ECONOMIC SURVEY 2006 – 2007

PAKISTAN’S NATIONAL BUDGET 2007-

2008

Compiled by:

Embassy of Swizerland, Pakistan

Islamabad, June 2007

Economic Survey 2006 - 2007

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

General Review
Pakistan’s economy continues to maintain its growth momentum for the fifth year in a
row. With economic growth at 7.0 percent in the current fiscal year, Pakistan’s econ-
omy has grown at an average rate of almost 7.0 percent per annum during the last
five years. Real GDP grew at 7.0 percent in 2006-07 as against the revised estimates
of 6.6 percent for last year and 7.0 percent growth target for the year.

The other key features of the economic survey covering the period from July 2006 -
April 2007 can be summarized as follows:

• Growth Performance of Components of GNP (% Growth at Constant Fac-

tor Cost)
Components 2004-2005 2005-2006 2006-2007
Agriculture 6.5 1.6 5.0
Manufacturing 15.5 10.0 8.4
Services 8.5 9.6 8.0

• Sectoral Contribution to the GDP growth (% Points)

Components 2004-2005 2005-2006 2006-2007
Agriculture 1.5 0.4 1.1
Industry 3.1 1.3 1.8
- Manufacturing 2.7 1.8 1.6
Services 4.4 4.9 4.2
Real GDP (fc) 9.0 6.6 7.0

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

• Per capita income grew by 11 percent this year to US$925 up from US$833
last year. The per capita income in dollar terms has grown at an average rate
of 13 percent per annum during the last five years, rising from US$ 586 in
2002-03 to US$ 925 in 2006-07.

• Foreign Direct Investment grew by almost 37 percent in the first ten month of
the current fiscal year to US$ 4.16 billion as against US$ 3 billion in first ten
month of last fiscal year.

• The Stock Market registered a growth with Karachi Stock Exchange index at
9989 points at the end of the fiscal year 2005-06. The KSE-100 index rose by
24 percent since then to 12370 points until April 2007. During the same period
total market capitalization increased by 28.6 percent rising from Rs 2801 billion
($ 46.5 billion) to Rs 3604 billion ($ 59.4 billion).

• The revenue deficit was at a deficit of 0.2% of GDP in 2005-06 compared to a

deficit of 2.2% in 2000-01. It has further progressed towards a targeted reve-
nue surplus of 0.6 percent of GDP in 2006-07. Total revenues are budgeted at
Rs. 1163.1 billion in 2006-07 compared to Rs. 1087.0 billion in 2005-06, show-
ing an increase of 7.0%.

• Total expenditure is targeted at Rs. 1536.6 billion or 17.4 percent of GDP for
the fiscal year 2006-07. Total expenditure was projected to be 8.6 percent hig-
her than last year (2005-06). During the first nine months (July-March) of the
current fiscal year total expenditure is estimated at Rs.1168.5 billion or 76 per-
cent of the annual target. Defense spending for the year is targeted at Rs.
250.2 billion — 3.8 percent higher than last year and during July-March 2006-
07, the spending has reached Rs.172.8 billion which is 69 percent of the full
year target. Development expenditure is targeted at Rs. 435 billion for the year
2006-07 as against revised estimate of Rs.313.7 billion in 2005-06. During the
first nine months (July-March) of the current fiscal year 2006-07, development
expenditure amounted to Rs.241.8 billion or only 58.3 percent of the yearly al-
location.

• Exports were targeted at $ 18.6 billion or 12.9 percent higher than last year.
Exports during the first ten months (July-April) of the current fiscal year are up
by 3.4 percent – rising from $ 13.46 billion to $ 13.9 billion in the same period
last year.

• Imports were targeted to decline by 2.1 percent in 2006-07 to $ 28.0 billion

from last year’s level of $ 28.6 billion. As expected, growth in import deceler-
ated to 8.9 percent during the first ten months (July-April) of the current fiscal
year as against hefty increase of 40.4 percent in the same period last year.

• The merchandise trade deficit widen to $11.1 billion in the first ten months
(July-April) of the current fiscal year as against $9.5 billion in the same period

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 last year. However, as percentage of GDP, trade deficit is likely to be 9.0 per-
cent in 2006-07 as against 9.5 percent last year.

• Current Account Balance Pakistan’s current account deficit further widened

to $ 6.2 billion (4.3% of GDP) in the first nine months (July-March) of the cur-
rent fiscal year from $ 4.6 billion (3.6% of GDP) in the same period last year.

• Foreign Exchange Reserves stood at $ 13,738 million at the end of April

2007, higher than the end-June 2006 level of US$ 13,137 million. Pakistani ru-
pee depreciated (0.7%) from Rs.60.2138 per dollars as at end June 2006 to
Rs.60.6684 as of end April 2007.

• Workers’ Remittances, the third largest source of foreign exchange inflows

after exports and foreign investment, continue to maintain its rising trend. Wor-
kers’ remittances totaled $ 4.45 billion in the first ten months (July-April) of the
fiscal year as against $ 3.6 billion in the same period last year, depicting an in-
crease of 22.6 percent.

