Text of Budget Speech

Bismillahir Rehmanir Rahim

Ladies and Gentlemen

1. It is an honor for me to present before you the budget of the federal government for the year 2002-2003. The budget will be presented in two parts. Part-I will review the main elements of economic policy we have pursued, the successes we have achieved and the new initiatives we plan to undertake to further consolidate these gains.

2. In Part-II, I will outline in detail the tax strategy of the government and the tax proposals planned to be undertaken during the next year.

Ladies and Gentlemen

3. The three years we have spent in the office have been most challenging. Apart from inheriting a declining economy that had lost its credibility with its development partners, we faced numerous problems that included skepticism of donors, resistance to reform, persistent drought and above all the September 11 episode. Under the circumstances, our task was to prepare the foundation for sustainable growth and undertake reforms while facing new and unthinkable challenges, clearly a formidable task.

4. We have faced these challenges with determination and fortitude. We knew that our survival depended on rebuilding our economy and that this objective had to be pursued with relentless zeal. Allah has been most gracious in rewarding our efforts with significant success. Today, Pakistan is not facing the economic challenges it faced in the past. We have a secure position on our external account and our main sectors of domestic economy, namely agriculture and industry are both functioning satisfactorily. More importantly, there are reasons to be optimistic about the future prosperity of the country.

5. This does not mean that we have achieved victory. Only that the relentless path of economic reform that we have followed has begun to yield dividends and a minimal security level, critical for economic stability, has been achieved. But we have to remain on course, as much more needs to be done to realize full benefits of reforms.

6. What I have just stated was fully demonstrated in the aftermath of the events that shaped the picture of the current year. Leaving aside the statistical comparison for now, it is widely accepted that 2001-02 was an epoch-making year that has changed the course of history. Pakistan found itself at the centre stage of this history-making process. These events have left indelible marks on our economy, geo-politics, military strategy and society.

7. The fall out of 9/11, however, was not limited to our decision on supporting the international coalition. The economic challenges it posed were no less daunting. Indeed, much before 9/11, the world economy was passing through a slow-down. All industrialized countries were affected by oil price shock that was followed by a slow down in IT sector in the wake of bursting of the dot-com bubble. On our part, besides the transmission of adverse effects of this global slow-down, we were confronted with a persistent drought that continued through the year. All these factors affected the growth prospects for Pakistan. But 9/11 radically altered the economic landscape.

8. First, there was a major slow-down in the level of our foreign trade. Many export orders were either cancelled or withheld and the process of placing new orders was suspended. Consequently, exports declined considerably. With the slow down in exports, the level of overall economic activity was also adversely impacted which led to a decline in the level of imports. The combined effect of these developments was a sizeable decline of more than $3 billion in the level of overall trade of the country.

9. Second, Pakistan was declared a war zone for the purpose of insurance, imposing a major additional burden on our industry. Government had to undertake extra-ordinary measures to secure continued operations of shipping and airlines, albeit at high cost to the economy.

10. Third, the overall tax collection was also affected both due to a slow down in domestic economy as well as a decline in imports. The growth in tax collections during the year that we had targeted was substantially lost due to this fall out.

11. Finally, the investment environment and the privatization program were both affected in the aftermath of 9/11.

12. A modest estimate suggests that our losses were well above $3 billion due to the conditions created by the events of 9/11. However, our challenges were not over as yet. As you are all aware, in response to a terrorist attack on its Parliament building in December 2001 in New Delhi, which we had condemned unequivocally, India massed troops on our eastern border, necessitating a response from our valiant armed forces.

13. Despite all this we have come out of crises relatively unscathed and facing the challenges with determination. In a short while I will give you the details of country's economic performance during the year fraught with formidable challenges. Economic growth and price stability, two main features during the first two years of our economic management, remained the hallmark of this year's performance also.

14. But what is more important for me at this stage is to let you know that it was due largely to the economic policies that we pursued and the manner in which we managed the economy that have enabled this country to meet the extra-ordinary challenges successfully.

15. At the outset, the process of reforms lies at the core of economy's ability to withstand shocks. Let me take a few moments to enable you to appreciate the logic of reforms and the effects they make on the ability of the economy to meet unforeseen shocks. In the simplest terms, reforms mean allowing each player in the economy to play the role it is best suited to play. The key players in the economy are obviously, business, government, regulatory institutions, markets and consumers. Each of them has a role to play best suited to their abilities. The problems or distortions in an economy erupt fundamentally from mixing or weakening of these roles. In our case, for instance, for a long time government became the leading business player of the country, controlling enormous economic power from manufacturing to trading and from finance to banking. Simultaneously, it severely neglected its regulatory functions that in turn allowed businesses to flaunt regulations. Large presence of public sector along side a weakly regulated business exposed markets to all kinds of manipulations, thereby jeopardizing the welfare of the consumers. After a while the consumers were faced with double jeopardy, colossal losses of government controlled businesses were picked up in the budget, which effectively meant use of taxpayers' money for underwriting these losses. What is more, when tax revenues did not suffice, government borrowed and ended up mortgaging the future of our coming generations.

16. The process of reforms is nothing more than putting every player in his right position. The greatest amount of a nation's potentialities are realized when each player performs his function alone and does not interfere in the functions of others. It is for this reason that our government has devoted greater part of its energies in designing and implementing the process of reforms, all of which were aimed at limiting government's direct economic role, expanding the action space for the private sector, strengthening government's regulatory function and allowing markets to play their due role in the process of price determination and resource allocation.

Ladies and Gentlemen

17. We have pursued the path of reform without any compromise. Our partners were initially skeptical of our plans but soon they were convinced of the seriousness and sincerity of our commitment. Then there were many occasions, when either because of resistance that we faced or due to momentary difficulties we encountered, many amongst us argued for temporary suspension of the process of reforms. However, it goes entirely to the credit of President General Pervez Musharraf who at each such juncture declared that there will be no relenting of the process. The track record so developed immensely helped us in averting the many crises we faced after 9/11.

18. Since each player was in the process of aligning itself to the role most suited to its potential, the shocks were absorbed with relative ease. There was no major disruption to the budget. The negative effect on investment was contained. The regulatory institutions remained vigilant and markets functioned satisfactorily despite major swings in some cases.

19. Then we were able to obtain soft loans and support from the Paris Club for rescheduling of bilateral loans, primarily on the basis of this reform program. This was supplemented by some additional support from donor countries.

20. The most notable support came from overseas Pakistanis who began to channel their remittances from normal banking channels. The phenomenal increase in the level of remittances, which increased from $1.1 billion to more than $2.2 billion, is a result of three factors, namely the infamy earned by the hawala business in the aftermath of 9/11, removal of the perception that foreign accounts offer safe havens, and a genuine interest among the expatriate Pakistanis to explore profitable opportunities in Pakistan. Undoubtedly, this process has been aided by the reforms effort currently going on in the country, which has inspired confidence among the expatriate community. There are clear signs that many Pakistanis who had thought it profitable to invest abroad than in Pakistan, are beginning to return to their motherland and a process of de-dolarization is in evidence.

21. The combined effect of these developments is that the overall foreign exchange reserves of the country have shot up to more than $6 billion, which is more than twice the highest level ever achieved by the country. It is important to note that this comfortable level of reserves is not a result of any bonanza earned by the country as reward for its participation in the international coalition. Rather it is the result of reform process and culmination of policy measures undertaken by the government. Indeed, the level of reserves had already crossed the $3 billion mark well before 9/11 which is the highest in the country's history. This strong reserves base has helped Pakistan regain its economic sovereignty and enabled it to meet the contingencies of any unforeseeable circumstances.

22. Thanks to this build up in reserves, today the country is facing a stable exchange rate. In fact if it was not due to our fear to lose competitive edge for our exports, the exchange rate could have further appreciated. The State Bank has very ably remained engaged in stabilizing the demand for dollar so that excess supply does not lead to any undue appreciation in the exchange rate.

23. To sum up, then, in the last three years, our economic policy has provided a solid foundation to the economy, which can withstand the shocks of the type we faced during the year. We have given a clear direction to economy, the one where each player is playing its due role, thereby enabling the country not only to absorb shocks but to achieve consistent growth.

24. It is sometimes said that reforms do not address the problems of a common man nor does it give him any comfort that country's reserves are exceptionally high or that the exchange rate is stable. As I said earlier, the greatest sufferings are inflicted on the common man in an economy plagued by distortions. For ultimately the cost of this disorder is passed on to the poor either in the form of higher taxes or inflation, which is also a form of taxation and a regressive one. The exchange rate stability is crucial for maintaining price stability and containing inflation. The level of reserves is directly correlated with the exchange rate stability and as such all these factors have a bearing on the common man and the long term prosperity of the country.

25. However, our concern for the common man does not confine to only these factors. Perhaps the most important achievement of this government is the overall stability in the price level that has contained inflation to less than 3% during this year. This was done through a combination of containing unnecessary government expenditures in the budget as well as by promoting growth in agriculture and industry which ensured continued availability of all essential commodities. As one example, the success of our agriculture policy is reflected in the fact that for the third consecutive year the country has not imported a single grain of wheat, where previously precious foreign exchange was spent to meet domestic demand. What is more, Pakistan is emerging as a net exporter of wheat, as for the last two years we are exporting considerable amounts of wheat to several countries, including Afghanistan. This turnaround is due entirely to the great contribution of our farmers, whose devotion has finally flipped this balance in favor of Pakistan. Similarly, the manufacturing output of sugar and vegetable ghee has been adequate keeping a check on their prices.

26. A similar period of price stability, in the face of adversities, cannot be found in recent economic history of the country. During the period we have experienced unprecedented events, most notably the drought and all time high oil prices in the international markets. In the past, such periods were inevitably associated with low growth and high inflation. Yet during the tenure of this government reasonable growth and high level of price stability have remained the main features of economic performance.

27. Price stability lies at the core of any welfare program for the common man. It is well known that low income groups are the worst hit by inflation. Conversely, lack of inflationary pressures is most helpful to this group of people.

28. More importantly, we are working through a proper program of poverty reduction, whereby almost all economic, social and governance policies are integrated in a holistic manner to improve the economic lives of country's poor. In the later part of my speech I would give you the details of what we have done through a number of specially designed poverty reducing intervention programs such as Khushal Pakistan program, food support program, Zakat, micro-credit, regularization of Katchi Abadis and land distribution. All these programs will help create jobs - both temporary as well as self employment - or provide assets that can yield a degree of economic and social security to vulnerable groups.

29. As yet another important step, the share of poverty related expenditures in the budget has been significantly increased. As against Rs.119 billion spent during the last year, in the current year the poverty reducing expenditures will be increased to Rs.136 billion. Next year, the expenditure will be increased to Rs.161 billion.

30. There is one area, however, which has undoubtedly affected the budget of the common man that is the prices of utilities. As much as the government would like to mitigate the suffering of common man, its options are somewhat limited. We must understand two things about the cost of utilities. First, for lack of any significant domestic source, we depend on imports for meeting our energy needs. Second, government has no control over international prices. When these prices were declining, government faithfully lowered the energy prices, and when they are rising, we have no option but to pass on the increase also. If we don't do so then we will have to meet the additional cost by extra borrowing. Our national choice is simple: Either ask those who use energy to meet the cost today, or pass it on to future generations. The debt burden we are carrying today is not against the moneys this generation had borrowed, rather this was done by those before us, yet we are bearing this burden. The policy adopted by this government is to lower the burden of future generations. We must pay today for whatever we are consuming and refrain from shifting this cost to future generations.

31. The problem of utilities prices was worsened due to persistent drought that led to low water levels in our reservoirs. Consequently, the share of hydel generation in total electricity production was significantly reduced and use of thermal power increased tremendously. As you know, with rising oil prices, cost of thermal production is very high. The cost of electricity production has thus increased significantly.

32. This does not mean that the government has not done anything to mitigate the impact of utilities prices within the constraints of existing resources. Significant support was made available to both WAPDA and KESC to provide relief to agriculture and domestic consumers and to limit their tariff increase to bearable levels. In particular, Rs.83 billion in accumulated losses of KESC are being picked up, including an injection of Rs.15 billion this year to keep it afloat. In the case of WAPDA, for the third consecutive year, its debt servicing payable to government has been absorbed in the budget. This year, a cost of Rs.20 billion was picked up in the budget on this account. Without these enormous doses of support, the electricity tariffs would have called for much larger increases. Clearly, these are subsidies given to mitigate the impact of increased cost of electricity.

33. In summary, I would submit that improvement in the welfare of the common man has been the primary focus of economic policy and there are visible signs that this process has received significant importance and attention in the last three years.

34. Before I leave this section, let me say that today the economy of Pakistan is in a more comfortable and stable position than at any other time in at least the last three decades. The problems that we are confronting today are much less structural than external and not entirely of our making. The tensions on the eastern border have to ease for economic prospects to brighten in the two countries. We have repeatedly said that war is not our objective, but no one should nurse any illusions about our capability to defend our motherland both militarily and economically. South Asia faces an acute poverty problem, as it houses the largest concentration of world's poor. We need to release some of the resources that we had to expend in defending our borders for poverty related expenditures. The sooner we realize that it is poverty, ignorance, disease and deprivation that are the enemies of this region, the earlier we will redirect our efforts to wage a war against them rather than creating tensions at the border. However, defense of Pakistan will remain a priority of the government and all resources will be made available to ensure that our territorial integrity is not threatened. Pakistan strives for peace, and wants to settle all issues, including Kashmir, through dialogue.

Economic Review

35. Let me now turn to a review of the main trends in the economy during the year 2001-02. The Economic Survey published on 13 June 2002 contains all the details in this regard and as such I would only point out some of the important developments that took place during the year. In particular, the following require special mention:

(1) The overall economic growth rate was registered at 3.6% against the post-9/11-revised target of 3.3% and original target of 4%. This is a highly satisfactory performance in view of the immense adversities the country faced during the year and truly reflects the resilience of our economy. Even in a regional context, Pakistan has done better than Thailand with a growth rate of 2.7% and Malaysia, 3.0%. On a global basis, the growth rate was 2.8%.

(2) Due to this higher growth rate and a declining population growth rate, the per capita income was increased by 3.2%.

(3) Despite the persistent drought the agriculture sector registered positive growth at 1.4% as compared to the negative growth of 2.9% that it registered last year. Wheat and cotton had flat growth, whereas sugarcane registered positive growth while the rice output declined during the year. This is a commendable performance of a sector whose primary input, namely availability of water, suffered a decline of nearly 50% during the year. Clearly, there are signs that our farmers have begun to use scarce water more efficiently. On its part the government provided necessary support by enabling farmers to acquire tubewells and offered them concessional rates for use of electricity and ensured adequate and timely flow of credit.

(4) The large-scale manufacturing sector maintained its growth momentum by registering a growth rate of 4.0%. This is an impressive performance given the higher base in view of exceptionally high growth of 7.8% it achieved last year and the economic slow down that was faced in the immediate period after 9/11. Industries that took lead in this performance were cotton cloth with 15% growth, sugar with 10% growth and record production at more than 3.3 million tons and petroleum products with growth of 18%;

(5) As I noted earlier, revenue collection suffered during the year because of significant loss of revenue in customs and sales tax on account of significant decline in imports in the immediate aftermath of 9/11. We hope to finish the year with a modest growth compared to last year. In addition, we paid an exceptionally higher amount of refunds to exporters to clear the backlog accumulated over the years.

(6) Inflation remained low at below 3%, due mainly to effective expenditure controls, tight monetary policy, efficient movement of commodities and availability of adequate supplies throughout the country.

36. In a year filled with tumultuous events the above performance is quite strong and a source of satisfaction. Undoubtedly, there is a need to accelerate the rate of growth so that per capita incomes can rise rapidly and poverty levels decline sharply. But we must always keep in mind our initial starting point, which was very grim due to excessive debt burden, and recognize that sustainable growth can only be achieved gradually in view of the past drag that we are carrying. It needs to be appreciated that we are achieving growth while containing the growth in our debt burden.

Macroeconomic Framework

37. The budget for 2002-03 is part of a three year macro-economic framework, covering the period 2001-2004, that sets the goals for major economic variables of the country. Let me point out the main features of the framework so that you may appreciate how the budget will facilitate the realization of the goals set out in this framework.

