IMPACT OFBUDGET ON ECONOMY The Income Tax Bar Association - Khi IMPACT OFBUDGET ON ECONOMY Tuesday, 16 June 2009 – Hotel Regent Plaza, Khi

Budget 2009-2010 at a glance (Rupees in Billions) REVENUE Budget Estimate 2008-09 Revised Estimate 2008-09 Budget Estimate 2009-10 Tax Revenue Direct Taxes Income tax 477.0 443.3 536.2 Others 19.0 17.7 21.1 496.0 461.0 557.3 Indirect Taxes   Customs 170.0 145.0 167.2 Sales tax 472.0 457.0 515.6 Federal excise 112.0 116.0 137.4 Carbon Surcharge on POL/CNG - 134.0 1.4 1.5 755.4 719.4 955.7 1,251.4 1,180.4 1,513.0

Budget 2009-2010 at a glance (Rupees in Billions) REVENUE Budget Estimate 2008-09 Revised Estimate 2008-09 Budget Estimate 2009-10 Non Tax Revenue 427.8 603.2 955.7 1,679.2 1,783,6 1,513.0 Less Provincial Share 568.3 559.9 655.2 1,110.9 1,223.7 1,371.5 Net Capital Receipts 221.3 187.2 190.5 External Receipts 300.2 367.4 510.4 Self Financing of PSDP by Provinces 124.2 123.7 173.0 Change in Provincial cash balance 78.9 37.7 72.9 Privatisation Proceeds 25.1 1.3 19.3 Bank Borrowings 149.0 146.0 144.7 2,009.8 2,087.0 2,482.3

Budget 2009-2010 at a glance (Rupees in Billions) EXPENDITURE 3 Budget 2009-2010 at a glance (Rupees in Billions) EXPENDITURE Budget Estimate 2008-09 Revised Estimate 2008-09 Budget Estimate 2009-10 Current Expenditure General Public Services   Debt Servicing 619.4 751.6 779.6 Others 310.1 381.0 409.5 929.5 1,132.6 1,189.1 Defence Affairs & Services 296.1 311.3 342.9 Economic Affairs 201.1 136.7 84.9 66.5 68.6 82.3 1,493.2 1,649.2 1,699.2 Developmental Expenditure PSDP 472.7 378.9 646.0 43.9 58.9 137.1 516.6 437.8 783.1 Total Expenditure 2,009.8 2.087.0 2.482.3

Key objectives for the Budget 2008-09 4 Key objectives for the Budget 2008-09 Reduction in Fiscal and Current Account deficits - Fiscal 7.6 – 4.3 - Current 8.5 – 5.1 - Trade 9.3 – 6.5 Rationalization of subsidies Budget 295 billion to 252 billion Building Foreign exchange reserves US$ 12 billion to US$ 11 billion Restore economic stability through: Protect vulnerable groups through targeted program of cash transfers BISF – High inflation Focus on Agriculture and Manufacturing sectors to enhance productivity and competitiveness Agri = no major change Manufacturing = Declined Restore Investors confidence Declined Remove key bottlenecks in supportive infrastructure for spurring growth Little progress Increase social sector allocations to improve social indicators PSDP produced by about 100 bill. Significant addition to low cost housing for low income groups Little progress

Composition of Sector GDP Growth 5 Composition of Sector GDP Growth 2007-08 2008-09 Economic Survey 07-08 08-09 GDP (FC) 5.8 4.1 2.0 GNP (FC) 6.1 2.6 Commodities Producing Sector 3.2 1.4 0.2 Agriculture 1.5 1.1 4.7 Major Crops (3.0) (6.4) 7.7 Minor Crops 4.9 10.9 3.6 Livestock 3.8 4.2 3.7 Manufacturing 5.4 4.8 (3.3) Large Scale Manufacturing 4.0 (7.7) Small Scale 7.5 Construction 15.2 (3.9) (10.8) Electricity, Gas Distribution (14.7) (22.0) (3.7) Service Sector 8.2 6.6 Finance and Insurance 17.0 12.9 (1.2)

Sectoral Contribution to GDP Growth 6 Sectoral Contribution to GDP Growth Sectoral Contributions to the GDP growth (Percent Point) 2006-07 2007-08 2008-09 Agriculture 0.9 0.24 1.00 Industry 2.3 0.45 -0.92 Services 3.6 3.41 1.92 Real GDP 6.8 4.10 2.00

