Syed Masoud Ali Naqvi Senior Partner KPMG Taseer Hadi & Co. Karachi 12 June 2006 Macro Economic Aspects FEDERAL BUDGET 2007-08

Syed Masoud Ali NaqviSenior Partner

KPMG Taseer Hadi & Co.Karachi

12 June 2006

Syed Masoud Ali NaqviSenior Partner

KPMG Taseer Hadi & Co.Karachi

12 June 2006

Macro Economic AspectsMacro Economic Aspects

Income Tax Bar Association, KarachiIncome Tax Bar Association, Karachi

FEDERAL BUDGET 2007-08FEDERAL BUDGET 2007-08

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Budget at a glanceBudget at a glance

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

Others 2.2 2.0 2.3

569.0 519.0 622.3

840.9 839.6 1,030.5

Budget Estimate 2006-07

Revised Estimate 2006-07

Budget Estimate 2007-

08

Revenue ---------------------------------(Rupees in billion)----------------------------

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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 75.0 75.0

Bank Borrowings 140.1 55.2 130.9

1,314.8 1,428.0 1,599.6




Revenue ---------------------------------(Rupees in billion)-------------------------------

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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

Others 50.6 54.9 60.5

879.8 1,033.5 1,056.3

Developmental Expenditure

PSDP 435.0 394.5 520.0

Others - - 23.3

435.0 394.5 543.3

Total Expenditure 1,314.8 1,428.0 1,599.6




Expenditure ---------------------------------(Rupees in billion)-------------------------------

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Composition of Sector GDP growthComposition 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

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GDP Growth TrendGDP Growth Trend

GDP Growth Trend

6.5%

4.6%

2.0%

3.1%

4.7%

7.5%

9.0%

6.6%7.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1980s 1990s 00-01 01-02 02-03 03-04 04-05 05-06 06-07

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Sectoral contribution to GDP growthSectoral 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

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InflationInflation

2005-2006 July / April2006-2007

CPI (Consumer Price Index)

Overall inflation 7.9 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 6.9

WPI 7.0 11.1

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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 DebtDomestic Debt

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Domestic DebtDomestic Debt

Domestic Debt as % of GDP

43.2%40.3% 39.3%

35.7%32.8%

30.0% 28.4%

43.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07

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Interest PaymentsInterest 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 18.3 17.9

GDP 5.5 2.7 2.6 2.3

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Savings & InvestmentSavings & Investment

Description 2001-02 2002-03 2003-04 2004-05 2005-06 (P) 2006-07

Total Investment 16.8 16.9 16.6 19.1 21.7 23.0

Changes in Stock1.3 1.7 1.6 1.6 15 1.5

Gross Fixed Investment 15.5 15.3 15.0 17.5 29.1 21.4

- Public Investment4.2 4.0 4.0 4.3 4.7 5.2

- Private Investment 11.3 11.3 10.9 13.1 15.4 16.2

Foreign Savings-1.9 -3.8 -1.3 1.6 4.5 5.0

National Savings18.6 20.8 17.9 17 17.2 18.0

Domestic Savings18.1 17.6 15.7 15.4 15.3 16.1

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Trends in External Debt & Debt BurdenTrends in External Debt & Debt Burden

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Pakistan Economy – SWOT Analysis Pakistan Economy – SWOT Analysis

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

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

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

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Pakistan Economy – SWOT AnalysisPakistan 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

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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


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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

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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

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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

Challenges

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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

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

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

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

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PUBLIC SECTOR DEVELOPMENT PROGRAMME PUBLIC SECTOR DEVELOPMENT PROGRAMME

2006-2007 2007-2008

Federal PSDP

Federal Ministries 171 232

Special Areas 17 20

Special Programs 34 34

Corporations 48 49

270 335

Provincial PSDP 115 150

Earthquake Rehabilitation

50 35

435 520

Outside PSDP 36 204

451 724

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SECTORAL DISTRIBUTION ANDSHARE OF PSDP SECTORAL DISTRIBUTION ANDSHARE OF PSDP

