BUDGET PAPER 20092010 Economic Policy

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BUDGET PAPER 2009-2010Economic Policy
Administration

• by
• Syed Shabbar Zaidi
• at
• The Institute of Chartered Accountants of
  Pakistan
• in
• Lahore, May 12, 2009

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TABLE OF CONTENT

• National and International Economic Scene
• What the world is saying ? Is it not a change ?
• Unimaginable Outcome / Unbelievable Events
• We are different - A lot of space to cover
• The debate on Economic Models
• Pakistans dilemma in Economic Policies and
  Administration
• Ray of hope In the days of gloom
• Pakistans regulatory environment
• Expected difference in outlook
• Objectives of the Budget 2009-2010
• Immediate steps required Budget 2009-2010
• Conclusion

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NATIONAL AND INTERNATIONAL ECONOMIC SCENE (1/4)

• INTERNATIONAL
• World has changed. Significant international
  developments are
• Crises emanating and limited to Financial
  Sector is expected to affect all segments of the
  economy.
• Crises emanating and limited to western countries
  specially USA is expected to effect the whole
  world.
• Capitalistic economic model has shown certain
  weaknesses it has not failed. Government
  intervention is now inevitable.
• Regulatory framework has not been able to
  forewarn the emerging crises.

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NATIONAL AND INTERNATIONAL ECONOMIC SCENE (2/4)

• International Development Institutions like IMF
  etc whose relevance had substantially reduced are
  re-emerging.
• A new economic world order is emerging. China,
  India, Brazil and Russia BRIC to play an
  important role.
• Regulatory frameworks (including Accounting and
  Auditing) are under pressure.

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NATIONAL AND INTERNATIONAL ECONOMIC SCENE (3/4)

• NATIONAL
• The international developments is expected to
  have a mixed effectively positive effect on
  Pakistan. The expected changes are
• Consumer demand led growth is expected to be
  corrected. Supply side has to be improved.
• Manufacturing and agriculture to gain importance.
• Paranoia for Dubai and Dubai type system is to
  diminish.
• Easy money from speculation and trading in
  shares, real estate and trading not to be
  available.

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NATIONAL AND INTERNATIONAL ECONOMIC SCENE (4/4)

• Pakistan fiscal system will come under pressure
  including on account of its heavy reliance on
  imports. Dilemma of choice between correction of
  trade deficit versus tax collection.
• Financial Sector will come under pressure.
  Non-Performing Loans and expected shrinkage in
  banking spread.
• Overall perception for upper and middle classes
  will be pessimistic but for lower classes there
  is expected to be an inherent correction. However
  they are ignorant and unconcerned.
• It is our duty to align economic policy and
  administration in the interest of ordinary people
  of Pakistan-No elitist economy. Trickle down
  theory may work but at this stage Direct
  Intervention is required.

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WHAT THE WORLD IS SAYING ? IS IT NOT A CHANGE ?

• G-20 Summit had a banner
• Stability, growth and jobs
• This is entirely different from what was being
  said earlier
• Globalization, WTO, Free Market Economy,
  trickle down effect
• This changed scene is in line with our. Now the
  time is to capitalize to carry the society with
  that thought process. The inherent trend is in
  our favor.. What we need is belief on our
  strength, hope and national consensus.

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UNIMAGINABLE OUTCOME/ UNBELIEVABLE EVENTS

• Over the past one and a half year we have heard
  and seen unimaginable and unbelievable things
• Talks about nationalization, government
  intervention of banks in the west Is it not
  socialism?
• Tax to the extent of 90 percent for Bonuses paid
  to Executives of Business in distress in US
  society rejecting abuse though being legal
• SDR to replace US as international currency
  demise of US predominance
• Dubai seeking relief from Abu-Dhabi. end of a
  myth
• These unimaginable and unbelievable outcome
  reveal that most unpredictable science is
  Economics. But these are not only events. These
  are signals of paradigm shiftWe have to align
  to new realities. In economics. Are we ready?

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WE ARE DIFFERENT A LOT OF SPACE TO COVER (1/3)
Girl in search of water
Man on the moon
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WE ARE DIFFERENT A LOT OF SPACE TO COVER (2/3)

• When we say we are different. It is construed in
  wrong sense. There is and will always be an
  integrated world economy and economic systems.
  Perceived islands utopias are misnomers only.
• We are different in the sense that a lot of
  development has yet to take place. Knowledge,
  technology, wealth and intellectual capabilities
  need to be developed. For that the only source is
  West.
• What we need is to domesticate the economic
  principles and policies to our needs.
• World Bank can only provide funds. They can not
  effectively lead economic policies. They can
  provide principles we will make policies as per
  our own requirements. That delicate balance is
  often blurred.
• The following picture depicts our status. That
  requires direct intervention not trickle down
  effect.