38. These features are:

(1) GDP growth will rise to 5% in the year 2003-04;

(2) Inflation, on average, will be contained at less than 4%

(3) Gross investment to GDP ratio will be increased to 17.2%;

(4) Fiscal deficit will decline to 3.5%;

(5) Current account deficit will be contained to 1.8% of GDP;

(6) Foreign exchange reserves will increase to 18 weeks of imports.

39. The above framework provides a yardstick to compare our performance. Our performance is largely in line with the above benchmarks, and in some cases, like in current account and gross reserves, we are already in a much better position that envisaged.

Structural Reforms

40. On many occasions I have stressed the point that what we are doing for the country is not fully reflected in the statistical comparisons normally used in comparing economic performance across different periods. The real focus of our efforts is on reforms, a process that continued during the year in all the major sectors of the economy.

41. I will now share with you some of the highlights of the present and future reforms:

Expenditure management:

42. A major focus of fiscal management is on expenditure control. Through a series of measures we have enabled the public to have greater access to information regarding the level of expenditure. All expenditure figures are now released on the web site of the Ministry of Finance on a monthly basis.

43. The public accounts committees are efficiently functioning at both the provincial and federal level and now the provinces have also opened their proceedings to the Press.

44. The separation of Audit and Accounts that was achieved last year was further strengthened during the year by the appointment of a Controller General of Accounts and establishment of his office. The quality of both these functions will improve immensely with this historic initiative of the government.

45. The process of accounts reconciliation and automation of all accounting function have advanced significantly during the year. These processes are being extended to provinces. With the help of new system of financial control and budgeting, the process of expenditure control has become effective and is being constantly monitored in the Ministry of Finance. The measures adopted for this purpose included ban on purchases of durable goods, new vehicles, except for operational duties and controlling other expenditures.

46. At this stage, one needs to remember that three main components of our expenditures, namely debt servicing, defense and establishment costs for running the civil government, leave very little resources for discretionary expenditures. Yet we have attempted to contain the growth in these expenditures also. In particular, the debt strategy we have adopted has enabled us to reduce the rate of growth in debt servicing. In the last three years, the growth in debt servicing has been brought down and this year a net saving has been witnessed in debt servicing.

47. We have judiciously managed the growth of defense expenditure also. But the tension on the eastern border has necessitated additional defense expenditure. Except for this contingency, defense was also contributing in meeting the needs of economic adjustment through a process of cutting non-essential expenditures. But let me assure the nation that defense is the ultimate need of a sovereign nation. We have no hegemonistic designs in the region nor do we want to engage in any arms race. Yet our sovereignty and freedom are too precious to be compromised in the name of any economic drive. We have met the needs of our defense forces to face the challenge and would continue to do so if needed in future.

48. Let me commend the people of Pakistan that there was no panic after the mobilization on our eastern borders - exchange remains stable, availability of essential commodities is adequate, prices are normal and banks have appropriate level of liquidity.

49. A major source bleeding our budget are the losses of the public sector corporations being picked up by the government. During 2001-02, the government picked up a total liability of Rs.134.44 billion, equal to more than 3.3% of GDP, on behalf of these corporations. These included accumulated losses of KESC as well as default of government dues payable by these corporations. Clearly, unless stopped quickly, such hemorrhaging can undermine the viability of the federal budget. Much of it relates to cash resources drained out at a time when the country is hard pressed to meet some of the most wanting social sector expenditures and development needs for such critical projects as in the water sector. The amount of resources that will be freed by avoiding these losses can be gauged from the fact that our total national spending on health and education was budgeted at Rs.83 billion, which is significantly lower than the losses of Rs.134.44 billion from PSEs. Clearly, if we plug these holes, enormous resources will be released for social sector spending.

50. We are already committed to privatizing these corporations and in the next year significant progress is targeted on this account. At this stage it will be appropriate to mention a couple of examples where some positive developments are in the making. These are PIA and Railways, Steel Mills and nationalized commercial banks, in which a visible turnaround in performance is evident and we hope these organizations will soon become self financing.

Debt strategy:

51. Let me turn to a problem that is central to our economic predicament. This is the problem of gigantic public debt that we have accumulated over the last five decades, and most notably during the decade of the 90s. Its present size and shape are essentially reflective of all the wrongs that we have been doing during all these years. It is simple to understand this phenomenon. Whenever we failed to meet our needs from tax revenues, we resorted to borrowing, without much consideration for the productivity of these loans. Today, our capacity to service these loans has been seriously constrained.

52. The President in his speech of December 1999 had set for the country the goal of self-reliance.  To achieve that one needed to tackle the debt problem, for it is the non-serviceable debt that comes in the way of achieving self reliance and compromises country's sovereignty. By self-reliance, it is not meant to have a state of autarky and isolation. Rather, we would like to be an active and responsible member of the world economy, building on our strengths and avoiding dependencies. We would essentially like to engage in trade and investment rather than seek foreign aid.

53. Given the importance of this goal, we had set-up a committee whose report was adopted last year and now forms the basis of our debt management strategy. I would like to share with you some of the successes we have been able to achieve by following the path envisaged in this strategy.

54. Over the last two years, we have lowered the burden of most expensive foreign liabilities on Pakistan by nearly $2 billion from $37.9 billion as on 30-6-2000 to a projected level of $35.9 billion as on 30-6-2002. This represents a reduction of nearly 5% in foreign liabilities. In addition, our external debt has undergone a major re-profiling, whereby the share of expensive debt has declined compared to soft term debt. Both these initiatives were made possible through a combination of increased supply of foreign exchange and contraction of soft loans.

55. Re-profiling of Pakistan's external debt by the Paris Club was also envisaged in the debt management strategy. We have achieved remarkable success in this regard. Our achievement is matched by only a few other countries, such as Poland, Jordon, Egypt and Yugoslavia. The entire stock of debt of about $12.5 billion has been rescheduled for a period of 38 years with a grace period of 15 years. To gauge the relief implicit in this exercise, one only needs to note that nearly 50% of this debt was due for payment in the next 5-6 years. Then there are individual creditors who have committed to either cancel their debts or have shown their willingness to swap them for social sector spending for up to $1.5 billion. The full extent of relief will be determined once Pakistan has worked out bilateral agreements with its creditors. Based on rescheduling alone, a 30% reduction in net present value of outstanding stock of debt has been achieved. With the addition of cancellation, debt swaps and interest rate reduction, this figure is likely to rise to nearly 40% reduction in net present value.

56. On the domestic side we have achieved considerable success by reducing outstanding domestic debt by 8% over last year. This decline is primarily due to retirement of market related treasury bills worth Rs.193 billion. Additionally, a combination of lower inflation and interest rate coupled with a favorable exchange rate has resulted in reducing the annual average growth in debt servicing to around 3% over the last three year compared with that of around 20% during the 90s.

57. A debt management office is being established in the Ministry of Finance to ensure better management of debt related matters in future. Professional experts are being recruited for this purpose. A pension management office is also being established in the Ministry of Finance staffed by professional actuaries to streamline government pension plans and future liabilities.

58. The long term and durable answer to resolve the debt problem lies in strengthening the country's system of taxation so that it can yield the resources needed to run the affairs of the government. To this, I now turn my attention.

Tax policy and administration:

59. As you are well aware, tax policy and administration have remained the main occupation of government's attention. This should not be surprising given the pivotal role the tax system plays not only in the fiscal system but in the process of resource allocation in the economy. I have already underlined the centrality of improved revenue collection in any scheme of retrieving the country from the shackles of mounting debts. The process of evolving a tax-machinery that is capable of meeting development needs of the country continued through the year:

(1) One of the most important initiatives taken by the government was the Survey and Registration exercise aimed at documentation of economy, broad-basing of tax-base and enhancing the overall tax revenues. The exercise has largely achieved these objectives. It will be useful to note some of the major achievements in this regard:

(a) A total of about 1.6 million forms were received during survey, on the basis of which some 1.07 million computerized tax profiles have been prepared. All these forms have been made available to the field offices enabling them to improve their information about taxpayers. The remaining forms would be profiled and supplied to field offices.

(b) As part of this exercise a sum of Rs.12 billion was received as taxes under the amnesty scheme, followed by a 30% increase in direct tax receipts in the two years 2000-02. In addition, based on the action initiated on the basis of survey forms, additional tax receipts of Rs.82 million were received. These gains will be further strengthened as soon as the entire set of profiles is made available to field offices.

(c) So far, as a result of the survey, 268,189 new tax payers have been added, of which 234,189 belonged to income tax and 34,000 belonged to sales tax.

(d) One significant difference that the survey has made is the distinct change in taxpayers' attitude to voluntary compliance with their tax liabilities. This phenomenon is reported by most of the field offices and is likely to be a permanent change, provided the accompanying changes in tax administration are faithfully implemented.

(e) Thus even more pronounced gains from the survey will emerge in the years ahead.

(2) The new income tax ordinance 2002 was promulgated in September 2001 but will become effective from July 1, 2002 in place of old income tax ordinance of 1979. This was done to facilitate a proper understanding of the new law. This law represents a revolutionary advance in instituting a modern tax system in the country where discretionary powers of tax authorities are minimized, presumptive and non-adjustable taxes have been gradually removed, self assessment is allowed for all types of incomes, audit is the main instrument of discouraging misreporting and discrimination against different classes of taxpayers has been eliminated. These reforms hold great promise for making income tax the most effective instrument of resource mobilization.

(3) To appreciate the provision of self-assessment built in the new income tax law, one needs to realize that there will no longer be a need for assessment order after filing returns. The return itself will constitute the assessment order. Through a parametric audit procedure, each year a fixed percentage of returns will be subjected to detailed audit. Other than these returns, no one will face any ITO for seeking assessment order for his tax return.

(4) Tax administration has now assumed primacy in our reforms efforts. These reforms cover tax processes, use of technology in tax assessment, reorganization of CBR and restructuring of terms and conditions of service of revenue officials. During the year, the reforms process was formally launched with the following measures:

(a) CBR has been given enhanced powers to formulate its budget, administrative and human resources policies.

(b) A Supervisory Council, with the status of a Committee of the Cabinet, has been established under the chairmanship of the finance minister to oversee the working of the restructured CBR set its policies in the areas of budgeting, target setting, human resources and employees' compensation.

(c) Policy and operational sides of CBR have been separated. To strengthen the policy side of CBR, five new members in the fields of Human Resource Management, Audit, Information Technology, Taxpayers Education & Facilitation and Fiscal Research and Statistics, recruited on competitive basis from the market, have been inducted and are now working.

(d) The present administration of income tax was run through 5 regions, 32 zones and 757 circles and deputy commissioners. This was a complex system that cloaked inefficiencies. This four layer system has been simplified to only 2 layers.

(e) Use of IT in tax administration is the key element of the reforms agenda. A major procurement effort to acquire modern computer hardware is underway to automate assessment procedures, audit methods and collection process. The objective of minimizing contact between taxpayer and tax collector can only be achieved through extensive use of information technology. Equally important, extensive use of IT would facilitate adoption of a tax regime that minimizes discretionary powers of tax officials. This, then, is also the key to fighting corruption in tax administration by reducing personal contact and discretionary powers.

(5) Given the significance of large taxpayers it has been decided to establish a Large Taxpayers Unit (LTU) to exclusively handle their affairs and facilitate them to comply with their tax liabilities. This unit will provide them quality service at a single point with respect to all their tax liabilities. This will also enable the rest of the tax administration to focus their attentions on smaller taxpayers that also need better services. The first LTU will begin functioning with 400 taxpayers in the Karachi region. This facility will be extended to other regions in course of time. All the three tax administration namely income tax, sales tax and excise duty shall be operating from this single point for the selected taxpayers;

(6) An experimental project for catering to the needs of small and medium industries, to be called Small and Medium Taxpayers Unit (SMTU) will be established in Lahore to provide the same services as LTU. Initially, some 10,000 taxpayers will be selected for this purpose. Based on the success of this initiative, a decision regarding its extension will be taken.

60. Large taxpayers need due recognition from the government. It has been decided that top 10 taxpayers, falling under the self-assessment scheme will be appropriately recognized and considered for national awards. They will also be invited to state functions. Details in this regard will be announced separately.

61. These measures are supplemented by a strong effort to streamline each federal tax and promote voluntary compliance. In Part-II of the speech I will give you the details of numerous measures being adopted for improving the overall ambience under which the taxpayer and collector are operating, which is critical for ensuring that the improvements in tax compliance achieved are sustained in future.

62. In this regard, it is important that I pass on a message to taxpayers. As it is said that it takes two hands to clap, the proposed measures will not bring the kind of changes expected unless the taxpayers extend their fullest cooperation and do so with responsibility and sense of national obligation. Government has done its part to facilitate compliance and will do more in the times to come. Taxpayers need to reciprocate so that the process can be taken to an even easier region.

Fiscal responsibility law:

63. As a last initiative in reforms of fiscal management, let me announce that as I had promised in my last budget speech, the government has formulated a fiscal responsibility law. This law places a limit on the level of government borrowing for financing its expenditures. This has been a significant missing element in our fiscal management, the one that induced mismanagement and indiscipline at a fairly wide scale. With this we have joined the ranks of those countries that have instituted similar laws and achieved stability in their fiscal system.

64. The law proposes to limit the government to make borrowings only for the purpose of development expenditures and meet all its current expenditures from revenue receipts. Thus no deficit will be allowed in the current account. A specified time period has been suggested to the government to comply with this requirement. In addition, the government will be bound to bring down the level of overall public debt to 60% of GDP, within a period of 10 years, and not to exceed this limit in future. Of course such limits can be relaxed by the Parliament particularly in the case of emergency such as war or natural calamity. The law also binds the government to regularly place reports of economic developments and progress in achieving the debt limits on a regular basis.

65. The draft law has been placed on the web site of the Ministry of Finance for public debate and will be enacted no later than 31 August 2002. With the promulgation of this law the country will have a responsible and accountable system of fiscal management.

Role of IMF and other IFIs

66. It is important that I must also clarify some misgivings about the role of IFIs in general and IMF in particular. It is often said by some commentators that our policies are not homegrown rather they are dictated by IFIs. Some even go to the extent of claiming that our Budget is made by IMF. Let me make a categorical statement: All such suggestions are false.

67. Just as much as it a fact that Pakistan is in need of their support, for valid reasons, it is also true that we do our own homework to decide what economic policies to be followed. Clearly, there are discussions on these policies with IFIs, but no dictation is taken. We have no monopoly over wisdom and as such we have no apprehension in holding a dialogue with our development partners, and often gaining from the experience of other countries. But to carry this process to the level of subjugation of our policies to the dictates of IFIs is absolutely false.

68. It is our stated objective not to have any Fund program after the current PRGF. This will require adherence to the reforms agenda and prudent fiscal management. I believe that this is a realistic objective.

Agriculture:

69. Agriculture continued to occupy central attention of the government. Water shortages, price uncertainty and poor marketing methods, continued focus on low value added agriculture and limited access to credit remained the main challenges of reforming the agriculture sector.

70. The following measures were adopted during the year as a response to these challenges:

(1) A medium term plan for radically augmenting water resources in the country was initiated during the year at a cost of Rs.116.2 billion to be spent on a number of projects over several years. These projects will enhance the existing storage capacity of the country by 5.6 MAF of water, and will bring millions of acres of land under cultivation and thousands of jobs will be created during construction of these schemes;

(2) To improve the supply of water at the farm level in the face of unusual shortages, government will encourage installation of new tubewells. To enable greater use of tubewells for meeting water shortages, the government has offered a subsidy for the use of electricity for tubewells. In addition, lining of water courses have been included as eligible schemes under Khushaal Pakistan program. ADBP has also provided funding support for small irrigation schemes such as precision land leveling, drip irrigation system and several other small irrigation schemes;

(3) Price stability is a major concern of economic policy. Farmers are enabled to secure international prices of their crops. All restrictions on the movement of agriculture commodities inside or outside the country have been lifted. Private sector is encouraged to participate in the procurement and marketing of all commodities, especially wheat, at the preferred financing rate of 12%. Credit facilities are provided for this purpose. Government will take appropriate measures to prevent any major swings in the market. In the case of Cotton and Wheat, support price system would remain intact, and market forces will be encouraged to price these products competitively.

