'pro-business' and enhancing the economic activity and capital formulation. The finance minister has announced further incentives for the textile industry including reduction in the cost of capital (mark-up on export refinance from 9.4% to 7.5%), attractive rates of duty drawback, and two more years of duty-free import of textile machinery etc. It may be hoped that with these measures, the largest industrial sector of the country will start on a positive note. However, it must be highlighted here that textile is the largest export earner but industry is not all about textiles. Other major industrial sectors, by and large, have not been providing the equally encouraging or corresponding incentives. An important point in this connection is almost total neglect of the SMEs, which are considered the main instruments of enhancing economic activity and employment generation the world over.

A somewhat renewed focus on the agriculture sector, still the mainstay of the country's economy, is welcome. Incentives such as credit for the small farmers, insurance cover for crops and livestock may bring positive results. However, as any improvement in the agriculture sector is linked closely with the development of country's resources, it is rather strange to note that allocation in the federal budget for the water sector has been decreased substantially, from Rs 57 billion to Rs 43 billion. The defense allocation - a hotly-debated subject in Pakistan - has been increased to Rs 700.0 bn (US $7 bn approx.) against revised estimates of Rs 629.5bn for the outgoing financial year. It is a rise of 11.1 per cent and a net increase of Rs 70.5 bn while the ministry of defense had requested for an increase of Rs 141 billion. While it is generally argued that defense spending in Pakistan eats up the required allocations for the social sector, there in fact is no trade-off. Both are necessary in their own respective rights. Imperatives, these are. The defence spending may look higher due to small size of economy; but in the peculiar geostrategic situation that Pakistan is confronted with, it hardly meets the bare minimum requirements. India has recently jacked up its military spending by 10%, and inflation in India is around 5%. Pakistan's increase of around 11% hardly covers the inflationary impact. As to the spending on social sectors, an important point to note is that after the 18th

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Amendment, now provinces are expected to allocate more resources for sectors such as education and health. They are doing so. The point here is not to absolve the federal government from its responsibility, which has increased allocation for the education sector up to Rs 24 billion. Though this allocation may not be sufficient considering the needs of society, the real issue in the federal and provincial allocations for social sector is corruption and mismanagement, which should be addressed at the earliest to improve the situation of these two sectors. Unless corruptions is checked and governance is improved, mere increased allocations would not be meaningful.

The government continues its lackluster approach of dealing with the Islamic Banking on the periphery. The constitution of a new committee for preparing recommendations aimed at enhancing the share of Islamic banks' assets in overall banking assets; and setting up of a Center of Excellence for Islamic Economics are, to say the least, too little and to late. It is also a question that what is the need for such committee and such center of excellence? The principles of Islamic banking and finance, and practices deriving out of these principles are well-established. Islamic banking and finance industry is flourishing the world over as well as in Pakistan in the light of these principles and practices. There should be no delay in turning the whole edifice of the financial industry, though under a well thought out strategy, on the principles of Islamic economics. It is specifically proposed that all new financial institutions that are being set up in the country, such as the EXIM bank should be made to work on the principles of Islamic banking and finance. Moreover, Takaful companies should be involved more in the new schemes of crops and livestock insurance to strengthen the Islamic finance industry in the country. Prime Minister's Youth Loan Scheme should also be run on the same lines. Social Safety Nets are an important need for society like Pakistan where a sizeable chunk of the population is spending an impoverished life. The amount for Benazir Income Support Program (BISP) has been increased to Rs 118 bn from 75 bn. Per month stipend has been increased from Rs 1200 to Rs 1500. With the planned increase of 0.5 million new beneficiaries, the BISP will this year be targeting some 5.3 million households. While the increase in allocation is encouraging, this represents the old cash handouts approach instead of improving the quality of service and making people self-sustained. There are also reports that at the local level, the disbursements are plagued with political considerations. Instead of continuing this approach - involving huge sums of money with actual results yet to be known - the need is objectively analyze this program as a whole and develop some initiatives that target uplifting the standards of living and social services besides devising schemes that put the recipients on the track of self-sufficiency. Increase in salaries (20% of the basic) and pensions is welcome; so is the raising of minimum pension to Rs 6000 from Rs 5000 made last year. However, it needs to be highlighted that while increases in pensions are made, the pensioners face a number of problems in actually getting this increase. Legal cover to ensure that such announced increases actually translate into reality should be provided.