FEDERAL GOVERNMENT 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

270 100 335 100

Operational Shortfall 20 35

250 300

July-April utilization 170 68

May-June 76 30

Expected upto 30 June

246 98

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INFRA STRUCTURE - 2007-2008INFRA STRUCTURE - 2007-2008

Water 64

Power 21

PAEC 12

Communications 30

Railways 12

139

Others 28

167

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SOCIAL SECTOR - 2007-2008SOCIAL 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 4

K. A. & N. A. 14

Sub & Frontier 8

Planning Commission 14

Others 19

156

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Common Man’s Perception of Economic DevelopmentCommon Man’s Perception of Economic Development

Food at affordable pricesFood at affordable pricesHealth support on efficient basisHealth support on efficient basisHousing and shelterHousing and shelterAccess to utilities (water, power, gas, telephone) on consistent Access to utilities (water, power, gas, telephone) on consistent basis at affordable costbasis at affordable costEducationEducation Good quality at low costsGood quality at low costs Aligned to required skills and vocational development demandAligned to required skills and vocational development demand

Employment opportunities – Massive investment in human capitalEmployment opportunities – Massive investment in human capitalLaw and order , security and access to justiceLaw and order , security and access to justiceFreedom of access to informationFreedom of access to informationValue for contribution to federal, provincial and local revenueValue for contribution to federal, provincial and local revenuePotential for vertical migration in terms of quality of life and a mechanism to balance Potential for vertical migration in terms of quality of life and a mechanism to balance consumption and savingsconsumption and savingsGood governanceGood governance

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KEY TARGETS FOR POLICY MAKERSKEY TARGETS FOR POLICY MAKERS

InflationInflation Supply side planning and reformsSupply side planning and reforms Balance between consumption and savingsBalance between consumption and savings Strengthening of direct government interventionStrengthening of direct government intervention Import substitutionsImport substitutions

InequalityInequality Growth to be inclusiveGrowth to be inclusive Ensuring efficiency and productiveEnsuring efficiency and productive

utilization of PSDPutilization of PSDP Accelerated focus on Social sectorAccelerated focus on Social sector

Social SectorSocial Sector Reallocation of resources from general administration, Reallocation of resources from general administration, defence; etc.defence; etc.

Raise revenue from Financial Services and other Profitable Raise revenue from Financial Services and other Profitable Sector like trading etc. for direct transfer to social sector Sector like trading etc. for direct transfer to social sector to be managed by an independent representative bodyto be managed by an independent representative body

MDG’s to be real goals rather than compliance of MDG’s to be real goals rather than compliance of committments. These goals should be dynamic and committments. These goals should be dynamic and progressiveprogressive

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ManufacturingManufacturing

SectorSector

Focused planning for identified capacities in the sector of competitive advantage Focused planning for identified capacities in the sector of competitive advantage to match demand and preferential treatment for specified sectors for:to match demand and preferential treatment for specified sectors for:

KEY TARGETS FOR POLICY MAKERSKEY TARGETS FOR POLICY MAKERS

AgricultureAgriculture

SectorSector

Live stock to be doubled in 5 years Live stock to be doubled in 5 years

Planned approach for both major and minor cropsPlanned approach for both major and minor crops

Skills DevelopmentSkills Development

and HRDand HRD Huge capital investment by public and private sector to leverage the potential of knowledge economyHuge capital investment by public and private sector to leverage the potential of knowledge economy

InterestInterest Utility costsUtility costs TaxationTaxation

Transperency and unbiased accountabilityTransperency and unbiased accountability

Discouraging Elite CultureDiscouraging Elite Culture

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Way ForwardWay Forward

Political consensus on leading National Economic imperativesPolitical consensus on leading National Economic imperatives

Agricultural sector- 22 percent GDP 45 percent labourAgricultural sector- 22 percent GDP 45 percent labour

Strategy for major crops to achieve higher quality, improved yield per Strategy for major crops to achieve higher quality, improved yield per acre, seeds development and stronger research and technological acre, seeds development and stronger research and technological supportsupport

Strategy for minor crops to meet local demand and lower dependence Strategy for minor crops to meet local demand and lower dependence on importson imports