(4) Agriculture credit remained a major focus of the State Bank of Pakistan. During July-April, total disbursement of credit to the agriculture sector was Rs.32.2 billion as against Rs.29.1 billion last year, representing an increase of nearly 11%. Last year State Bank had committed to meet all the needs of agriculture during the year. This policy of the State Bank will remain intact.

(5) In addition to credit availability, government was equally conscious of the difficulties faced by the farmers in servicing their previous obligations in those areas where drought had severely affected agriculture activities. To mitigate their sufferings, the President of Pakistan had waived all loans of up to Rs.25,000 in Sindh, Punjab and NWFP in the drought affected areas. This limit was increased to up to Rs.50,000 in the case of Balochistan. For loans of up to Rs.100,000, the mark-up charges have been waived. This package will go a long way to rehabilitate the farmers badly affected by the drought.

(6) To revitalize its operations and to expand its role in the agriculture sector, the Agriculture Development Bank is undergoing a fundamental restructuring program with the assistance of Asian Development Bank. Professional outlook, strong capital base, mandate to mobilize resources and introduction of new products for financing are some of the elements envisaged in the restructuring program. The restructuring will enable the Bank to play a more effective role in ensuring availability of credit to the agriculture sector.

Small and Medium Industry:

71. Small and Medium industry is the backbone of country's industrial potential. This is because of its labor intensive character and high exports potential. For these reasons, it was included as one of the four sectors for economic revival. Government has taken a large number of initiatives to spur growth in the small and medium industries. The focus of these initiatives is in four areas, namely availability of credit, reduction in the cost of doing business, up-gradation of technology and marketing of their products in the international markets. These are the core areas where SMEs need help for their growth.

72. During the year, a number of measures were adopted for promoting the SME sector in the country. Some of these included:

(1) An SME Bank was established after merging Regional Development Finance Corporation (RDFC) with the Small Business Finance Corporation (SBFC). The two institutions were frittering their energies in scattered directions. The new Bank, which has a proper banking license, will provide a wide range of financial services to SMEs. Its capital and deposits base of more than Rs.10 billion will significantly alter the overall availability of credit for the SME sector. In addition, commercial banks are establishing new divisions that would focus exclusively on providing services to the SME sector.

(2) A number of irritants come in the way of smooth business operations. Indeed, such irritants increase the cost of doing business and render our industries uncompetitive whether SMEs or large industries. For this purpose, the President of Pakistan constituted a ministerial level committee for Deregulation. This committee is working on 8 different areas where a host of irritants unnecessarily impose a cost on doing business. These areas are labor laws, corporate laws, provincial regulations, district regulations, transfer of land titles (urban and rural), tax procedures, utilities and industry with special reference to pharmaceutical industry. Preliminary reports have been received in the areas of labor law and tax procedures. The following measures are being adopted with immediate effect:-

Labor Levies

(a) A proper self assessment scheme is adopted for collection of EOBI contribution, whereby for two years no inspection will be undertaken by the staff of EOBI. The rate of contribution will be charged at the same regular rate of Rs.150 and not Rs.250 as asked at present under the self assessment scheme. After two years, a one time inspection will be done under the supervision of senior EOBI officer, with no questions asked for past two years. There will be amnesty from any past mis-declaration.

(b) Under the regular scheme, a single visit during a year will be allowed with a 15 days advanced notice. Amnesty will be available to new entrants under the regular schemes. After two years, a one time inspection will be done under the supervision of senior EOBI officer, which will be limited to only previous two years.

(c) The contributions will be limited only to those employees actually paid, to eliminate the possibility of ghost pensioners and minimize mal-practices in EOBI. A passbook will be issued to employees showing contributions made by employer/employee.

(d) Provincial governments are working to develop similar arrangements for social security contribution and shall be announced by them.

(e) As a major concession to business, provincial governments have reduced the number of inspections by different departments. In Sindh, inspections will be carried out in a single day with an advance notice. Other provinces are likely to adopt similar measures.

(f) In addition, the Minister for Labor is working closely with provincial labor minister and other stakeholders to consolidate the labor laws and provide for their simple and effective implementation. A new Industrial Relations Ordinance 2002 is at an advanced stage of finalization and shall be published for eliciting public views before its approval and promulgation.

CBR Procedures

(g) An internet based system is being instituted to track processing of refunds that will be accessible to public at large. Exporters will know the various stages of processing and the causes of delays, if any.

(h) More branches of NBP will be designated for the collection and receipt of tax returns.

(i) Sales tax audited accounts will be accepted for income tax returns.

(j) A policy of tenured-based appointments of CBR officers will be adopted to ensure continuity and avoid frequent changes that delay resolution of tax disputes.

(k) All audit procedures, audit scheme and audit reports shall be given to the taxpayers.

(l) Consignment of goods examined by customs or excise staff in a factory or warehouse will not be re-opened for record examination at Karachi Port or at airports.

(m) Advance rulings will be made to enable simpler applications of rules and regulations.

(n) CBR will compile a full account of all its notifications, general orders, rules and circulars in a printed form and make them available to public, which will also be periodically updated.

(o) Appeals will be made against departmental decisions only when there are good reasons to win a case.

73. Clearly, these and several others are significant measures that hold promise for improving the overall investment environment for all industries. However, reform in the investment environment is an on-going effort and with the help of all the stakeholders government remains committed to make further improvements in existing conditions.

Information Technology:

74. Information technology represents a significant untapped potential of Pakistan through which it can leap frog the technology gap. For these reasons, IT was included as one of the four priority sectors selected for unleashing the growth process in the country. The IT landscape in the country has been radically altered in the last three years. An IT policy was given early to chart the course of initiatives government planned to adopt for the promotion of IT in the country. Four areas in which these initiatives are adopted are human resource development, telecommunication infrastructure, legal framework for IT sector, and marketing support for IT and software exports. In each of these areas, significant measures have been adopted to lift the profile of the IT sector.

75. During the year, support was given to degree awarding institutions for IT programs, new universities, including a Virtual University, have been established, 3 new technology parks have been added while 6 will be established through public-private partnership in the next year. On the infrastructure side the fiber-optic linkage was further expanded along with installation of additional lines. To provide avenues of financial support, framework for the establishment of venture capital companies has been approved and notified.

76. One of the reasons for the significance of IT industry is its potential to generate employment for educated manpower of the country. The policies pursued by the government aim not only in expanding the pool of IT talent in the country but of its absorption as well.

77. The performance of Pakistan Telecommunication Corporation was quite satisfactory. It earned a profit of Rs.18 during 2000-01 which represented an increase of 38% over the previous year. In addition, PTCL is working on a number of expansion projects that will significantly increase its capacity. Next year, the PTCL plans to invest Rs.18 for this purpose.

Oil, gas and mineral sector:

78. The oil, gas and mineral sector holds great potential for playing a leading role in the economic development of the country. For this reason, this has been included as one of the four priority sectors in the economic policy. Indeed, the sector has taken the lead in the process of reforms, as it has been the focus of major changes in its regulatory and investment environment. It is the leading example of how we have allowed private sector to expand its scope of operations. Today, the government no longer enjoys the primacy it enjoyed until few years ago in this sector. From dismantling the freight pool system to deregulation of oil imports, the sector has undergone unprecedented changes and at a rapid pace.

79. The process of deregulation of oil imports will be furthered by allowing imports of petroleum products from July 1, 2002, which can be freely imported by oil marketing companies. The government has done-away with the practice of fixing margins for oil market companies. Now only a maximum limit will be set under which they can set any margin on the basis of competitive conditions.  Oil and Gas Regulatory Authority (OGRA), which became functional this year, will regulate the operations of oil and gas companies and ensure due protection of consumers' rights.

80. To undertake major expansion and restructuring in the gas transmission system of the country, both transmission companies, Sui Southern and Sui Northern, are undertaking investment projects at a cost of Rs.17.1 billion. These projects envisage augmentation of the entire transmission system through the addition of 411 miles of loop lines with the objective to inject about 1 billion cubic feet of gas per day from newly discovered gas fields into the system for supply to power generation plants and manufacturing units. This will save nearly $700 million in imports of furnace oil and reduce the load on port facilities. To radically alter the availability of gas resources government has recently signed an MOU with the Governments of Afghanistan and Turkmenistan to build a gas pipeline from Turkmenistan to Pakistan through western Afghanistan. Government is also supporting work on the development of gas pipeline from Iran.

81. As part of the mineral development strategy, the Saindak Copper-gold project is being handed over to Chinese operators. The project is likely to restart its operations shortly. Government has received significant expression of interest from Chinese investors for the development of Thar Coal. Initial negotiations point to fairly strong commitment to invest in commercial mining of this coal and its use in power generation. Government is also encouraging the use of coal as a source of energy in the manufacturing sector. For this purpose, import duties have been reduced on import of such equipment necessary to use coal as the fuel in cement industry. Many cement projects have already converted their plants on to coal.

Trade & Industry:

82. International trade is a major source of economic activity in any open economy, like that of Pakistan. A sizeable portion of country's economy is linked to international trade through backward and forward linkages. In addition, international trade is a benchmark for judging the competitive strength of our own industry. In the emerging global trade regime, manifested in WTO, our industry has no escape but to be competitive. Accordingly, the focus of our trade policy is to enable the industry to remain competitive. The Minister for Commerce will announce the trade policy soon after the budget. Here I would restrict myself to outlining the measures adopted by the government to facilitate a competitive trade regime:

(1) As part of the tariff rationalization program, the maximum tariff rate has been further reduced to 25% thus reducing input costs of our industry. With this, the overall competitiveness of country's trade regime will compare extremely favorably with other countries in the region. Additionally, the customs regime has been further simplified with adjustment of rates due to reduction in maximum tariff in a manner that provides greater incentives to value added industries.

(2) As I mentioned in the context of industry, a host of irritants are being removed on the basis of the recommendations of the Inter-Ministerial Committee on Deregulation. This is an ongoing work and additional measures will be taken as the recommendations are received from the sub-groups;

(3) Customs services for export consignments at Karachi Port will be available 24 hours.

(4) Exchange rate appreciation had created some initial problems for our exports. However, the predictable exchange rate regime we have promoted has largely been helpful to exports. Indeed, within the limits set by the liberal framework, the SBP has done all that was possible to avert any more appreciation than what was natural in view of exceptional inflow of remittances in the country and the consequent build-up in reserves. However, government remains committed to maintain a competitive exchange rate in the country;

(5) The availability of export refinance was adequate during the year. Since the rate of export refinance was linked to the market rate, with low market rates, cost of refinance has also come down. The retirement of export finance during the year was due to availability of internal resources of companies due to large refunds made available by the CBR.

(6) To allow our industry and traders to take advantage of the opportunities emerging in Afghanistan, trade with Afghanistan has been fully liberalized. Except for a few items on the negative list, all items are eligible for export to Afghanistan and in case proceeds are received in a convertible currency, exports will qualify for duty draw-back.

Privatization program:

83. As I mentioned at the beginning, the privatization program was adversely affected due to the departure of prospective investors from the country soon after the 9/11 episode. The process of their return has been slow. Yet we have been able to make significant progress in advancing the process of privatization. The following major actions have been taken to accelerate the process of privatization:

(1) Over the last two years, and after the promulgation of Privatization Ordinance, transactions totaling Rs.22.5 billion (or $375 million) have been either completed or approved for disposal;

(2) The completed transactions include sale of 10% shares of National Bank of Pakistan, sale of 100% shares of Pak-Saudi Fertilizer and minority interests of various sizes in 9 oil and gas fields of the federal government;

(3) Transactions relating to UBL, PTCL, PSO, HBL, OGDC and KESC are at an advanced stage of completion and are likely to be through latest by December 2002.

(4) In addition, transactions relating to Faisalabad Electricity Company (FESCO), two power generation plants of Jamshoro Electric Company (GENCO-I) will be completed by the first half of 2003.

84. This is a significant progress of the privatization process, particularly in view of a challenging investment environment.

Financial sector reforms:

85. Finance and Banking sector is a special focus of reform process. This is so in view of the critical nature of financial sector in modern economies. Government undertook a number of reform initiatives to help this sector play its due role in the process of economic revival. These measures included:

(1) The State Bank maintained an expansive monetary stance for greater part of the year, in view of exchange rate appreciation and the need for greater credit intake in the wake of slow-down in economic activities post 9/11. The SBP discount rate was lowered from 14% to 9%. The yield on Treasury Bills also declined by the same margin. These reductions in discount rates and yields on T Bills were partially passed on to the investors through reduced lending rates by the banks.

(2) Although the overall credit expansion from the banking system to private sector declined during the year but taking into account the fact that massive refunds were provided by CBR, cost of inputs had significantly declined, and use of TFCs was frequently resorted by corporate sector, the overall availability of funds to the private sector was better than last year. Availability of plenty of liquidity with the banking system at low rates of financing clearly reflected the fact that credit availability was not a problem for the industry and at low rates of return. Through prudent monetary policy the weighted average interest rates charged by banks declined to 12% last year and are expected to improve further due to lower inflationary expectations and adequate liquidity.

(3) To further strengthen the regulatory function of the State Bank, its non-regulatory operations were split and transferred to a new institution that would be autonomous but function under the Board of Directors of the SBP.

(4) With a view to facilitating the access to credit State Bank is undertaking a review of Prudential Regulations. These regulations, wherever found to be inhibiting access, will be modified and made progressive relying on banks to develop there own risk assessment parameters.

(5) To improve the soundness of banking companies, their capital requirements have been doubled and existing companies have been given two years to raise their capital to the increased level or merge with stronger companies. Accordingly, there has been consolidation of the financial sectors as weak institutions merged with the stronger ones. To further strengthen their capital base, banks have been allowed to raise capital through the issue of TFCs, which will be counted as Tier-II Capital and be given appropriate weightage in the assessment of capital adequacy ratio.

(6) The process of restructuring and rightsizing in nationalized commercial banks was accelerated with a view to add value in their forthcoming privatization. All three banks have achieved their targets in this respect and are ready for privatization;

(7) The Corporate and Industrial Restructuring Corporation (CIRC) is making an important contribution in the revival of sick units. During the year, 339 units were acquired by the corporation with dues of Rs.59 billion. Out of this, 154 units with an outstanding amount of Rs.34 billion reached a settlement before their disposal by the corporation. Out of the remainder units, 51 were disposed at a price of Rs.1.2 billion. These units are likely to create 15,000 employment opportunities. Next year, the corporation has budgeted disposal of 180 units.

(8) To create further depth in the financial sector a new law was promulgated to allow for the establishment and operations of microfinance institutions. These institutions will engage in providing small loans to and inculcate savings habits in poorer sections of population. They will thus be helping in the poverty reduction in the country. Such institutions can be established under license from the State Bank at the district, provincial or national level depending on the capital structure of the proposed institutions.

(9) Effective July 1, 2002, all non-bank financial institutions, except development finance institutions, shall be reclassified as Non-Bank Finance Companies (NBFCs) and shall be regulated by the Securities and Exchange Commission of Pakistan. Through this initiative the confusion on regulatory roles of SBP and SECP on Non-Bank Finance institutions will be removed and SECP can devote necessary attention for their sound and safe working.

(10) With a view to integrating the kerb market with the inter-bank market, the State Bank of Pakistan will be taking significant steps during the year. First, banks will be allowed to perform money changers' functions. Second, rules are being promulgated for the establishment of exchange companies that would essentially deal with the money changing business. These companies will be required to maintain appropriate capital base. They will be allowed to have branch and franchise operations, and will be subject to complete documentation and reporting to State Bank.

(11) An area where Ministry of Finance and State Bank are jointly expending efforts is to develop anti-money laundering legislation. Two key features being evolved under this initiative are the establishment of a Financial Intelligence Unit in the State Bank of Pakistan and strengthening of provisions relating to 'Know Your Customer' feature of bank-clients relationship.

