FEDRAL URDU UNIVERSITY OF ART SCIENCE AND TECHONOLOGY BUDGET REVIEW 2006-2009

Submitted To: Miss Shafaq Naqvi

Submitted By: Aisha Bashir Amtul Saboor Rabia Faaiza Ashraf Iqra Shamshad

Date: July 3, 2009

2006-2007

2006 2007

The Economic Survey of Pakistan for the year 2006 2007 was released by the Finance Division of the Government of Pakistan on 08 June 2007. The report presents a review of the performance of Pakistans economy during the fiscal year 2006 2007 (01 July 2006 30 June 2007).

General Review
Pakistans economy continues to maintain its growth momentum for the fifth year in a row. With economic growth at 7.0 percent in the current fiscal year, Pakistans economy has grown at an average rate of almost 7.0 percent per annum during the last five years. Real GDP grew at 7.0 percent in 2006-07 as against the revised estimates of 6.6 percent for last year and 7.0 percent growth target for the year. The other key features of the economic survey covering the period from July 2006 - April 2007 can be summarized as follows: Growth Performance of Components of GNP(% Growth at

Constant Factor Cost) Components Agriculture Manufacturing Services

2004-2005 6.5 15.5 8.5

2005-2006 1.6 10.0 9.6

2006-2007 5.0 8.4 8.0

16 14 12 10 8 6 4 2 0 2004 2005 2006 Y R EA S

GNP

Agricu re ltu M u an factu g rin Serv ices

Sect oral Contribution to the GDP growth (% Points)

Components Agriculture Industry Manufacturing Services Real GDP (fc)

10 9 8 7 6 5 4 3 2 1 0 2004

2004-2005 1.5 3.1 2.7 4.4 9.0

2005-2006 0.4 1.3 1.8 4.9 6.6

2006-2007 1.1 1.8 1.6 4.2 7.0

Agriculture Series2 Manufacturing Series4 Real GDP (fc)

GDP

2005 YEARS

2006

Inflation (percent change)

Category CPI (General) Food Group Non Food Group 2004-2005 9.3 12.5 7.1 2005-2006 7.9 6.9 8.6 2005-2006 8.0 7.0 8.8 2006-2007 7.9 10.2 6.2

July - April

14 12 INFLATION 10 8 6 4 2 0 2004 2005 2006 2007 CPI Food Group Non Food Group

YEARS
Per capita income grew by 11 percent this year to US$925 up from US$833 last year. The per capita income in dollar terms has grown at an average rate of 13 percent per annum during the last five years, rising from US$ 586 in 2002-03 to US$ 925 in 2006-07. Foreign Direct Investment grew by almost 37 percent in the first ten month of the current fiscal year to US$ 4.16 billion as against US$ 3 billion in first ten month of last fiscal year. The Stock Market registered a growth with Karachi Stock Exchange index at 9989 points at the end of the fiscal year 2005-06. The KSE-100 index rose by 24 percent since then to 12370 points until April 2007. During the same period total market capitalization increased by 28.6 percent rising from Rs 2801 billion ($ 46.5 billion) to Rs 3604 billion ($ 59.4 billion). The revenue deficit was at a deficit of 0.2% of GDP in 2005-06 compared to a deficit of 2.2% in 2000-01. It has further progressed towards a targeted revenue surplus of 0.6 percent of GDP in 2006-07. Total revenues are budgeted at Rs. 1163.1 billion in 2006-07 compared to Rs. 1087.0 billion in 2005-06, show-ing an increase of 7.0%. Total expenditure is targeted at Rs. 1536.6 billion or 17.4 percent of GDP for the fiscal year 2006-07. Total expenditure was projected to be 8.6 percent hig-her than last year (2005-06). During the first nine months (JulyMarch) of the current fiscal year total expenditure is estimated at

