Macro Economic Aspects 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 Revenue Tax Revenue - CBR Direct Taxes Income tax Budget Estimate 2006-07 Revised Estimate 2006-07 Budget Estimate 2007-08 Revenue ---------------------------------(Rupees in billion)---------------------------- Tax Revenue - CBR Direct Taxes Income tax 257.8 305.0 388.0 Others 14.1 15.6 20.2 271.9 320.6 408.2 Indirect Taxes Customs 157.1 134.0 154.0 Sales tax 341.6 311.0 375.0 Federal excise 68.1 72.0 91.0 2.2 2.0 2.3 569.0 519.0 622.3 840.9 839.6 1,030.5

Budget at a glance Revenue Non Tax Revenue 241.9 374.4 337.6 1,082.8 Budget Estimate 2006-07 Revised Estimate 2006-07 Budget Estimate 2007-08 Revenue ---------------------------------(Rupees in billion)------------------------------- Non Tax Revenue 241.9 374.4 337.6 1,082.8 1,214.0 1,368.1 Less Provincial Share 378.2 390.9 465.9 704.6 823.1 902.2 Net Capital Receipts 16.4 80.5 58.5 External Receipts 239.3 276.6 258.5 Self Financing of PSDP by Provinces 85.6 95.5 122.7 Change in Provincial cash balance 53.8 22.1 51.8 Privatisation Proceeds 75.0 Bank Borrowings 140.1 55.2 130.9 1,314.8 1,428.0   1,599.6

Budget at a glance Expenditure Current Expenditure Budget Estimate 2006-07 Revised Estimate 2006-07 Budget Estimate 2007-08 Expenditure ---------------------------------(Rupees in billion)------------------------------- Current Expenditure General Public Services   Debt Servicing 295.8 389.9 437.4 Others 208.5 244.9 204.5 504.3 634.8 641.9 Defence Affairs & Services 250.2 252.6 275.0 Economic Affairs 74.7 91.2 78.9 50.6 54.9 60.5 879.8 1,033.5 1,056.3 Developmental Expenditure PSDP 435.0 394.5 520.0 - 23.3 543.3 Total Expenditure 1,314.8 1,428.0 1,599.6

Composition of Sector GDP growth (Growth in Percentage) 2004-2005 2005-2006 2006-2007 GDP (Constant Factor Cost) 9.0 6.6 7.0 Manufacturing 15.5 10.0 8.4 Large scale manufacturing 19.9 10.7 8.8 Small scale manufacturing 6.3 8.3 7.7 Construction 18.6 5.7 17.2 Agriculture 6.5 2.5 5.0 Major Crops 17.7 - 4.1 7.6 Minor Crops 1.5 0.4 1.1 Livestock 2.3 7.5 4.3 Services sector 8.5 9.6 8.0 GNP (Constant Factor Cost) 8.7 6.4 6.9

GDP Growth Trend

Sectoral contribution to GDP growth Sectoral Contribution to the GDP growth (Percent Point) 2005-2006 2006-2007 Agriculture 0.4 1.1 Industry 1.3 1.8 Services 4.9 4.1 Real GDP 6.6 7.0

Inflation 2005-2006 July / April 2006-2007 CPI (Consumer Price Index) Overall inflation 7.9 Food inflation 6.9 10.2 Non-Food inflation 8.6 6.2 Core inflation 7.5 6.0 SPI (Sensitive Price Index) 10.1 WPI 7.0 11.1

Domestic Debt Outstanding Domestic Debt 2002 2003 2004 2005 2006 2007 Permanent Debt 424.8 468.8 570.0 526.2 514.9 540.2 Floating Debt 557.8 516.3 542.9 778.2 940.2 1086.5 Unfunded Debt 792.1 909.5 899.2 854.0 859.2 896.6 Total 1774.7 1894.5 2012.2 2158.4 2314.3 2523.4 % of GDP 40.3 39.3 35.7 32.8 30 28.4

Domestic Debt

Interest Payments As percentage of 1999-2000 2004-2005 2005-2006 2006-2007 Total Revenue 41.0 20.0 18.3 17.1 Tax Revenue 51.8 27.3 24.9 22.4 Total Expenditure 29.6 16.1 14.3 12.9 Current Expenditure 33.5 19.1 17.9 GDP 5.5 2.7 2.6 2.3

Savings & Investment Description 2001-02 2002-03 2003-04 2004-05 2006-07 Total Investment 16.8 16.9 16.6 19.1 21.7 23.0 Changes in Stock 1.3 1.7 1.6 15 1.5 Gross Fixed Investment 15.5 15.3 15.0 17.5 29.1 21.4 - Public Investment 4.2 4.0 4.3 4.7 5.2 - Private Investment 11.3 10.9 13.1 15.4 16.2 Foreign Savings -1.9 -3.8 -1.3 4.5 5.0 National Savings 18.6 20.8 17.9 17 17.2 18.0 Domestic Savings 18.1 17.6 15.7 16.1

Trends in External Debt & Debt Burden

Pakistan Economy – SWOT Analysis 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 Strengths 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 Weaknesses 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 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 Opportunities

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

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

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

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

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

Pakistan Economy – SWOT Analysis 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 Strengths 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 Weaknesses 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 and local governments Revenue generation by provinces 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 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 Opportunities

PUBLIC SECTOR DEVELOPMENT PROGRAMME   2006-2007 2007-2008 Federal PSDP Federal Ministries 171 232 Special Areas 17 20 Special Programs 34 Corporations 48 49 270 335 Provincial PSDP 115 150 Earthquake Rehabilitation 50 35 435 520 Outside PSDP 36 204 451 724

SECTORAL DISTRIBUTION AND SHARE OF PSDP FEDERAL GOVERNMENT   2006-2007 % 2007-2008 Infra-structure 132 49 167 49.7 Social Sector 131 48.4 156 46.6 Others 7 2.6 12 3.7 270 100 335 Operational Shortfall 20 35 250 300 July-April utilization 170 68 May-June 76 30 Expected upto 30 June 246 98

INFRA STRUCTURE - 2007-2008 Water 64 Power 21 PAEC 12 Communications 30 Railways 139 Others 28 167

SOCIAL SECTOR - 2007-2008 Special Program KPF&KP 34 Finance 17 Education 7 HEC 18 Health 14 I. T. & Telecom 3 S. & T. 4 Population Welfare K. A. & N. A. Sub & Frontier 8 Planning Commission Others 19 156

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

KEY TARGETS FOR POLICY MAKERS Inflation Supply side planning and reforms Balance between consumption and savings Strengthening of direct government intervention Import substitutions 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 committments. These goals should be dynamic and progressive

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

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

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

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

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

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.

Thank you

Presenter’s contact details SYED MASOUD ALI NAQVI KPMG Taseer Hadi & Co. +92 (21) 568 5847 mnaqvi@kpmg.com www.kpmg.com.pk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2005 KPMG Taseer Hadi & Co., the Pakistan member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Pakistan. The KPMG logo and name are trademarks of KPMG International.