1. 1 KEYNOTE ADDRESS BUDGET 2008 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi KPMG TASEER HADI & CO. Syed Masoud Ali Naqvi Senior Partner Beach Luxury Hotel, Karachi, 17 June 2008

2. 2 CONTENTS POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi 3  Budget 2008-09 at a glance 6  Key objectives for the Budget 2008-09 7  Common Man’s Perception of Economic Development 10  GDP Growth Trend 9  Key Targets for Policy Makers 11  Composition of Sector GDP growth 12  Sectoral Contribution to GDP growth 13  Inflation

3. 3 CONTENTS POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi 17  Savings & Investments 18  Pakistan Economy: SWOT Analysis 25  Public Sector Development Programme 26  Composition of PSDP 28  Sectoral Distribution and Share of PSDP 14  Domestic Debt 16  Interest Payments 29  Subsidies

4. 4 Budget 2008-2009 at a glance POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi (Rupees in Billions) REVENUE Budget Estimate 2007-08 Revised Estimate 2007-08 Budget Estimate 2008-09 Tax Revenue – CBR Direct Taxes Income tax388367.3477.0 Others20.321.019.0 408.3388.3496.0 Indirect Taxes Customs154148.0 170.0 Sales tax375375.0 472.0 Federal excise9192.0 112.0 Others2.3 1.4 622.3617.3755.4 1030.61,005.61,251.4

5. 5 Budget 2008-2009 at a glance POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi (Rupees in Billions) REVENUE Budget Estimate 2007-08 Revised Estimate 2007-08 Budget Estimate 2008-09 Non Tax Revenue337.6393.3427.8 1368.21,398,91,679.2 Less Provincial Share466457.2568.3 902.2941.71,110.9 Net Capital Receipts58.5142.8221.3 External Receipts258.5275.4300.2 Self Financing of PSDP by Provinces 122.7129.7124.4 Change in Provincial cash balance 51.832.678.9 Privatisation Proceeds751.725.1 Bank Borrowings80.9424.1149.0 1549.61,948.02,009.8

6. 6 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi (Rupees in Billions) EXPENDITURE Budget Estimate 2007-08 Revised Estimate 2007-08 Budget Estimate 2008-09 Current Expenditure General Public Services Debt Servicing437.4564.2619.4 Others204.5317.5310.1 641.9881.7929.5 Defence Affairs & Services275277.2296.1 Economic Affairs78.9293.4201.1 Others60.563.966.5 1056.31,516.21,493.2 Developmental Expenditure PSDP470395.1472.7 Others23.336.743.9 493.3431.8516.6 Total Expenditure1549.61,948.02,009.8 Budget 2008-2009 at a glance

7. 7 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Key objectives for the Budget 2008-2009 Restore economic stability through:  Reduction in Fiscal and Current Account deficits.  Rationalization of subsidies.  Building Foreign exchange reserves to US$12 billion.  Protect vulnerable groups through targeted program of cash transfers.  Focus on Agriculture and Manufacturing sectors to enhance productivity and competitiveness.  Restore Investors confidence.  Remove key bottlenecks in supportive infrastructure for spurring growth.  Increase social sector allocations to improve social indicators.  Significant addition to low cost housing for low income groups.

8. 8 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi  Reduction in Fiscal and Current Account deficits.  Rationalization of subsidies.  Building Foreign exchange reserves to US$12 billion. Restore economic stability through:  Protect vulnerable groups through targeted program of cash transfers.  Focus on Agriculture and Manufacturing sectors to enhance productivity and competitiveness.  Restore Investors confidence.  Remove key bottlenecks in supportive infrastructure for spurring growth.  Increase social sector allocations to improve social indicators.  Significant addition to low cost housing for low income groups. Key objectives for the Budget 2008-2009

9. 9 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Common Man’s Perception of Economic Development  Good quality at low costs  Aligned to required skills and vocational development demand  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  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

10. 10 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi  Inflation  Supply side planning and reforms  Balance between consumption and savings  Strengthening of direct government intervention  Import Substitution  Social Sector  Inequality  Growth to be inclusive  Ensuring efficiency and productive utilization of PSDP  Accelerated focus on 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 Common Man’s Perception of Economic Development

