Saturday, 25 June 2016

BREXIT – Implication on Pakistan

People of Great Britain voted out the pro EU sentiments in a referendum by 52 percent to 48 percent on June 23, 2016 which was called by the PM David Cameron who wanted Britain to remain in EU. As a result he announced his resignation. The voting was done to decide on Britain Exit from EU, therefore it is in general known as Brexit.
The European Union is a political economic union of 28, now 27, countries. Initially Germany, France, Belgium, Italy and Netherlands formed the first federation of Europe after the World War II in 1952. Later on England, Ireland and Denmark joined the group in 1973. The last country which joined EU was Croatia in 2013.
The EU is a single market system which was developed through standardized rules of free goods, labor and capital mobility through Schengen Visa. They have common trade policies and several coherent policies of agriculture, fisheries, and justice and home affairs. It is governed through the 7 different institutions.
EU member countries have GDP worth of €16.63 Trillion and their intra EU trade is €2.8 trillion. Due to joint trade agreements trade share among EU countries is higher. UK is one of those countries whose exports to EU member states did not change much in the last one decade but imports have increased by €40 billion.
Economists, financial experts and bookies were predicting different impacts of Brexit on Britain, EU and other countries which are economically and financially integrated with Britain and EU. During the first day of BREXIT polls, stock markets of all the countries had witnessed decline. UK stock market declined initially by 8 percent, though recovered later on but overall it declined by 3.15 percent in the entire day. Similarly Nikkei index down by 7.9 percent, while Hang Seng by 2.9 percent, Euro index by 8.6 percent while Dow index by 3 percent. Pakistan stock exchange reacted to Brexit very strongly today at one point of time it declined by 3.7 percent but later on recovered 1.5 percent to net loss by 2.2 percent.
Second panic attack hit UK’s currency which depreciated by 9 percent in one day. In short to medium run, depreciation may lead to improvement in trade balance until prices of exports do not increase. Apart from depreciation since UK’s market inside the EU was quite integrated with EU member countries thus there is a fear that UK may face repercussions of moving out of EU. Though it is fair to assume that companies which are currently trading their products with Britain will not stop their trading abruptly unless there are some bureaucratic hurdles are attached to Brexit.
Considering the level of integration these day, though not to the extent of EU, every country will be hit by Brexit, Pakistan may not be exception to it. However, lack of open policies as well as constraints to investment in Pakistan the effect on Pakistan may not be very substantial, nonetheless, few target areas need to be studied. On the other hand other open economies are expecting more business with Britain after Brexit.
Pakistan receives 13 percent of remittances from UK. Brexit may effect in two ways (i) Due to depreciation in exchange rate people may need to send more in Pound Sterling, therefore there are good chances that remittances may increase. Contrarily, recipient households may need to cut down their expenditures which will directly affect our GDP growth and (ii) In case of job loss due to Brexit, even in the short run, the flow of remittances will be reduced to Pakistan. Therefore we may face little higher current account balance than otherwise.
In addition to that, Pakistani exports to EU are 29 percent out of which 7 percent goes to Britain. Due to massive depreciation of British currency, which may take 6 months to go back to its old value, and possible decline in overall income of the British people (British GDP) Pakistani exports are less likely to increase unless Pakistan exchange rate is also depreciated which is currently overvalued. If in case, Euro depreciates as well then Pakistan may face decline in their exports to EU, which would be more alarming. Nonetheless, Pakistan will keep on enjoying GSP plus status to EU.
Having said that, there are good chances that due to depreciation Germany, France and other EU member countries may not to be able to exports their products to Britain. Thus Pakistan has good chances to exploit this opportunity and increase its exports to Britain. Nonetheless, it depends on the products UK imports from EU as well as the negotiations between the two governments on the tariffs.
Although the amount is not very significant, nevertheless, share of FDI from UK is around 6 percent in total FDI we receive every year. Decline in the economic activity may reduce FDI from UK to Pakistan.
Britain is also involved in giving aid and grants to Pakistan, which could be lessened due to overall Britain’s fragile economic situation at least for a year. However, 18 billion pounds Britain is saving from Brexit, a chunk of it could be spent on aid and grants.
Moreover, students who go for higher studies to UK may not get temporary jobs due to lower economic activity as well as UK/EU scholarship may be reduced for the students due to economic turmoil. Few other question which need answers are; how will it affect Pakistani businessmen living in UK who were involved in trading with EU? What will happen to the Pakistan immigrants to Britain who were on Schengen Visa? Are we expecting more exits from EU? Will there be any split in Great Britain?

