Identifier
Created
Classification
Origin
09ISLAMABAD1427
2009-06-29 13:42:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:
NATIONAL ASSEMBLY PASSES FY09-10 BUDGET
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UNCLAS ISLAMABAD 001427
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECPS ECON ETRD PREL PK
SUBJECT: NATIONAL ASSEMBLY PASSES FY09-10 BUDGET
REF: ISLAMABAD 1355
UNCLAS ISLAMABAD 001427
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECPS ECON ETRD PREL PK
SUBJECT: NATIONAL ASSEMBLY PASSES FY09-10 BUDGET
REF: ISLAMABAD 1355
1. (SBU) Summary: The GOP presented its budget to Parliament on
June 13 (reftel). After a week of debate, on June 22 the GOP
presented a revised budget which reflected revisions desired by
members. This budget was passed unanimously by Parliament with no
changes on June 25. While the overall parameters of the budget
remained the same - the budget deficit of 4.9 percent, and revenue
and expenditure targets - additional outlays on such items as higher
civil service wage increases and lower withholding taxes on imports
will most likely be financed by a decrease in development spending.
The country representatives of the Asian Development Bank and the
International Monetary Fund, along with many other economists,
voiced concerns that the GOP's revenue projections were optimistic
and that their expenditures were underestimated, which would lead
ultimately to a substantially larger budget deficit. End Summary
2. (SBU) After a week of Parliamentary debate, the GOP presented a
revised budget on June 22, which reflected the wishes of the
National Assembly members. There were several major changes: a 20
percent rather than a 15 percent salary increase for lower grade
civil servants; the withholding tax on imports for the industrial
sector reduced from a proposed 4 percent to 3 percent; and
compressed natural gas (CNG) exempted from the carbon surcharge.
The Parliament also introduced some changes in the customs duties
and excise taxes on a wide variety of raw materials meant to revive
certain industrial sectors. The major parameters of the budget,
however, did not change. The total budget was still $36.21 billion,
the total tax collection target remained at $17.5 billion, and the
budget deficit was still 4.9 percent of GDP. On July 25, the
Parliament unanimously adopted this budget with no change.
3. (SBU) According to the Ministry of Finance, the latest revisions
will cost between $375 million and $437 million. The World Bank, on
the other hand, estimates they will total between $500 and $625
million: salary increases will cost an additional $250 million;
lower withholding taxes will cost $125-$137 million in lost revenue;
and dropping the tax on CNG will forfeit $150 million of projected
revenue. MOF sources say that some of the losses can be made up
through more stringent tax collection and that the new tax on real
estate transactions has a much greater potential than projected in
the budget. However, most experts believe that the GOP will make up
the difference by cutting development expenditures, which were
increased by 54 percent this year.
4. (SBU) More generally, experts have voiced concern that both the
original and final versions of the budget have underestimated
expenditures and overstated revenues. For example, the World Bank
told us that a more realistic estimate for the original salary
increases would have been $200-250 million, rather than the budgeted
$100 million. The IMF resident representative gave the example that
revenue estimates from the State Bank of Pakistan were considerably
overstated. In a June 19 roundtable on the budget with major
donors, the Asian Development Bank [protect] was particularly
critical of the GOP's inability to increase its tax receipts, noting
that revenue receipts, net of transfers to the provinces, were not
sufficient to pay for the government's current expenditures. It had
expected something closer to 1 percent of GDP in new tax measures,
whereas the current budget had initiated only 0.3-0.4 percent of
GDP. The ADB also expressed disappointment that the budget
undertook no forward leaning, long-range reforms.
5. (SBU) Comment: The budget presented on June 13 is regarded as
risky and likely to run into challenges as the year progresses,
given its narrow revenue base and dependency on foreign assistance
flows. The revised budget, which contains roughly $400-600 million
in additional outlays/tax reductions, will be even more so. While
these changes are unfortunate, they reflect the political reality
here and do not in themselves presage a collapse of the IMF Stand-By
Arrangement, but rather the perennial trade-off between special
interests and development spending.
PATTERSON
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECPS ECON ETRD PREL PK
SUBJECT: NATIONAL ASSEMBLY PASSES FY09-10 BUDGET
REF: ISLAMABAD 1355
1. (SBU) Summary: The GOP presented its budget to Parliament on
June 13 (reftel). After a week of debate, on June 22 the GOP
presented a revised budget which reflected revisions desired by
members. This budget was passed unanimously by Parliament with no
changes on June 25. While the overall parameters of the budget
remained the same - the budget deficit of 4.9 percent, and revenue
and expenditure targets - additional outlays on such items as higher
civil service wage increases and lower withholding taxes on imports
will most likely be financed by a decrease in development spending.
The country representatives of the Asian Development Bank and the
International Monetary Fund, along with many other economists,
voiced concerns that the GOP's revenue projections were optimistic
and that their expenditures were underestimated, which would lead
ultimately to a substantially larger budget deficit. End Summary
2. (SBU) After a week of Parliamentary debate, the GOP presented a
revised budget on June 22, which reflected the wishes of the
National Assembly members. There were several major changes: a 20
percent rather than a 15 percent salary increase for lower grade
civil servants; the withholding tax on imports for the industrial
sector reduced from a proposed 4 percent to 3 percent; and
compressed natural gas (CNG) exempted from the carbon surcharge.
The Parliament also introduced some changes in the customs duties
and excise taxes on a wide variety of raw materials meant to revive
certain industrial sectors. The major parameters of the budget,
however, did not change. The total budget was still $36.21 billion,
the total tax collection target remained at $17.5 billion, and the
budget deficit was still 4.9 percent of GDP. On July 25, the
Parliament unanimously adopted this budget with no change.
3. (SBU) According to the Ministry of Finance, the latest revisions
will cost between $375 million and $437 million. The World Bank, on
the other hand, estimates they will total between $500 and $625
million: salary increases will cost an additional $250 million;
lower withholding taxes will cost $125-$137 million in lost revenue;
and dropping the tax on CNG will forfeit $150 million of projected
revenue. MOF sources say that some of the losses can be made up
through more stringent tax collection and that the new tax on real
estate transactions has a much greater potential than projected in
the budget. However, most experts believe that the GOP will make up
the difference by cutting development expenditures, which were
increased by 54 percent this year.
4. (SBU) More generally, experts have voiced concern that both the
original and final versions of the budget have underestimated
expenditures and overstated revenues. For example, the World Bank
told us that a more realistic estimate for the original salary
increases would have been $200-250 million, rather than the budgeted
$100 million. The IMF resident representative gave the example that
revenue estimates from the State Bank of Pakistan were considerably
overstated. In a June 19 roundtable on the budget with major
donors, the Asian Development Bank [protect] was particularly
critical of the GOP's inability to increase its tax receipts, noting
that revenue receipts, net of transfers to the provinces, were not
sufficient to pay for the government's current expenditures. It had
expected something closer to 1 percent of GDP in new tax measures,
whereas the current budget had initiated only 0.3-0.4 percent of
GDP. The ADB also expressed disappointment that the budget
undertook no forward leaning, long-range reforms.
5. (SBU) Comment: The budget presented on June 13 is regarded as
risky and likely to run into challenges as the year progresses,
given its narrow revenue base and dependency on foreign assistance
flows. The revised budget, which contains roughly $400-600 million
in additional outlays/tax reductions, will be even more so. While
these changes are unfortunate, they reflect the political reality
here and do not in themselves presage a collapse of the IMF Stand-By
Arrangement, but rather the perennial trade-off between special
interests and development spending.
PATTERSON