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A critical review of Federal budget 2005-06

National budget is one of the most important documents of a country. It is not merely a statement of income and expenditure; it is a mirror of the financial and economic state of an economy and authentic statement about the economic, financial and fiscal policies of the government. From Magna Carta until the emergence of modern democratic states, a central issue had been that of the authority to control and supervise the national treasury.

Islam from day one had laid down the principle of Amanah and responsibility to control and authorise financial mechanism and the sources of state income and expenditure within the framework of Divine Guidelines.

Public accountability of managing the Bail-ul- Maul has been a cardinal principle of Islamic Economics.

The contemporary democratic system also expects the principle of “no taxation without legislation”, which means that only Parliament is authorised to sanction and control income and expenditure of the state. However, in monarchy, imperialistic or despotic regimes, budget has always been controlled by the Executive to the marginalization of parliament and public representatives. During the British rule while elected representatives were given the luxury of discussing the budget, the real authority remained in the hands of the Executive – the foreign rulers.

Unfortunately, after independence the same situation prevails. The three constitutions of Pakistan, as far as the Finance Bill is concerned, are within the framework of what was laid down in the Act of 1935.

The important aspect of it is classification of expenditure into charged and non-charged. Charged expenditure, which relate to defence, debt and debt servicing and expenditure on some of the key state institutions, both in the center and the provinces (president, Governor and Judiciary etc), come into the category of ‘charged’ expenditure.

This part of the budget, which presently goes to make up over 50% of the budget, is exclusively in the hands of the Executive and the Parliament cannot make any changes therein. Even Parliament vote is not needed for this part of the budget. As to the rest, while theoretical cut motions are possible, they are symbolic and for public consumption.

The myth of expense of a cut motion without ruling party’s concurrence is tantamount to a vote of no confidence and, as such, there is not a single example when cut motions could bring changes in the budget. This has made the whole budgetary process a big farce, at best a showpiece and a PR exercise and no real parliamentary control over state finances.

In most of the democratic countries of the world, budget making is spread over two to six months. Proposals are initiated in the Parliamentary Committees and then worked out by the Executive.

In the UK, “Ways and Means Committee” remains in session for almost four months before the budget to lay down its major parameters. Budgets are not made in closet. Even tax programs for the next 3-8 years are spelled out and publicly discussed.

There is no provision of SROs and delegated legislation on financial matters. Everything is decided under the search light of parliamentary debate and scrutiny. It is not so in Pakistan where budget is made in the Executive and presented in the Parliament as a fait accompli. There is hardly any time for thorough scrutiny and in-depth discussion. Earlier governments used to give the Parliament around three to four weeks to discuss, debate and vote on the budget. The present government did not deem it necessary for the last two/three years. This year again the budget was presented as late as June 06 and has been cleared only in twelve days ie by 18th June. This is a mockery of parliamentary oversight on the budget. The whole budgetary process deserves to be totally recast to make it democratic.

It is unfortunate that in Pakistan, Executive pays scant attention to the demands of the Constitution. Article 160 of the Constitution makes it imperative that there must be a National Finance Commission (NFC) to decide the parameters within which the financial resources and revenues are to be shared between the Federation and the provinces. The Constitution makes it obligatory that within every five year, the NFC should be re-constituted and budget must be made within the parameters laid down by the NFC.

The NFC’s life expired in 2002 and the government has wasted three years and not constituted the NFC until now, with the result that practically the 2005-2006 budget has been made in the light of 1997 Award, which is now constitutionally obsolete. Similarly, the provisions of Articles 161 and 162 are not being scrupulously followed.

Article 166 also poses very important question about the Federation’s authority to borrow upon the security of the Federal Consolidated Fund (FCF) and the power of the Parliament to set limits to that from time to time. This demand of the Constitution has been blatantly ignored and it has been assumed as if the approval of the Finance Bill ipso facto fulfils the demand of this Article, which apparently is not correct.

