KARACHI: At a time when the government is working hard to create national consensus on the imposition of reformed General Sales Tax (GST); the State Bank of Pakistan (SBP) has serious doubts whether the enlargement in the tax net would be sufficient to cater to the needs of the country in the aftermath of the devastation wrought by the floods.
According to preliminary estimates of the Ministry of Food and Agriculture (MFA), the devastating floods have inflicted massive damages of around Rs 281 billion upon the agriculture sector alone.
Although backing the present, embattled, government’s plan on “temporary” arrangements for the raising of revenues through the direct taxation of the certain segments of the population, the State Bank deemed even these measures as inadequate.
“The government correctly proposes to temporarily enhance revenue generated from relatively affluent segments of the tax base; needs are unlikely to be meet by any realistic expectations,” SBP Deputy Governor Yaseen Anwar told the participants at the Pakistan German Business Forum here Wednesday.
Declaring the floods a serious setback to the country’s fragile economic state, the deputy governor urged Islamabad to adopt a frugal approach based on fiscal prudence.
“Fiscal prudence also demands a conscious effort to contain non-essential expenditures to a minimum,” the deputy governor maintained, adding “This will help reduce the fiscal deficit from 6.3 percent in fiscal year 2010 to a manageable level this year.”
He said a cursory assessment of the flood damages indicated that the task of relief and rehabilitation was a huge challenge.
Anwar hoped the government could transform the calamity into an opportunity by ensuring improved water availability for the increasingly fertile alluvial soil (silt) deposited by the floods and ensure better crop harvests in the future.
He stated that supply disruptions were already reflected in the marked inflation in food prices in recent couple of months. According to SBP assessments, the direct impact of the flood-related supply shocks would likely to be limited.
“The impact of flood damages and supply disruption of minor crops is not expected to persist beyond a few months as the supply scenario improves and as fresh crops enter the market,” the deputy governor exemplified.
He said the central bank’s estimates were suggesting that average CPI inflation for FY11 was likely range between 13.5 and 14.5 percent, up from 11.7 percent inflation seen last year.
“Encouragingly, preliminary data suggests relatively stable consumption expenditure; the fears of a significant downturn in consumer demand have been allayed,” he added.
About industrial losses, he said the obvious direct losses included those of manufacturing units dependant on cotton, sugarcane, and rice crops, as well as those suffering temporary supply disruptions. Indirect losses, he said, were also thought to stem from higher food inflation caused by flood-related supply disruptions which could dampen consumer demand.
Summing up, Anwar was confident that the forces of strong consumer demand and the potential inherent in Pakistan’s economy would overshadow the temporary setback presented by the floods.