11. 11 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Huge capital investment by public and private sector to leverage the potential of knowledge economy Skills Development and HRD Agriculture Sector  Live Stock to be doubled in 5 years  Planned approach for both major and minor crops 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 Manufacturing Sector Transparency and unbiased accountability Discouraging Elite Culture Key Targets for Policy Makers

12. 12 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi GDP Growth Trend

13. 13 (Growth in Percentage) 2005-2006 2006-2007 2007-2008 GDP (Constant Factor Cost)5.86.85.8 Manufacturing8.78.25.4 Large scale manufacturing8.38.64.8 Small scale manufacturing8.78.17.5 Construction10.217.915.2 Electricity, Gas distribution-14.7-26.62.5 Agriculture6.33.71.5 Major Crops-3.98.3-3.0 Minor Crops0.4-1.34.9 Livestock15.82.83.8 Services sector6.57.68.2 GNP (Constant Factor Cost)5.66.76.1 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Composition of Sector GDP growth

14. 14  (Percent Point) 2005-062006-072007-08 Agriculture1.40.80.3 Industry1.12.11.3 Services3.33.94.2 Real GDP5.86.85.8 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Sectoral Contribution to GDP growth

15. 15  2006-072007-08 Overall inflation7.810.3 Food inflation10.315.0 Non-food inflation6.06.8 Core inflation5.97.5 SPI (Sensitive Price Index)6.913.7 WPI (Wholesale Price Index)10.814.1 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Inflation

16. 16  POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Outstanding Domestic Debt (Rupees in Billions) 2005200620072008 Permanent Debt526.2514.9562.5615.7 Floating Debt778.2940.21107.71407.2 Unfunded Debt854.0859.2940.0997.2 Total2158.42314.32610.23020.1 Percent of GDP32.830.0 30.3 Domestic Debt

17. 17  POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Domestic Debt

18. 18  POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Description (Percentages of GDP) 2004- 2005 2005-2006 2006-2007 2007-2008 Total Investment19.122.122.921.6 Changes in Stock1.6 Gross Fixed Investment17.520.521.320.0 - Public Investment4.34.85.7 - Private Investment13.215.715.614.3 Foreign Savings1.63.95.17.6 National Savings1718.217.813.9 Domestic Savings15.416.316.011.7 Savings & Investments

19. 19  POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi As percentage of GDP 1999-2000 2005-2006 2006-2007 2007-2008 Total Revenue41.018.822.121.6 Tax Revenue51.825.232.329.0 Total Expenditure29.614.917.217.0 Current Expenditure33.519.623.023.1 GDP5.52.73.33.0 Interest Payments

20. 20  Political uncertainty and current judicial crisis  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  Persistent high global oil prices  Increasing trend of terrorist activities  Pressure on exchange rates  Soaring core and food inflation Threats  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$1,085 in 2007-08  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  Higher foreign direct investment  Reduction in poverty level  Tight monetary policy to moderate inflationary pressure Strengths  Credibility of statistics  Indications of doubtful sustainability of growth momentum  Continued sharp increase in prices of food items  Incompetent contribution of various sectors of economy in tax revenue  Inefficiency in utilization of development expenditure  High administrative costs  Quality of governance  Increasing trade and current account 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 and water crisis  Poor HDI indicators  Decline in trend of foreign investment  Continued subsidies to loss making public sector companies Weaknesses  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  Global high commodity prices  Focused skills development to secure dividend from demographic advantage Opportunitie s Pakistan Economy: SWOT Analysis

21. 21  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$1,085 in 2007-08  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  Higher foreign direct investment  Reduction in poverty level  Tight monetary policy to moderate inflationary pressure Pakistan Economy: SWOT Analysis Strengths

22. 22  Credibility of statistics  Indications of doubtful sustainability of growth momentum  Continued sharp increase in prices of food items  Incompetent contribution of various sectors of economy in tax revenue  Inefficiency in utilization of development expenditure  High administrative costs  Quality of governance  Increasing trade and current account 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 and water crisis  Poor HDI indicators  Decline in trend of foreign investment  Continued subsidies to loss making public sector companies Pakistan Economy: SWOT Analysis Weaknesses