Rs.1168.5 billion or 76 per-cent of the annual target. Defense spending for the year is targeted at Rs. 250.2 billion 3.8 percent higher than last year and during July-March 2006-07, the spending has reached Rs.172.8 billion which is 69 percent of the full year target. Development expenditure is targeted at Rs. 435 billion for the year 2006-07 as against revised estimate of Rs.313.7 billion in 2005-06. During the first nine months (July-March) of the current fiscal year 2006-07, development expenditure amounted to Rs.241.8 billion or only 58.3 percent of the yearly al-location. Exports were targeted at $ 18.6 billion or 12.9 percent higher than last year. Exports during the first ten months (July-April) of the current fiscal year are up by 3.4 percent rising from $ 13.46 billion to $ 13.9 billion in the same period last year. Imports were targeted to decline by 2.1 percent in 2006-07 to $ 28.0 billion from last years level of $ 28.6 billion. As expected, growth in import decelerated to 8.9 percent during the first ten months (July-April) of the current fiscal year as against hefty increase of 40.4 percent in the same period last year. The merchandise trade deficit widen to $11.1 billion in the first ten months (July-April) of the current fiscal year as against $9.5 billion in the same period Last year. However, as percentage of GDP, trade deficit is likely to be 9.0 per-cents in 2006-07 as against 9.5 percent last year.

Current Account Balance Pakistans current account deficit further widened to $ 6.2 billion (4.3% of GDP) in the first nine months (July-March) of the cur-rent fiscal year from $ 4.6 billion (3.6% of GDP) in the same period last year. Foreign Exchange Reserves stood at $ 13,738 million at the end of April 2007, higher than the end-June 2006 level of US$ 13,137 million. Pakistani ru-pee depreciated (0.7%) from Rs.60.2138 per dollars as at end June 2006 to Rs.60.6684 as of end April 2007. Workers Remittances, the third largest source of foreign exchange inflows after exports and foreign investment, continue to maintain its rising trend. Workers remittances totaled $ 4.45 billion in the first ten months (July-April) of the fiscal year as against $ 3.6 billion in the same period last year, depicting an in-crease of 22.6 percent. Unemployment rate recorded at 6.2 percent and 3.1 million people remained unemployed during 2006 as against 7.69 percent in 2005 with 3.6 million people unemployed. Public debt was 85 percent of GDP in 1999-2000 but has declined to 53.4 percent in end-March 2007 a decline of 32 percentage points in seven years. During the year, public debt has declined from 56.9 percent in 2005-06 to 53.4 percent of GDP a decline of 3.5 percentage points in a year. Pakistans external debt and liabilities stood at $ 38.86 billion at endMarch, 2007. This is an increase of US$ 1.6 billion which represents a 4.3 percent in-crease over the stock at the end of FY06. During the last 60 years, Pakistans population has increased from 32.5 mil-lion to an estimated population of 158.2 million by 2006 2007 at an average rate of 2.7 percent per annum. The increasing political uncertainty since March 2007 as a consequence of judicial crisis and forthcoming elections later in the fiscal year 2007-08 have somehow not impacted the growth trend of the economy. Sustained macroeconomic policies, grow-ing domestic demand, fiscal discipline and renewed confidence of private sector are some key areas which contributed towards taking Pakistans growth rate to seven percent for the fifth time in its history. Some areas which did not perform well are in-vestment, poverty alleviation, return on national savings and current account balance. According to the survey, rising inflation has been another grey area for Pakistan. While the sustained economic growth over past five years leaves

the impression of a stable and resurgent economy, rising inflation and widening trade gap and above all the political situation bring into question its future sustainability.