The aforementioned are some of the issues which Pakistani government needs to address by either negotiating with British high commission and/or British Government to avoid possible hitches.

Friday, 17 June 2016

Setting high targets again

Appears here

Islamabad - Finance Minister Ishaq Dar revealed Rs4394 billion federal budget of 2016-17 yesterday. Besides, Rs. 800 billion federal PSDP the major chunk similar to that of last year goes to interest payments and defense payments.

It is a mere estimation of taxation and expenditures. Every year government takes few measures to address the prevailing major issues in the economy. Three major problems the government has been facing since it took over are terrorism, energy crisis and stagnant economic growth.

Economic growth is linked with the first two issues, therefore, in the past two years, the government tried its best to allocate a big chunk of funds to eradicate terrorism and mitigate the energy shortages. It is worth to mention here that the war on terror has separate budget than the budget allocated on the defense expenditures. Due to better energy management the government has controlled loadshedding especially in bigger cities. Nonetheless, it won’t be wrong to say that due to energy crisis economy is performing less than the potential.

In this budget, Rs. 432 billion are allocated in PSDP for electricity generation and distribution. It includes PAEC allocation for Chashma Nuclear Power Projects but it did not include the CPEC PSDP fund. It is expected that due to the projects which were set up in previous few years almost 5000 MW electricity will be added to the national grid. This will lessen loadshedding to very short duration. Moreover, it will mark a big impact on the manufacturing sector which is currently deprived of due to energy shortages.

Last year was among the worst year for the farmers due to negative growth of agriculture sector. Therefore, in this budget special initiatives are taken for the agriculture sector. Among them reduction in the price of Urea and DAP, abolishment of sales tax on pesticides and reduction in the electricity price in peak hours are the main policies that will probably reduce the cost of production. The only concern is the effectiveness of implementation that farmers will get the benefits of reduction in prices of these products.

In addition to that, duty rates on cold storage have been abolished. This implies that supply chain process of food from farm to market will be improved. In addition to that, this also implies that if cold storages are properly utilized then problem of food security will be reduced by minimizing the food wastage.

Exports recorded a decline in the last year which was surprising on one end because of having GSP plus status, however, it was not contracting the expectations due to energy constraint and exchange rate forced overvaluation. Therefore, the government has tried to give incentives to those industrial sectors which are active in exporting their products. Especially textile sector will get maximum benefits from the announced policies in this budget. Nonetheless, it is also believed that not all the products in the textile sector will be benefited from the policies announced in the budget.

PSDP has included several infrastructure projects which will directly affect the employment in the country. Moreover, allocation for Diamir, Bhasha and Bunji Dams is a positive sign that people will get employment in those projects which will be completed by 2019 and beyond.

Withholding tax, which was started in 1990s became favourite of the Finance Minister. It seems he knows that this tax can be used in various ways to include people in the tax net as well as to get maximum revenues. Nevertheless, the former objective has not been achieved for the last three years but the later objective, which is a short term gain, is successfully achieved. The budget reveals several higher tax rates for non-filers and lower tax rates for filers. This will eventually hurt a common man and above middle class person who wants to earn little more money but is afraid of filing tax returns due to the behaviour of FBR personnel. Therefore, if the objective is to get more revenue each year then the policy is achieving that goal otherwise it is a bad policy to adopt.

Reduction in corporate income tax by one percent is a shaggy policy. Corporate sector does not feel privileged by paying 1 percent lesser tax than in the previous year. They will feel good if the government reduces the rate by 5 to 10 percent. Nonetheless, there is always a fear to get lesser revenue if the rates are slashed by a bigger margin.

Apart from economy and taxation, one of the important aspects of budget is the relief for common person. The present government is known to be “industrialist friendly government”, however, they came up with few policies which will ease the burden of common person. One of the policies which have already discussed was agriculture policy which will reduce the prices of agriculture products due to decline in the cost of production.