Capital market reforms:

86. Yet another important focus of reforms efforts of the government is the Capital market. Its role in providing resources for investment is well known. Our market needs support to expand its base of investors, improve standards of corporate governance, provide protection for small investors, increased use of credit, lower financing margins, upgrade in trading infrastructure and strengthened regulatory capacity of the Securities and Exchange Commission. The reforms program undertaken by the government addresses all these areas. Some of the notable reforms undertaken during the year and to be taken next year are:

(1) With induction of a significant cadre of new professionals, SECP is now equipped to play an active role in the development of capital markets;

(2) T+3 system is now fully operational in all the stock exchanges of the country, minimizing settlement risk and enhancing transparency and efficiency of stock trading;

(3) The code of conduct for stockbrokers was further strengthened during the year both on account of capital requirements as well as exposure limits. Additional initiatives to limit their leveraged exposures are likely to be adopted during the year. In addition, companies have been asked to submit quarterly accounts to shareholders;

(4) Rules against insider trading have been issued;

(5) A code of corporate governance for listed companies has been developed and implemented after consultation with all the stakeholders. Among other things, the code requires appointment of independent internal auditors, induction of outside professionals as non-executive directors on the Board of Directors and significant disclosure of information by listed companies.

(6) To promote futures' trading a futures counter has been established in both Karachi and Lahore Stock Exchanges and trading has started on these counters under the rules framed by SECP.

(7) Rules for the Venture Capital Companies and Venture Capital Funds have been issued.

(8) Rules for Employee Option Scheme have been framed and issued by SECP;

(9) Rules were suitably amended to allow public sector corporations to use a portion of their funds in the capital market through the use of fund managers or by developing in-house facilities;

(10) SECP has finalized the rules for the promotion of private pension funds which are being considered by an inter-ministerial group. These rules will shortly be promulgated.

(11) Take-over law will soon be promulgated.

(12) Government is in the process of approving rules for pension funds in the private sector. Gradually, we want to move to a pension system from defined benefits to defined contributions. Appropriate tax incentives are being provided in this budget to encourage salaried class persons to participate in such schemes.

Islamic Banking:

87. During the year, the government has, in line with its policy commitments announced last year, taken a number of measures to promote Islamic banking activities in the country.

88. A framework for the establishment of new Islamic banks in the country was announced by the State Bank of Pakistan and first license for an Islamic Bank in the country was given to Al-Meezan Investment Bank, which has already begun functioning. Existing banks are at various stages of starting their own subsidiaries or branches to undertake operations on the basis of principles of Islamic finance.

89. The House Building Finance Corporation Act has been amended as directed by the Supreme Court and HFC has recommenced its operations in line with Shariah compatible mode of financing.

90. A high level delegation was sent to Egypt, Saudi Arabia and Malaysia to learn from their experience of Islamic banking. Based on the practices adopted by these countries, the government believes that a parallel evolutionary approach would be a proper course to follow. Let me reiterate the intention of the government to promote Islamic banking in the country while keeping in view its linkages with the global economy and existing commitments to local and foreign investors.

Independent Statistical Organization

91. Let me point out another important initiative our government is undertaking. As you know, in any economy availability of reliable economic data is the key to efficient and informed decision making. In all modern economies, elaborate arrangements are made and sizeable resources are expended to collect, compile and generate reliable information on economic indicators. This is a highly professional and technical area that requires skills and expertise in its management.

92. In Pakistan, the statistical organization charged with this responsibility is the federal bureau of statistics, which is a division of the Ministry of Finance and Economic Affairs. It acts and behaves like any other government department. Although they have done tremendous job in the circumstances they operate, but there are signs that point to the fact that such an organization is ill suited to the kind of responsibilities placed on it to discharge.

93. With a view to develop a professional organization that is free of bureaucratic influences, it has been decided to convert FBS into a fully autonomous authority with its own board of governors that would be competent to lay down its technical, human resources and financial polices. The Board shall comprise top statisticians and practitioners and shall be aided by various technical and financial committees in discharging its responsibilities.

94. A lot of preparatory work has been completed and a law will soon be promulgated, after due consultation with all the concerned, to give effect to above planned structure of the new statistical organization of Pakistan

Poverty Reduction and Social Sector Development:

95. I now turn to the cross cutting objective of our economic strategy, namely poverty reduction. During the year, we produced the Interim Poverty Reduction Strategy Paper of Pakistan, which outlines a comprehensive strategy to attack the problem of poverty. For the first time in country's economic management, a holistic approach - integrating economy, social sectors and governance - has been adopted to address the issue of poverty.

96. As noted in the I-PRSP "Poverty is not merely income deprivation. It is a multi-dimensional concept, which encompasses economic, political, and social needs that are sine qua non for a meaningful existence. The poor in Pakistan are not only deprived of financial resources but they also lack access to basic needs such as education, health, clean drinking water and proper sanitation. Limited access to education, health and nutrition, undermine their capabilities, limits their ability to secure gainful employment and results in income poverty and social exclusion. This cycle is further exacerbated when institutions of governance tend to exclude the most vulnerable from the decision-making process and thus feeds into poverty and human deprivation." Given this complex nature of poverty, only a holistic effort, aiming to correct economic, social and governance distortions, stands a chance to succeed the vicious cycle of poverty and human deprivation.

97. The I-PRSP is an outcome based approach to planning. For the first time, we have begun to track expenditures that can be classified as poverty reducing. These include such expenditures as those on education, health, population planning, water supply and sanitation, housing and rural development. Quarterly reports are published and placed on the web-site of the Ministry of Finance. For instance, during the year it is estimated that total expenditure on poverty related activities will amount to Rs.136 billion as against Rs.119 billion last, representing an increase of 14%. Next year total anti-poverty spending will further be increased to Rs.161 billion, representing an increase of 18%.

98. To ensure effectiveness of these expenditures, specific targets have been set to be achieved from the resources allocated for the activity. A monitoring framework has been developed that would track changes in these indicators on a quarterly basis and report them on the website of the Ministry of Finance. This will not only infuse greater transparency in our poverty reduction efforts but also allow for policy corrections to be made in light of the results obtained.

99. Space will not permit me to give you the details of all that we are doing under the I-PRSP. Suffice it to say that in almost all major policies it is poverty reduction that is the ultimate objective. As part of this approach, education, health and population planning have been given importance. A brief account of these efforts will be in order:

Education:

100. It is difficult to overemphasize the role of education in human development and economic prosperity. Government is devoting extra-ordinary efforts to give a major boost to the quality of education across all types of learning programs. Our strategy targets primary and secondary education, universal education, technical education, higher education and reforms in the traditional Islamic institutions of learning. In each of these areas specific programs have been formulated under the Education Sector Reforms.

101. This is clearly a very ambitions program that sets such targets as achieving 100% enrollment in primary education, 6% increase in literacy rate, technical education at tehsil level and significant increase in the availability of funds for higher education. In addition, the program also focuses on improving the quality of education, upgrading the infrastructure of existing schools, provision of books, redesign of curriculum, and class room material and training of teachers. The total cost of the ESR is estimated at Rs.55 billion over a three years period and will be implemented by the provincial and local governments. Clearly, this is a very large sum and from our own resources, it is not possible to fund the entire cost of this program. A number of donor agencies, impressed by the quality of program, have shown keen interest to provide necessary financing and we hope to provide increasing allocations to ESR in the years ahead.

102. As part of improving the girl's participation in education, a new program named Tawana Pakistan has been introduced by Ministry of Women Development whereby girls attending schools will be given a grant for school lunches which their mothers will be cooking in schools. An allocation of Rs.1 billion has been made in this year budget for this purpose. Next year, the allocation will depend on the performance of this program, which will be spilling over to the next year.

103. The proposed education sector programs are all aimed at giving skills to our children that would allow them to be gainfully employed. Specially the technical stream and induction of main stream subjects in Mudrassah education will endow our young men and women to learn those skills that are in need and hence be economically productive in the society.

Health:

104. Health is yet another important area whose linkage with poverty is now well established. The health policy of the government focuses on the preventive side, as opposed to curative, from urban to rural, with emphasis on mother and child health, greater stress on public awareness and nutrition education and integration of health and population sector programs at the grass roots level. The "Health for All" policy is premised on accessibility, affordability and acceptability of health services by the general population.

105. The primary instrument of preventive health is the lady health workers program and expanded program of immunization. An additional number of 10,000 lady health workers were added this year, raising the total number to nearly 65,000. With an average coverage of 1000 population per LHW, the outreach of the program has expanded to nearly 65 million people, nearly half of our population.

106. The second program is that of vaccination to prevent common diseases. At present under the expanded program of immunization (EPI) vaccines against polio, BCG, DPT, TT and measles are provided. Through these measures EPI coverage will be increased by 5% to 55%. Additionally, under the polio immunization program, almost every child under the age of 5 years was vaccinated. The government aims at making Pakistan a polio free country in not too distant a future.

107. Apart from EPI, preventive programs for malaria, TB and HIV/AIDS are also in hand and significant resources are spent to expand their coverage. From next year vaccine against Hepatitis-B will be added to immunization program from the next year. For this purpose, a new project has been formulated out of grant support of $300 million from Global Alliance for Vaccination and Immunization (GAVI).

108. Yet another focus of preventive health policy is the nutrition program for mother and child. A program at a cost of Rs.3.7 billion was launched in July 2000 to improve the health, nutrition and social status of women and girls in 20 districts. In addition, to combat mal-nutrition among children and anemia amongst pregnant women a new program is launched at a cost of Rs.303 million from this year.

109. President's Commission on Human Development: An important initiative taken by the government during the current year is the establishment of President's Commission on Human Development. The Commission, being established under a law, will be charged with the responsibility for capacity building for social sector development at the local government level. The social activists that would undergo the training in the programs of the Commission will enable communities to fully exploit the opportunities being made available to them through a number of development initiatives. A trust fund of Rs.2 billion has been created to support the programs of the commission. This will be supplemented from donations of expatriate Pakistanis and other philanthropist organizations and individuals.

Special Poverty Reduction Programs

110. Khushaal Pakistan: This is a development program that holds enormous promise for impacting a positive effect on the lives of the poor. Under this program small public works schemes, such as development of farm to market roads, water supply, sewage, garbage collection, spurs, culverts and repair of education and health facilities are undertaken. Such schemes help in the creation of temporary employment opportunities and augment income earning possibilities for the poor.

111. During the year a sum of Rs.15 billion was released by the federal government to provincial government for onward transfer to local governments, who are now in-charge of this program after successful devolution of power to local governments. This was significantly higher than Rs.5 billion spent on this program last year by the federal government. With the new local governments the process of schemes selection is totally democratic as district assemblies take decisions in this regard after holding proper debates. The transition to new system of local government initially led to a slow-down of the rate of utilization but now teething problems have been overcome and utilization rates have increased significantly. During the year it is estimated that a total of 14,004 schemes have been approved under the program. Of these, 2902 schemes were for farm to market roads, 1,102 schemes for water supply, 2118 schemes for spurs, storm channel and flood protection, 1409 schemes for repair and operations of schools and health facilities were undertaken. In the process, a total of 175,000 temporary jobs were created and thus helped the poor of the rural and urban areas alike. As I had noted last year also, this program has given new hope to people for a prosperous future. The resources allocated under the program are unprecedented in the history of development expenditure in the country.

112. Food Support Program: The food support program is yet another effort to help mitigate the sufferings of the poor. Under this program a food subsidy of Rs.2000 per annum was provided to poorest of poor. An allocation of Rs.2.9 billion was made in the federal budget during the year against Rs.2.5 billion in the earlier year. The new local governments were inducted in the management of the program through appointment in the district and local committees that monitor the implementation of the program and select the beneficiaries. Between the period July-March this year, total disbursement of Rs.2.02 billion was made to about 2 million beneficiaries, as against Rs.1.1 billion to 1.1 million beneficiaries during the same period last year. Some 1.2 million households with an income of Rs.2200 per month or less were given this subsidy by crediting their accounts with the post offices. An independent study conducted by the Punjab University has pointed out outstanding popularity of the program among the beneficiaries who find it a critical source of support in their effort to meet their economic needs.

113. Microfinance: Microfinance is an important instrument of poverty alleviation. It goes to the credit of this government that it recognized the significance of this instrument and launched a full scale program to develop the microfinance sector. Our first effort in this regard was the establishment of the first microfinance bank, now named Khushali Bank. In a short span of 2 years, the bank has significantly expanded its outreach. In the first 9 months of this fiscal year, its operations were expanded to 26 districts and disbursed Rs.277 million to about 28,500 poor borrowers. PPAF and ADBP also played a major role in expanding credit to small borrowers. PPAF made disbursements of Rs.365 million to some 38,127 beneficiaries in 35 districts, while ADBP provided Rs.44 million to about 2,000 borrowers in 61 districts. In sum, a total micro credit of Rs.686 million was made available to 68,500 poor borrowers, as against Rs.340 million provided to 16,177 borrowers last year during the same period by the three institutions.

114. In addition to microfinance, these institutions are also extending support for community based small infrastructure schemes, like water supply, irrigation and flood protection. Khushali Bank has also established a training institution that is producing high quality social activists which will act as critical input in the provision of microfinance by developing capacities among the poor to exploit the opportunities provided by credit availability. As I noted earlier, to give a major impetus to microfinance movement in Pakistan, government has promulgated a new law for the establishment and operations of microfinance institutions in the private sector. The first license under the law was recently granted and a new microfinance bank in the private sector has already started its operations. In the year ahead, this will be a major avenue of credit availability for the poor people of Pakistan.

115. Zakat System: Zakat has come to occupy a central place in the social safety net programs of the country. As part of revamping the Zakat administration, the government reconstituted some 39,612 Zakat Committees in all parts of the country. The new committees will ensure transparency and objectivity in the selection of Mustahiqueen. The procedures relating to disbursement of Zakat for educational stipends have been simplified to allow a much larger number of students to have access. The rates of stipends were also increased to make them realistic. The marriage assistance was increased from Rs.5,000 to Rs.10,000. Zakat assistance was also provided to mitigate the disaster visited on poor people during flooding last year. On an overall basis, during the first 9 months of the current year, a total Zakat of Rs.3.1 billion was disbursed under different schemes among 955,031 Mustahiqueen compared to Rs.1.7 billion disbursed among 878,088 Mustahiqueen in the same period last year

116. To expand its potential the government has added a new form of assistance out of Zakat fund known as rehabilitation grant. Under the program, deserving and eligible persons will be given financial support that would enable them to set-up their own business and become self employed. During the year, an amount of Rs.1.53 billion was disbursed to 76,554 Mustahiqueen on account of rehabilitation program.

117. Land Distribution: Government continued with its policy of land distribution among landless peasants. During the year, 32,980 acres of land was distributed among 2,694 beneficiaries.

118. EOBI Assistance: A critical support to low income people is provided by the Employees Old Age Benefit Scheme. During the year, the EOBI made a disbursement of Rs.1.1 billion in old age benefits to 92,485 persons. Although the number of beneficiaries remained the same, the total disbursement increased by nearly 17% reflecting the recent increase in the payout government had announced.

119. Regularization of Katchi Abadis: Provision of housing for the poor is an important policy of the government. As part of this, regularization of Katch Abadis is an important program. During the year, 28 Katchi Abadis were regularized having 9,293 houses and benefiting 45,595 people.

Development Plan

120. An important instrument of capital formation in the country is the public sector development plan. The National Economic Council, headed by the President and comprising governors of all provinces, has approved a development plan of Rs.134 billion for the year 2002-03. This represents an increase of more than 7% over the revised target of Rs.127 billion spent during the year. In addition, we have identified a list of projects totaling Rs.10 billion which will be funded as and when grant support is made available by friendly countries in the fields of human development, water, irrigation, power and transport and communications.

121. One of the 7-Points that the President had included in the program that he announced on 17th October 1999 was the promotion of better provincial-federal relations. An important step toward this goal is the increasing transfer of development responsibilities toward the provinces. This is reflected in the composition of the overall development plan. The share of provinces, which was Rs.30 billion in the current budget has been increased to Rs.40 billion, an increase of more than 33%.

122. To enable provinces to shoulder these responsibilities, government will be transferring 2.5% out of 15% of sales tax receipts. This will amount to Rs.32 billion and represent an additionality of Rs.13 billion. With this additional resource, the provinces will have no difficulty in discharging higher development responsibilities. It needs to be emphasized that this is not a new tax revenue item rather it reflects redistribution of existing revenues.

123. The priorities of the plan are human development, radical uplift of country's water storage capacity, rehabilitation of the irrigation and development of drainage system and improvement in transport and communication.