In the light of these, arrangements for Parliament’s oversight as well as accountability before the elected representatives and the arrangements for budget making deserve to be reviewed and restructured.

Announcing the budget for fiscal year 2005-06, the government has once again presented a generally pleasant picture of national economy for the people. Assertions along with figures have been brought forward to support the claims that speedy economic development is continuing for the third fiscal year and extraordinary increase is also being witnessed in it.

According to the annual official document carrying economic statistics (Economic Survey), GDP growth rate is touching impressive figure of 8.4 per cent. This is not only significantly ahead of 6.6 percent target for this year but this is only the fifth year of Pakistan’s history in which growth rate has exceeded 8 percent.

This apparently amazing performance was possible due to extraordinary growth rate in the largest sector of country’s economy, agriculture, as well as in manufacturing and services sectors. As compared to 2.2 % in 2003-4; growth in agriculture during this fiscal year was 7.5 %. The two most important crops, cotton and wheat, registered a record increase in production where growth was 45.5 and 8.2 % respectively.

The rate of growth of manufacturing has been 12.5 per cent with large scale manufacturing growing at 15.4 %. Industries like automobile (30.1 %) engineering (11.3 %) textile and clothing (24.5 %) and electrical (54.9 %) grew impressively. Services sector’s growth was recorded at 7.9 percent.

Central Board of Revenue (CBR) has collected Rs 451 billion revenues during first 10 months (July 04- April 05) of the fiscal year. These are 7 billion more than the target.

It is expected that at the end of the fiscal year (June 30, 2005) total collection will go beyond the full year’s target of Rs 590 billion. Loans given to the private sector during July 04-March 05 period rose up to Rs 335 billion while in the same nine months of the preceding year these were Rs 244 billion. Social sector development expenditure has increased to Rs 191 billion from 156 billion.

The capital market has expanded rapidly and record breaking surge was witnessed in Karachi Stock Exchange’s share index. The index reached 10330 points on March 15, 2005. (The market though crashed afterwards but the index did not go under 7000 points.) Total market capitalisation increased from Rs 1357.5 billion in June 2004 to Rs 2114.8 billion on March 31, 2005.

Exports have reached 10.2 billion dollars with an increase of 14.6 per cent during first nine months of the fiscal year 2004-5 while these were 8.9 billion dollars during the same period of the last fiscal year. Foreign exchange reserves remained at a high level. Rupee’s value remained stable. It depreciated only by 1.8 % against dollar until April from the start of the fiscal year. Per capita income rose to $736 per annum; while with the increase in access to health, education and other basic facilities government officials claim that poverty has decreased.

The upward trend in remittances of overseas Pakistanis also continued and these are expected to cross the full fiscal years target of $3.8 billion. During ten months of July 04 to April 05, these have gone to 3.5 billion dollars while in the same period of the last fiscal year these were 3.2 billion dollars, so the increase is 7.5 percent. Foreign Direct Investment has crossed $1 billion mark in first ten months of the fiscal year. This is 63 percent higher than $629 million of the same period of last year.

Seeing the above mentioned claims and statistics, economic situation looks promising. But for an objective analysis one needs to look at the total and overall picture of the economy. A number of trends of the economy are contrary to this and worrisome. It must be appreciated that government has itself admitted a few of these trends in Economic Survey 2004-05. Following indicators demand attention and also indicate the vulnerability of the economic situation.

The claim in the Economic Survey that the standard of living has improved is rendered baseless with government’s own admission that inflation has risen. The rate of inflation in the first ten months of the fiscal year as calculated by Consumer Price Index (CPI) averaged 9.3 %. It was only 3.9 % during the same period of last year. More important is the fact that inflation of edibles increased to 12.8 per cent.

Obviously, less resourceful segments of society have suffered more because of this. The government may argue that this high inflation is because of increase in oil prices in the international marker and resultant increase in prices of edibles. But total inflation after deduction of the inflation of oil and edibles remains 7.4 %, which shows a marked increase over the rate of 3.4 pre cent last year.