In addition to that 10 percent raise in the salaries of government employees, merging the 2013 and 2014 ad hoc relief allowance with basic pay, 10 percent raise in pensions and 25 percent increase in pension of those who are more than 85 years of age are few initiatives which help government employees.

Beside government employees, the budget of BISP is raised to Rs.115 billion and number of beneficiaries will be increased. Although total anticipated number of people who should get benefit from BISP program is higher but every year more and more people are included in the pool. Minimum wage is increased to Rs.14000 for the informal sector, however, how much actually they will get is always one of the major concerns.

Overall we can call it “agriculture budget” even though there is no policy device for the cotton crop apart from reduction in the duty of pesticides. However, it is hoped that in the next fiscal year economic activity will be kicked off due to a better energy situation. In addition to that similar to that of last year, Mr Dar is trying his best to collect revenues from the non-filers’ pockets. Above all, even though there is some relief to government employees but there isn’t much for a common man in this budget.

Tuesday, 19 January 2016

Why are the stock markets crashing and what should you do ?

The market rout that started with the dawn of the new year continued yesterday with the Nifty closing at a 19 month low of 7437.80 down by 99 points(1.31%). BSE Sensex fell 317.93 points(1.28 %) to 24455.04.
Ostensibly the fall was caused by the fall in oil prices which dipped below the $30 barrel mark. The WTI was trading at $29.42 and the Brent at $28.94 at the time of writing this article. The Dow recovered to close down by 390 points after falling 530 points. The fresh fall in crude was linked to the impact of Iran’s entry into the global oil market which is already reeling under massive supply glut.
But there is deeper malaise which is a derivative of the poor state of the global economy as a whole. A week into the new year a host of influential experts and investors warned of a gloomy 2016
George Soros said “China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”
JP Morgan experts said this in a note “Our models suggest that US recession risks over a two- to three-year horizon have increased materially as a result of weak supply-side performance. US expansions don’t die of old age, but an environment of tight labor markets amid weak productivity gains and limited global pricing power signals that the expansion is becoming more vulnerable.”
George Osborne who warned of a “Dangerous Cocktail” of risks. Here are some of the major ingredients of the cocktail that threatens to unleash a perfect storm in the global economy.
The much vaunted BRICS grouping is in battling multiple crises at the same time. Russia is battling multiple problems of falling crude prices, internal turmoil, western sanctions and its involvement in the Mid-East. The country is also facing a massive budget deficit since it requires oil to be at $82 dollars to balance its budget. it derives over 50% of its revenues from oil. The Russian economy is a very bad state contracting 4.1% year-on-year.
Brazil is battling a spiraling corruption scandal that is hanging a threat of impeachment over Dilma Rousseff. The commodities rout has battered the South American giant since it was a large exporter of commodities to China, its largest trading partner. Spiraling inflation which is currently at 10%. is another sign of the looming crisis in Brazil. Brazil’s GDP shrank 1.7% in the third quarter of 2015, “worse than market expectations,” and has had negative growth for over a year
China needs no explanation what with a constant deluge about the state if it’s economy and the impact of its transition for a spending economy to a consumption economy battering our senses. The origins of the new years continued crash also can be attributed to mounting worries over the state of the Chinese economy and fall in Chinese equities under a new circuit breaker system that has been since removed.
Japan is battling a decades long deflation spell and is continuing its much maligned quantitative easing program worth $680 billion a year. The core consumer-price index, which excludes fresh food, was up 0.1% from a year earlier in November way below the BOJ’s target of 2%. Japan is also grappling with an aging population that also is stubbornly refusing to spend forcing it ramp up its stimulus program. Japan’s QE program is so large that it now owns $54 billion in exchange-traded funds (ETFs) or roughly about half of the ETF market.
This level of central bank intervention is unprecedented and shows how deep the rot has spread not only in Japan’s economy but also the global economy.
South Africa also is a victim of the commodities crash and a slowdown in China. It is also facing the threat of a rapidly depreciating South African Rand which has fallen by over 44 per cent against the US dollar, 48 per cent against the Yen, and 31 per cent against the euro. It is also reeling under the impact of a severe drought.
The Eurozone continues to battle deflationary pressures with the CPI inflation at 0.2% way below its target of 2%. The EU also officially embraced NIRP(Negative interest rates policy) where the banks have to pay the central bank to park money. It also facing a worsening refugee crisis and a radical political transformation that is seeing many right wing parties getting sizable political representations. A reluctant GDP that is refusing rise is adding to the monetary unions woes.
The state of the US economy also leaves a lot to be desired. The December rate hike was supposed to be a signal that that the economy is performing decently and on a road to recovery, but all the data points since the hike including the recent jobs data have been negative.
US retail sales slipped 0.1% in December wile the consensus was that that there would be no change. Retail sales excluding automobiles, gasoline, building materials and food services (which can be volatile), fell 0.3% last month, following a 0.5% rise in November.
Industrial production data was also negative with output falling for the third month in a row, by 0.4% in December, after a downwardly revised 0.9% decline in November. The fall in crude was a major contributor.
In a note titled “Is it safe?” published Thursday, the strategists at JP Morgan said that 2016 is likely to see “pockets of stress,” and that the US economic expansion is becoming “more vulnerable.”

