KPMG TASEER HADI & CO.
KEYNOTE ADDRESS
BUDGET 2008
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Syed Masoud Ali Naqvi
Senior Partner
Beach Luxury Hotel,
1
Karachi, 17 June 2008
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
CONTENTS

Budget 2008-09 at a glance
3

Key objectives for the Budget 2008-09
6

Common Man’s Perception of Economic Development
7

Key Targets for Policy Makers
9

GDP Growth Trend
10

Composition of Sector GDP growth
11

Sectoral Contribution to GDP growth
12

Inflation
13
2
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
CONTENTS

Domestic Debt
14

Interest Payments
16

Savings & Investments
17

Pakistan Economy: SWOT Analysis
18

Public Sector Development Programme
25

Composition of PSDP
26

Sectoral Distribution and Share of PSDP
28

Subsidies
29
3
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Budget 2008-2009 at a glance
REVENUE
Tax Revenue – CBR
Direct Taxes
Income tax
Others
Indirect Taxes
Customs
Sales tax
Federal excise
Others
Budget
Estimate
2007-08
(Rupees in Billions)
Revised
Estimate
2007-08
Budget
Estimate
2008-09
388
20.3
408.3
367.3
21.0
388.3
477.0
19.0
496.0
154
375
91
2.3
622.3
1030.6
148.0
375.0
92.0
2.3
617.3
1,005.6
170.0
472.0
112.0
1.4
755.4
1,251.4
4
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Budget 2008-2009 at a glance
REVENUE
Non Tax Revenue
Less Provincial Share
Net Capital Receipts
External Receipts
Self Financing of PSDP by
Provinces
Change in Provincial cash
balance
Privatisation Proceeds
Bank Borrowings
(Rupees in Billions)
Budget
Revised
Budget
Estimate
Estimate
Estimate
2007-08
2007-08
2008-09
337.6
1368.2
466
902.2
58.5
258.5
122.7
393.3
1,398,9
457.2
941.7
142.8
275.4
129.7
427.8
1,679.2
568.3
1,110.9
221.3
300.2
124.4
51.8
32.6
78.9
75
80.9
1549.6
1.7
424.1
1,948.0
25.1
149.0
2,009.8
5
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Budget 2008-2009 at a glance
EXPENDITURE
Current Expenditure
General Public Services
Debt Servicing
Others
Defence Affairs & Services
Economic Affairs
Others
Developmental Expenditure
PSDP
Others
Total Expenditure
(Rupees in Billions)
Budget
Revised
Budget
Estimate
Estimate
Estimate
2007-08
2007-08
2008-09
437.4
204.5
641.9
275
78.9
60.5
1056.3
564.2
317.5
881.7
277.2
293.4
63.9
1,516.2
619.4
310.1
929.5
296.1
201.1
66.5
1,493.2
470
23.3
493.3
1549.6
395.1
36.7
431.8
1,948.0
472.7
43.9
516.6
2,009.8
6
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.
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
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
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





9
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
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
10
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
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:
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
 Interest
 Utility costs
 Taxation
Transparency and unbiased
accountability
Discouraging Elite Culture
11
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
GDP Growth Trend
10.0%
9.0%
9.0%
7.5%
8.0%
7.0%
6.8%
6.5%
5.8%
6.0%
5.0%
4.6%
4.7%
1990s
02-03
5.8%
4.0%
3.0%
2.0%
1.0%
0.0%
1980s
03-04
04-05
05-06
06-07
07-0812
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Composition of Sector GDP growth
(Growth in Percentage)
GDP (Constant Factor Cost)
Manufacturing
Large scale manufacturing
Small scale manufacturing
Construction
Electricity, Gas distribution
Agriculture
Major Crops
Minor Crops
Livestock
Services sector
GNP (Constant Factor Cost)
2005-2006
2006-2007
2007-2008
5.8
8.7
8.3
8.7
10.2
-14.7
6.3
-3.9
0.4
15.8
6.5
5.6
6.8
8.2
8.6
8.1
17.9
-26.6
3.7
8.3
-1.3
2.8
7.6
6.7
5.8
5.4
4.8
7.5
15.2
2.5
1.5
-3.0
4.9
3.8
8.2
6.1
13
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Sectoral Contribution to GDP growth
2005-06
(Percent Point)
2006-07
2007-08
Agriculture
1.4
0.8
0.3
Industry
1.1
2.1
1.3
Services
3.3
3.9
4.2

Real GDP
5.8
6.8
5.8
14
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Inflation
2006-07
2007-08
Overall inflation
7.8
10.3
Food inflation
10.3
15.0
Non-food inflation
6.0
6.8
Core inflation
5.9
7.5
SPI (Sensitive
Price Index)

6.9
13.7
WPI (Wholesale Price Index)
10.8
14.1
15
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Domestic Debt
2005
(Rupees in Billions)
2006
2007
2008
Permanent Debt
526.2
514.9
562.5
615.7
Floating Debt
778.2
940.2
1107.7
1407.2
Unfunded Debt
854.0
859.2
940.0
997.2
Total
2158.4
2314.3
2610.2
3020.1
32.8
30.0
30.0
30.3
Outstanding
Domestic Debt

Percent of GDP
16
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Domestic Debt
As percentage of GDP
45.0%
40.3%
40.0%
39.3%
35.7%
32.8%
35.0%
30.0%
30.0%
30.3%
05-06
06-07
07-08
30.0%
25.0%
20.0%
15.0%
10.0%