124. During the year, a large number of high priority projects were initiated to expand water storage and drainage capacity in the country. The persistent drought has vindicated the stance taken by the government whereby it was considered critical that unless the storage capacity was radically altered, the agrarian potential of the country would remain threatened. These projects include medium sized dams, water storage and irrigation infrastructure. During the year, an expenditure of Rs.3 billion was incurred on these projects. Next year, expenditure is likely to be doubled to more than Rs.6 billion. In addition, a number of new water sector projects are proposed to be launched this year. An additional allocation of Rs.3.7 billion has been made to initiate work on these schemes during the year. Our brotherly countries, Saudi Arabia, UAE are helping us fund these projects.

125. To significantly increase the share of hydel in the overall mix of power generation and to meet certain critical shortages in the transmission infrastructure in the country, government has allocated Rs.29 billion in the power sector. This will see near completion of Ghazi Barotha hydro power project, and a number of small hydro projects in different part of the country. In addition to evacuate power from Ghazi Barotha project and to plug gaps in transmission capacity, a power dispersal project and secondary transmission and grids project have been included in the power sector plan.

126. The transportation and communication sector comprises of two major sub-sectors, namely railways and roads. Both these sectors can play a pivotal role in the development of the country by providing efficient and reliable means of communications. Accordingly, government is attaching high priority to not only rehabilitating the existing infrastructure but also significantly expanding the assets of both the sub-sectors.

127. In the case of Railways, track rehabilitation, locomotives, coaches, wagons and induction of new locomotives, coaches and wagons are the focus of the development plan. An expenditure of nearly Rs.7 billion has been made in the next year's budget for this purpose, which is higher by 11% compared to the allocation of Rs.6.3 billion during this year.

128. In the roads sub-sector, Dualization of N5, completion of Indus Highway, completion of M1, M3, Mekran Coastal Highway, Lyari Expressway and Northern By-pass are some of the key projects that would add critical support to the overall road infrastructure of the country. An allocation of Rs.14.8 billon has been made for the roads sub-sector which is higher by 15% compared to the allocation of Rs.13 billion in the current year.

129. Another important sub-sector in the communications sector is seaports. A critical project in this sub-sector is the development of Gwadar seaport. The work on Phase-I of Gwadar port, comprising deepening of channel and construction of 3 berths, is proceeding apace and an expenditure of Rs.3.6 billion was incurred during the year. In the budget for 2002-03 an additional expenditure of Rs.3.9 billion is planned. The Phase-I will be completed in 2003-04, which will represent a watershed in the economic history of Balochistan. Here, I would like to thank the Chinese government for helping us fund and build this landmark project.

130. The above development plan, as last year, is growth oriented. It will enhance the social and economic infrastructure of the country in a big-way and augment its growth capacity in the years ahead.

Employment

131. A major challenge facing the economy is creation of job opportunities. Accordingly, the government is taking a number of initiatives to provide new employment opportunities to people.

132. Since employment is a function of level of investment, it is important that the overall level of investment should increase in the country. On its part, the government has accelerated the public sector development plan. As just noted, the public sector program is being increased. Most of the development projects, particularly those in water, power, transport and communications and physical infrastructure sectors will create significant employment opportunities through increased public sector demand for goods and services. In addition, expenditure on Khushaal Pakistan program and increased availability of microfinance will create new temporary employment opportunities of nearly 174,000 persons and self employment opportunities for 68,500 small borrowers. Significant expansion in these opportunities is planned for next year.

133. Special efforts are expended by the government to explore employment avenues for our work force outside Pakistan. Last year, the overseas employment corporation had arranged 132,492 jobs for Pakistanis in foreign countries. This year until May 2002, a total of 105,266 persons were sent abroad for employment.

134. Despite challenges, we have created new jobs. Next year more jobs will be created. But the more durable answer to jobs creations lies in revival of private investment demand. It is in the private sector that jobs will have to be created for sustainable employment. Government is focusing on providing a conducive environment to private sector where it can invest with confidence. With growth, more employment will be generated.

Devolution

135. The corner stone of our governance reforms is the devolution of power to local tiers of government. During 2001-02, all local governments were installed in office and are now functioning. These governments have allowed people to have a role in the management of their own affairs. The devolution plan envisages transfer of such functions like primary education, health, planning and civic amenities to the local governments. This would ensure greater accountability of performance by these departments.

136. For a durable system of local government it is critical that along with responsibility they are also provided with adequate resources. With a view to developing a reliable system of resource transfer to local governments, NRB has devoted considerable efforts to evolve a viable local government finance system. This system, which is gradually put in place, would be fully functional w.e.f. 1st July 2002. Under the new system, each province has appointed a Provincial Finance Commission, comprising representatives from provincial and local governments and independent experts to recommend a formula for distribution of provincial resources.

137. Capacity building at the local level is one of the main focuses of devolution plan. NRB has undertaken training programs both for elected representatives as well as for the local government functionaries. The federal government provided an assistance of Rs.3 billion in the current year to help the process of establishment of local governments. However, with the transfer of additional resources in the form of 2.5% GST receipts, some of these works will be undertaken by local governments on their own.

138. As part of capacity building, and also to provide for proper accountability of local governments, a detailed accounting and auditing system has been developed. This system is under implementation under the supervision of the Controller General of Accounts and Auditor General of Pakistan.

139. Apart from devolution, government has elaborate reform programs in the areas of civil services, judiciary and police. Space will not permit me to give the details of these programs, suffice it to say that these are aimed at increasing the quality of service to people, provide easy and cheap access to justice and ensure law and order in the country.

Investor confidence

140. Despite major advances made by the government in creating an enabling environment for the private sector, the process of investment has remained slow. Undoubtedly, this is a reflection of low investor confidence. This then remains the major concern of the government.

141. In some measure, this state is the result of various imperatives that the government had to pass through in its transitional phase, like the delayed resolution of IPPs issues and negative impact of accountability drive that scared away some businessmen. These matters have now been decisively settled. IPPs issue has been amicably resolved while accountability process has been tapered through the involvement of State Bank. Yet the process has not been accelerated. Of late, the problem is largely external. The events of 9/11 have taken their toll by negatively affecting the investment environment. The escalation of tension on the eastern border has exacerbated this situation.

142. Having said this, it needs to be emphasized that the investment environment in the country has significantly as a result of reforms undertaken by the government. There are profitable opportunities that should be exploited especially on account of the vast areas of investment that hitherto were the exclusive domain of the government. These opportunities should not be passed over on account of uncertainty.

143. The main features of the economic policies that should inspire private sector confidence are the following:

(1) Consistency in economic policy;

(2) Continued tariff rationalization that improves the competitive edge to industry;

(3) Constant reform in tax laws and tax machinery that should act as a major source of comfort to business community;

(4) Speedier release of refunds and removal of other procedural bottlenecks in complying with the tax laws;;

(5) Reforms in the banking sector and capital market making unusually large credit allocations to ensure improved availability of finances and facilitating the process of capital formation;

(6) Removal of a host of irritants in the light of recommendations of the Deregulation Committee;

(7) To top it all, the President on numerous occasions has assured the business community of the continuity and sustainability of economic reforms carried out by the government.

144. As I noted at the outset, the focus of economic policy is to create additional space for the private sector. With slow pace of investment in the private sector, we are confronted with this curious situation where government is rapidly vacating its occupied space but private sector is not entering to fill the gap created by government's departure. No one would like to make a case that government should re-enter in the investment process.

145. There are several emerging opportunities for which it is important that the private sector should get itself positioned today. Two of them require special mention. The first is the construction of Gwadar port the work on which is progressing fast. The government plans to declare a vast area around the Gwadar port as free-trade area that would provide avenues for warehousing, trading and establishment of new industry. Although successfully introduced in some East Asian countries, this will be a new concept for Pakistan. However, it opens a whole new world of profitable opportunities. The port will be located strategically and in course of time holds the promise to open up as the only viable access to central Asia to warm waters. Closely linked to this is the rehabilitation work in Afghanistan, where Pakistan, by its very location, has to play a leading role. Stability in Afghanistan would surely unleash unprecedented opportunities by allowing Central Asian countries to access open seas, for which Pakistan provides the shortest distance.

Overseas Pakistanis

146. Overseas Pakistanis are an important economic asset of Pakistan. They are not only our ambassadors, but one of the best exports of Pakistan. Their economic position abroad is a source of great strength for the country. Government is committed in creating conditions that would enable expatriates to play their role in the economic development of Pakistan.

147. During the year, flow of remittances has experienced a dramatic increase as it doubled from the last year's level. This has played a pivotal role in strengthening the overall position of our foreign exchange reserves.

148. Apart from the reasons I noted earlier for this unusual increase, a modest role was also played by the foreign exchange remittances card scheme that government had announced in the last budget. Expatriates remitting $2,500 or $10,000 were eligible to obtain silver and gold cards, respectively, which would allow them special handling at the airport plus some duty free allowance at the time of arrival. The special facilitation counters for card holders have been established at international airports in Pakistan. In addition, the facility of free issuances and renewal of passport on urgent basis is also provided to card holders. Some 3000 expatriates have so far acquired the cards under the scheme.

149. It is proposed to increase the duty free allowance for card holders from $700 to $800 per year for silver card holders and from $1200 to $1500 per year for gold card holders.

150. Additional incentives for card holders are being designed and will be announced during the year.

Pay and Pension reforms

151. When the pay and pension committee was deliberating the new package, it was given actuarial advice that commutation allowed represented the present value of the commuted portion and that the government buys that portion out-rightly. Therefore, there was no justification for restoration of the pension once commuted. Hence this portion was discontinued for past as well as future pensioners.

152. However, old pensioners have appealed to the government to restore the right of restoration of commuted portion to them. The government has decided that all those government servants who retired prior to 1-12-2001, others who have opted to remain in the pay scales of 1994, shall be entitled to the restoration of surrendered portion of pension in lieu of commutation/gratuity. It has also been decided that all other benefits available under the 1994 scales shall continue for those who have opted to remain in the 1994 scales. Government servants who availed the benefit of presumptive fixation of pay in the 2001 scales, i.e. those who retired between 1-7-2001 to 1-12-2001 shall be governed by the Pay and Pension package of the 2001 scales.

153. With these changes, the hardship suffered by some of the pensioners has been redressed.

Budget estimates for 2001-02 and Revised Estimates 2000-01

154. Let me now turn to present you the budget estimates for the next year in the context of the fiscal performance achieved during the year:

155. The budget for 2002-03 aims at achieving a GDP growth rate of 4.5% containing inflation at 3.9%, and building up of foreign exchange reserves to nearly $7 billion. In line with our strategy relating to fiscal consolidation, the budget 2002-03 has been formulated with the objective to reduce the overall fiscal deficit to 4.0% of the GDP. Achieving the fiscal deficit target will require significant improvement in tax revenue performance. The budget assumes increasing impact of CBR reforms and tax policy measures. On the expenditure side, the tensions on our borders restrict our ability to create fiscal space for more infrastructure expenditure so that there is a no deviation from our debt reduction strategy. We will continue restructuring of public sector enterprises to achieve reduction in quasi fiscal deficits and in explicit and hidden subsidies to such corporations. The budget for 2002-03 also caters for support to the district governments and proposes to transfer additional resources along with expenditure responsibility to the sub-national governments. We expect that devolution of investment choices to the local level will increase the effectiveness of expenditure.

CBR Revenues

156. CBR tax revenues for the year 2001-02 were originally estimated at Rs.457.7 billion i.e. 12.1% of GDP. Lower than projected imports resulted in reduced customs duties as well as income tax and sales tax receipts. As a consequence, the CBR revenue estimates are revised downwards to Rs.414.2 billion or 11.2% of GDP.

157. The receipts under direct taxes are estimated at Rs.146.5 billion against a target of Rs.149.8 billion while sales tax receipts are estimated at Rs.170.1 billion against the target of Rs.185.2 billion. Similarly, customs receipts, which were budgeted at Rs.69.6 billion, are now estimated at Rs.50.5 billion and excise duty is estimated at Rs.47.1 billion, down from the budgeted target of Rs.53.1 billion.

158. For the year 2002-03, it is expected that normal economic activities will resume. CBR tax revenues are estimated at Rs.460.6 billion (11.4% of GDP) indicating an increase of 11.2% over the revised estimates of Rs.414.2 billion for the current year.

159. Direct taxes are estimated to increase by 1.3% over revised estimates, Customs duties by 11.9% and sales tax by 20.9%. These increases are largely on account of better tax administration, improved compliance and stricter enforcement. Excise duty receipts are estimated to increase by 6.2%.

Surcharges

160. The receipts from petroleum development levy were estimated at Rs.32.0 billion for the year 2001-02. Previously the refineries were paid a minimum guaranteed return out of the levy. As these were not paid on time, arrears against the government built up. During the year, accumulated arrears amounting to Rs.13.5 billion were settled and adjusted against government receivables from these refineries and the system was cleaned up. The revised petroleum levy receipts are estimated at Rs.39 billion.

161. The Ministry of Petroleum is implementing a policy of reforms and deregulation of import of petroleum products in phases. The import of furnace oil stands deregulated and HSD is proposed to be de-regulated w.e.f. 1.7.2002. In addition, the government has adopted a formula under which retail and ex-refinery prices of all petroleum products are based on international prices and adjusted on a fortnightly basis by the oil marketing companies. The government will continue to receive petroleum levy at a notified rate per liter for various petroleum products. The receipts from petroleum levy for 2002-03 are estimated at Rs.45.5 billion.

162. As part of the restructuring and de-regulation of the oil sector the Ministry of Petroleum has decided to abolish the minimum 10% rate of return guaranteed for the National Refinery Limited, Pakistan Refinery Limited and Attock Refinery Limited and allow them to compete in the market through tariff protection formula. For this purpose, import duty at 10% ad valorum on import of HSD and 5% ad valorum plus 1% surcharge on import of kerosene oil, light diesel oil and JP-4 is being proposed. However, excise duty on these products is being abolished and petroleum development levy is being reduced to minimize the impact of this measure on the retail prices.

163. The receipts from GDS are transferred to the provinces according to well head production ratios. These receipts form a major source of revenue for the provinces of Balochistan and Sindh. The revised estimates of GDS for the current financial year are Rs.14.9 billion and the budget estimates for next year are Rs.15.0 billion.

Non-tax revenue

164. Non tax revenues comprise a large number of receipts received in various accounts. Major receipts include return on loans to the provinces and public sector enterprises, dividends from corporations, profits of SBP, royalty on oil & gas and other miscellaneous receipts. In the budget estimates 2001-02, non-tax revenues were estimated at Rs.130.1 billion. The revised estimates of non-tax revenues are Rs.164.7 billion. Although there was a serious shortfall in debt servicing from public sector enterprises (PSEs), these were more than offset by substantial increase in dividends from OGDC, SBP profits and defense receipts.

165. In the past year, support to the PSEs through the budget has been a major drain on the public finances. During the mid 90s the combined net deficit of the major PSEs was around 2% of the GDP. Following a major effort to bring about financial discipline in the PSEs, this deficit is now 1.2% of the GDP excluding one off debt conversion into equity in the case of KESC of Rs.83 billion and deferment of debt servicing in the case of WAPDA of Rs.20 billion. KESC's performance has now improved in operational terms with a reduction in operational shortfall to Rs.16 billion from Rs.18 billion in 2000-01. With the cleaning up of its balance sheet and elimination of its accumulated losses through the debt to equity conversion, KESC is now poised for privatization before the end of this year. WAPDA's performance is similarly expected to improve in 2002-03 with the implementation of its Financial Improvement Plan.

166. For the year 2002-03 non tax revenue is budgeted at Rs.153.8 billion on the assumption that the public sector enterprises especially WAPDA would meet their debt servicing liability in full.

Transfers to provinces

167. The transfers to provinces on account of divisible taxes, royalty on oil & gas, excise duty and surcharge on gas are made on the basis of actual collection. For the year 2001-02 a sum of Rs.190.0 billion was projected as transfers to the provinces. However, due to lower than estimated CBR taxes, provincial transfers are now estimated at Rs.175.1 billion.

168. Under the 1997 Award, special grants/subventions were allowed to NWFP and Balochistan for a period of five years i.e. up to 30th June, 2002. As the 1997 NFC Award will remain effective until a new award is announced, provisions have been made to continue the grants/subventions to NWFP and Balochistan for the next year at the current year's level of Rs.3.9 billion and Rs.4.8 billion  respectively.