Rising global debt

Global debt has grown by $57 trillion to reach $199 trillion in the seven years following the financial crisis – a 40.1% rise, according to a new report. All major economies are now recording higher levels of borrowing relative to gross domestic product (GDP) than they did in 2007.
Total debt as a share of GDP stood at 286% in the second quarter of 2014 compared with 269% in the fourth quarter of 2007. China’s total debt has nearly quadrupled over the same period, rising from $7 trillion in 2007 to $28 trillion by mid-2014 fueled by real estate and shadow banking.
Although hight debt to GDP levels don’t suggest imminent disaster, they are a dangerous sign especially during a deflationary environment.
The above factors will be the major hotspot’s to watch out for heading into 2106. We at Lazyrupee expect Brazil and Japan to be the next troublemakers with Eurozone’s troubles mounting slowly.
2016 may very well not see any crashes but it will be the year when the perfect storm will brew and be ready to lash out.  Read what Larry Elliot had to say

India is okay…ish!

A host of  analysts, both individual and institutional alike have been harping about the growth prospects of India and some have even termed as an island of growth. But it doesn’t take away the fact that Indian economy is linked to global economy and any turmoil will directly have bearing over it.
But India also has many positives going in favor of it, most importantly it has a stable political regime (for what it’s worth), falling commodity prices are net-net beneficial, a fiscal deficit under control and inflation under check. But continuing rout in commodities and crude will be harmful as it will lead to reduced capex and jobs. But the negatives what you and me should worry are about with
  • The most prominent one being the high levels of NPA’s in the banking sector with a disproportionate amount of it being confined to the PSB’s. The RBI has set an ambitious goal of cleaning up the NPA’s mess by March 2017, but we still remain skeptical given the scale of the problem which we covered in this article. Corporate India is addicted to debt
  • Discom debt crisis, although UDAY scheme is a positive.
  • Over leveraged balance sheets of the private sector which has led to muted investment growth hampering the prospects of a cyclical recovery.
  • With the government frontloading a significant amount of public spending and private investments yet to pick up, there have been calls for the government to relax the next years fiscal deficit target of 3.5%, but if it does relax it it will send a negative signal to the global investor community but will be a positive for the domestic economy and the investor community will be looking for cues in the budget as the whether the government will loosen its purse strings or tighten it.
  • China has become the biggest trade partner with almost every country in the world, hence gyrations in China will continue to impact India as well.
  • The flailing reforms drive is another problem with crucial pieces of legislations such as land bill, GST being victims of political polarization.
  • Although there have never been three successive monsoon, the pattern of rainfall and the amount of ti will always be a a risk. El Nino is expected to peak and analysts are now predicting La Nina which brings heavy rainfall. But the chances of Climate Change disrupting the quantum of rainfall remain.
  • With two successive failed monsoons, rural spending will remain depressed and firms will be looking for the elusive recovery in consumer discretionary in urban areas.
  • Many analysts are predicting a bottoming of earnings and the tone and path of the markets will depend on how the earnings recovery pans out. So far the Q3 results have ranged for disappointing to muted.
So to put it simply the global economy is a mess and sadly India is also a part of it, and we will be affected whenever global volatility spikes.

So what should you do ?

