July 4, 2002	Thursday	Rabi-us-Sani 22,1423

ISLAMABAD, July 3: The banking sector is raising serious concerns over the government’s economic agenda in view of the October parliamentary elections, collaboration with the United States and the possible militant backlash.

“Domestic social tensions exacerbated by the government’s collaboration in the Afghan war and possibility of a backlash of the government’s crackdown on militants raises serious concerns regarding the government’s ability to keep its economic agenda on track,” said the Habib Bank Limited’s economic research wing.

“With the domestic political environment, as Pakistan edges closer to parliamentary elections and the presence of new and untested local governments, domestic political risk is possibly the single largest unmitigated risk factor for Pakistan,” said the bank in its latest report.

The form of government and elections in October 2002 will be pivotal in determining Pakistan’s medium-term economic and policy direction with its ensuing impact on credit ratings, it added.

The bank, that is on its way to privatization, noted that while the government’s efforts to remove infrastructure bottlenecks, low domestic interest rates and improved external liquidity are encouraging factors, the extent which investor sentiment will react positively to these stimuli is still questionable.

In the absence of wide-scale investment, the bank believed that Pakistan’s economy will continue to be constrained by a dominant agricultural sector and highly concentrated and primitive industrial base.

The bank also viewed the government’s dependence on the tax reforms to achieve the targeted growth in revenue with caution in view of the expected political change following elections in October 2002.

The government estimated that Rs250 billion worth of tax revenue is lost every year due to corruption and inefficiency of the tax system and hoped that its reforms would result in additional revenue of nearly Rs11 billion per annum.

The HBL also termed the government’s estimates of 40 per cent growth in indirect taxes through fiscal year 2004. After accounting for an anticipated reduction in customs duties, extension of GST to pharmaceuticals, edible oils, fertilizers, electricity and services sectors and withdrawal of subsidies and exemptions, the HBL forecast indirect tax collection at 94 per cent of revised IMF targets for fiscal year 2004.

Mid-year shortfalls in indirect taxes during fiscal 2002 forced the government to increase its levy on energy consumption, doubling contributions from oil surcharge. The full year impact of this increase in oil surcharge will be visible in fiscal 2003, resulting in an 18 per cent increase.

While increases in energy surcharge are easy to implement and recover, these are regressive in nature and increase the cost of production. The bank forecast the current level of energy levies to be maintained over the next two years barring any significant shortfall in tax collection in other categories.

Poor performance by large public sector utilities, particularly the two power utilities, Wapda and KESC, has led to a shortfall in interest income in fiscal 2002. Given the financial fragility of these utilities, the bank expected below target performance in interest income over the next few years.

The HBL research wing estimated the savings in interest on foreign debt would range between Rs8 to Rs11 billion following bilateral negotiations under December 2001 Paris Club agreement. On the other hand, a decline in recovery of interest from public sector utilities or a requirement for increased subsidies to the same can potentially endanger Pakistan’s fiscal stability thereby putting enormous pressure on the economic recovery agenda being pursued.