5.0%
0.0%
01-02
02-03
03-04
04-05
17
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Savings & Investments
Description
(Percentages of GDP)
2004- 2005
2005-2006
2006-2007
2007-2008
Total Investment
19.1
22.1
22.9
21.6
Changes in Stock
1.6
1.6
1.6
1.6
Gross Fixed Investment
17.5
20.5
21.3
20.0
- Public Investment
4.3
4.8
5.7
5.7
- Private Investment
13.2
15.7
15.6
14.3
 Savings
Foreign
1.6
3.9
5.1
7.6
National Savings
17
18.2
17.8
13.9
Domestic Savings
15.4
16.3
16.0
11.7
18
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Interest Payments
As percentage of GDP
1999-2000
2005-2006
2006-2007
2007-2008
Total Revenue
41.0
18.8
22.1
21.6
Tax Revenue
51.8
25.2
32.3
29.0
Total Expenditure
29.6
14.9
17.2
17.0

Current
Expenditure
33.5
19.6
23.0
23.1
GDP
5.5
2.7
3.3
3.0
19
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$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
Opportunitie
s
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
Weaknesses
 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
Threats












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
20
Soaring core and food inflation
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$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
21
Pakistan Economy: SWOT Analysis
Weaknesses
 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
22
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
 Global high commodity prices
 Focused skills development to secure dividend from demographic advantage
23
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
 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
24
Pakistan Economy: SWOT Analysis
Challenges
 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
25










Pakistan Economy: SWOT Analysis
Strengths













Weaknesses
4-5 years of strong growth has led to higher medium term growth path
 Credibility of statistics
Resilience against shock and extra ordinary jerks
 Indications of doubtful sustainability of growth momentum
Rise in per capita income for US$503 in 2002 to US$1,085 in 2007-08
 Continued sharp increase in prices of food items
Robust Consumer spending
 Incompetent contribution of various sectors of economy in tax revenue
Substantial increase in private sector credit
 Inefficiency in utilization of development expenditure
Balance between fiscal deficit and growth
 High administrative costs
Medium Term Development Framework
 Quality of governance
Maintenance of external and domestic debt within limit
 Increasing trade and current account deficit
Reach to Global Capital Markets
 Concentration of export in restricted items and markets
Geo political situation post 9/11
 High cost of doing business
Higher foreign direct investment
 Lack of focus on agriculture sector
Challenges
Reduction in poverty level
 Political instability
Tight monetary policy to moderate inflationary pressure
 Shortage of skilled workforce
Sustainability of growth momentum
 Energy crisis and water crisis
 Addressing structural problems in
energy,
 Poor
HDIagriculture
indicators
and exports sectors
 Decline in trend of foreign investment
 Continued subsidies to loss making public sector companies
 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
Opportunitie
s
 Harmonious relationship amongst Federation and its units
Capacity constraints with India in IT sector
 Political uncertainty and current judicial crisis
 Equitable distribution of resources between Federal, Provincial
Recent investment in IT sector
 Issues in Balochistan and Northern Areas
and Local governments
BPO’s potential
 Worsening of situation on Western borders
Telecom and Media revolution
 Revenue generation by provinces Anti Pakistan attitude in Afghanistan
Geo political situation
 Balanced approach of combination
of Fiscal
and Monetary Policy
 Level
of corruption
Foreign Direct Investment
measures
to
combat
inflation
 Broadening gap between Rich and Poor
Investment in education and health







 Lapsing of WTO multi-fibre agreement
 Global high commodity prices
 Focused skills development to secure dividend from demographic
advantage






Threats
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
26
Soaring core and food inflation
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Public Sector Development Programme
(Rupees in Billions)
Development Expenditure
Federal Government
Federal Ministries
Corporations
Special Programmes
Special Areas
ERRA
Provincial Governments
Total PSDP:
Other Development Exps.
Estimated operational shortfall in PSDP
Budget
2007-08
Estimates
Revised
2007-08
Budget
2008-09
230
50
34
21
335
35
150
520
23
543
197
42
29
21
289
19
150
458
37
495
234
51
62
26
373
27
150
550
44
594
50
63
77
493
432
517
27
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Composition of PSDP
(Rupees in Billions)
Revised Ratio of
2007-08
GDP
2008-09
Ratio of
GDP
Percentage
Variance
Federal PSDP
Federal Ministries
197
1.9
234
1.9
18.8
Corporations
42
0.4
51
0.4
21.4
Special Programmes
29
0.3
62
0.5
113.7
Special Areas
21
0.2
26
0.3
23.8
289
2.8
373
3.1
29.0
19
0.2
27
0.2
1
150
1.4
150
1.2
-
458
4.4
550
4.5
20
ERRA

Provincial PSDP
Total PSDP:
28
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Composition of PSDP
(Rupees in Billions)
Revised
2007-08
2008-09
Income Support Fund
-
34
Peoples Works Programme
-
28
Khushal Pakistan Programme
19
-
 Pakistan Fund
Khushal
10
-
29
62
Special Programmes
29
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Sectoral Distribution and Share of PSDP
(Rupees in Billions)
Budget
2007-2008
%
Budget
2008-2009
%
Infra-structure
167
50
166
45
Social Sector
156
47
188
51
Others
12
3
19
4
335
100
373
100

Operational
Shortfall
35
50
300
323
30
POST BUDGET SEMINAR 2008
The Income Tax Bar Association, Karachi
Subsidies
(Rupees in Billions)
Budget Revised Estimates Budget
2007-08
2007-08
2008-09
Current
WAPDA
KESC
TCP (Wheat & Sugar)
USC
Oil Refineries / OMC / Others
Others
53
20
9
2
15
2
114
20
46
2
175
21
75
14
26
3
140
2
101
378
260
13
114
29
407
35
295
Development
Import of Fertilizers
Total Subsidies:
31
KPMG TASEER HADI & CO.
Presenter’s contact details
SYED MASOUD ALI NAQVI
KPMG Taseer Hadi & Co.
+92 (21) 568 5847
mnaqvi@kpmg.com
www.kpmg.com.pk