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Besides the official pensions, EOBI should also increase its minimum pensions for its beneficiaries.

Will the targets be met? Considering the low level of savings and investments, growth target would be hard to meet only through the official spending on mega projects. There does not seem to be any potent approach that will help realize the ambitious revenue target. Resultantly, the bank borrowing target will have to be revised and it will impact the inflation as a spillover effect. As to the target of bringing the fiscal deficit down to 4.9% of GDP, the numbers related to fiscal deficit are dictated by and large by the IMF. The Fund was pressing for the deficit to be at 4.1% of GDP while the government was asking for 5.4%. The understanding reached was to keep it at 4.9%. The overall budgetary allocations indicate that it will be an uphill task to keep the deficit within this limit and it is bound to go to the tune of 6% of GDP. Considering that some of the amounts that were received in the form of Saudi aid and from auction of 3G/4G spectrum will not be forthcoming during fiscal year 2014-15, many of the ambitious targets would require creative thinking along with improved governance of the economic management by the present government, one finds that it is below targets set by the government itself and desired level in all the major areas of economy, not only in terms of numbers but more importantly so viz-a-viz the quality of life and social services. The promises of the budget 2014-15, particularly in terms of growth rate and inflation, depict only a modest improvement even if the targets set are achieved at 100%. As far as the prospects are concerned, there is not a single measure that can be seen as bringing any ground-breaking change and the budget, by and large, exhibits the business-as-usual approach. The statements of the senior government personalities also indicate that the people of Pakistan hardly trust the institutions and the measures taken by them. Trust is hard to restore unless some drastic measures are taken to revive the economic activity up to the desired level and to minimize the socio-economic sufferings of the people at large, while developing an overall transparent and merit-based approach in all other areas of governance. One budget indeed is not enough but one budget certainly indicates a direction, which is missing in this case.

BUDGET AT A GLANCE

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The total size of the budget 2014-15 is 7.9% higher than the size of budget estimates for 2013-14 with total outlay of Rs 4,302 bn and federal resource/expenditure balanced at Rs 3936 bn. Revenue estimates are estimated at Rs 2225 bn, up 16% from the budget estimates of outgoing fiscal year. Estimated external resources of Rs 869 billion are 50.7% higher than the budget estimates for 2013-14. The share of current expenditure has increased once again to 80.5%; up from the 78.8% estimated for the budget estimates of the outgoing financial year. Federal Public Sector Development Program is budgeted at Rs 525 billion, while Rs 650 of the PSDP has been allocated for the provinces. (Figures give the percentage distribution of overall allocations of the expenditure for year 2014-15.)

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AND

BUDGET SECTORSFollowing are the sectors:

• EDUCATION• AGRICULTURE• INFRASTRUCTURE DEVELOPMENT• WATER• POWER• TECNOLOGY• DEFENCE• HEALTH CARE

EDUCATION:

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The educational budget for the fiscal year 2014-15 has been allocated as Rs. 63 billion. A substantial allocation of Rs. 20 billion has been apportioned for the 188 development projects associated with Higher Education Commission (HEC). These projects intentioned to develop programs for the different educational institutes and universities across the country, under Public Sector Development Plan (PSDP). It was Rs. 18.3 Billion in the previous fiscal year of 2013-14.

A hefty amount of Rs. 43 billion has also been allocated to the Higher Education Commission (HEC) Pakistan, making it a total of Rs. 63 billion which is 10 percent increased than the preceding budget and slightly above the 2 % of the total budget as compared to the fiscal year 2013-14.