Inflation 2007-08 (Jul-Apr) 2008-09 Overall inflation 12.0 10.2 22.4 Food inflation 17.6 15.0 26.6 Non-food inflation 7.9 6.8 19.0 Core inflation 8.4 7.5 17.8 SPI (Sensitive Price Index) 16.8 14.1 26.3 WPI (Wholesale Price Index) 16.6 13.7 21.4

Savings & Investment (Percent of GDP) Description 2005-06 2006-07 8 Savings & Investment (Percent of GDP) Description 2005-06 2006-07 2007-08 2008-09 Total investment 22.1 22.5 22.0 19.7 Changes in stock 1.6 Gross fixed investment 20.5 20.9 20.4 18.1 - Public Investment 4.8 5.6 6.9 4.9 - Private Investment 15.7 15.9 15.2 13.2 Foreign Savings 3.9 5.1 8.5 5.3 National Savings 18.2 17.4 13.5 14.3 Domestic Savings 16.3 15.6 11.5 11.2

Subsidies (Rupees in Billions) Budget 2008-09   Budget 2008-09 Revised Estimates 2008-09 Budget 2009-10 Current WAPDA 75 93 63 KESC 14 19 4 TCP (Wheat & Sugar) 26 27 30 USC 3 Oil Refineries / OMC / Others 140 70 15 Others 2 7 260 220 120 Development Import of Fertilizers 35 32 10 Benazir Track Support Program - Total Subsidies: 295 252 132

Key objectives for the Budget 2009-10 Provide protection to poor and vulnerable against the current economic downturn. Revive manufacturing and industry, especially export oriented industry. Key Objectives Broaden tax base, instead of overburdening the existing tax payer. Restrain unnecessary imports to improve the Balance of payments position.

Budget for a Common Man 11 Key Drivers Welfare of the people Reduce unemployment and creation of jobs Reduce inequity of distribution of Target reduction of Poverty Focus on Agriculture value addition, productivity and research Rationalize subsidies Skills development Improve Tax GDP ratio Direct cash transfers Induce growth of manufacturing sector and productivity improvement Micro-finance reach Enhance social sector allocations Access to basic needs Skills Development And Training Provide quality health and other services at affordable costs Inflation target

Common Man’s Perception of Economic Development 12 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 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

Common Man’s Perception of Economic Development 13 Common Man’s Perception of Economic Development Inflation Supply side planning and reforms Balance between consumption and savings Strengthening of direct government intervention Import Substitution Inequality 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 commitments. These goals should be dynamic and progressive

Pakistan Economy – SWOT Analysis 14 Pakistan Economy – SWOT Analysis Strengths Weaknesses Strategically geo political position post 9/11 inducing active interest of USA and other global powers in safeguarding its stability Strong large population base with potential to be a sizeable market Medium term Development framework IMF stabilization stand by arrangement Consensus on major political issues including fight against insurgency and extremism Sustainable external and domestic debt Most liberal foreign investment regime Tariff barriers are being reduced Credibility of statistics Quality of governance Low Tax / GDP ratio Incompatible contribution of various sectors of Economy in tax revenue Inefficiency in utilization of development expenditure High unproductive non development expenditure Continued trade and fiscal deficits Low level of Foreign Currency reserves Economy vulnerable to external shocks Dependence on aid and loans from multilateral institutions and bilateral parties Potential impact of global recession on exports and expats remittances High cost of doing business Poor HDI indicators Decline in trend of Foreign investment Continued subsidies for loss making public sector enterprises Inequality in distribution of income Continued increase in poverty Fragile political system Opportunitie s Threats Capacity constraints with India 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 Global financial crisis Focused skills development to secure dividend from demographic advantage Global intent and support in our fight against extremism IMF stabilization program Friends of Pakistan Forum Intensity of war against terror Issues in Balochistan and Northern Areas Worsening of situation on Western borders Anti Pakistan attitude in Afghanistan Level of corruption Broadening gap between Rich and Poor Social unrest Public discontent with the policies which may threaten reform process Increasing trend of terrorist activities Pressure on exchange rates Soaring core and food inflation Worsening law and order situation Large number of IDPs Increasing oil prices

Pakistan Economy – SWOT Analysis 15 Pakistan Economy – SWOT Analysis Strengths Strategically geo political position post 9/11 inducing active interest of USA and other global powers in safeguarding its stability Strong large population base with potential to be a sizeable market Medium term Development framework IMF stabilization stand by arrangement Consensus on major political issues including fight against insurgency and extremism Sustainable external and domestic debt Most liberal foreign investment regime Tariff barriers are being reduced

