Finance minister Shaukat Aziz has done well to reject a new war tax as a fiscal option in these difficult times. He has done that despite fears to the contrary in the economic sector earlier, and the fact the Indian Parliament has passed a bill enabling the government to levy the war tax to reduce its large budget deficit.

India has not yet levied the tax which is to take the shape of enhanced central excise duties. If the finance minister had come up with a war tax the 18 foreign shipping companies, which announced a 20 per cent cut in the hefty war risk insurance charge might not have done that, the exports would have been hit further and the Karachi Stock Exchange Index would not have crossed the crucial 1400 points mark after jumping by 138.63 points on the day of General Pervez Musharraf’s momentous speech and touched 1428 points on Wednesday [January 12]. Nor might Standard and Poor reaffirmed its earlier rating for Pakistan of B for the debt issued in foreign currency and B-plus for the debt in rupees. The outlook for both the ratings now is “stable”.

The damage to Pakistan’s economy as a result of the Afghan war has so far been rather small. And that is because the war lasted for a short while as was feared earlier. But as the Afghan war was winding down fear of a war with India increased and India’s threatening postures became menacing.

Pakistan exports in the first six months of the year ending December 31 were $4.45 billion against the annual target of $10.1 billion. And that is a better performance than feared after the September 11 incidents.

If exports fell marginally the imports cost far less because of the fall in prices, beginning with world oil prices. It is now being said the trade deficit will be around one billion dollars for the first time in 25 years, after it had exceeded $3 billion in 1995-96 and 1996-97. The deficit was 1.476 billion last year.

As a result of the fall in economic activities after September 11 the federal revenues had fallen 4.1 per cent in the first six months of the year ending December against last year’s collection. But more significant is the fact the revenue collection is 9.43 per cent short of the target for the first half of the year set at Rs192.7 billion.

But the revenues from direct taxes at Rs62.77 billion were 7.6 per cent more than the collection in the same period last year. But indirect tax revenues fell by 9.6 per cent compared to the same period last year.

Far more significant is the fact the customs duty earnings in the same half year fell by 37.3 percent from Rs 28.79 billion during the same period last year to Rs 18 billion this year, which shows the large fall in imports which meant reduction in economic activities.

However the performance in December showed notable improvement as revenue collection rose to Rs42 billion in the first half of the financial against Rs40.4 billion in the same period last year, showing an improvement of 3.96 per cent.

If the December trend is sustained better days are ahead. But the president of the All Pakistan Textile Mills Association, Nadeem Maqbool, says worse days are ahead unless positive measures are taken to help textile exporters, particularly in getting larger access to the US market which is too slow in materialising.

The smaller revenues in the six monthly period could also be the result of larger refund of taxes to the exporters which is said to be Rs44.4 billion against Rs27 billion in the same period last year - an increase of 64 per cent.

But the loss of revenues has been more than compensated by the grant for budgetary support of $600 million given by the US which means Rs36 billion. In addition, the rescheduling of the old loans and lowering of interest rates on them have reduced the official returned spending.

And now it has been reported the US is to give another grant of 600 million dollars from next year’s budget which beings in October 1.

In addition, the UK, Canada, Norway and Germany are offering to swap their old loans for social sector spending, which means less repayment of loans and no interest payments thereon and lower pressure on the foreign exchange resources.

Such assistance should help the foreign exchange reserve of the country which stood at $4.801 billion on January 11 to cross the five billion mark in the manner the first US grant of $600 million boosted the reserves in a significant manner.

Mr Alan Larson, US under secretary for Economic Affairs, who accompanied Colin Powell, US Secretary of State, on his visit to Pakistan, has assured finance minister that in addition to the financial grant the US would provide far larger market access for Pakistan in terms of higher quotas and preferential treatment to Pakistani exports.

He says the trade Promotion Authority Bill has been adopted by the US House of Representatives and would be cleared by the Senate soon. And that would increase the market access for Pakistan as well as provide for new cash grant.

He also said a high level delegation of the Overseas Private Investment Corporation (OPIC), EXIM Bank and Trade Development Authority would be visiting Pakistan next month.

At home a number of steps are being taken to reinvigorate the economy. Finance Minister Shaukat Aziz has told the CBR to clear tax refunds for exporters positively by January 31 and be regular in clearing future refunds. And the high cost of loans and the handicaps in obtaining them and the need for larger funds for exporters, make it imperative the tax refunds are expedited instead of that remaining an eternal sore point between the government and the exporters. The ministry of commerce has also decided to abolish the export surcharge until June 30 to reduce the financial burden of exporters.

The government is also to abolish import duty on machinery for special industrial zones to make investment less expensive. Agriculture too is to play a very helpful role in the economy this year. Inclusive of the existing stocks there can be an exportable surplus of 3 million tonnes of wheat.

Due to the ample availability of sugar-cane sugar output this year is estimated at 2.9 million tonnes, leaving a modest surplus for export. Fertilisers are to be exported in increasing quantities. If more gas is made available to the fertiliser factories they can certainly export a good deal of fertilisers, including to Afghanistan to which Pakistanis are to make a sizable fertiliser donation.

Then there is talk of the five billion dollar Afghan reconstruction programme to which Pakistan will also be making its contribution. How large a share we have in that programme as an interested neighbour of that shattered country depends on how well or skillfully we play the diplomatic game.

Meanwhile, with conditions in Afghanistan returning to the normal slowly, the massive smuggling into Pakistan of goods via Afghanistan has resumed. And that is largely taking the form of Afghan transit trade. And when the large scale Afghan reconstruction begins, far more goods would be imported there and more of them can find their way into Pakistan. We have to be deftly on guard in this regard.

Meanwhile inflation is picking up heat at home. The Sensitive Price Index for the first half of this financial year rose by 2.1 per cent, the Consumer Price Index by 2.57 per cent and the wholesale price index by 2.03 per cent. The government may feel if these invoices for the whole year rise around 5 to 6 per cent it need not be disturbed or the people feel agitated.

But the fact is these are days of very low inflation around the world, in fact recession in many countries. Secondly the low inflation growth of Pakistan marks a rise over the high inflation which pushed up the cost of living for many many years. So it is more like one more drop of poison, and not a matter for relief that growth in inflation now is not as diddy as in the past.

A major issue agitating trade and industry is a high cost of the loans at a time of low interest rates around the world. The finance minister and the governor of the State Bank are taking up the issue with the banks. They must succeed in their objectives if the industrial revival is to be speeded up now.