Rs. 47.69 billion of the budgeted outlay of education has been earmarked for tertiary education affairs and services against the given allocation of Rs. 47.34 billion in the previous fiscal year. About Rs. 6 billion has been allocated for pre-primary education affairs services against the revised budget of Rs. 5.71 billion for 2013-14. For Secondary education Rs7.87 Billion has been allocated in the budget. Moreover Rs. 913.979 million would be spent on 23 different programs for strengthening the existing structure of the schools and colleges.

In his budget speech in the National Assembly, Finance Minister Ishaq Dar said that the federal government has decided to introduce 32 new schemes for development of education under PSDP. In this regard, qualified and trained teachers would be designated on merit to improve the standards of education, he said

After the implication of the 18th amendment, the basic structure of schools and colleges, staff hiring, and basic equipment etc. are the responsibility for the provinces and it is still to be proposed by provinces. Federal Govt. is financing only the Higher Education Commission.

The total spending on the education was 2 % last year and it has still not approached a considerable hike as it remained 2 %. Govt. promised to increase financial allocation of education to at least by 4% of GDP but they failed to do that, the global standard to which most countries have committed and the majorities have lived up to. According to the UNDP Human Development Report 2013, only seven developing countries in the world spend less on education than Pakistan.

AGRICULTURE:

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The government has a lower growth rate target of 3.3% for the agricultural sector in 2014-15, after the sector failed to meet the targeted growth rate for 2013-14 by 1.5%.The worst performing subsectors of the agricultural sector, minor crops and cotton ginning, dampened the better than expected growth of major crops, which surpassed its target by 1%.

Beside important crops, every other subsector within agriculture failed to meet growth targets.The government now aims for a GDP growth rate of 5.1% in the fiscal year 2014-15, compared to last year’s target of 4.4% which the economy failed to meet by 0.3%.In the budget for 2014-15 the government has set aside Rs20.52 billion for agriculture out of the total allocation of Rs47.59 billion under the Economic Affairs head of current expenditure.

Below is a chart showing the yearly allocation in millions of rupees for agriculture, food, irrigation, forestry and fishing under the economic affairs head of the budget.

The Minister of Finance Ishaq Dar in his budget speech said that a National Food Security Council will be established to ensure agricultural policy coordination across provinces.He also announced several incentive and support packages for the agricultural sector.A credit guarantee scheme for small and marginalized farmers is being introduced to encourage banks to finance small farmers who previously did not have access to banking facilities. Under the program the government, through the State Bank of Pakistan (SBP), will guarantee up to 50% loans made by financial institution to farmers who have up to five acres irrigated and 10 acres non-irrigated land holdings.

Dar also introduced a crop loan insurance scheme for farmers that covers the risk posed by natural calamities, climate change and plant disease. The total budget cost of

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the scheme is Rs2.5 billion.The sales tax on tractors has also been reduced from 16% to 10% to encourage the use of tractors in farming.Dar added that the SBP will increase overall credit to the agriculture sector to Rs500 billion in the year 2014-15.

Dairy and livestock

In its federal budget for fiscal year 2014-15, the government has allocated Rs300 million for the Livestock Insurance Scheme for small livestock and dairy farmers, Finance Minister Ishaq Dar said in the budget speech on Tuesday.

Dairy and livestock segment is 12% of the country’s gross domestic product (GDP) and 56% of its agriculture. With dairy segment alone accounting for 27% of agriculture sector, Pakistan is one of the world’s top five producers of milk having an annual turnover of over 36 billion liters of tradable milk.By contrast, the majority livestock ownership is at subsistence level, which increases the risk of loss, Dar said in the budget speech.

“In order to mitigate the risk of losses of small livestock farmers, the government is introducing the Livestock Insurance Scheme for all farmers getting financing for up to 10 cattle,” the finance minister said.The scheme would cover livestock insurance in case of calamity and disease, according to Dar. The scheme would benefit 100,000 livestock farmers or families.