23. 23  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  Global high commodity prices  Focused skills development to secure dividend from demographic advantage Pakistan Economy: SWOT Analysis Opportunities

24. 24  Political uncertainty and current judicial crisis  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  Persistent high global oil prices  Increasing trend of terrorist activities  Pressure on exchange rates  Soaring core and food inflation Pakistan Economy: SWOT Analysis Threats

25. 25  Sustainability of growth momentum  Addressing structural problems in energy, agriculture and exports sectors  Job creation  Poverty alleviation  Improving social indicators and enhancement of safety nets  Strengthening of physical infra-structure  Converting the demographic transitions into demographic dividend  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 Challenges Pakistan Economy: SWOT Analysis

26. 26  Political uncertainty and current judicial crisis  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  Persistent high global oil prices  Increasing trend of terrorist activities  Pressure on exchange rates  Soaring core and food inflation Threats  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$1,085 in 2007-08  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  Higher foreign direct investment  Reduction in poverty level  Tight monetary policy to moderate inflationary pressure Strengths  Credibility of statistics  Indications of doubtful sustainability of growth momentum  Continued sharp increase in prices of food items  Incompetent contribution of various sectors of economy in tax revenue  Inefficiency in utilization of development expenditure  High administrative costs  Quality of governance  Increasing trade and current account 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 and water crisis  Poor HDI indicators  Decline in trend of foreign investment  Continued subsidies to loss making public sector companies Weaknesses  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  Global high commodity prices  Focused skills development to secure dividend from demographic advantage Opportunitie s  Sustainability of growth momentum  Addressing structural problems in energy, agriculture and exports sectors  Job creation  Poverty alleviation  Improving social indicators and enhancement of safety nets  Strengthening of physical infra-structure  Converting the demographic transitions into demographic dividend  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 Challenges Pakistan Economy: SWOT Analysis

27. 27 (Rupees in Billions) Development Expenditure Estimates Budget 2007-08 Revised 2007-08 Budget 2008-09 Federal Government Federal Ministries230197234 Corporations504251 Special Programmes342962 Special Areas21 26 335289373 ERRA351927 Provincial Governments150 Total PSDP:520458550 Other Development Exps.233744 543495594 Estimated operational shortfall in PSDP506377 493432517 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Public Sector Development Programme

28. 28  Revised 2007-08 Ratio of GDP 2008-09 Ratio of GDP Percentage Variance Federal PSDP Federal Ministries1971.92341.918.8 Corporations420.4510.421.4 Special Programmes290.3620.5113.7 Special Areas210.2260.323.8 2892.83733.129.0 ERRA190.2270.21 Provincial PSDP1501.41501.2- Total PSDP: 4584.45504.520 (Rupees in Billions) POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Composition of PSDP

29. 29  Revised 2007-08 2008-09 Special Programmes Income Support Fund -34 Peoples Works Programme -28 Khushal Pakistan Programme 19- Khushal Pakistan Fund 10- 2962 (Rupees in Billions) POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Composition of PSDP

30. 30  Budget 2007-2008 % Budget 2008-2009 % Infra-structure 16750166 45 Social Sector 1564718851 Others 123194 335100 373100 Operational Shortfall 35 50 300 323 (Rupees in Billions) POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Sectoral Distribution and Share of PSDP

31. 31 (Rupees in Billions) Budget 2007-08 Revised Estimates 2007-08 Budget 2008-09 Current WAPDA5311475 KESC20 14 TCP (Wheat & Sugar)94626 USC223 Oil Refineries / OMC / Others15175140 Others2212 101378260 Development Import of Fertilizers132935 Total Subsidies:114407295 POST BUDGET SEMINAR 2008 The Income Tax Bar Association, Karachi Subsidies

32. Presenter’s contact details SYED MASOUD ALI NAQVI KPMG Taseer Hadi & Co. +92 (21) 568 5847 mnaqvi@kpmg.comwww.kpmg.com.pk KPMG TASEER HADI & CO.