Federal Budget 2007-08:

The overall size of the budget outlay for 2007-08 is projected at Rs1.6 trillion which is 21.7 percent higher than the last year's Rs1.315 trillion budget. The current expenditure of Rs1056.0 billion shows an increase of 20.0 percent and federal development expenditure at Rs335.0 billion a increase of 24.1 percent over the budget of the year 2006-07. With Rs150 billion provincial development budget, Rs35 billion for earthquake rehabilitation and over Rs23.3 billion for other expenditures, the total size of the budget comes to Rs1.9 trillion.. Tax revenue is estimated at Rs1025.0 billion, which is 21.8 percent higher than the original budget estimates of Rs840 billion and 22.1 percent higher than revised estimated collection of Rs839.6 during the year 2006-07. The share of current expenditure in total budgetary outlay for 2007-08 is 66 percent as against 67 percent for the budget 2006-07 and 72.3 percent of revised estimates for 2006-07. Debt servicing (Rs437.4 billion) and Defense (Rs275 billion) together account for 67.5 percent of current expenditure. The budget for fiscal year 2007-08 envisages a allocation of Rs520 billion for Public Sector Development Program (PSDP) which is 19.5 percent higher than that of 2006-07. The federal development budget of Rs335 billion is 24.0 percent higher than original budget of Rs270 billion for the year 2006-07. The Provincial PSDP ofRs150 billion is 30 percent higher than Rs115 billion of 2006-07. In addition, there will be expenditure of Rs35 billion on rehabilitation and reconstruction of earthquake hit areas. Federal PSDP allocation includes 53.4 percent expenditure on infrastructure and 46.60 percent on social sectors which together will build up social and physical infrastructure and ultimately bring about poverty reduction.

2007-2008

ECONOMIC REVIEW 2007-2008

Pakistans economy remains vulnerable to external and internal shocks due to internal security concerns and global financial crises. The country also continues to struggle with reforms, having mixed success, especially in reducing its budget and current account deficits.

Agriculture and Natural Resources:

Pakistan's principal natural resources are arable land, water, hydroelectric potential, and natural gas reserves. About 28% of Pakistan's total land area is under cultivation and is watered by one of the largest irrigation systems in the world. Agriculture accounts for about 21% of GDP and employs about 42% of the labor force. The most important crops are cotton, wheat, rice, sugarcane, fruits, and vegetables, which together account for more than 75% of the value of total crop output. Despite intensive farming practices, Pakistan remains a net food importer. Pakistan exports rice, fish, fruits, and vegetables and imports vegetable oil, wheat, cotton (net importer), pulses, and consumer foods. The economic importance of agriculture has declined since independence, when its share of GDP was around 53%. Following the poor harvest of 1993, the government introduced agriculture assistance policies, including increased support prices for many agricultural commodities and expanded availability of agricultural credit. From 1993 to 1997, real growth in the agricultural sector averaged 5.7% but declined to less than 2% in 2008.

Industry:
Pakistan's manufacturing sector accounts for about 19% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 51.4 % of total exports. Other major industries include food processing, beverages, construction materials, clothing, and paper products. Manufacturing sector growth has slowed in the last two years due to energy shortages and capacity constraints. In 2007-2008, the manufacturing sector grew by 5.4%. Despite government efforts to privatize large-scale parastatal units, the public sector continues to account for a significant proportion of industry. In the face of an increasing trade deficit, the government seeks to diversify the country's industrial base and bolster export industries. Net foreign investment in Pakistani industries is only 0.5% of GDP.

Sector Growth Performance (Percentage)

1990`s GDP Agriculture 4.6 4.4 200203 4.7 4.3 200304 7.5 2.3 200405 8.6 6.7 200506 6.6 1.6 200607 6.8 3.7 2007-08 5.8 1.5

Manufacturing Large scale manufacturing Services

4.8 3.6 4.6

6.9 7.2 5.2

14.0 18.1 5.9

12.6 15.6 8.0

10.0 10.7 9.6

8.2 8.6 7.6

5.4 4.8 8.2

GDP and GNP Growth (percentage)

10 9 8 7 6 5 4 3 2 1 0 1990 2002 2003 GDP 2004 2005 2006 2007 6.3
4.6 4.7 7.5
7.3

8.6

8.3
6.6 6.8

6.4

6.7

5.86.1

GNP

Foreign Trade and Aid:

Weak world demand for its exports and domestic political uncertainty has contributed to Pakistan's high trade deficit. Pakistan's trade deficit rose to over $15 billion in FY 2008, up from $9.7 billion in FY 2007, as lackluster export growth fell far short of increasing imports. Energy imports account for 29.6% of Pakistan's imports, and growth in exports cannot cover the increases in international commodity prices. Pakistan's exports continue to be dominated by cotton textiles and apparel, despite government diversification efforts. Major imports include petroleum and petroleum products, edible oil, wheat, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products, rising to $35.41 billion in 2008. External imbalance has left Pakistan with a growing

foreign debt burden. In 2008, GDP growth rate slowed down to 5.8% with slight deterioration in public and external debt indicators. The stock of Pakistan's total debt and liabilities (TDL) increased by 27% year on year, to PKR 6,417.4 billion (U.S. $80.7 billion at 79.5 rupees per dollar), with a commensurate deterioration in the debt sustainability indicators. In particular, the ratio of total debt and liabilities to GDP, a broad measure of the country's capacity to sustain debt, saw an end to a seven-year declining trend, rising in FY 2008 to 60%. (GDP at the official exchange rate is around $132 billion.) The fiscal deficit widened from 5.6 % of GDP in 1994-95, to 7.7% in 1997-98, and to 8.0 % in 2007-2008. Support for loss-making, state-owned enterprises, fuel subsidies, and a weak domestic tax base are critical elements in the recurring fiscal deficits. The Pakistan Telecommunications Company Ltd. (PTCL) represented the largest of Pakistan's privatization programs for 2005. Pakistans privatization program has, however, stalled after the Supreme Court of Pakistan reversed the Government of Pakistan decision to privatize Pakistan Steel Mill and has not take off since then. Despite its economic and political difficulties, Pakistan took steps to liberalize its trade and investment regimes, either unilaterally or in the context of commitments made with the World Trade Organization (WTO), IMF, and the World Bank.

Structure of saving & Investment as percentage of GDP

200102 TOTAL INVESTMENT Gross Fixed Investment Public Investment Private Investment NATIONAL SAVINGS Domestic Saving 16.8 200203 16.9 200304 16.6 200405 19.10 200506 22.10 200607 22.90 2007-08

21.60

15.5

15.3

15.0

17.5

20.5

21.3

20.0

4.0 11.3 20.8 17.6

4.0 11.3 20.8 17.6

4.0 10.9 17.9 15.7

4.3 13.1 17.5 15.40

4.8 15.7 18.2 16.30

5.7 15.6 17.8 16.0

5.7 14.2 13.9 11.7

National savings to Total investment (percentage)

25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007

National avings

Total Investment

Budget 2008-2009:
In the 2008-2009 budgets, however, the Government of Pakistan raised the maximum tariffs from the 20%-25% range to the 30%-35% range on 300 luxury items due to a large trade gap and growing current account deficit. Pakistan has received significant loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank (ADB)) and bilateral donors, particularly after it began using its military/financial resources in the war on terror. In addition, the ADB is negotiating $500 in loans to Pakistan. The World Bank has $2 billion in assistance in the pipeline, but it seems that only $700 million may be disbursed before the end of fiscal year 2008-2009. GDP (year ending June 30, 2008, PPP): $446 billion. Real GDP growth rate (year ending June 30, 2008): 5.8%. Per capita GDP (year ending 2008, PPP): $2,600. Natural resources: Arable land, natural gas, limited oil, substantial hydropower potential, coal, iron ore, copper, salt, limestone. Agriculture: Products--wheat, cotton, rice, sugarcane, eggs, fruits, vegetables, milk, beef, mutton.