INFRASTRUCTURE DEVELOPMENT:

The size of the Public Sector Development Programme (PSDP) for the fiscal year 2014-15 has been increased from Rs425 billion in the outgoing fiscal year to Rs525 billion – and 24% increase from last year’s PSDP size.Energy, water, infrastructure, value-addition and human resource development will be the priority sectors for development.

“For the first time in recent history of the country we are investing the fullest available development outlay of Rs.425 billion,” said Finance Minister Ishaq Dar while announcing the federal budget.

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The finance minister hailed the move as a remarkable achievement since the government has made a fiscal adjustment of 2.4% during the year.

“Frequently, in the past, whenever such adjustment was made it was essentially made by cutting development spending. We have broken this tradition,” he said.

WATER:

It is this vision in view that is reflected in our development plan allocation for the water sector. We are investing Rs.59 billion for the water sector projects that will include such projects as Katchi Canal (Dera, Bugti and Nasirabad), Rainee Canal (Ghotki and Sukkur), Kurram Tangi Dam (North Waziristan), Extension of Pat Feeder Canal to Dera Bugti, Gomal Zam Dam (South Waziristan), Ghabir Dam (Chakwal), completion of Mangla Dam raising, lining of water courses in Sindh and Punjab, flood protection and drainage schemes all over the country.

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POWER:

Another sub-sector that is getting our utmost attention is the powersector. Widespread power shortages have badly damaged our industrialsector and added to the sufferings of the common people. Prime MinisterNawaz Sharif has devoted personal attention to the process of reforms andinvestments in this sector. We have taken a number of steps to addressstructural problems of the sector including reduction in system losses,improvement in recoveries, elimination of theft and settlement of intercorporate circular debt. However, our real focus is on developing additionalresources of energy so as to permanently overcome the problem ofshortages. Therefore, in keeping with last year’s practice we have allocatedthe largest amount of resources to create more economical capacity in thecountry. During the current year a sum of Rs.205 billion will be invested in thissector. The projects included in the program include Neelum-Jehlum HydroPower Project (969 MW), Diamir-Bhasha Dam and Hydropower Project (4500MW), Tarbela Fourth Extension Project (1410 MW),Thar Coal GasificationProject (100 MW), Chashma Civil Nuclear Power project (600 MW), TwoKarachi Nuclear Coastal Power Projects (2200 MW) with Chinese assistance,KeyalKhawarHydroPower Project (122 MW), AllaiKhawar Hydro PowerProject (122 MW), Combined Cycle Power Projects at Nandipur(425 MW) andChichoki Malian (525MW), Refurbishment and Up-gradation of GenerationUnits of Mangla Power Station, Up-gradation of Guddu Power Project (747MW gas-based), conversion of oil based power projects to coal atMuzaffargarh and Jamshoro (3,120 MW), transmission network to evacuatepower from Wind Power Projects in Jhimpir and Gharo, interconnection ofChashma Nuclear III and IV, interconnection of Thar Coal based Engro (1200MW) and massive allocations to improve the transmission lines, grid-stationsand distribution systems. We have expended unusual efforts to make thedream of Dasu Hydropower Project a reality. TheWorldBank will soon beapproving $700million for financing this critical project that will add more than4500 MW of power after completion. We are designing innovative ways tomobilize the requisite finances for constructing this project within the shortestpossible time.Addition of a number of hydel projects, coal based plants, wind energyand nuclear projects will correct the energy mix to provide cheap electricity tothe people of Pakistan while improvement of the transmission and distributionsystem will reduce the system losses. The drive against energy theft willfurther reduce the burden on the common man.

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TECHNOLOGY:

Auction of Spectrum License:

Anothernotable achievement of our government is the successful auction of radio spectrum license of 3G and 4G.