169. For the year 2002-03 provincial transfers are projected at Rs.193.5 billion. This is based on an estimated tax revenue collection of Rs.460.6 billion, Rs.15.0 billion from GDS and about Rs.12.3 billion from royalty on oil and gas. It is proposed that of 2.5% of 15% GST be transferred to the provinces which will mean an additional resource transfer of about Rs.13 billion from the federation.

Current expenditure

170. In the budget for 2001-02, the current expenditures were estimated at Rs.621.7 billion while the revised estimates are projected at Rs.648.6 billion. Interest on domestic debt was estimated at Rs.197.9 billion. As part of the fiscal reforms, measures were introduced which gradually brought the six months treasury bill interest rates from 12% at the start of the year to 6.5% currently. The domestic debt servicing consequently went down by Rs.5.3 billion during the year.

171. Defense expenditure was budgeted at 131.6 billion (3.5% of GDP) which was at the previous year's nominal level. The outlay on defense had to be increased to Rs.151.6 billion (4.1% of GDP) due to the post December 13, 2001 mobilization of forces on the eastern border.

172. Expenditure on the running of civil government was restricted to the budgeted level of Rs.80.6 billion with an additionality of Rs.4.0 billion provided for pay and pension increase.

173. Grants were reduced from Rs.44.2 billion to Rs.36.8 billion. Expenditure on subsidies went up from Rs.20.7 billion to Rs.25.6 billion. The additionality was on account of supplementary grants for payment of WAPDA dues outstanding against the Government of AJK (Rs.2.0 billion), payment of GST refunds to WAPDA (Rs.1.2 billion) and subsidy to oil refineries (Rs.2.0 billion).

174. For the year 2002-03, interest on domestic debt is estimated at Rs.191.8 billion based stable and low rates of return. While the outlay is at the same level as the current year, this caters for additional borrowing of Rs.50 billion from the non-bank sources to avoid pressures on money supply. The interest on foreign debt is projected at Rs.53 billion compared with revised estimates of Rs.60.7 billion, thus reflecting significant savings in this important cost to the budget. Repayment of foreign loans is projected at Rs.44.8 billion as compared to Rs.66.7 billion in revised estimates for 2001-02. This reduction is due to the relief allowed under the Paris Club-III Agreement signed in December, 2001 where the entire foreign debt stock of Pakistan of more than $12 billion from Paris Club has been re-profiled.

175. Expenditure on the defense is budgeted at Rs.146 billion (excluding pensions). As percentage of GDP, the defense expenditure is 3.6% of GDP as compared to 4.1% of GDP for the revised estimates 2001-02. However, if the situation on the border continues to be tense and the forces remain mobilized, the defense outlay will be reviewed during the year.

176. The expenditure on running of civil government have been kept at around this year's nominal level of Rs.92.6 billion which shows an increase of around 5% over the revised estimates which includes provision for full years impact of pay and pension increase. The total expenditure on grants to provinces and local authorities in the year 2002-03 is estimated at Rs.56.3 billion against revised estimates of Rs.66.3 billion showing a decrease of 15%.

177. Expenditure on subsidies is estimated at Rs.20.8 billion which is 18.8% less than the revised estimates. A sum of Rs.1 billion has been budgeted to pick up losses on account of export of surplus wheat.

Net capital receipts

178. Net capital receipts were budgeted to decline by Rs.5.8 billion for the year 2001-02 while the revised estimates stands at a reduction of Rs.73.8 billion. The decrease is due to higher encashment of Special US Dollar Bonds (Rs.21 billion) and higher repayment of short term credits (Rs.100 billion). For the year 2002-03 the net capital receipts are estimated at Rs.35.9 billion. This caters for on lent loans of Rs.12 billion to the provinces of NWFP and Sindh under the Provincial Structural Adjustment Credit.

External receipts

179. Gross external receipts in 2001-02 were estimated at Rs.261.1 billion. These external receipts are likely to increase to Rs.302 billion in the revised estimates 2001-02 mainly on account of budgetary support grants of Rs.42 billion received from friendly countries. In addition, debt rescheduling from the Paris Club creditors provided relief from debt servicing commitments to the extent of Rs.65.6 billion.

180. For the year 2002-03, gross external assistance is estimated at Rs.198.1 billion against Rs.302 billion in the revised estimates 2001-02. Assistance from IDB is estimated at Rs.25.2 billion.

181. The Government is moving away from high costing short term credits and is availing the soft loan facility of the IFIs. The budget for 2001-02 estimated a short term borrowing of Rs.47.9 billion while the revised estimates are Rs.30.3 billion. In the next financial year, the government does not intend to borrow high cost short term credits

Public sector development program

182. The budget for 2001-02 provided for a PSDP size of Rs.130 billion. This included a provision of Rs.10 billion for drought relief and Rs.3 billion for the devolution support program. After September 11, 2001, Pakistan received budgetary support grants from several countries. Of this, a sum of Rs.14 billion was allocated for additional expenditures on the Khushhal Pakistan Programe, Health and Education Sector Reforms and the "Tawana Pakistan" Programme. Keeping in view the limited spending capacities by the newly inducted district governments, it is projected that the development expenditure is not likely to exceed Rs.124.7 billion during 2001-02.

183. The National Economic Council (NEC) approved the PSDP 2002-03 for Rs.134 billion which is 3.3% of GDP. It was also decided to have a standby list of projects with an outlay of Rs.10 billion which could be taken up during the next financial year if additional budgetary resources are made available.

Overall fiscal deficit

184. In the budget 2001-02, the Overall Fiscal Deficit (OFD) was estimated at Rs.186.9 billion or 4.9% of GDP, which was projected to be Rs.3796 billion. This deficit included some one off expenditures, totaling Rs.20 billion, for such purposes like drought and devolution support. The underlying deficit was 4.4% of GDP. The revised estimates 2001-02 of OFD work out to Rs.257 billion which is 7% of GDP. This includes one off expenditures of Rs.80 billion which are 2.1% of GDP and reflect equity injection in KESC, CBR refunds and shortfalls in debt servicing payments from the public sector enterprises. Thus the underlying deficit comes to 4.9%.

185. In line with the policy of containing deficit, the underlying OFD target for 2002-03 is 4.0% of GDP.

Relief Measures

186. In order to provide some relief to the low paid employees, the following measures are proposed:-

(1) Medical Allowance for employees in BPS 1-16 is increased from Rs.160.0 to Rs.210.0 per month. (Impact of Rs.450 million approximately).

(2) The Over Time Allowance for drivers which fixed in 1991 is increased from Rs.6.0 per hour to Rs.9.0 per hour subject to a maximum of Rs.50 per day as against maximum of Rs.36.0 per day previously.(Impact of  Rs.9 million approximately).

(3) Late sitting/conveyance charges have been revised and improved. The details are announced separately.

Internship Scheme

186. Governments plans to introduce a program of internship for students nearing completion of their degrees. Initially, the program will be limited to the disciplines of economics and finance. The interns will undergo a training program on the working of the federal government divisions, departments and its corporations. It is proposed to establish 500 internships in the next fiscal year. A stipend of Rs.2500 will be paid to interns for a period of 2-3 months. Students will be selected on merit on the recommendation of vice chancellors of universities

Ladies and Gentlemen

187. I now turn to the second part of my speech that deals with tax proposals.

188. At the outset I would like to place before you the main elements of tax policy that we have pursued through out our tenure.

189. As I mentioned in Part-I, the main objectives of tax policy were:

(1) Reduction in number of taxes, both at the federal and provincial levels;

(2) Reduction in tax rates and penalties;

(3) Simplification of assessment and collection procedures;

(4) Reforms in labor levies;

(5) Efficiency in dispute resolution;

(6) Broadening the tax base; and

(7) Honesty and efficiency in tax administration.

190. These remain the guiding principles for our tax policy. Our tax policy is now focused on reforms in tax administration that cover tax processes, assessment procedures, re-organization of CBR, improved compensation and training for tax officials and automation of tax operations. Details of measures taken during the year, in this regard, have been noted earlier. In the tax proposals for the year, additional steps in improving tax administration are included.

191. I now present the proposals within the context of each of the main taxes:

Income Tax

192. As I have said on many previous occasions, income tax is the tax of the future. It is capable to cater both for economic efficiency as well as social equity. The process of reforming this tax that we have initiated last year has been carried to its logical end with the promulgation of new Income Tax Ordinance 2001, which would come into effect from July 1, 2002. Truly revolutionary changes have been brought in the income tax, all aimed at simplifying its application and enabling taxpayers to comply with its provisions.

193. The following important features of the new income tax law are worth noting;

(1) Unlike the previous tax laws that relied on the principle that an "assessing officer" had to determine the income of the taxpayer and compute his tax liability, the new law, in a philosophical departure, places this responsibility on the taxpayer. All income tax returns for income earned from 1st July 2002 onward shall now become assessment orders on the date of filing. The income tax department will have no power to make any changes in the income or tax except that a certain percentage of the cases will be subjected to audit to verify the accuracy of the returns filed.

(2) This self-assessment procedure would be meaningful, not conditioned on declaration of higher income, or limited to certain classes of taxpayers. This will be universal in the true sense of the word, as all classes of taxpayers, irrespective of their status, location or income level, will be entitled to the use of self assessment scheme. Indeed, there will be no other method of assessment, except self assessment. Thus we have removed one of the most pervasive distortion of income tax system, the one that placed our tax system in the class of primitive system. This change alone will bring modernity and progress in our system.

(3) The new law aims to attain uniformity of tax rates and tax treatment, reduce dependence on withholding taxes, encourage voluntary compliance, minimize exemptions and ensure an effective dispute resolution.

(4) In view of the new law, the existing income tax rules require modification to bring them in line with the new law. Accordingly, new rules are being formulated and will be notified soon.

194. Evidently, with above changes the goal of fundamentally transform the income tax regime has been accomplished. In the days ahead, this process will be further strengthened and some of the shortcomings that may still remain will be removed.

Rationalization of personal and corporate taxes:

(1) It is proposed to reduce tax rates so as to induce greater economic activity by such taxpayers:

(a) To lessen the tax burden on low income groups, the minimum taxable income limit, which was increased to Rs.60,000 last year from 40,000, is being raised further to Rs.80,000.

(b) As a step towards reducing the tax rates, 5% surcharge applicable to the corporate sector was withdrawn last year and tax rate applicable to banking companies was reduced to 50% from 58%. In order to further rationalize the tax rates, there shall be a progressive reduction in tax rates for banking companies by 3% per year and for private companies by 2% per year for the next five years so as to reach the tax rate of 35%. This will bring the corporate tax rates to the similar level in the region and would encourage investment and capital formation.

(c) In the last budget, the government had increased the salary of its employees who were not given a pay rise for nearly a decade. Conceptually, the new income tax law provides for monetization of perquisites and withdrawal of exemptions from tax of all cash allowances. The application of new provisions will substantially increase the burden of such employees and result in a net reduction of take-home salary. In order to avoid this, it is proposed to allow the existing benefits to such persons whose salary including allowances and perquisites are up to Rs.600,000 per annum.

(d) The special tax rebate equivalent to 50% of tax payable which was available to taxpayers aged 65 years or more, and having annual income up to Rs.200,000 is being retained though it was required to be withdrawn according to original provision of law.

Reduction in the number of withholding taxes:

(2) To reduce the number of withholding taxes having the character of indirect taxes, 5 types of withholding taxes, namely taxes on import of wheat, bearer certificates, sale by public auction of property, bonus shares and gas consumption bills, were withdrawn. In continuation of this policy, two more withholding taxes, namely tax on out-station checks and commission on petroleum products, are being withdrawn.;

(3) Withholding tax on telephone, mobile telephone and prepaid cards is being rationalized downwards in respect of small denomination cards. The rate of withholding tax will apply on mobile phones and prepaid cards.

(4) Withholding tax is being collected on private motor cars at the time of payment of provincial road tax. Even 10 years old private cars are being subjected to this. This withholding tax is being abolished on private cars which have been used in Pakistan for over 10 years.

Incentive for poultry industry

(5) For the encouragement of the export of "processed poultry meat" exemption from withholding tax is being allowed on live poultry supplies to the poultry processing industry. Moreover, tax rate on export of "processed poultry meat" is being reduced from 1.25% to 0.75%.

Incentives for capital markets:

(6) Withholding tax on commission and brokerage is 10% and is considered excessive. This is being reduced to 5% to make the withholding tax regime reasonable.

(7) Withholding tax on interest on securities at 30% is high and creates liquidity problems for banks. This is therefore being brought to 20%.

(8) Withholding tax at 10% on issuance of bonus shares posed problems for the withholding agents. The same was withdrawn last year. It has been represented that there is no justification of taxing the receipt of bonus shares in the hands of the shareholders, as the receipt does not amount to value addition. The tax on bonus shares is proposed to be withdrawn.

(9) At present, any distribution received by a taxpayer from NIT or a mutual fund established by ICP out of capital gain on which tax has already been paid is exempt from tax. This facility Is being extended to investment companies registered under the Investment Companies and Investment Advisors Rules, 1971 or a Unit Trust Scheme constituted by an assets management company registered under the Assets Management Companies Rules, 1995.

(10) Presently, income of Mutual Funds received by way of dividend, commission and interest is subjected to withholding tax. This withheld amount is refunded if said mutual funds distribute 90% of their income to the unit holders. It has been decided to exempt those mutual funds which are approved by the Securities and Exchange Commission of Pakistan from such deduction. This concession would also be available to those investment companies, which are registered under Investment Companies and Investment Advisors Rules 1971 or a Unit Trust Scheme constituted by an Assets Management Company registered under Assets Management Companies Rules 1995, or a Modaraba Management Company established under Modaraba Ordinance 1980.

Incentives for mergers

(11) There is a growing economic need of mergers and business reorganizations, especially in the financial sector. In order to facilitate such amalgamations, the following tax incentives are being provided for banking and non-banking financial institutions:

(a) Transfer/carry forward of losses of merged institutions;

(b) Tax admissibility of expense on merger;

(c) Continued availability of unabsorbed depreciation; and

(d) Admissibility of different tax rates for banking and non-banking operations.

Incentives for banking companies

(12) To accelerate the pace of privatization of banks, it has been decided to amend the law to extend the period of carry forward of loss from six years to ten years sustained by nationalized banks for the assessment years 1995-96 and 2000-01.

Rationalization of depreciation allowances:

(13) In order to simplify the multiple depreciation allowances, extra depreciation allowance and industrial building allowance were abolished under the new income tax law and an initial depreciation at the rate of 40% was introduced. It has been represented that the rate of initial depreciation should be enhanced to provide incentive to investment and capital formation through deferred tax liability. It has, therefore, been decided to allow initial depreciation at 50% of the cost of all depreciable assets, to all taxpayers.

(14) Depreciation on pre-commencement expenses was not provided in Income Tax Ordinance 1979 due to which there was an unending litigation between the taxpayers and income tax department. It is proposed to allow amortization of pre-commencement expenses at the rate of 20% annually.

Incentives for the housing sector:

(15) The government is committed to provide incentives for construction of Residential Houses. Last year, mark up paid on loans obtained for this purpose was allowed rebate at average rate of tax with the condition that the loan amount does not exceed Rs.600,000 with maximum ceiling of mark-up of Rs.50,000. The condition of maximum ceiling on loan amount of Rs.600,000 is withdrawn and the maximum ceiling of mark-up is raised to Rs.100,000. This will go a long way to provide relief to the self employed and salaried classes and encourage them to own a residence.

Concessions for pension funds and annuities:

(16) Last year, with a view to providing incentive for pension contributions, contribution to an approved annuity scheme to the extent of 5% of income subject to maximum of Rs.50,000 was allowed as tax allowance. To further improve incentives for such contributions, the upper limit of this allowance is being enhanced to Rs.100,000.

Concessions on depreciation for purchase of cars:

(17) The deprecation of motor vehicles in the past was being restricted to a cost of Rs.600,000. Government had increased it last year to Rs.750,000 which is further increased to Rs.1 million.