• Unemployment rate recorded at 6.2 percent and 3.1 million people remained
unemployed during 2006 as against 7.69 percent in 2005 with 3.6 million peo-
ple unemployed.

• Public debt was 85 percent of GDP in 1999-2000 but has declined to 53.4
percent in end-March 2007 – a decline of 32 percentage points in seven years.
During the year, public debt has declined from 56.9 percent in 2005-06 to 53.4
percent of GDP – a decline of 3.5 percentage points in a year.

• Pakistan’s external debt and liabilities stood at $ 38.86 billion at end-March,

2007. This is an increase of US$ 1.6 billion which represents a 4.3 percent in-
crease over the stock at the end of FY06.

• During the last 60 years, Pakistan’s population has increased from 32.5 mil-
lion to an estimated population of 158.2 million by 2006 – 2007 at an average
rate of 2.7 percent per annum.

The increasing political uncertainty since March 2007 as a consequence of judicial

crisis and forthcoming elections later in the fiscal year 2007-08 have somehow not
impacted the growth trend of the economy. Sustained macroeconomic policies, grow-
ing domestic demand, fiscal discipline and renewed confidence of private sector are
some key areas which contributed towards taking Pakistan’s growth rate to seven
percent for the fifth time in its history. Some areas which did not perform well are in-
vestment, poverty alleviation, return on national savings and current account balance.
According to the survey, rising inflation has been another grey area for Pakistan.
While the sustained economic growth over past five years leaves the impression of a
stable and resurgent economy, rising inflation and widening trade gap and above all
the political situation bring into question its future sustainability.

Federal Budget 2007-08

Minister of State for Finance announced the national budget for the fiscal year 2007-
08 (01 July 2007-30 June 2008) in the National Assembly on 09 June 2007. The total
outlay of the budget has been projected at Rupees 1599 billion which is 21.7% higher
than the size of budget estimates for the year 2006-07.

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The salient features of the budget are as follows:

• Budget at a Glance
Budget Revised Budget
Estimate Estimate Estimate
2006-2007 2006-2007 2007-2008
Rupees in billion
Tax Revenue -CBR
Direct Taxes
Income Taxes 257.8 305.0 388.0
Others 14.1 15.6 20.2
271.9 320.6 408.2

Indirect Taxes
Customs 157.1 134.0 154.0
Sales Tax 341.6 311.0 375.0
Federal Excise 68.1 72.0 91.0
Others 2.2 2.0 2.3
569.0 519.0 622.3
840.9 839.6 1030.5
Non Tax Revenue 241.9 374.4 337.6
1082.8 1214.0 1368.1
Less Provincial Share 378.2 390.9 465.9
704.6 823.1 902.2
Net Capital Receipts 16.4 80.5 58.5
External Receipts 239.3 276.6 258.5
Self financing of PSDP by Provinces 85.6 95.5 122.7
Change in Provincial cash balance 53.8 22.1 51.8
Privatisation Proceeds 75.0 75.0 75.0
Bank Borrowings 140.1 55.2 130.9
1314.8 1428.0 1599.6

Expenditure
Current expenditure
General Public Services
Debt Servicing 295.8 389.9 437.4
Others 208.5 244.9 204.5
504.3 634.8 641.9
Defence affairs & Services 250.2 252.6 275.0
Economic Affairs 74.7 91.2 78.9
Others 50.6 54.9 60.5
879.8 1033.5 1.056.3
Developmental Expenditure
PSDP 435.0 394.5 520.0
Others 0.0 0.0 23.3
435.0 394.5 543.3
Total Expenditure 1314.8 1428.0 1599.6

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Highlights

• The outlay of Budget is estimated at Rs.1,599 billion as against the Budget esti-
mate of Rs.1,314.8 billion revised estimates of Rs.1,428 billion for last year.
• The tax revenue is targeted at Rs.1,030.5 billion (an increase of 22.7 percent
over estimates of previous year) as against revised estimates of tax revenues of
Rs. 839.6 billion of 2006-2007.
• The non-tax revenue is estimated at Rs. 337.6 billion showing a decline of 9.8
percent over previous year.
• Current expenditure is budgeted at Rs. 1,056.3 billion as against revised esti-
mate of Rs. 1,033.5 billion in 2006-2007.
• Development expenditure is projected at Rs. 543.3 billion against revised esti-
mate of Rs. 394.5 billion.
• Defence affairs and services has been projected at Rs. 275 billion against the
budget estimate of Rs. 250.2 billion and revised estimate of Rs. 252 billion for
2006-2007. This is an increase of more than 9 %. The amount is 3.13 percent of
the country’s GDP. The defence spending is higher than the spending on educa-
tion and health.
• Debt servicing has been projected at Rs. 437.4 billion against budget estimate of
Rs. 295.6 billion and revised estimate of Rs. 389.9 billion.
• Fiscal deficit is estimated at 4 percent to facilitate development.
• 15% increase in the salaries of public servants proposed.
• Minimum wage limit for unskilled workers proposed to be enhanced to Rs. 4,600
from Rs. 4,000.
• Exemption from Capital Value Tax on imported cars and certain specified power
of attorneys.
• Microfinance institutions authorized to receive remittances from abroad.
• New tariff lines added under Pakistan Customs Tariff introducing zero-percent
rate of customs duty on approximately 400 items.
• Special surcharge @ 1% is made applicable on import of all goods except Petro-
leum products.
• Used car import restricted to 03 years.
• Higher rate of sales tax from 15% to 20% on the raw material of industrial sec-
tors such as iron and steel, plastics and paper whether imported or sold.
• Scope of sales tax refund along with duty drawback within specified time has
been limited to zero-rated supplies only.
• Corporate tax rate of 35% to continue for tax year 2007 and onwards.