Creating New Jobs:

We need to create jobs to absorb the risingnumber of young men and women entering the job market. As Isaid previously, much of this activity has to take place in theprivate sector, as our primary job is to provide an enablingenvironment for the private sector to undertake investments.The 3G-4G technologies, successfully introduced by our Government,will spur growth not only in rolling out this facilitybut enabling other users to improve productivity and efficiency intheir operations. A detailed study on the impact of 3G-4Gtechnology on employment has estimated some 900,000 jobswill be created in the next four years.Investments areencouraged through other policies, most notably by reducinggovernment borrowings and making more credit available forprivate investments. On our part, a major increase indevelopment spending is planned during the year. PSDP will beincreased from Rs.425 billion during 2013-14 to Rs.525 nextyear, an increase of nearly 24%. As I will enumerate shortly,these funds will be invested in major projects of infrastructurethat will not only create immediate jobs but will go a long way inpromoting more investments in the private sector.

DEFENCE:

In a security state like Pakistan, Defense budget wields significant importance to equate means with the end. The second budget presented by the current government on June 3 of this year has proposed to allocate Rs. 700.2 billion for the 2014-15 fiscal year compared with Rs. 627.2 billion allocated last year. There has been an increment of 11 per cent in the current defence budget as compared to the last one.Weeks before the announcement of the budget, the Ministry of Defence had called for an increase in budget allocation for armed forces. Out of the Rs.627 billion defence budget of the last year, 43 per cent had been spent on employees-related expenses, 26 per cent on operations and 10 per cent on civil works. The remaining 21 per cent went to servicing and maintenance of equipment. These facts provided by the ministry of defence indicate that only 26 per cent of the defence budget was spent on operations. For professional armed forces of a country entangled by existential threat from India and border security issues, a small amount of money, comparably, spent on operations supplements an increase in defence budget.

Budget 2014-2015

Being an existential threat to Pakistan’s territorial integrity, India’s defence expenditure cannot be seen in cannot be seen in isolation. There has remained a palpable difference between the defence expenditures of India and Pakistan with India spending huge sum on its defence. India spent about USD 37 billion on its armed forces as compared to Pakistan’s defence budget of USD 6.27 billion. Not only is this existing huge difference between the defence expenditures of the two countries but India increasing its defence allocation multiply with each passing year also. However, it doesn’t mean that Pakistan should follow the course and engage itself in an ambitious arms race but it should not ignore the Indian developments at the expense of its sacrosanct core national interests.Besides external security threats, Pakistan has been facing gruesome internal security challenges in the face of terrorism and insurgency. Since 2001 when Pakistan became a part of US-led War on Terror Pakistan has been suffering huge losses both in terms of money and lives. Traditionally, Pakistan’s army has remained border-oriented but after the beginning of war on terror it has been subjected to an irregular warfare. However, despite its unaccustomed orientation to confront irregular warfare tactics, Pakistan’s armed forces have been resolute and successful in neutralizing the threat posed by terrorists. It is high time that the armed forces should be more trained and equipped to successfully uproot the menace of terrorism. Against this backdrop, an increase in defence expenditures seems indispensable so that more percentage of the defence budget can be allocated to Operations.

HEALTH CARE:

Health sector service delivery has been fully devolved to theprovincial governments. But the Federal Government iscognizant of its responsibilities to support the provinces ineradication of deadly diseases, regulation of the health sectorand coordination to achieve the Millennium Development Goals(MDGs). Therefore the current budget allocates Rs.26.8 billionfor the health sector programs. Our major focus will be polio eradication. An emergency plan has been made for this purposeand the Federal Government will work closely with the provincialjurisdictions to eradicate polio from Pakistan.(c) Additionally the budget will also fund the Expanded Program ofImmunization (EPI), National Maternal Neonatal and ChildHealth Program, National Program for Family Planning and Primary Healthcare and several national programs forprevention and control of important diseases such as blindness,TB, Hepatitis and AVN Influenza.

BUDGET HIGHLIGHTSBudget 2014-2015

-Total Budget outlay: Rs 3.945 billion.