Eliminating exemptions:

(18) Presence of exemptions and deduction of certain liabilities allowed to certain taxpayers creates distortions in the tax regime. Full benefits of the new law would not accrue until such distortions are removed. With this in view, the entire list of such exemptions were examined and it is proposed to remove 55 of them with immediate effect.

(19) Exemption to income from investments in national savings schemes made after 1-7-2001 was eliminated. The withholding tax on amounts exceeding Rs.300,000 was maintained at 10% of the yield. The limit of Rs.300,000 is proposed to be reduced to Rs.150,000. This shall however be effective on investments made after 1-7-2002 and shall not affect the investments already made.

(20) Entertainment allowance and Senior Post allowance provided to government servants were exempt from income tax. It is proposed to bring them into the tax net. However, the take-home salary will be protected through appropriate adjustment in allowances.

(21) Payment on account of utilities allowed to Ministers was previously exempt up to Rs.15,000. This is now made taxable.

Non-profit organizations

(22) Non-government organizations are playing an increasingly important role in pursuit of human development and poverty reduction. In order to strengthen the role of such organizations, existing income tax law and rules are being amended suitably to align the same with new development models.

Taxpayer facilitation

(23) In the case of legal disputes pending for final resolution in the higher judicial forums, the income tax department continues to make further assessments on their own version of law. In order to save taxpayers from the inconvenience of having to file appeals before superior courts in each such case, necessary legal provision is being made in the income tax law.

Central Excise

195. The role of central excise in country's tax system has been made marginal, and that too for technical reasons. Yet in whatever little coverage it has, irritants remain that make compliance difficult. With a view to removing these irritants, the following steps were taken during the year:

196. Last year central excise duty was abolished on ten items. This year central excise duty is being withdrawn on 10 more items.  These are filament yarn, polyester chips, electric batteries, metal containers, optical fibre, kraft paper, ship plates, services provided by travel agents, advertising agents and shipping agents.  The revenue loss on these items is estimated at rupees one billion.

197. The process of equalizing central excise duty incidence on imports and local production is being completed in this budget. Henceforth, there would not be any item on which there is any disparity between central excise duty incidence on import and on local production.  This will provide a level playing field to local manufacturers.

198. Aerated beverages are a highly taxed item attracting CED @ 15% besides duty @ 50% on concentrate.  Sales tax is also leviable at each stage.  Such a high tax incidence tends to increase non-compliance.  As a first step, excise duty on aerated beverages is being reduced from 15% to 12% of retail price.

199. In view of adverse effects of cigarette on human health and to raise some revenue, it is proposed to increase the incidence of duties on cigarettes.

200. To facilitate taxpayers and remove irritants, central excise procedures are being further modified to bring them closer to the sales tax procedures. Manufacturers of excisable commodities registered with sales tax are being exempted from keeping separate raw material accounts and submitting quarterly returns of consumption.  Condition of annual renewal of central excise licence is also being dispensed with.  Two more items namely cement and cigarettes are being shifted from supervised clearance system to self-clearance system.

Customs

201. The overriding objective of tariff reforms undertaken during the last decade has been to create a competitive trade regime that reduces the undue protection to the local industry and removes the anti-export bias of imports.

202. Last year, a quantum jump was undertaken in the process of reform initiated in early 90s. Not only the maximum tariff rate was brought down from 35% to 30% but the number of duty slabs was reduced from 5 to 4. Consequently, duties on some 4000 items of custom manual were altered, which had a salutary effect on economic activity.

Tariff Reforms

203. This year the process of reforms has been carried forward to its conclusions in the medium term. The following are notable changes proposed in the Customs regime to simplify and enable it to meet the needs of a international competitive environment:

(1) The maximum customs tariff rate of 30% is being reduced to 25%.  There will be only 4 rates i.e. 25, 20, 10 and 5%. In addition, some further rationalization has also been undertaken in order to strengthen the competitiveness of local industries.

(2) Duty rates on over 2500 tariff lines have been reduced.  These include the tariff reductions introduced on account of arrangements with the European Union who have provided greater market access to Pakistani exports.  Simultaneously, the customs tariff has been made consistent with the Harmonized System of WCO 2002 version.

(3) The duties on import of plant and machinery for development of grain handling and storage facilities and aircraft and their spares are being reduced.

(4) The government's conscious policy of providing cheaper inputs for our industries has been continued.   Last year's concessions given to the TV industry and the electric fans industry have given rich dividends as the production of these items has increased substantially.  The production of TV units estimated during the current year is 450,000 as against 350,000 in the previous year.  The export of electric fans during the current year is estimated at 900,000 as against 500,000 in the previous year.

(5) This year the rate of customs duty on stainless and alloy steel has been reduced from 10% to 5% which will provide a boost to our surgical and cutlery industries which mostly fall in the small and medium category.

(6) Some other items which will help industry substantially are titanium dioxide on which duty has been decreased from 20 to 10% and waste paper on which the duty has been decreased from 10 to 5%.

(7) Customs duty on compressors has been reduced from 20 to 10% and 5%. Glass fiber mats from 20 to 10%, ethylene and propylene from 10 to 5%, hand tools from 20 to 10% and electronic calculators from 20 to 10%.

(8) C.T scans will now attract 5% customs duty as against the previous rate of 10%.

(9) The items presently attracting zero percent customs duty have also been reviewed in order to curb the inherent tendency of over-invoicing in zero duty items.

Reducing SROs

204. One of the major irritants for the manufacturers was the difficulties which the widespread SRO regime used to pose for the manufacturers.  On the other hand, the SRO regimes used to provide incentives for misdeclaration by unscrupulous importers in collusion with errant tax officials.  The government has continued its policy of removing the irritants inherent in the SROs.

205. An experts committee on investment has pointed out that the concessional regime regulated through Form `S' entails cumbersome procedure of industrial survey, fixation of capacity, opaque procedures for bringing amendments therein, etc. Moreover, there are complaints of harassment by officials.  It is, therefore, proposed to move out of the concessionary tariff regime  to the extent possible at present.  In the case of 254 items the statutory rates have been brought closer to the erstwhile concessional rates. Consequently, irritant to the industries through the Form `S' regime would be diminished to the extent of these 254 items.  The expectation of the government is that the scheme of Form `S' should be altogether abolished in the next two years.

206. The investment driven SRO.439(I)2001 and SRO 28(I)/98, which carried a concessionary rate of 5% and 10% for manufacturers and service sector respectively entailed bureaucratic hurdles of its own such as approval by various government agencies, submission of indemnity bonds, etc. In order to remove an irritant to the investors, the SRO has been rescinded and the rates of machinery covered therein have been transposed to the tariff without any variation in rates.

207. With these changes, the number of SROs which were reduced from 120 to 56 in 2001-2002 will stand reduced to about 30 this year.  The remaining SROs mostly cover GOP's commitments to foreign investors and to cover various policy commitments such as those for shipping, petroleum and agriculture sectors.

208. The duties on import of vehicles are extremely high and thus there is no import of vehicles.  The sense of lack of competition tempts the local manufacturers to be costly and less quality conscious thus jeopardizing the legitimate interests of consumer.  In order to create an environment of efficiency and competition, the duties on import of cars are being reduced as under:

From To

Cars upto 1000CC 100% 75%

Cars upto 1500CC 120% 100%

Cars upto 1800CC 150% 125%

Cars over 1800CC 250% 200%

Motorcycles 105% 75%

Discouraging under-invoicing

209. Despite substantial reduction in rates of customs duty, there are still persistent complaints of under invoicing. To combat this menace, all dry ports are being linked electronically for sharing of valuation data at Custom House Karachi and at other dry ports. Lahore and Sambrial dry ports are already on line while the remaining dry ports will be connected soon. A Task Force will be set-up in the CBR to monitor the progress work in this area.

Customs General Orders

210. Conscious to the needs of public in general and trade in particular and for the resolution of their problems in complying with revenue related issues, several hundred Customs General Orders issued over the past three decades have been amalgamated into an easily understandable single document.  In the process almost 500 redundant General Orders have been weeded out.  It may be recalled that a similar exercise was done last year regarding custom rules.

211. The Government is considering to establish a large Free Trade Zone at Gawadar in the close vicinity of Gawadar Deep Water Port Project.  The overall plan under preparation for the development of this region is giving this aspect full consideration.  A special package to encourage large scale investments and particularly in the industrial, mineral and petroleum sectors in Gawadar Export Free Trade Zone will be decided shortly in consultation with the Provincial Government of Balochistan.

Baggage Rules:

212. In order to provide additional incentives to Overseas Pakistanis who remit foreign exchange, it is proposed to increase their duty free allowances from $700 to $800 for those remitting over $2500 and from $1200 to $1500 for those remitting over $10,000.  It is also proposed to allow them to purchase locally manufactured electrical and electronic items (free of sales tax) from duty free shops within their allowances.  This facility will also be allowed to those availing Transfer of Residence facility within their allowances.

Anomalies:

213. Large scale restructuring of tariff regime can give rise to some tariff anomalies.  In order to facilitate those who may be affected because of such anomalies, it has been decided to constitute a committee headed by Secretary General Finance and comprising Secretaries of Commerce, Revenue and Industries to review any complaints in this regard and dispose them by the end of July.

Single Customs Declaration Document

214. At present 5 different forms for customs declaration are in use. There are home consumption bill of entry, into bond bill of entry, transit bill of entry, shipping bill and baggage declaration form. The emerging practice worldwoide is to consolidate all these declarations into single document covering all purposes. We will also be introducing a single document in Pakistan at some selected customs stations in the near future. Hopefully, the coverage of this document will be extended to the entire country within a few months.

Exports

215. You all know that exports from Pakistan received a serious setback due to events of 11th September. Taking immediate cognizance of the situation, the Government offered a major fiscal relief to exporters by freezing duty drawback rates at the level of 1st October, 2001. The third and fourth revisions in duty drawback rates due on 1st January and 1st April, 2002, respectively were put-off. These two corrections in DDB rates would now be effected from 1st July, 2002.

216. To further alleviate the difficulties of exporters, the backlog of duty drawback which accumulated during the second half of last fiscal year was cleared by 31st January, 2002 in addition to the current payments of duty drawback. In the process, CBR paid Rs. 26.1 billion of duty drawback in eleven months which is 59% more than 16.4 billion paid in the whole financial year 2000-2001.

217. One of the major irritants mentioned by the GoP's Committee on Investment is regarding the inadequate arrangement for timely and transparent payment of duty drawback and refunds of sales tax.  In acceptance of the recommendations of the Committee, it has been decided that customs duty drawbacks repayments will be made through bank branches directly. I will talk about the sales tax refunds a little later.

218. Traditionally, exports for Afghanistan were not entitled to exemption of duty and taxes due to fear of smuggling.  However, because of recent events, it was necessary to promote exports to Afghanistan.  Thus, permission of zero-rating and duty drawback were allowed on exports to Afghanistan via land route.  Moreover, Pakistani made goods purchased by UN agencies for relief supplies to Afghanistan were also deemed as exports for the purpose of zero-rating. Permission has also been given for duty and tax-free "Export Warehouses" at Chaman and Peshawar for storage and ready availability of construction materials for export to Afghanistan.

219. Some other noteworthy measures of facilitation for exporters include round the clock export facility at all customs stations, waiving of prior permission for late examination of export cargo, reduction of time from 10 days to 3 days generally for laboratory tests reports and where required introduction of evening shifts for speedier disposal of duty draw-back claims.

220. One major initiative made in the previous budget was about the DTRE regime under which the exporters were to be freed from the hassle of paying any duties & taxes on import and to subsequently undergo the rigours of claiming duty drawbacks and refunds.  While 317 manufacturers have availed the DTRE Rules and are operating under the same, the response has been less than satisfactory.  The industry felt that the DTRE Rules were not adequate.  I am happy to announce that in consultation with the stake holders, the CBR has modified the DTRE Rules.  Provision has been made for the admissibility of GST paid on utilities and the users of polyester staple fibre will be entitled either to avail the option of importing the same under the DTRE or to obtain duty drawback on locally purchased PSF on deemed import basis.  Issues of disposal of wastages as well as the local disposal in distress situations have been addressed.

221. Since the DTRE rules will be finalized within a few weeks, the other temporary import SROs which were to have lapsed on 31.12.2001 but were allowed to remain operative, shall stand rescinded on 31.12.2002.

222. The validity of SRO 260 of 2002 meant for duty drawback on polyester staple fibre on deemed import basis is being extended for one year.

Sales Tax

223. Being admittedly the tax of the future, the government continued to pursue the policy of expansion of the sales tax net but also remained alive to the resolution of genuine difficulties of taxpayers.  During the year, sales tax was imposed on pharmaceutical products but substantial relief was provided to the public by exempting 256 essential medicines constituting 40-50% of the total value of sales by the industry.

224. You are aware that GST is already leviable on imported edible oils used for production of ghee and cooking oil.  Consequently, the consumers are already paying for the impact of GST on imported edible oils, packing material and utilities. It is now proposed to complete the tax chain to ghee and cooking oil, which will extend documentation in this sector.  The impact on consumer prices will be only 5% or so because of input credit.  It is also proposed to enhance customs duty on imported oilseeds from 5 to 10%.  This will give an encouragement to the local farmers to grow more oilseeds locally.   This measure will bring some saving in huge spending of foreign exchange which is estimated at Rs.26 billion for the current year.

225. Last year the government had experimented with a withholding sales tax @ 20% on specified raw materials. The objective was to promote documentation and to provide some edge to the honest taxpayer manufacturers. 190 items were covered initially while some more were added during the year.  It is now proposed to add 6 more items to this list.  These are edible oils, talc, solvent oil, calcium carbonate, maleic anhydride and acrylic tops. This measure has no impact whatsoever on the price of the end product.

226. In order to place the local manufacturers on equal footing against imported machinery, an arrangement is being provided for zero-rated supply by local manufacturers to such oil and gas exploration companies who are entitled to import similar machinery free of sales tax.

227. The government has been extending its coverage while improving the legal and administrative aspects.  However, in keeping with the difficulties encountered in other countries which adopted sales tax as their main revenue earner, we have also had our share.  One major reason of resistance is the initial difficulties which the GST regime poses to individuals as well as classes of taxpayers.  In order to alleviate the genuine difficulties of those in transition to fully conforming with the GST regime, it is proposed to provide an alternate dispute resolution mechanism in the sales tax law.  The committees to be set up on need basis for addressing specific difficulties of individual as well as classes of taxpayers will include representatives from the private sector including chartered accountants, lawyers, academicians and prominent taxpayers.  The recommendations of these committees will be given due weightage in settling such disputes. This measure will not only help in expansion of the tax net but also alleviate unnecessary suffering. This initiative is being taken on account of the success of a similar ad-hoc experiment in a few cases during the current year. This arrangement is, therefore, being institutionalized.

228. In acceptance of the demand of the taxpayers, 72 more branches of National Bank are being designated to receive sales tax returns and payment of tax.

Sales Tax Refunds

229. The government is committed to further reform the GST refund system.  We have got the malaise of flying invoices, the profile of wrongdoers and all other attendant factors studied carefully in consultation with all stakeholders.  As a result, proposals for further reform in the GST refund regime have been prepared.  Besides increased use of automation, the number of those entitle to speedier refunds on basis of their profile will be substantially enlarged.  This low risk category will receive their due refunds immediately.  It will also be ensured that exporters in the other categories also receive their share without being made to wait unduly.  In order to devise the new refund rules, a committee under the Chairman of Export Promotion Bureau is being set up today to finalize the reform package within the next 4 weeks for implementation by end of August.  It is also proposed that new rules will be issued in supersession of SRO.417 whose very name has come to signify undue discomfort for the exporters.

230. As know, in 2002 the government had decided to clear the backlog. As a result, by March this year an amount of Rs.15 billion was repaid as sales tax refund as well as customs duty drawback in excess of the amounts refunded in the preceding year. This was a major relief provided to exporters in the wake of testing times they faced in the aftermath of 9/11. However, it has been reported to me that in the recent weeks there has been a slowing down of refund payments. I do not approve of this situation and instructions have been issued to clear the outstanding refunds.

231. I am happy to announce that the government has fulfilled its promise to the taxpayers to lay down parameters of audit. For most sectors this has been done already while action for the remaining is in hand. This fulfills a long outstanding demand of taxpayers. Henceforth audit will be objective and painless. I take this opportunity of applauding the active role of the FPCCI in this exercise.