Pakistan Economy – SWOT Analysis 16 Pakistan Economy – SWOT Analysis Weaknesses Credibility of statistics Quality of governance Low Tax / GDP ratio Incompatible contribution of various sectors of Economy in tax revenue Inefficiency in utilization of development expenditure High unproductive non development expenditure Continued trade and fiscal deficits Low level of Foreign Currency reserves Economy vulnerable to external shocks Dependence on aid and loans from multilateral institutions and bilateral parties Potential impact of global recession on exports and expats remittances High cost of doing business Poor HDI indicators Decline in trend of Foreign investment Continued subsidies for loss making public sector enterprises Inequality in distribution of income Continued increase in poverty Fragile political system

Pakistan Economy – SWOT Analysis 17 Pakistan Economy – SWOT Analysis Opportunities Capacity constraints with India 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 Global financial crisis Focused skills development to secure dividend from demographic advantage Global intent and support in our fight against extremism IMF stabilization program Friends of Pakistan Forum

Pakistan Economy – SWOT Analysis 18 Pakistan Economy – SWOT Analysis Threats Intensity of war against terror Issues in Balochistan and Northern Areas Worsening of situation on Western borders Anti Pakistan attitude in Afghanistan Level of corruption Broadening gap between Rich and Poor Social unrest Public discontent with the policies which may threaten reform process Increasing trend of terrorist activities Pressure on exchange rates Soaring core and food inflation Worsening law and order situation Large number of IDPs Increasing oil prices

Pakistan Economy – SWOT Analysis 19 Pakistan Economy – SWOT Analysis Challenges Sustainability of growth momentum Addressing structural problems in energy, agriculture and exports sector Job creation Poverty alleviation Improving social indicators and enhancement of safety nets Strengthening of physical infrastructure Converting the demographic transitions into demographic dividend Leverage the current strategic role in achieving meaningful economic dividends Supply side improvement to match growing domestic demand Achieve political stability and institutional strengthening Harmonious relationship amongst Federation and its units Equitable distribution of resources between Federal, Provincial and Local governments Revenue generation by provinces Balanced approach of combination of Fiscal and Monetary Policy measures to combat inflation Containment of exposure to war on terror

Pakistan Economy – SWOT Analysis 20 Pakistan Economy – SWOT Analysis Strategically geo political position post 9/11 inducing active interest of USA and other global powers in safeguarding its stability Strong large population base with potential to be a sizeable market Medium term Development framework IMF stabilization stand by arrangement Consensus on major political issues including fight against insurgency and extremism Sustainable external and domestic debt Most liberal foreign investment regime Tariff barriers are being reduced Strengths Credibility of statistics Quality of governance Low Tax / GDP ratio Incompatible contribution of various sectors of Economy in tax revenue Inefficiency in utilization of development expenditure High unproductive non development expenditure Continued trade and fiscal deficits Low level of Foreign Currency reserves Economy vulnerable to external shocks Dependence on aid and loans from multilateral institutions and bilateral parties Potential impact of global recession on exports and expats remittances High cost of doing business Poor HDI indicators Decline in trend of Foreign investment Continued subsidies for loss making public sector enterprises Inequality in distribution of income Continued increase in poverty Fragile political system Weaknesses Sustainability of growth momentum Addressing structural problems in energy, agriculture and exports sector Job creation Poverty alleviation Improving social indicators and enhancement of safety nets Strengthening of physical infrastructure Converting the demographic transitions into demographic dividend Leverage the current strategic role in achieving meaningful economic dividends Supply side improvement to match growing domestic demand Achieve political stability and institutional strengthening Harmonious relationship amongst Federation and its units Equitable distribution of resources between Federal, Provincial and Local governments Revenue generation by provinces Balanced approach of combination of Fiscal and Monetary Policy measures to combat inflation Containment of exposure to war on terror Challenges Capacity constraints with India 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 Global financial crisis Focused skills development to secure dividend from demographic advantage Global intent and support in our fight against extremism IMF stabilization program Friends of Pakistan Forum Opportunitie s Intensity of war against terror Issues in Balochistan and Northern Areas Worsening of situation on Western borders Anti Pakistan attitude in Afghanistan Level of corruption Broadening gap between Rich and Poor Social unrest Public discontent with the policies which may threaten reform process Increasing trend of terrorist activities Pressure on exchange rates Soaring core and food inflation Worsening law and order situation Large number of IDPs Increasing oil prices Threats

THANK YOU !