-Provincial transfers: Rs 1.720 billion.

-Fiscal Deficit stands at 5.8%.

-Public Sector Development Program (PSDP): Rs 1.17 trillion has been allocated

-Pensions: An increase in pensions from Rs 5000 to Rs 6000

-Minimum Wage: The minimum wage for laborers rose to Rs11000 from Rs1000.

-Economic Growth has been projected at 4.14%, the highest growth in the last six years.

-Inflation Rate stands at 8.6% compared to 12.6% in previous regime

- Per Capita Income, which stood at US $1339 last year is projected to increase to $1386, showing a growth of 3.5%.

- Industrial Sector, which grew by a meager 1.37% during Jul-Feb last year, has registered a growth of 5.84%.

-Inflation, which had averaged around 12% in the five years before our government, was recorded at 8.6% for Jul-May 2013-14.

-FBR revenues, which had registered one of the poorest performances of in the recent past of 3% growth in 2012-13, are up by 16.4%, rising from Rs.1,679 billion to Rs.1,955 billion in the first 11 months of the current year.

-Fiscal deficit, which was registered at 5.5% during Jul-Apr 2012-13, has been brought down to only 4.0% for the same period this year.

-Exports were recorded at $21billion during Jul-Apr 2013-14 compared to $20.1billion last year.

Imports: were recorded at $37.1 billion during Jul-Apr 2013-14 compared to $36.7 billion last year and showing a marginal growth of 1.2%. However, imports of machinery have increased by an impressive 11% an indication of investment activity.

Remittances: which were recorded at $11.6 billion during Jul-Apr 2012-13, rose to $12.9 billion for the same period this year, showing an increase of 11.5%.

Foreign Exchange Reserves: which had declined to a precarious level when in June 2013 SBP they stood at $6 billion, of which $2 billion were due to a swap that was payable in August.

Budget 2014-2015

Karachi Stock Exchange Index: which stood at 19,916 on 11 May 2013, the day the elections were held, has continuously scaled new heights and stood at 29,543 on 29 May 2014, showing an increase of 46%.

Auction of Spectrum License: Anothernotable achievement of our government is the successful auction of radio spectrum license of 3G and 4G.

Reduction of fiscal deficit: Government aims to reduce the fiscal deficit still further from 5.8% of GDP to 4.9% of GDP.

Creating New Jobs: A detailed study on the impact of 3G-4G technology on employment has estimated some 900,000 jobs will be created in the next four years.

Protecting the Poor: Benazir Income Support Program allocation increased to Rs 118 billion. Monthly stipend under the program will now be Rs 1500 per month.

Prime Minister’s ICT Scholarship Program: Rs.125 million have been allocated out of National ICT R&D Fund to provide 500 scholarships in a transparent manner.

Water: Rs.42 billion allocated for projects in various parts of the country.

Power: Rs.205 billion allocated for this vital sector, except US $ 700 million IMF grant for different power projects.

Railways: Rs.77 billion for 45 development schemes and pay & pensions of railway employees.

Human Development: An allocation of Rs.20 billion for 188 projects of the Higher Education Commission.

Agriculture: National Food Security Council has been established. The council will be responsible for ensuring policy coordination across provinces and relating to productivity improvements, market reforms, value addition and prices that ensure stable incomes for farmers.

Housing: Three initiatives taken for housing sector, they are: Low Cost Housing Guarantee Scheme, Mortgage Refinance Company, Revival and Restructuring of HBFC:House Building Finance Company Limited and PM Low Cost Housing Scheme

Budget 2014-2015

Positives of Budget Corporate tax rate reduced to 33%. Maximum general tariff rate of 30% is reduced to 25%. For textile sector, tax credits is allowed on garments (4%), Made ups (2%) and

Processed fabrics (1%). Plus, an extension of duty free import of machinery for another two years. A training program with a cost of Rs 4.4 billion is also announced to enhance the quality of final products. Mark-up on long-term financing facility is also reduced from 11.4% to 9%.