Though exports have increased by 14.6 pre cent and crossed 10 billion dollar mark in first nine months, imports have also in the same period. With imports reaching 14.46 billion dollars, an increase of 38 %, the trade deficit has reached around four and a half billion dollars. It is feared that at the end of fiscal year, trade deficit may surpass 5 billion dollars. It will be the highest ever trade deficit in Pakistan’s history. Current account that was showing a surplus of 1.505 billion dollars last year has gone in to deficit of 1.358 billion dollars this year, showing an overall decrease of around three billion dollars.

While these are the facts that government has also admitted; given below are few other important indicators that demand attention.

Ratio with GDP is an important yardstick to gauge the economic statistics. Seeing from this angle, one finds deterioration instead of improvement in many ways. For example, collection of revenues of Rs 590 billion apparently seems to be a big success. But tax-GDP ratio is still only 10-11 percent. It may be pertinent to note here that it was 13 per cent in 2000.

Despite significant rise in credit to private sector, total investment as a percentage of GDP has also gone down. It has dropped off to 16.9 % from 17.3 % of last year. Fixed investment has also slightly decreased from 15.6 % of GDP to 15.3 %. One of the most important points regarding investment is that national savings has shown an alarming decrease as a percentage of GDP. As against 17.6 percent of last fiscal, these have gone down to 13.7 per cent of GDP in 2004-05.

This is in no way an encouraging trend in a developing country like Pakistan. Though FDI has increased to over one billion dollars in first ten months of the fiscal year, which is 63 % more than 629.1 million dollars of last year, it is still low considering foreign investment in the region and at international level.

It is heartening to note that remittances of overseas Pakistanis are touching 4 billion dollars, but these are still lower than the actual potential. According to certain estimates, overseas Pakistanis have the potentials of saving 15 billion dollars per annum.

The government has been repeatedly claiming of reduction in foreign loans. While it is true that due to rescheduling amount being spent on debt servicing has decreased; it needs to be noted that total foreign debt / liabilities have gone up to 36.62 billion dollars in first nine months of the fiscal year as against 35.258 billion dollars of June 30, 2004.

Referring the decrease in poverty, the government has based its claim on some of the results of survey being conducted by Federal Bureau of Statistics. According to the survey, access to basic facilities is increasing. However these are still preliminary findings. For a detailed comment we shall have to wait for comprehensive results but according to independent sources including World Bank and Asian Development Bank, poverty and particularly rural poverty is increasing in Pakistan. It was indeed a very embarrassing situation when EU representatives contradicted the claim of Prime Minister Shaukat Aziz during the session of Pakistan Development Forum (April 2005) that not only the poverty was rising in rural areas of Pakistan but gap between rich and poor was also increasing.

In this regard it must also be noted that during last five years government has spent 1138 billion rupees under this head. If the poverty is still increasing, one is constrained to say that there may not be any other reason but faulty planning, irregularities in implementation and mismanagement.

Per capita income has risen, but inequalities in distribution of income /wealth have also increased. This can be estimated from the fact that according to State Bank of Pakistan number of account holders with deposits of up to Rs 25,000 have decreased from 25.5 million in 1999 to 17.7 million in 2004, thus showing a decrease of 7.8 million.

The total amount deposited in these accounts has also decreased from Rs 247.9 to 175.6 billion. On the other hand, number of account holders with deposits of rupees 10 million and above have increased from 4343 to 9909. The amount deposited in these accounts has also gone up to 581.6 billion rupees from 239.7 billion in the same period.

It is also worth mentioning that according to government’s own figures, inflation is 9.3 % while the banks’ rates of profit for depositors are much less than this; only 1 % in some cases. Seeing the lower rates of profit in the context that there has been no decrease in bank’s overall profits, it is rather unjustified.

Had the banking being carried out on Islamic principles, not only depositors’ profits would have gone up but total national saving could have been higher as well.