Presenter’s contact details SYED MASOUD ALI NAQVI Senior Partner KPMG Taseer Hadi & Co. +92 (21) 568 5847 mnaqvi@kpmg.com www.kpmg.com.pk

Macro Economic stability & real sector growth Real GDP is expected to grow by 3.3 percent in 2009-10 and by 4 and 4.5 percent during Fiscal Years 2010-11 and 2011-12 Sectoral growth rates expected Agriculture - 3.8 percent Manufacturing - 1.8 percent Services - 3.9 percent Inflation target for 2009-10 is 9.5 percent and will be brought down to 7 and 6 percent during Fiscal Years 2010-11 and 2011-12 Current expenditure to decline by 15.3 percent of GDP in FY 2009-10 and 14.7 percent of GDP in 2010-11, owing to elimination of unproductive subsidies Measures for documentation of the economy and broadening of the tax base Total revenue to grow by 15.7 percent and FBR collections to grow by 16.8 percent Tax to GDP ratio will be 9.6 percent (9 percent in 2008-09) Revenue as a percentage of GDP at 14.7 percent in 2009-10 and will increase to 15.1 percent in 2010-11

Targeting the poor and vulnerable Benazir Income Support Programme (BISP) Rs. 70 billion from Rs. 22 billion Social assistance Program – Health Insurance up to Rs. 25,000 per family Poverty exit strategy, training and employment, social mobilization program Transparency to be enhanced Plan to have Social Security Protection Program People Works Program Rs. 35 billion to create employment opportunities

Targeting the poor and vulnerable Workers Welfare - Rs. 10.8 billion for workers welfare development schemes - Marriage grant enhanced from Rs. 50,000 to Rs. 70,000 - Cash back of 9,469 housing units / flats for workers Microfinance Plan to increase outreach from 2 million to 3 million houses Housing - Low income population community participation and squatter settlement regulation - Allocation of flats in Islamabad for working journalists - Tax credit for loans increased from Rs. 500,000 to Rs. 750,000

Agriculture–Increasing Productivity and Value Addition Upgrade existing R&D facilities and set up two world class research institutes for wheat and cotton Development of new technologies Productive use of water through precision land leveling and high efficiency irrigation systems Promote production and export of high value crops Focus on live stock rearing, dairy production, fisheries and horticulture Creating necessary infrastructure Ensure availability of Agriculture credit Common facilitation centers Ten model agricultural union councils for each major crop across country Promotion of model organic farming

Agriculture–Increasing Productivity and Value Addition Allocation in PSDP increased from Rs. 14.4 billion to Rs. 18 billion Rs. 2.5 billion proposed for food security and productivity enhancement of farmers Plan to treat livestock, Agriculture and fisheries as an industry Agreement with Monsanto of US to introduce genetically modified cotton Farmers will be offered BT cotton hybrids varieties National on Farm Water Management Program implemented Water sector Rs. 60 billion 32 small and medium Dams 12 billion for raising of Mangla Dam including resettlement Rs. 10 billion for improvement of water courses Rs. 15 billion for canal improvement and rehabilitation of irrigation system Benazir Tractor scheme - Rs. 4 billion over two years A new Agricultural model village programme in 26 villages

Agriculture–Increasing Productivity and Value Addition Capacity Enhancement of Dairy Products under Public Private Partnership’ a project worth Rs 3.5 billion (Rs.300 million in 2009-10) Poverty Reduction through Small Holders Live Stock and Dairy Development’ worth Rs 3.5 billion (Rs 400 million in 2009-10) More model dairy community, biogas and breeding farms, cooling tanks, rural services providers and pasteurization plants Focus on fisheries lifting European Union’s ban on fisheries export by upgrading fishing vessels improvement of infrastructure facilities for value added products establishing a fisheries training centre at Gawadar landing sites along the coastal line reducing post harvest losses through improved fish handling along the food chain and marketing establishment of shrimp aquaculture in the country

Industry Export Investment Support Fund of Rs. 40 billion Government – Rs. 10 billion Export Development Fund – Rs. 10 billion Government agencies – Rs. 20 billion Fund for credit guarantee for SME sector – Private Public partnership (Rs. 2.5 billion from Government in 2009-10) Venture Capital Fund – Private Public partnership Create new DFI for industrial financing Industrial clusters for skill development Allocation of M/o industries from Rs. 2 billion to Rs. 8.7 billion Allocation for science and technology from Rs. 1.5 billion to Rs. 3.1 billion