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WE ARE DIFFERENT A LOT OF SPACE TO COVER (3/3)
Child labour scavenging food
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THE DEBATE ON ECONOMIC MODELS (1/3)

• The most effective exponent of liberal economics
  The Economist of UK has stated last week that
• for the liberals even if the cycle swings back
  in their direction, the financial crises and
  recession have shown defects in the way they too
  implemented their model. Getting regulations
  right matters as much as freeing up the market
  an efficient public sector counts as much as an
  private one public investment in transport,
  schools and health care, done well can pay
  dividends. The packing order may change but
  pragmatism and efficiency will always count.
• The message is loud and clear. If a common man is
  not provided the basic facilities every other
  thing is irrelevant. Economics is not a theory it
  is a reality. LUMS has to be integrated with
  Shah Aalmi.

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THE DEBATE ON ECONOMIC MODELS (2/3)

• insert the cover of economist

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THE DEBATE ON ECONOMIC MODELS (3/3)

• The model being conceived contains the following
  features
• A larger state
• Higher taxes
• Heavier regulation on product and labour markets
  and
• Generous social security net work.
• We, in principle, all agree with this model.
  However the problem is that all the four
  segments, in their individual character, are
  problems for us.
• We have large inefficient government, inelastic
  tax structure, over regulated product markets and
  effectively no social security net work.
• So our model will have same principles but a
  domesticated structure. Do we have the capability
  and desire to create one?

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PAKISTANS DILEMMA IN ECONOMIC POLICIES AND
ADMINISTRATION (1/3)

• Policy and structural issues
• Is economics a priority?
• Security state or economic reality?
• Domestic knowledge and experience?
• Politics overriding economic considerations - a
  vicious circle
• Admiration and closeness to Dubais trading
  models

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PAKISTANS DILEMMA IN ECONOMIC POLICIES AND
ADMINISTRATION (2/3)

• Implementation issues
• Is Islamabad model of delivery workable? Delivery
  and resources?
• Size, system and mechanics of government.

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PAKISTANS DILEMMA IN ECONOMIC POLICIES AND
ADMINISTRATION (3/3)

• Practical realities
• Trade deficit
• Current account deficit
• Expected reduction is PSDP
• Allocation for basic necessities viz education,
  health, housing, and transport.
• Trust deficit between government and peopleAll
  levels.

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RAY OF HOPE- IN THE DAYS OF GLOOM

• International economic crises in certain manner
  provides, a ray of hope for us for correction.
  The relevant indicators for the same are
• Oil prices have plummeted
• Commodity prices have plummeted
• Interest rate and capital markets around the
  world have become extremely un-remunerative -
  Outflow of capital from Pakistan ?
• Re-emphasis on manufacturing and agriculture
• Pressure for WTO implementation has softened
• Chinas inherent cost are expected to become
  competitive and
• Financial sector will concentrate on real
  returns.

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PAKISTANS REGULATORY ENVIRONMENT

• In economic framework of Pakistan the relevant
  players are
• Ministry of Finance
• State Bank of Pakistan
• Federal Board of Revenue and
• Securities Exchange Commission of Pakistan.
• There had been substantial improvements in all
  these institutions, however, the unresolved
  problem is again Translating the same into
  Delivery. Delivery means Economic Revival. The
  other relevant players are
• Planning Commission
• Provincial Ministries of Finance and
• Departments responsible for delivery e.g.
  Education, Health, Industries etc.
• This disconnect is very Deep. Bridging the
  gap and the way towards that is to be our
  priority. The way to undertake this function is
  counter productive.

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The economists outlook has projected that

• EXPECTED DIFFERENCE IN OUTLOOK

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OBJECTIVES OF THE BUDGET 2009-2010 (1/2)

• Words or Reality ?
• Reducing macro-economic imbalance
• Improving equity and efficiency of public
  finances
• Enhancing competitiveness of currency and
• Improving safety nets.
• There is no question on the correctness of
  objectives. The issue is ways and means to
  achieve the same and translating the same for a
  common man.

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OBJECTIVES OF THE BUDGET 2009-2010 (2/2)

• The issues
• Inflation Inflation is bad Deflation is worst
  22 to a single digit
• Trade deficit US 18 billion sustainable
  amount
• Current Account Deficit US 5 billion or over
• Tax Collection Target Rs 1,650 billion or less
• Tax to GDP ratio from 10 to 15 per cent
• A delicate balance has to be maintained. Is
  there any homework any communication for the
  same ?

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IMMEDIATE STEPS REQUIRED-BUDGET 2009-2010

• Correction in basic discount rate below 10
  percent
• Discouragement of trading activities-Free market
  or free for all. Direct government intervention
• Industrial revival-subsidized electricity,
  natural gas, security etc
• Agricultural-support to continue
• Subsidized Interest Rate-Revival of development
  finance institution
• Reduction in the overall tax incidence on
  manufacturing
• Development of proper credit market-exploitation
  by the pseudo-financial sector

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CONCLUSION

• International economic scene is in our favour
• Incorrect economic paradigms have disappeared
• Solutions are difficult to achieve but few
  choices now available
• Revival and correction of taxation system is
  inevitable for national stability
• Objective of the Budget as disclosed to be
  aligned with practical step and
• Management of Governments direct intervention.
• This is a very beautiful and lovely country we
  can not afford to destroy it.

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