As to the culture of simplicity and austerity, government lacks any initiatives. On the contrary there are decisions that are making the situation verse. A budget of Rs 120 million was allocated for salaries and benefits of ministers, advisors and parliamentary secretaries for year 2004-05. The government has spent Rs 1.8 billion dollars on purchase of luxury vehicles during last three years. Rs 11 million were spent on one Mercedes for speaker National Assembly. Such expenditure can never be justified when 30 per cent of the populace ie around 50 million people are living below the poverty line and almost an equal number just over it in the country.

Before any detailed analysis of budget 2005-06 it is important to note that despite changes of governments during 1999-2005 periods under General Musharraf, the team of economic mangers has remained almost the same. Looking at the current history of Pakistan no one has got such an opportunity to continue the policies for that long a period. It is no wonder to expect a higher level of performance in such a situation of control and relative stability. However, while there are a few positives in macro-economic areas, relief to the bulk of population is missing. Situation on ground regarding inflation, poverty, unemployment, and income inequalities presents a dismal picture. Above all genuine improvement and increase in real economic activities leading to resolve these problems still seems to be a distant future.

The government has announced to move ahead on Medium Term Development Framework, but if the basic strategy remains un-changed and increase in real economic activity and decrease in poverty and unemployment are not targeted, MTDF cannot be expected to change the life of common man. The situation in fact demands a change in strategy but a comparison of the last five years’ budget indicates pursuance of the old strategy.

Total volume of federal budget for fiscal year 2005-06 is Rs 1098.5 billion ie 21 per cent higher than 902.8 billion of last year. As against total expenditure of 1098.5 billion, resources are estimated at Rs 980 billion. A target of Rs 690 billion of revenues is fixed for CBR against expected Rs 590 billion of this year but net revenues are estimated at Rs 643 billion. Current expenditure is Rs 826 billion while development expenditure will be Rs 272 billion.

Rs 223 billion have been allocated for defence while amount for repayment of foreign and domestic loans is just over Rs 300 billion. Adding the two make up almost half (over Rs 523 billion) of the budget. Total resources are shown at Rs 980 billion including the external resources as against total expenditure of 1098.5 billion.

The budget deficit therefore apparently comes at Rs 118 billion. After deducting Rs 20 billion proceeds from privatisation, deficit is projected at Rs 98 billion. Whatever technical reason one may give it is a fact that the amount of Rs 212.3 billion, expected from external sources consists of Rs 191 billion loans and only Rs 21 billion as grants. Thus in real sense the total deficits are almost one third in a budget of Rs 1098 billion.

As to the sustaining of fast growth and increasing it the government has announced many incentives for improving economic, industrial and business activities in the country.

These measures of reduction in taxes and duties are welcome and that is why the budget has generally been termed as pro growth. However, government has itself fixed GDP growth rate to seven per cent from this year’s historic rate of 8.4 per cent. It shows that government realises that these measures are not enough for the economy and growth will be less in the next year.

For continuing fast economic development, it is necessary that national savings remain around 25-30 per cent of GDP and investment at around 20-25 per cent of GDP. However, there are not enough measures in the budget to encourage savings. Presently, small savers hesitate in depositing their savings with the banks. Besides low saving capacity of the people, increase in service charges and low rate of return are also its major causes. On the other hand, interest rates on banks’ credit to privates sector have risen significantly during fiscal year 20004-05. We have already mentioned that that due to low rate of return and higher service charges, the number of deposits of up to Rs 25,000 has decreased by 7.8 million during 1999 to 2004.

Instead of encouraging savings, consumption culture is being promoted. It is worth noting that although private sector credit has risen, a sizeable portion of this consists of personal consumption loans. Figures for such loans have risen to Rs 65 billion in fiscal year 2004-05. These loans are being given for purchase of luxury items that is of no productive use in present economic scenario. It is because of this type of demand that assembling of air conditioners has increased by 464 pre cent and the same factor is at work behind fast growth in industries like automobile and overall large scale manufacturing. So not only this high rate of growth seems to be artificial but there are even greater dangers of this increased non productive expenditure at the national level.