For retailers, sales tax at 5% is announced in case of monthly electricity bill up to Rs 20,000 and at 7.5% of the monthly electricity bill exceeding Rs 20,000. For other retailers that operate international franchises or operate in air-conditioned malls, normal GST regime will be applied.

To encourage electricity generation from local coal, it is proposed to exempt the profits and gains of coal mining projects in Sindh supplying coal exclusively to power generation projects and also to tax their dividends at a reduced rate of 7.5%.

For domestic electricity consumers, it is proposed to collect adjustable advance tax at 7.5% on the monthly bill of above Rs 100,000.

To discourage perpetual declaration of losses or very low income using tax avoidance means by companies, an alternate corporate tax at 17% is proposed to be imposed on accounting income. The companies shall have to pay ACT or corporate tax whichever is higher. In order to facilitate companies that have genuinely low income for some period of time, the ACT paid is proposed to be carried forward up to 10 years.

To broaden the tax net, it is proposed to make obtaining NTN a compulsory condition for obtaining commercial/industrial electricity and gas connections.

In order to discourage CGT avoidance in bonus shares, it is proposed that bonus shares be treated as dividend and tax shall be deducted at the rate of 5% on the ex-bonus price of the shares.

Currently, foreign institutional investors in stock exchanges are neither voluntarily paying due taxes on capital gains by filing returns nor are they subject to deduction of tax like many other investors. It is proposed to bring FIIs under the WHT regime.

10% raise is announced in government employees’ salary. Minimum wage is also raised by Rs 2,000, minimum pension by Rs. 1,000 and BISP funds per family are also raised from Rs 1,200 to Rs 1,500.

Budget 2014-2015

Export Refinance Rate is reduced from 9.4% to 7.5%. Export focused bank is to be established as well.

Karachi-Lahore motorway, agriculture credit and insurance and 10% reduced GST on tractors are further steps in the right direction.

Government, through SBP, will provide guarantee to commercial, specialized and micro finance banks for up to 50% loss sharing.

Rs 81.12 billion allocation for establishing new hydropower projects. FED from telecommunication services is withdrawn from those provinces which have

imposed GST on telecom services. In areas where FED shall continue to be collected, the rate is proposed to be reduced from 19.5% to 18.5%. WHT on telephone services is also reduced from 15% to 14%.

Additional tax for those persons who did not file income tax returns – 5% for dividend income, 5% for interest income above Rs 500,000, 0.2% for cash withdrawals from banks and 0.5% in case of advance CGT collected from the seller of immovable property.

The rate of tax on advertising agents has been raised to 10% from 5%; exemption from deduction of WHT be withdrawn on foreign news agencies; the rate of tax on dividend distributed by Mutual Funds to companies in respect of interest income shall be 25%, instead of 33%, applicable to companies.

Five-year income tax exemption will be given for setting up processing plants for locally-grown fruits in Balochistan, Malakand Division, Gilgit-Baltistan and Fata. Customs duty and sales tax will also be exempted on import of equipment for these areas.

Budget 2014-2015

Negatives of the Budget Current expenditure has been estimated to be higher than the revised estimates for

2013-14 by 8.3%, while development expenditure is lower by 2.4%. PSDP was originally Rs 540 billion for 2013-14. Now, Rs 525 is erroneously but

deliberately compared to the revised lower allocation of Rs 425 billion for 2013-14. Comparing the original allocations, PSDP allocation has actually gone down by Rs 15 billion.

Again defense expenditure and interest payments on debt will eat up almost 80% of tax revenues.

Corporate tax rate is now reduced to 20% if the investment is in a new industrial undertaking to be set up by 30.06.2017 and at least 50% of the project cost including working capital is through FDI in equity. While tax relief is good, but existing local investors are discouraged this way.