Markets rise and fall, thats the reality but investors should understand the underlying economic dynamics and tune their investing and trading strategies.
The key to surviving any crash is to buy and hold quality
First rule is to never panic, that is if you are holding quality stocks. If not then may the countless god’s bless your portfolio.
As presented above there is sufficient evidence to prove that the global economy is in a bad shape, but that doesn’t mean that it is going to implode overnight. Central banks have some amount of ammo(No much but some) left in case a crisis but based on the data you should take a call whether to stay invested or get out and enter at crisis levels.
Extraordinary and unconventional monetary policies have disfigured the global economy but it remains to be seen the full impact of those policies namely QE, ZIRP and NIRP.
But the undeniable fact is in spite of crashes, corrections, recessions and terrorist attacks the Nifty and Sensex have risen over a period of time and will continue to, but the pace will differ based on the state of global economy and the pace of its recovery in the event of a financial crisis.
Remember your returns are proportional to the quality you hold
  1. Average down: Markets will fall during economic turmoil but if you are long term investor average down with market falls and over a period of time you will have a better entry price.
  2. Stay away: When bears are in full control there is very little you can do, so one option is to completely stay away, until the storm subsides no matter how long.
  3. Don’t bet what you can lose: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” Warren Buffet. Put in the money that you can afford to lose as cruel as it sounds.
  4. Hedge your portfolio with derivatives: “Derivatives are financial weapons of mass destruction.” Warren Buffet. Use them only when you truly y=understand the complexities of using them, if not then you are better off.
  5. Diversify: Allocate your investible corpus into multiple asset classes such as equities, mutual funds, bonds and precious commodities. Putting all your eggs into a single basket is the worst thing you do during a market crash.
  6. Look at beaten down stocks: Value investors thrive during turmoil, so look at under-priced and beaten down stocks proportionate to their quality and invest in them. Market crashes provide valuable entry points.
  7. Jumping a leaking ship: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” You don’t want to sell solely out of fear, but you don’t want to hold stubbornly on to a losing investment, either. Timing is everything. There are winners and losers with every market crash, and it’s largely up to you which team you’re on. Choose wisely, and let those–like Buffet–who’ve been there and done that help you out.
  8. One mistake people most often commit is buy high and sell low. They enter the markets when valuations are frothy and expect the markets to perpetually rise which can lead to a lot of heartache and lesser zeros.
  9. Hold defensive stocks: These are non cyclical stocks that perform irregardless of the economic cycles such as FMCG stocks. One more idea is buy quality names with high dividend yields so that you make some money regardless of crashes.
  10. Don’t follow the crowd: Panic during crises can be contagious and most often than not it can be very destructive to follow the crowd and the parade of demagogues on CNBC, ET etc. It wise to take step back and evaluate your portfolio and remain sanguine.
This tweet gives a pretty good idea

Take a calculated, unemotional and circumspect stock of the Indian as well as the global economy and chart your course of action. Leave your emotions at the door.
Buy Right And Sit Tight And Happy Investing.

Tuesday, 14 July 2015

Documentation of economy

Documentation is nothing more than keeping the record of every transaction and every activity in the country. In general, people who want to avoid government regulations, habit of utility pilferage, tax evaders and avoiders are part of the undocumented economy. It is not necessary that all the informal activities are undocumented. In certain cases formal sector is also undocumented.
Problem of documentation is not just mere tax collection, but it is core part of good governance. It helps in eradicating the problem of terrorism, for example, having all the records of sim cards issued on respective CNICs.
Furthermore, better documentation helps in better policy formulation such as offering social security benefits to the lay off or unemployed persons can only be effective in the presence of proper documentation.
Avoiding government regulations, sometimes, is inevitable in the presence of higher inflation and lesser purchasing power of the people. People tend to do more jobs than one and hide it from the government. In this way they avoid legal problems as well as they can save more but not paying taxes. Therefore, these kinds of undocumented activities can be mitigated by change in regulations.

Documenting the economy does not imply that our economic activity will increase. There is a good possibility that economic activity is reduced after the documentation and will be unemployed due to high cost of documentation including paying utility bills, paying indirect taxes etc. As well as poverty may also increase after the documentation. This is one of the reasons that every economy has smaller undocumented part, where poor are working for their existence. 