Industry Automobile Reduction of 5% FED Construction FED on cement reduced by Rs. 200 per ton Textile Withdrawal of FED on import and supply of Viscose Staple Fiber (VSF) Zero rating of chemicals used in manufacture of Fire retardant fabrics Cellular service providers Regulatory Duty of Rs. 250 per set eliminated Reduction in Customs Duty from Rs. 500 per set to Rs 250 per set FED reduced from 21 percent to 19 percent Sim activation charges reduced from Rs. 500 to Rs. 250

Industry Priority allocation of gas and electricity Cross subsidy in electricity and gas tariffs would be reduced in a phased manner Large Export Houses to be established Special Economic Zones and Special Industrial Zones to be fast tracked Corporate Rehabilitation Act (CRA) to improve bankruptcy and insolvency regime Resolution Trust Corporation (RTC) to promote consolidation of industry Transparent privatization policy based on Public Private Partnership National Trade Corridors Improvement Program launched Enhanced allocation for infrastructure development Custom duty reduced on raw materials for poultry, dairy, fish processing and pharmaceuticals

Industry PSDP for energy sector increased from Rs. 11.4 billion to Circular debt of energy sector being reduced to create liquidity for power sector Projects for transmission and distribution system are being undertaken – 15 IPPS with capacity of 2,921 Megawatts (13 to be completed by 2010) Five rental power projects for 800 Megawatts 16 Hydro power projects with capacity of 4,160 Megawatts initiated Plan for electrification of all villages Conservation measures are also being undertaken Ideal policy mix for hydel, coal, wind and solar power

Human Resource Development Establishment and operation of basic education and community schools (Rs. 2 billion) Education for All - through providing missing facilities to primary schools (Rs 2 billion) Development funding to Higher Education Commission enhanced to Rs 22.5 billion (60% increase) in 2009-10; current budget provision also enhanced by 26% to Rs. 21.5 billion National Vocational & Technical Education Commission to target one million trainees every year in a phased programme (Rs. 2.2 billion in 2009-10) Skill development (vocational/technical) programmes aimed for labour export market are being planned

Health PSDP increased by 66 percent, from Rs. 13.99 billion in 2008-09 to Rs. 23.15 billion in 2009-10 Family Planning and Primary Healthcare and Immunization programmes with allocations of Rs. 7 billion and Rs. 6 billion respectively The Prime Minster’s Emergency Action Plan for disease launched (Rs. 11 billion in the next five years) Concessionary import duty rate on 35 raw materials used in pharmaceuticals, medicines and diagnostic kits Zero rate sales tax on import and supply of wheelchairs for the special people Tobacco taxation is being increased as per WHO recommendations

Youth Affairs, Culture and Sports Different programmes for youth motivation, character building, awareness and integration, and establishment of youth activity centers - under the National Youth Policy Approximately 30,000 educated postgraduates will be offered internships under the National Internship Programme (Rs 3.6 billion in 2009-10) A Mobile Youth Computer Literacy and Awareness Programme launched Approximately 15,000 volunteers registered for community development activities and disaster management Rs 450 million in 2009-10 for cultural development (Rs 186 million over the previous year) Special focus on the development of sports - Rs 583 million allocated in 2009-10 (Rs 140 million in 2008-09

Governance of Just and Fair system Establishment of Public Defender and Free Legal Aid System Establishment of Fast Track and Evening Courts at the federal level and provincial headquarters Pro-poor legislation and automation of the justice sector Monetizing incentives for civil servants Making public sector ‘Employer of choice’ Improved service delivery Greater transparency and self-accountability Market-based competitive salary structure

Governance of Just and Fair system An ad-hoc relief allowance of 15% of pay for serving government servants from 1 July 2009 An increase in the allowance of armed forces deployed on the western front equal to one month’s initial basic pay with effect from 1 July 2009 For the remaining armed forces personnel, allowance equal to one month’s initial basic pay will be admissible from 1 January 2010 and in the interim period, an adhoc relief allowance of 15% of pay The retired government servants and armed forces personnel will also get 15% increase in their net pension from 1 July 2009 Limit for the exemption on Income Tax for salaried male enhanced from Rs 180,000 to Rs 200,000

Governance of Just and Fair system Limit for the exemption on Income Tax for salaried female enhanced from Rs 240,000 to Rs 260,000 Senior citizens will now enjoy 50 percent relief in their tax liability in case of income upto Rs 750,000; previously this limit was upto Rs 500,000 Reform process for Public sector enterprises including Pakistan Railways, Pakistan Steel Mills, Pakistan International Airlines and the Power Distribution Companies Corporate status for National Savings Organisation and the Federal Bureau of Statistics