Development and higher allocation for water resources, storage and Development and higher allocation for water resources, storage and equitable distributionequitable distribution

Targeted Agricultural financingTargeted Agricultural financing

Exploiting the benefit of corporate farmingExploiting the benefit of corporate farming

Investment on infra-structure and communication to have efficient Investment on infra-structure and communication to have efficient supply chain managementsupply chain management

Development of cultivable waste landDevelopment of cultivable waste land

Balanced application of Fertilizer and PesticidesBalanced application of Fertilizer and Pesticides

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Agro based industry and Live Stock sector - Ventures.49 Percent of agriculture 11 Agro based industry and Live Stock sector - Ventures.49 Percent of agriculture 11 percent GDPpercent GDP

Identification and encouraging small and medium size Agro based Identification and encouraging small and medium size Agro based industries around rural areasindustries around rural areas

Stronger focus on Live Stock sector and to encourage global players Stronger focus on Live Stock sector and to encourage global players to participate in Jointto participate in Joint

Manufacturing Sector Manufacturing Sector Identification of capacity demand for economically viable competitive advantageous Identification of capacity demand for economically viable competitive advantageous

unitsunits Import substitution be the key strategy for manufacturing sectorImport substitution be the key strategy for manufacturing sector Preferential treatmentPreferential treatment

• InterestInterest

• TaxTax

• Research & DevelopmentResearch & Development

• Utility costsUtility costs

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Venture Capital & Private equity to focus on: Venture Capital & Private equity to focus on: Nano technologyNano technology I. T. based units (Software and Hardware)I. T. based units (Software and Hardware) Bio technologyBio technology Research & Development of chemical entities in pharmaceutical sectorResearch & Development of chemical entities in pharmaceutical sector Dairy and poultry industryDairy and poultry industry

Infra-structure Development Infra-structure Development

Water ResourcesWater Resources Power generation and distributionPower generation and distribution CommunicationsCommunications Railways Railways

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All the above are lagging well behind the required infra-structure All the above are lagging well behind the required infra-structure support to commensurate with the demand and growth imperatives.support to commensurate with the demand and growth imperatives.

Water and power resources are substantially inadequate, inefficient Water and power resources are substantially inadequate, inefficient and incompatible and this require a high priority for allocation of and incompatible and this require a high priority for allocation of resources and its efficient and expeditious utilization resources and its efficient and expeditious utilization

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Our beloved country Islamic Republic of Pakistan has been a Our beloved country Islamic Republic of Pakistan has been a gift to us from its Founder and has sustained all external gift to us from its Founder and has sustained all external shocks and self destructive internal strife which is a blessing shocks and self destructive internal strife which is a blessing of Almighty. We all owe a debt to this country which despite of Almighty. We all owe a debt to this country which despite constraints has given us a lot.constraints has given us a lot.

Let us now pledge to be unanimous in making it a country of Let us now pledge to be unanimous in making it a country of choice for all ‘Y’ and ‘Z’ generations, who do have unlimited choice for all ‘Y’ and ‘Z’ generations, who do have unlimited energy potential provided we are free and do justice to them.energy potential provided we are free and do justice to them.

Pakistan should have quality growth with a motto of a market Pakistan should have quality growth with a motto of a market based economy with a balanced focus on social welfare and based economy with a balanced focus on social welfare and community development.community development.

All sectors of population participates and benefit from such All sectors of population participates and benefit from such development.development.

MISSIONMISSION

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Thank youThank you

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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.

Presenter’s contact detailsPresenter’s contact details

SYED MASOUD ALI NAQVISYED MASOUD ALI NAQVI

KPMG Taseer Hadi & Co.KPMG Taseer Hadi & Co.

+92 (21) 568 5847+92 (21) 568 5847

[email protected]@kpmg.com

www.kpmg.com.pkwww.kpmg.com.pk

Documents

Syed Masoud Ali Naqvi Senior Partner KPMG Taseer Hadi & Co. Karachi 12 June 2006 Macro Economic Aspects FEDERAL BUDGET 2007-08