Monday, 29 June 2015

Growth by Spending

Growth is the main target of the policymakers. If growth is inclusive then the benefits of growth are distributed among all the groups of society. However in case of non-inclusive growth the redistribution of benefits will trickle down effect of growth. Nevertheless, the trickle down effect is insignificant in the short run.
Several policies have been made by the government and then affiliated departments support government to achieve that announced level of growth. Among those several departments Federal Board of Revenue has significant importance. Every year an impossible task is given to the FBR which sabotage the reputation of FBR.
Along with taxation, the other significant part is expenditures which everyone wants to do without any restriction. However, everyone faces the income constraint which at macro level comes from the revenues government generated from people and the income from the investment they have made. Unfortunately, government entities are not in habit of earning profits thus subsidized heavily by revenues collected by FBR.
Government invests where markets fails, for example it involves in services industry such as PIA and Railways in our case which provide facilities to the general public because private sector does not invest in non-profitable or lesser profitable ventures. Despite these two sectors, government invest in all those activities which are used by general public or in other words which can be called a public good such as parks, defense, police etc. Public goods are provided without considering the profits to all segments of the society. It is worth to mention that Metro Bus service is a public good, which is subsidized by the government and used by the general public. Although in more technical terms this kind of public good is known as club good since it is not totally free. However, since it is used by few people in the society that is one of the reasons it is highly criticized by the opposition, though the beneficiaries are praising it.
Coming back to the main point that growth is the target agenda of policymakers then why are we following lower inflation (stabilization) and lower fiscal deficit policy (fiscal consolidation) from the last several years. Although several seminars and reports prepared by Institute of Policy Reforms suggested that growth is necessary. Dr Pasha repeatedly said that the stabilization is achieved and now its time to shift to higher gears of growth. But unfortunately IMF’s agenda is above the wail of national economists and think tanks.
A recent paper by PIDE suggested number of things. One of the major findings it has is that fiscal consolidation leads to growth which is in accordance with the IMF agenda. However, how it should be achieved is very interesting.
There are several components through which fiscal consolidation is done. As discussed earlier the two major components are revenues and expenditures. Thus it can be done by increae in revenues or decrease in expenditures. For the last 25 years several ineffective policy measures are taken to increase tax revenues but tax revenues as percentage of GDP had declined from 13 percent in 1990 to less than 10 percent in 2014.
Literature on fiscal consolidation explicitly says that consolidation is only effective when it is done by cutting down expenditures. A noteworthy question is what expenditures? These can be classified into capital/development as well as current expenditures. Capital expenditures or development expenditures are those which will payback in future while current expenditures, although very important but are those those expenditures which do not pay back in future. The definition may be debatable because employee’s salaries are current expenditures. However, if school/college/university teachers are paid then it is also known as investment because government is investing in existing knowledge to produce further knowledge (students) which is the crux of endogenous growth theory of Paul Romer.
One of the important conclusions of PIDE’s paper is to reduce interest payments. In the current budget Rs.1328 billion is the estimated budget deficit and Rs.1280 billion is interest payments. If interest payments are zero, which is almost impossible with the high debt and high fiscal deficit, then the total budget deficit comes to Rs.48 billion. In this way government can spend rest of the money to produce further knowledge, i.e. spending on Research and Development, which is low to an embarrassing level. The interest payments can only be curtailed by reducing the overall debt, which is close to impossible, in the current scenario.
It has also been revealed that higher growth episodes are strongly related to the higher capital/development spending. Nonetheless, the trend of capital spending has been declining for the last 2 and half decades. This implies that fiscal consolidation, if it is followed in few years, is done by cutting in development expenditures. This is the worst form of fiscal consolidation. It affects the growth negatively.
It is high time to identify the leakages in the system, which will give us more fiscal space to invest in development projects. Finding an efficient way of doing the mega projects is very necessary. The recent worst example is metro bus system which according to Dr Farrukh Saleem cost us Rs.2 billion per KM. This cost is 8 times of the cost of building Indian Metro and more than double the cost of building Turkish Metro (0.88 billion per KM).

In conclusion we may say that since we are facing huge debt and deficit problems and we are scarce in resources to fund our development projects thus (i) leakages and over spending should be avoided by carefully examining every project, thus we may have more fiscal space to allocate funds on other development projects (ii) prioritize the projects according to the need of public (iii) give importance to Paul Romer’s theory of endogenous growth and allocate sufficient fund for research and development.