The Budget 2007-2008 is being acclaimed by Government as a historic budget with

record outlay and a specific focus on relief measures in the backdrop of forthcoming
elections. The macroeconomic stability has continued and the trend of increasing allo-
cation for development plan has been continued and as against Rs.349.4 billion for
2006-2007, the allocation for 2007-2008 has been projected at Rs.520 billion indicat-
ing an increase of 19.5 percent over budget and 31.8 percent over the revised esti-
mate of 2006-2007.

The budget also proposed an increase of more than 9 % in defence spending which
is 3.13 percent of the country’s GDP and higher than the spending on education and
health. Despite the fact relations between India and Pakistan are improving since both
states are engaged in peace process since early 2004. The planned defence spend-
ing is in addition to military aid Pakistan is getting from the United States for its role as
a front line state in war against terror. In the past six years, Pakistan has received an
estimated $10 billion of assistance in the form of military aid from United States.

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Budget showed that during fiscal years 2007-08 unemployment labour force rate
will be 3.18 percent. Moreover the budget figures showed that 3.1 million people re-
mained unemployed during 2006-07 and unemployment rate remained 6.2 percent.

A street man is more concerned about the high food inflation which was recorded
at 10.2 % during the last fiscal year. They term the government announcement of es-
tablishing 4000 more utility stores (a chain of subsidized grocery stores managed by a
Government Corporation) as a political statement in the backdrop of elections later
this year. They think government is unable to control the inflation. However people in
general hailed 15 % increase in the salary and 15 to 20 percent increase in pension
as well as increase in the minimum wage of unskilled worker from 4000 to 4600 Ru-
pees.

Corporate sector gives mixed response to budget, appreciating zero-rated raw mate-
rial imports and reduction in duty on imports of alternative energy resources, con-
demned increase from 15 to 20 % in sales tax on some raw materials and chemicals.
Stock market brokers termed the budget as market friendly and hailed the exemption
of capital gain tax on share transactions.

Textile sector condemned the 1% special surcharge on all imports and raised their
concern on the existing mark up rate which is almost 14 % and demanded reduction
in mark up rates. Textile sector had imported capital machines worth over $6 billion
over a period of five years when interest rates were in the range of four to six percent
to enhance textile exports. Both the factors tend to decline the future investments for
growth in textile sector.

Opposition political parties termed the budget for 2007-08 as disappointing as it

lacks any relief measure for the poor and middle class of the country. In their opinion
the government is still ignoring the major issues of poverty, unemployment and denial
of basic rights for the majority of country’s population. The leader of Opposition in the
National Assembly termed the budget as non-friendly and said that the actual inflation
rate is 20 to 25%. Former Finance Minister and PML (N) Parliamentary Leader in
senate Ishaq Dar said the government protected the elite class and ignored the poor
people in the budget. Former Finance Minister and the PPP leader Naveed Qamar
said the increase in salaries is meagre as compared to the inflation.

Despite positive reforms and strong performance, major threats to Pakistan econ-
omy are high inflation, particularly food inflation, unemployment and increasing ine-
quality. The agricultural sector has shown better progress this year but it still substan-
tially is dependent on the favourable weather conditions and demonstrates lack of
planning or supply estimates and demand pressures with a consequence of import of
a number of minor crops. The high cost of doing business, low productivity, infrastruc-
ture constraints inadequate institutional capacity and lack of skills development still
remains major constraints. The economy has shown traction in the form of extended
period of high growth but its sustainability in competition with exceptionally high
growth economies of India and China would depend on a dynamic reform process,
solid institutional support, high quality of governance and transparency coupled with
political stability.

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Date: 20 June 2006
Author: Ahmed Chughtai
Author’s Address: Embassy of Switzerland, Pakistan
P.O.Box 1073
Islamabad 44000
Tel. 031 324 18 81 (from Switzerland) or
Tel. +92 51 227 92 91/92
Fax +92 51 227 92 86
E-mail: isl.vertretung@eda.admin.ch

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