Concluding Remarks

Ladies and Gentlemen

232. The Budget 2002-03 is an investor friendly budget. Rather it has reduced the overall tax burden by lower maximum tariff, corporate and personal income tax together with minimizing discretionary powers of tax officials and personal contact between taxpayer and collector. In addition, it proposes to eliminate a host of irritants that continue to keep the cost of doing business high. The cost of financing has been reduced through better control of government's demand for credit and keeping the rate of inflation down. All this points to an improved enabling environment necessary for investment promotion.

233. The budget has also catered for the common man. The increased development spending will create new jobs, provide better access to basic human needs afford more effective social safety protection. Inflation has been low and anti poverty program along with improved investors' confidence will create more jobs.

234. The budget caters fully for the needs of country's defense, as whatever is needed for this purpose has been provided. The economy drive would never cut corners when it comes to meeting the needs of country's defense.

235. But, what I have presented before you is not merely an exercise in booking keeping rather it is a story of continuous and determined effort to bolster the economy of Pakistan. We have averted all the dangers that were threatening the economic viability of Pakistan. The risk of default that in 1999 appeared imminent is now off the radar screen. The reforms process, whose on-and-off and sporadic implementation had earned the country infamy, has been pursued with relentless determination enabling the country to regain its lost credibility. The capacity of institutions of governance that had eroded to the point of ineffectiveness is being restored through a well crafted program of power devolution and reforms in civil services, judiciary and police, all through a participative method. The poor has been brought to the centre-stage of economic, social and political planning of the country. Social sectors are receiving attention that was not witnessed previously.

236. This is the foundation over which a system of social justice is being erected by the government of General Pervez Musharraf. The year 2002-03 has demonstrated that this can withstand shocks, as ferocious and unpredictable as 9/11. At the onset of tensions on our eastern border, some analysts had apprehended that this was an attempt at economic strangulation of Pakistan. Clearly, if there were any such assessments, they have been veritably wrong. Pakistan's economy has proven to have resilience to face challenges.

237. This is testimony to the strength of our nation. We should take pride in this achievement. Some may feel that not enough has been done but let me say, Ladies and Gentlemen that there are clear signs that Pakistan has bright economic future. Today, our foreign exchange reserves are plenty, exchange rate is stable, banks are flushed with liquidity, agriculture is performing despite persistent drought, industry is growing - and regarding unprecedented growth in some sectors like sugar - inflationary pressures have subsided, regulatory institutions are becoming effective, culture of merit is promoted in public appointments, power is devolved and poverty reduction is exalted to the status of primary focus of economic and social planning.

238. However, none of this should be a source of complacency. We have lot more to do. We must remember the advice of Quaid-i-Azam, which he gave on the occasion of the first anniversary of Pakistan on 14 August 1948:

We have faced the year with courage, determination and imagination, and the record of our achievements has been wonderful one in warding off the blows of the enemy. ...... The result of our constructive and ameliorative work has gone far beyond the expectations of our best friends. I congratulate you all....., and I thank the people of Pakistan from whom we have received patience and genuine support in every effort that we have made to put forward the program of the first year.

But that is not enough. Remember, that the establishment of Pakistan is a fact of which there is no parallel in the history of the world. It is one of the largest Muslim states in the world, and it is destined to play its magnificent part year after year, ..., provided we serve Pakistan honestly, earnestly and selflessly

239. There are numerous challenges and difficulties that we continue to face and hence we cannot afford to lower our guard. There is a large agenda that remains on the table. The state of poverty, exports, revenue collection and debt is such that we have to continue to work hard to completely break the shackles of our economic dependence. The private sector has to rise to the occasion and play its due role, especially in accelerating the rate of investment. If we put our hearts and minds together, there is no challenge too big for our joint efforts. Lets resolve that we will work together to shape our destiny. The journey that we began three years ago is proceeding apace. We have to remain on course.

240. And then there will be unforeseen problems and difficulties that we may face in future. We are now blessed with a dependable economic base, that would Inshallah allow us confront them with the same determination and courage that we displayed after 9/11. We have emerged stronger in the aftermath of 9/11, and the same phenomenon will be repeated, provided we remain on course and don't lose site of our goal. Thus we should not worry about challenges, as Dr. Allama Iqbal has said that they visit us only to make us stronger:

241. I have no doubt that Pakistan has a bright future. Lets advance in unison toward that shining tomorrow.

242. Pakistan Painda-e-bad.

HIGHLIGHTS

Public Sector Development Programme (PSDP)

An amount of Rs. 9.179 billion has been allocated for the on-going and new federal-funded special projects in the Public Sector Development Programme (PSDP) 2002-03 under Finance Division.

Major allocations with respect to the on-going projects in this segment of PSDP 2002-03 included Rs. 6.001 billion with Rs. 6 billion of foreign aid component for Drought Relief Emergency Assistance, Rs. 997.76 million for Greater Bulk Water Supply Karachi, Rs. 300 million for Greater Quetta Water Supply - main and Rs. 153 million for Construction of Zubaida Jalal Road (Turbat-Mand Road).

While under the new SUPARCO project, an amount of Rs. 151 million has been allocated for Satellite Ground Station for Acquisition of Data from SPOT-5 and Rs 100 million for Islamabad Institute of Space Sciences.

Other on-going projects securing allocations in PSDP 2002-03 included Rs. 185 million for Project for Improvement of Financial Reporting and Auditing in Pakistan (PIFRA), Rs. 18 million for Financial Monitoring and Evaluation of SAP, AG Office Islamabad, Rs. 63 million for Kotri Surface Drainage Scheme Phase-1, Rs 119 million for TA Project for Modernization of Customs Administration CBR, Karachi, Rs. 5 million for Strengthening of Financial Policy and Debt Management, Islamabad, Rs 75 million for Technical Assistance for Capacity Enhancement in Energy Sector, Rs. 1.26 million for Institutional Strengthening and Re-alignment of CBR and Rs. 10 million for Renovation of Dargah Hazrat Lal Shahbaz Qalandar.

Industries Division in PSDP 

The government has allocated an amount of Rs. 313.975 million including Rs 72.230 million foreign aid component in the Public Sector Development Programme (PSDP) 2002-03 for the new and on-going projects under the Industries and Production Division. In this respect, the PSDP allocations for new projects included Rs 23.595 million for Support for Reforms Regulatory and Legal Policy Environment for Private Sector Growth (WB) and Rs 57.6 million for Project Preparatory technical Assistance for SME's Sector Development. 

Under the on-going projects the PSDP allocations included Rs 230 million for Rehabilitation of People's Steel Mills (PSM Ltd. Mangopir, Karachi) and Rs 2.78 million for Balancing and Modernization of Workshop Facilities at PITAC, Lahore. 

Health Development projects 

The federal government has allocated Rs. 3309 million under Public Sector Development Programme 2002-03 for health department projects which includes Rs. 309 million as foreign aid component. 

According to the details of the PSDP new projects will be initiated to fight against HIV/AIDS with Rs. 150 million. 

For national programme for family planning and primary health care the government has allocated Rs.1791 million during the next fiscal year while spent Rs. 8124 million has already been spent on this sector by June 2002. 

Under the PSDP 2002-03, the government has allocated Rs. 500 million for Expanded Programme of Immunization while Rs. 2970 million has already been spent on this programme. 

Giving due importance to aids control, the government has allocated Rs. Rs. 100 million for National Aids Prevention Control Programme during the next fiscal year while Rs. 581 million on this sector has already been spent during the current fiscal year.

To control malaria, the government has allocated Rs. 31 million under PSDP for the next fiscal year and government has already spent Rs. 146 million during the current year to Roll Back Malaria Control Programme.

Rs. 74 million has been allocated under PSDP for the establishment of on going scheme of extension of 200 bedded hospital in D.I. Khan which will be completed at a cost of Rs. 391 million.

For the National Tuberculosis Control Programme, a sum of Rs. 25 million has been allocated under PSDP for the next fiscal year. 

Law and Justice Department 

The Government has allocated Rs. 1145.67 million under Public Sector Development Programme for Law, Justice and Human Rights division during 2002-03 which includes Rs. 894.71 million as foreign aid component.

The government has also allocated a sum of Rs. 24.935 million for Human Rights Mass Awareness and Education Projects during 2002-03 under Law, Justice and Human Rights division which also include Rs. 23.96 million foreign aid component.

The Ministry of Law, Justice and Human Rights will also spent Rs. 50 million to complete the construction of new building of Federal Shariat Court.

The total estimate for the building of Federal Shariat Court which is under construction was Rs. 109.344 million. The government is also initiating a new project in the next fiscal year to ensure access to Justice programme and allocated Rs. 774 million for this project during the next year.

With a view to improve the facilities for the courts, the government has also allocated Rs. 200 million for the betterment of the court infrastructure. The Law and Justice department has also allocated Rs. 96.75 million for the improvement of study on strengthening of institutional capacity for judicial and legal reforms during 2002-03. The total allocation will be from foreign aid component. 

Education sector

An amount of Rs. 2603.728 million has been allocated for the development of Education sector during the fiscal year 2002-03. According to annual Public sector Development Programme (PSDP) released here on Saturday an amount of Rs. 800 million has been allocated for carrying out Madrassas Reforms during next year.

It said that government has decided to spend an amount of Rs. 150.000 million has been earmarked for Literacy Programme during the year 2002-03. An amount of Rs. 105.722 million will be spent on Primary Education which included Rs. 96.700 million for carrying out on going project while Rs. 9.000 million for new projects.

The government has earmarked an amount of Rs. 147.512 million  on Secondary Education which included Rs. 107.350 million for on going projects and Rs. 40.161 million for new projects.

An allocation of Rs. 31.825 million has been made for Teachers Education while Rs. 128.946 million will be spent on Technical Education of the Teachers during the year 2002-03. It included Rs. 37.275 million for Technical Education Project with ADB assistance and Rs. 69.271 million for Establishment of Polytechnic Institute for Boys Islamabad.

An amount of Rs. 123.226 million has been allocated for College Education which include expenditure of Rs. 28.334 million for Establishment of Federal College of Arts and Design at Jamshoro.

An allocation of Rs. 124.825 million has been made for on going and new Scholarships. An amount of Rs. 695.997 million has been earmarked for University's on going and new projects while allocation of Rs. 119.287 million has been made for Agriculture Universities. An allocation of Rs. 80.000 million has been made for Establishment of Karakuram University at Gilgit.  

S & TRD under PSDP  

The government has allocated Rs. 2600.18 million for Science and Technological Research Division under Public Sector Development Programme (PSDP), 2002-2003. According to PSDP, in the total allocation, Rs.516.492 million would be contributed by foreign components. Ten mew projects have been planned during the next fiscal year 2002-03 and an amount of Rs. 1352.9 million has been allocated in this regard.

The main new projects planned under PSDP are  the establishment of Third World Centre for Science and Technology, Phase-ll, University of Karachi (Rs. 510 million), Acquisition and Development of Land for NUST in Sector, H-12, Islamabad (Rs. 367.5 million), establishment of Headquarter NUST and High Tech Postgraduate S&T Institutes at Islamabad (123 million, Dr. A.Q Institute of Bio-Technology & Genetic Engineering (KIBGE) (Rs. 100 million), Survey for Extension Continental Shelf of Pakistan (Rs.60 million), PCSIR Industry Linkage Programme (Rs. 50 million) and Introduction of new Technology in Polytechnic Institutes.

The government has also allocated Rs. 1247.28 million including Rs. 4.92 million as foreign aid for the 84 on-going projects under PSDP 2002-03. The on-going main projects include Teachers and Researchers Overseas Scholarship Scheme (Rs. 200 million), Development of S&T Manpower Through Indigenous Ph.D (300 Scholars, Rs. 150 million) and Merit Scholarship for Ph.D Students in S&T (Rs. 70 million).  

Energy projects

Public Sector Development Programme (PSDP) 2002-03 was Saturday unfolded, indicating handsome allocation of Rs 342.697 million for nine development projects in the energy sector, including four ongoing and five new ones. The foreign aid component of PSDP 2002-03, is estimated at Rs.106.497 million while the local component amounted to Rs236.200 million.

Of the total four ongoing schemes to be funded during the fiscal 2002-03 by the Ministry of Petroleum and Natural Resources, Systematic evaluation and appraisal of coal resources for four specific tracts in Thar coal field, Sindh to get the maximum chunk of Rs.70 million. This project will be totally funded by the government of Pakistan as it has no foreign component.

Support for the preparation of policy reforms in the petroleum sector to fetch Rs.12.697 million which includes Rs.10.497 million foreign component while the local shares come to Rs.2.200 million. CIDA Oil and Gas sector programme phase III to get Rs.96.500 million in which the local share is Rs.0.500 million while the rest all is foreign aid.

Similarly, ongoing project i.e BMR of HDIP Stations at Karachi and Islamabad to have 100 per cent share of the local component in the PSDP 2002-03. It merits to mention here that Rs.1043.580 million have already been spent on the four ongoing scheme of which Rs.813 million have been utilised on CIDA Oil & Gas sector programme Phase-III.

The new projects to be undertaken during 2002-03 included Bankable feasibility study of Thar coal mining (Rs.71 million), Exploration and Evaluation of Coalfield of Loralai and Kohlu Districts, Baluchistan, (Rs.11.400 million) Opening of E&P Activities in Tribal Areas of Baluchistan,(Rs.11.400), Construction of HDIP Head Office Building Islamabad (Rs.5 million) and Construction of Laboratories and Office Buildings for GSP at Peshawar(Rs.20 million).  

Finance Minister Shaukat Aziz said that the country achieved over 6 billion dollars Foreign Exchange reserves, the highest ever in our history, due to the fiscal policies of the present Government.  

Announcing the budget for the year 2002-2003 on Radio and TV the Minister said that it was not due to September 11 or a result of Pakistan joining the Coalition. "It is the culmination of our policies and we had achieved 4 billion Dollars Foreign Exchange reserves before September 11, 2001," he said.  The process of de-dollarization is another indication of our economic policies and also the stable exchange rate.  

IT & Telecommunication

The government has allocated Rs. 4488.925 million for Information Technology and Telecommunication Division under Public Sector Development Programme (PSDP), 2002-2003.

According to details, in the total allocation, Rs.  443.198 million would be contributed by foreign components. Twelve mew projects have been planned during the next fiscal year 2002-03 and an amount of Rs. 1617.354 million has been allocated in this regard.  

Interior Division in PSDP  

The federal government has allocated Rs. 800.862 million for Machine Readable Passport Project (MRPP) in the Public Sector Development Programme (PSDP) 2002-03. According to the budget document released Saturday, the total cost of MRPP is projected as Rs. 2,830.925 million, which also included foreign aid of Rs. 1,586.098 million.

The Interior Division would spend Rs. 217.05 million on construction of 14 Regional Passport Offices. The total allocation for Interior Division for the fiscal 2002-03 is Rs. Rs. 2,713.736 million, which included Rs. 380 million of foreign aid and Rs. 2,333.736 million by the government for various development schemes in all over Pakistan.

From the total Rs. 380 million foreign aid allocations, Rs. 300 million would be allocated for establishment of National Forensic Science Agency in Pakistan. The total cost of this project is estimated as Rs. 1,292.450 million.

The PSDP-2002-03 would spend Rs. 20 million for a new scheme of construction of Wing Headquarter for Swat Scouts. The total estimated cost of the project is Rs. 39 million.

The government would spend Rs. 39.645 million for construction of 100 border out-posts of Pakistan Rangers, Punjab and another amount Rs. 7.213 million for acquisition of private land for 138 border out posts.

The PSDP has allocated Rs. 5 million for Pak Rangers, Sindh, to construct Married Accommodation for 104 Other rankers of Bhitai Rangers, Karachi. A similar amount will also be provided for construction of Married Accommodation for 30 Inspectors.

An amount of Rs. 10 million has been allocated for construction of zonal headquarter and residential accommodation for FIA staff, Peshawar. For construction of Islamabad Capital Territory Area (ICTA) Judicial and Administration Complex an amount of Rs. 100 million habeen earmarked. Total cost of the project is Rs. 419.207 million and till June 2002 an amount of Rs. 66.7 million have been spent on it.