Friday, 12 June 2015

Issues not addressed in the Budget 2015-16

Published in The Nation, Jun 13, 2015

Budget 2015-16 does not bring happiness in everyone’s life. I call it partly friendly in my previous article. Nevertheless, there are certain problems which are not addressed. Let’s look at the neglected sectors which are not addressed in the budget and forgotten issues.
Services sectors contributed more than 50 percent to GDP but it is totally neglected once again. Services sector is neglected and the major emphasis is on the commodity producing sector, i.e. manufacturing and agriculture. What constitute the services sectors? It includes drivers, road transporters, telecom sector, storage sector, cobbler, barber, electrician, plumbers, tailors, shopkeepers (wholesalers and retailers), Banks and Bankers, insurance agents and other staff, construction workers, Public administration and defense, and social services.  Therefore in nutshell not everyone is working in Industrial sector an in agriculture sector. Furthermore, the neglected sector has maximum share in GDP and 40 percent of employed labor force.
Although the components of services sectors are inter-linked with the production of industry and agriculture thus making policies for commodity producing sector will enhance growth of services sectors as well nonetheless, services sector has its own significance through domestic commerce (at term introduced by Dr nadeem-ul-Haque, former deputy chairman Planning and Development Division and former Vice Chancellor PIDE in 2006 in Pakistan). Increase in domestic commerce leads to more employment opportunities for the people, Local competition in open market will increase which helps in generating innovative ideas; these ideas thus result in expansion in business and eventually increase in exports. These local industries which look for the demand of local buyers are known as organic industries. The domestic commerce will increase the need for space in the market as well as create new cities. Therefore, budget should bring certain reforms which helps domestic commerce to flourish. This would also reduce the income inequality and poverty in the country.
It’s been more than 2 and half decades when Paul Romer wrote an article on endogenous growth. It is among the most quoted article since then. It says that investment in human capital innovation and knowledge are drivers of economic growth not the external forces which are in general known as exogenous factors. Moreover, the outcome of this investment will have spillover affect which results in better economic development. However, the budget makers may not know the importance of investment in innovation and knowledge. This seems to be the only reason that even after twenty years the allocation of budget on research and development in all the sectors is negligible. I am sure that out of thousand billion budget government may allocate few billions to the research and development and grant it to various universities depending on the research projects they are running. It is very much possible that dues to this allocation they may not have to introduce billion rupees incentive structure to the industries.
The budget, every year, gives us the equation of revenues and expenditures. Expenditure heads are initially decided and then deciding on the magical number of budget deficit, revenue target is set. After the decision of revenue target several possible algorithms are made to achieve the impossible target of total revenues, this year its Rs. 3100 billion. This year tax reform commission has been established which gave several recommendations to the government. Moreover, Dr Pasha has also gave several recommendations to increase the revenues, nevertheless, no major initiative has been taken to improve the tax administration, cover the loopholes, and abolishment of exemption apart from abolishing the SROs issued by FBR.
Apart from these reforms construction sector and agriculture income is still un-taxed. Although agricultural income tax is a provincial matter but people get exemptions by declaring their income coming from agriculture sectors. In general it is seen that agriculture income tax become controversial, nonetheless, it is not. The same rules will be applied on the agriculture income which are applied on the income from other sources. Most of the investment is either going into real estate sector. Prices of the real estate sector are also changing frequently at rapid speed, which implies higher profitability of the investors in the real estate sector. Since mostly it is undocumented sector therefore it is difficult to tax, nonetheless, looking at the profitability it is pretty sure that FBR can raise significant amount of revenues from this sectors. Neglecting both the sectors for revenue collection affects negatively to the revenue collection efforts.

Similar to the real estate sector several informal activities are undocumented and are not paying sales tax especially albeit consumers are paying them sales tax when they use their services. For instance, restaurant, fast foods, bakeries etc. Vague estimates show that FBR is losing close to Rs. 250 billion every year by not collecting taxes from informal sector. 