It is being argued that petroleum prices in international market are one of the major causes of higher trade deficit. This is true to some extent. Along with this, another reason that is being stated is that machinery imports are surging, which is a sign of increasing economic activities in the county. However, according to Economic Survey (2004-05), import bill of edibles has risen to 942 million dollars during nine months of July 04 to March 05. It is certain to cross the billion dollar mark at the end of fiscal year. Miscellaneous imports have also reached to $3 billion in the same period. This needs to be taken care of. It is nothing but our mismanagement that we are importing food items despite being an agricultural country. Economic mangers are aware of this dimension but neither any comprehensive policy for self sufficiency in food is present in budget nor any measures to curtail un-necessary imports.

Expenditure on defence has been increased to Rs 223 billion. Last year, the allocation was Rs 193.9 billion but actual expenditure rose to 216.2 billion rupees. There is no guarantee that it will not rise further. There are no two opinions that despite apparently good relations with the neighbours and present CBMs with India, defence needs of the country can not be ignored. But the important point regarding defence expenditure is that nation has a right to know the details and review this expenditure.

However no details are available to the nation of this huge amount. Even distribution of defence expenditure among three forces is not clear. Sensitive issues apart, details of defence expenditure should be presented before the parliament. As far as usage of defence expenditure, we should prepare and get IT based modern weapons rather than relying upon conventional weapons.

It is true in its own right that the number of tax payers is too low in the country and those paying taxes other than salaried class show their incomes much less than actual. Keeping this in view, every effort aimed at documentation and expanding the tax net must be appreciated. However, a comprehensive program that can raise people’s stakes and restore confidence in government is needed in this regard.

For restoration of confidence, governments need to prove that it is taking measure to eliminate corruption, its decisions are transparent and based on merit, accountability is across the board and looted money should is being recovered. Higher government official and institution should demonstrate simplicity and austerity rather than over-spending. It needs to be shown that development works are corruption free and for the benefit of common man. In the absence of any such program under a comprehensive strategy, no notable development is possible in this regard only on the basis of administrative measures.

It may be possible to raise some money with 0.1 per cent withholding tax on withdrawal of Rs 25,000 and more from the banks, as is proposed in recent budget proposals; but as far as documentation is concerned, it will bear negative results. It is feared that transactions through banks will decrease further.

The salaries and pensions of government employees have been increased by 15 and 10 per cent respectively. This increase is welcome but too less considering the actual needs. Moreover, whatever benefit this could have brought, has been washed with just one tax measure. In the next financial year Rs 294 billion will be collected in the head of sales tax. Although all the segments of people will be affected by this but it makes increase in salaries meaningless for lower income people.

There is no crash program for controlling inflation and rationalisation of prices of daily use items. The prices of petroleum become too high because of heavy taxes and affects prices of almost all the commodities. But the budget has no remedy in this regard. Prime Minister has promised to provide 11 eatables including wheat flour on cheaper rates at utility stores, three days after the budget.

This is not a permanent solution and provides only a short term relief. Secondly, the number of utility stores in the country is not more than a few hundreds, so only a limited portion of populace can benefit from it. This scheme is hardly relevant for majority of 150 million people. It should also be kept in view here that it is too difficult for two systems of prices to work simultaneously in any country.

Overseas Pakistanis are a great asset for the country. We got only 5.5 billion dollars from IMF in sixteen years, while overseas Pakistanis have sent over 14 billion dollars only after 9/11. A portion of their incomes and savings is being transferred to Pakistan but it is very small as compared to their potential.

According to experts, overseas Pakistanis can save at least three times more than this amount. Overseas Pakistanis can bring much more money than the present level if financial corruptions, procedural hindrances and obstacles in the way of justice are removed. But like the past, no incentive for attracting the savings of overseas Pakistanis is included in the budget. Nor there is any solid scheme for productive use of their remittances.

