KARACHI, Nov. 12: A straight two per cent increase in one go in discount rate of State Bank of Pakistan was the monetary measure prescription given by a panel of more than a dozen eminent economists only last week to the government. The panel was engaged by the Planning Commission in September, which gave its report on “Economic Stabilisation with a Human Face” last Friday.

Headed by a former assistant secretary general of United Nations, a former caretaker minister and adviser Dr Hafiz Pasha the panel of economists was expected to make a presentation of its report on November 7, to the prime minister but it was put off for some unexplained reasons. This report is now in circulation in government offices and offers a short-term programme for Pakistan’s macroeconomic stability.

The panel has also suggested a two per cent increase in rate of return on national saving schemes beyond the recent increase to facilitate the government in increasing its reliance on non-bank borrowing. The panel expects the government to finance up to Rs250 billion from the non-bank sources and reduce its dependence on the State Bank borrowing.

Another important suggestion of the panel is the passage of a parliamentary resolution to “renew commitment” to the Fiscal Responsibility and Debt Limitation Act, 2006. This piece of law was disregarded with utter contempt in 2007-08 when government’s borrowing went up to almost 8 per cent of the GDP and still going on unabated.

Within less than a week of the presentation of this report, Governor State Bank Dr Shamshad Akhtar announced on Wednesday the jacking up of discount rate. On Tuesday, she faced hostile and angry business leaders, who were of the view that last three increases in discount rate failed to control inflation and check on fast downward slide of rupee exchange parity.

All these developments in monetary and economy are being taken at a time when the government is giving all indications of entering into a final and decisive phase of negotiations with the International Monetary Fund (IMF) and a bailout agreement is expected sometimes late this month or early next month “only after compliance of certain set of conditions,” to quote a business leader.

The business leaders have been invited on Thursday at Islamabad for briefing on Pakistan’s joining IMF programme.

The main purpose of the steps proposed by the panel of economists is to contain Consumer Price Index (CPI) to stay around 22 per cent in 2008-09 and come down to 17 per cent in 2009-10. The exchange rate will remain volatile in 2008-09 and will stabilise in 2009-10.

“The panel is of the view that Pakistan must take decisive action to restore macroeconomic stability, while protecting the vulnerable citizens,’’ the report observes at the very outset, while pointing out that it was essential to restore investors’ confidence, both domestic and foreign, and garner political support to resume robust growth.

Pakistan’s budgetary expenditure estimates, which have been knocked out of original projections because of the running inflation and a steep unending fall in rupee-dollar exchange parity, has been highlighted by the panel of economists in their report, who now consider these as unrealistic and want a fresh full-dress review.

As a short-term stabilisation step, the report proposes a straight cut of Rs115 billion in current expenditure in relation to the level projected without stabilisation package. It suggests a cut of Rs30 billion in defense spending, Rs30 billion in subsidies, Rs25 billion in debt servicing and Rs40 billion in other expenditures.

While suggesting Rs115 billion saving in the expenditure budget of 2008-09, the report proposes mopping up of Rs75 billion through additional taxation. It proposes levying of a broad-based regulatory duty on non-essential imports on which such a duty has not been imposed. While explicitly excluding essential items like wheat, edible oil, pulses, pharmaceuticals, fertilizer and petroleum products from the regulatory duty net, the report has proposed a tax rate of 4 per cent on machinery import and 8 per cent on import of other items.

From January 1, 2009, the panel has proposed the commencement of broadening of the tax net by bringing 12 services initially in the tax net. It recommends the designing of services tax on the Indian model. It has proposed levy of excise duty on non-essential consumer goods and durables. Provincial governments should levy capital gains tax on property.

Without specifying, the report suggests withdrawals of some exemptions from income tax. It stresses on development of agricultural income tax as farmers are now getting international prices of their products.The report proposes a restructuring of the Public Sector Development Programme for 2008-09 and has suggested a straight cut of Rs100 billion. It has set certain criteria for retaining the development projects, which would involve a capital outlay of Rs165 billion. It has set priorities for projects for which additional Rs106 billion can be allocated. Overall size of the PSDP for 2008-09 would come down to Rs271 billion from original Rs371 billion.

As a result of the proposed measures suggested by the panel of economists, the GDP growth rate will fall to 4.4 per cent as against originally planned 5.5 per cent in the 2008-09 budget. The balance of payment gap will be reduced to $4.5 billion and will be largely eliminated in 2009-10.

Exports are expected to be around $23.5 billion while imports at $31.4 billion. Fiscal deficit is to contract to 4.5 per cent of the GDP in 2008-09 from 7.4 per cent in 2007-08. Unemployment is set to rise 6.5 per cent in 2008-09 as against 5.3 per cent in 2007-08.

The panel has suggested several measures to bring economic stability by curtailing both civil and military spending and raising additional revenue from new taxations.

It has been estimated that defence expenditure is to increase by only 4 per cent in 2008-09, but could be higher because of the cost of military operations in the NWFP and salary hike of military personnel of 20 per cent announced in the budget, leading to an extra expenditure of Rs50 billion.

The panel suggested curtailment of current expenditure by Rs115 billion through savings in defense expenditure, in subsidies, in debt servicing and in other expenditure.

It has been proposed to raise Rs75 billion from new taxes, Rs55 billion from regulatory duties, Rs20 billion from other proposals, a cut of Rs63 billion in the development expenditure.

They proposed services tax (of the Indian type) by January 1, 2009 on 12 selected services initially like import cargo handling services, custom house services, general insurance, banking and other financial services, etc; levy of an excise duty on non-essential consumer goods like ACs, refrigerators, etc and durables; capital gains tax on properties by provincial governments; withdrawal of some exemptions from income tax. Sales tax on under-taxed manufacturing sectors like textiles (possibly at the yarn stage), iron/steel ( as presumptive sales tax at the import stage).

Other includes development of the agricultural income tax by the provinces (since farmers are now getting world prices); equating top marginal rate of income tax with the corporate tax rate; reduce threshold companies for the purpose of corporate taxation and reduction of the tax thresholds pertaining to sale taxes.

It has been proposed to increase reliance on non-bank borrowing to finance up to Rs250 billion of the budget deficit and to reduce borrowing from SBP will necessitate an increase in the average return on national saving schemes of up to 2 percentage points beyond the recent increase.

The freeze on non-salary current expenditure of federal and provincial government ministries/departments will have to be enforced strictly, yielding savings of up to Rs40 billion (a cut of 5 per cent).

The balance of payments gap reduced to $4.5 billion in 2008-09 (from $6.2 billion in 2007-08) and be largely eliminated in 2009-10. Growth of exports will take exports to $23.5 billion by 2009-10.

Imports are expected to decline to $31.4 billion in 2008-09 from the target of $40 billion in 2008-09. Remittances will continue to show rapid growth, foreign investment is expected to fall in 2008-09 and rise once again in 2009-10 to $5 billion.

The fiscal deficit falling to 4.5 per cent of the GDP in 2008-09, from 7.4 per cent in 2007-08 and further to 4 per cent in 2009-10 has been recommended.

The current account deficit is expected to come down from 8.4 per cent of the GDP in 2007-08 to 5.5 per cent in 2008-09 and to 4.4 per cent in 2009-10. Private investment also falls in 2008-09 by over 6 per cent but is expected to show a strong recovery of 8.5 per cent in 2009-10. National savings rise sharply in each year by 9 to 10 per cent.

In addition, an immediate injection of around $4-5 billion is required to provide cover of 3 months imports. Consequently, the total external financing needs of Pakistan in 2008-09 are $9.5 billion, the economists said.