Budget 2015-16 is Partly Friendly

The article is published in the Nation on 6/6/2015

Budget is nothing more than an estimate of income and expenditures. However, in Pakistan we celebrate it as a major national event. We also have a tendency of estimating our expenditure first and then, according to the budget deficit (which is either dictated by IMF or some imaginary golden number in our minds) we set the tax target. 
This year, the economists, especially, were hoping that since stabilization has been achieved (inflation came down to 4 percent level) so there is a dire need to adopt a set of policies that result in a boost in growth. However a common person’s expectations are something else. Those expectations can generally be never met in any kind of budget, barring a few exceptions. Every year, there are boilerplate statements after a budget is announced. One significant comment is whether the budget was people-friendly or pro-rich. My initial assessment of the budget presented by Finance minister Ishaq Dar yesterday is that 2015-16 budget is a partly people-friendly budget. 
This assessment can be explained in six parts: (i) interest payments issue (ii) PSDP (iii) relief to common person (iv) Employment Generation through public and private sector investment (v) Human Capital and (vi) Taxes.
The estimated budget deficit is Rs. 1328 billion out of which Rs. 1280 billion are interest expenses and Rs. 1512 billion is allocated for PSDP, out of which Rs.700 billion will be spent by Federal government. Therefore, as suggested by few latest research papers at the Pakistan Institute of Development Economics, the interest payments need to be curtailed down because it eats up significant amount of resources.
This year development expenditures need special attention because of two reasons (i) the allocation (ii) the way it will be spend on each project. Lots of money is needed to eradicate the problem of energy shortages and government has allocated Rs.142 billion, to spend on development projects.  It includes projects of Neelum-Jhelum and Diamir and Dasu dams. Moroever, as Dar sb announced they are determined to get rid of electricity shortages by December 2017. Therefore it is necessary to invest in the projects. 
Relief for common person has few dimensions. Budget of BISP is raised to Rs.102 billion and number of beneficiaries will be increased from 41 million to 50 million. However one question remain that what is the total anticipated number of people who should get benefit from BISP program. If it is close to 80 million then we are still short of 30 million. Moreover, Baitul-Maal budget is increased from Rs.2 billion to Rs.4 billion, which implies that it will increase the beneficiaries by significant amount as well as they can start new ventures. Salaried class will get more salaries, which is more than increase in inflation. Minimum wage is increased to Rs.13000 for the informal sector. 
Other than monetary increase in wages and salaries several projects will be started by the government, such as renovation of Islamabad-Lahore Motorway, Lahore-Karachi Motorway, highways which are part of Pak China Projects, canals and dams in Baluchistan and Sindh etc. These projects will definitely generate employment opportunities.
To boost domestic production, industrial tax holiday in KPK, decline in exports financing, reducing the exporter’s risk, and setting up exports development fund and land port authority will increase industrial production as well as exports. Rs.600 billion is allocated for the betterment of agriculture sectors, as well as duty free solar tube wells, will reduce the cost of agriculture production. 
Health and education is a provincial subject, nevertheless, Rs.71.5 billion is allocated for higher education out of which Rs.20.5 billion is allocated for HEC. The government is determined to increase the budget of education to 4 percent of GDP which is close to 2 percent currently. Nonetheless, important thing is not to spend more but how to spend and where to spend is vital for better results. Moreover government has started internship programs for all those graduates who do not get jobs after getting degrees from their institute.

Every year it is debated that poor should be taxed less and rich should be taxed more. Moreover, neglecting the excess burden the debate of regressivity and progressivity is the topic of the town. Considering the hot topic, the announced tax policy is not pro rich apart from decline in corporate tax from 33 percent to 22 percent. 10 percent tax is imposed on all the electricity bills exceeding Rs.75000. This implies that revenue will increase if theft does not increase. Moreover, capital gains tax is increased to 15 percent if the shareholder sells his share within one year, 12.5 percent if he sells between one and two years and 7.5 percent if he sells his shares after two years. Currently, the share of capital gains tax in total tax is 0.3 percent. Therefore, it is a very good initiative to collect taxes from share market. Moreover, tax-non-filers need to pay extra tax, which will increase the compliance rate. Apart from above few taxes, minimum tax rate slab is declined to 2 percent. Vehicle transfer duty is reduced, regulatory duty on mobile phones is decreased but sales tax is doubled, taxes on cigarettes are increased, and more importantly SROs cannot be issued by FBR.