WHT on marriage functions is being reduced by 5% from 10% level. Advance tax of 1% on the purchase of immoveable property may encourage people

to under report property value further. No mention of how to control debt to GDP ratio. Tax to GDP ratio is destined to be brought to 13% without any significant measures

to increase tax net. There is heavy reliance on WHT. For documentation and tax liability computation; FBR is heavily relying on proxies like electricity bills. But, even in urban and especially in rural areas and small cities, electricity theft is easy.

10% FED on locally made motor vehicles exceeding 1800cc has been withdrawn while customs duty on used imported cars has been increased by 10%. Automobile sector had been pampered for decades. While subsidies on basic essentials are reduced, but continuing further protection to the uncompetitive sectors defies justification.

KSE earned around 50% returns in last 2 years consecutively. No reason why CGT be kept low if there are gains of this much magnitude and especially if participation is dominated by institutional investors.

Rupee appreciation will make exports expensive. Plus, oil import bill will put further pressure on rupee. If rupee has to be kept at the current level, then poor people must be provided with relief on inflation front. Inflation of 9% is still very high given just 4% growth.

Finance Minister said introduction of 3G and 4G technology would create jobs for about 9,00,000 youth in the next four years. It seems very ambitious given that the

Budget 2014-2015

increase will be about 5% of total non-agricultural employed individuals. It is not explained how it will be achieved?

Fiscal deficit which was 8%+ suddenly comes down to 5.8%. This is strange especially when the tax revenue target was also underachieved and expenditures did not come down.

Investment to GDP ratio was targeted to rise by 20%. That too is not explained clearly especially amidst very lower returns on bank deposits, higher government domestic borrowing, higher inflation, lower real growth in per capita incomes and security and energy crisis.

Import to GDP ratio has climbed and exports to GDP ratio has declined in last few years. That is due to stagnant exports growth, decline in manufactured exports as a ratio of total exports and heavy reliance on imported sources of fuel.

More than housing at the moment, people need to be provided with long term relief by resolution of energy crisis. Saving poor from death is important than laptop, higher education and even housing at the moment.

For FY15, the government will borrow Rs 914 billion from domestic sources, Rs 508 billion from external sources and Rs 289 billion will be saved by four provinces from their budgets. Pakistan debt to GDP ratio exceeds 60%. But, in Pakistan, banking population is just 12%. Banking assets to GDP ratio is lower as compared to other developed regions. So, when government finances more than 50% of its debt from domestic loanable funds market, it leads to higher interest rate more elastically and that crowds out private investment. Private sector financing to GDP ratio in last 8 years or so substantiates that.

Tax on services is raised from 6% and 7% for corporate and non-corporate taxpayers respectively to 8% and 10%.

FED on cement is levied at 5% on retail price while the cement sector was already paying sales tax, running at 70% capacity and may face decline in export demand further in post NATO exit 2014 scenario from Afghanistan.

Education budget allocation in real terms declined by 11%. 75% of it is concentrated in higher education where people have better means of securing scholarship themselves while primary and secondary education is not given equal attention.

Steel sector tax rate has been enhanced from Rs 4 to Rs 7 per unit of electricity. Steel, cement and other LSM sectors usually have procyclical demand, so in an effort to take-off the economy towards growth, pre-production incentives shall precede more taxation.

Budget 2014-2015

Tax concessions are post production incentives. Right now, industries with liquidity constraints need pre-production incentives like 1) cheaper financing sources from banks and capital markets, 2) improved infrastructure support, 3) political and policy stability and most importantly, 4) increase in energy supply that can make the industries competitive.

Budget 2014-2015

CONCLUSION:The public, especially government employees, seemed depressed after listening to the speech of Federal Minister Finance, Muhammad Ishaq Dar in which he announced the Federal Budget 2014-2015.

The common is quite suffered in this budget 2014 15. Well the Budget is far better than the previous one. So, we should be thankful to ALMIGHTY ALLAH that ALLAH has blessed us a land which is full of resources.

Budget 2014-2015

pakistan’s federal budget summary 2014 15 (macro-economics,iqra university)

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