Industry: Types--textiles & apparel, food processing, pharmaceuticals, construction materials, shrimp, fertilizer, and paper products. Trade (2007 est.): Exports--$16.31 billion: textiles (garments, bed linen, cotton cloth, and yarn), rice, leather goods, sports goods, carpets, rugs, chemicals and manufactures. Major partners--U.S. 21%, United Arab Emirates 9%, Afghanistan 7.7%, U.K. 5.1%, China 5.3%. Imports--$30.33 billion: petroleum, petroleum products, machinery, plastics, paper and paper board, transportation equipment, edible oils, pulses, iron and steel, tea. Major partners--China 13.8%, Saudi Arabia 10.5%, United Arab Emirates 9.7%, Japan 5.7%, U.S. 6.5%, Kuwait 4.7%, Germany 4.1%.

2008-2009

2008-2009

Budget at a Glance:
Sources of Funds - 2008-09 (Estimated)
Rupees in billion Net Revenue Receipts 1,111 Net Capital Receipts 221 External Receipts 300 Self Financing of PSDP by Provinces 124 Change in Provincial Cash Balance 79 Privatization Proceeds 25 Bank Borrowing 149 Total Sources of Funds 2,010 % 55.3 11.0 14.9 6.2 3.9 1.3 7.4 100

Application of Funds - 2008-09 (Estimated)

Rupees in billion General Public Services (Including Debt Servicing) 930 Development Expenditure 516 Defense Affairs and Services 269 Public Order & Safety Affairs 27 Economic Affairs 201 Others 40 Total Application of Funds 2,010

% 46.3 25.7 14.7 1.3 10.0 2.0 100

Macro Economic Framework of Budget 08-09:

08 GDP Growth Rate Fiscal Deficit Inflation Current Account Deficit FBR Revenue (PKR billion) Investment to GDP Ratio 7.20% 4% 6.50% 5% 1000 25%

09 5.50% 4.70% 12% 6% 1250 20%

% -23.6% 17.5% 84.6% 20.0% 25.0% 00

25 20 15 10 5 0 GDP Fiscal Deficit Inflation Current Account Deficit GDP

2008

2009

EXPENDITURE SIDE-UP BY 29.7 PERCENT Y-O-Y:

With massive shifts in the economic picture of the country the size of the budget has also been raised to PKR 2.01 trillion in order to deal with growing challenges faced by the economy. Although this is roughly 29.7 percent higher compared to last years budget size but we believe its justified keeping in mind growing inflation and rising expenditures on the subsidy side. As per the composition presented by the Ministry current expenditures constitute a hefty chunk of 73 percent in the total pie amounting to PKR 1.49 trillion down by 1.5 percent YoY while PSDP would take the rest 27 percent worth PKR 550 billion in the upcoming fiscal year.

Highlights of the budget FY08-09:

Total Budget outlay of PKR 2.01 trillion Revenue collection target for FBR for FY09 has been increased to PKR 1250 billion up by 25 percent as compared to last years revised target of PKR 1000 billion

 From the cumulative outlay, current expenditure would take a hefty chunk of PKR 1493 billion while PSDP would take an amount of PKR 550 billion registering a change of 1.5 percent and 20 percent respectively Fiscal deficit is estimated to be curtailed at a level of 4.7 percent GDP growth rate would slow down to 5.5 percent during FY09 Current account deficit would hover around 6 percent of GDP Inflation rate would loom at a yearly rate of 12 percent in the upcoming fiscal Foreign Exchange reserves which are already shrinking are estimated to improve to a reasonable level of USD 12 billion GST has been increased from 15% to16% Increase in customs duty on import of 300 non-essential and luxury items in 15%, 20%, and 25% slabs of import duty to higher slabs of 30% and 35% respectively Estimates of privatization proceeds are PKR 25 billion No change in taxes for the share market Income tax exemption slab has been increased from PKR 150K to PKR 180K per annum for males while a new slab of PKR 230K has been implemented from the previous level of PKR 200K for females Focus on plunging the fiscal gaps by offering commercial papers, savings schemes at attractive pricing to lure investments Hike in NSS rates by 2 percent Increment of 20 percent in salaries and pensions of government employees.