It has been witnessed in last two/three years that money sent by overseas Pakistanis is mostly being put in to stock exchanges and real estate business. Because of this, prices and rents of land and houses have gone out of the reach of common Pakistanis, besides creating a deceptive image of artificial economic growth.

Economic mangers including Prime Minister have repeatedly claimed that results of fast economic growth will soon start reaching the people. But it is not visible. It is also worth noting that significantly less importance has been given to poverty in the Economic Survey as compared to the past.

On the contrary tax measures like imposition of duty on second hand clothes; a commodity essentially used by poor and white collar segments of the society negate the government’s claims of providing relief to poor people. Whatever reason is stated for this apparently trivial looking measure, this reflects an approach and will certainly impact people with limited incomes to some extent.

The volume of Public Sector Development Program has been increased to Rs 272 billion from last year’s Rs 202 billon. This increase looks impressive, but it is also fact that during first seven months of current fiscal year (2004-05) lass than half of this amount of Rs 202 billion were spent. However, like in the past, the figure was raised after quick spending in last months of the fiscal year. Anyone keeping an eye on the affairs of economy knows that this approach is a result of flawed planning and mismanagement as a sheer wastage of resources.

Development expenditure should be raised and any increase in it should be appreciated, but this raise is low as a percentage of GDP and on the other hand no co-ordinated mechanism of prudent use of these funds is included in the budget. No doubt that Rs 272 billion are much higher than Rs 202 billion of the last year but it is only 2.9 per cent of GDP. This percentage was 7 percent in 80s and 4.7 % on average in 90s. Thus it is lowest in last around two decades.

The allocations for education and health have gone up to Rs 16.2 bn form Rs 12.6 bn and to Rs 4.1 bn from Rs 3.2 bn respectively. Increase in amount to be spent on these important social services is appreciable, but it is still very low considering actual needs of 150 billion people. Also as a percentage of GDP allocation for education is only 1.6 per cent while it was 2.1 per cent last year.

Another aspect worth mentioning in this regard is that out of these 16.2 billion rupees, a major portion of Rs 11.4 billion is earmarked for the tertiary education while collective allocation for primary and secondary is three and a half billion rupees. This indicates that the educational needs of the majority of population have been ignored.

Another aspect that demands attention regarding educational facilities is that on one hand the government is introducing appreciable steps like exempting fees and provision of free books up to primary level, while on the other hand taxes are too high on items of daily usage for education. Prices of pencils, stationary items like pens, ink and exercise books etc are becoming unbearable due to heavy taxes on them.

It is estimated that a good number of students is dropping out of school because of this factor. It is regrettable that 15 pre cent GST is collected on these items of daily use in education. Similarly, 25 percent duty is collected from import of inputs for stationery while amazingly, input of luxuries like TV, ACs and mobile phone set are exempted from duty.

The stationery manufacturing industry is also facing problems because of smuggling, under-invoicing and miss-declaration. If access to education and education facility is to be increased, these hardships will have to be removed.

Shortage of housing units in the country is an important problem. According to 1998 census, total number of housing units in the country stood at 19.3 million and the shortfall was 4.3 million.

Every year 5,70,000 new housing units are needed to fulfil the need of increasing population while only 3,00,000 units are being built every year. So the short fall increases by 2,70,000 units every year instead of going down. Obviously more than required housing units are needed to be built to fulfill the shortfall. Yet no comprehensive program is included in the budget for this important social problem.

Though there has been increase in bank’s loans to build houses, but most of the loans are being given for building of big houses. Recently, the banks have increased the limit of housing finance to Rs 10 million. It is clear that only rich will benefit from this. It is estimated that if a comprehensive program to meet the demand of houses is run in the country, it can generate economic activity in range of Rs 300 to 400 billion in construction and related sectors. Housing programs should be made for low and middle income segments.

House Building Finance Corporation has played an important part in the past in this regard and larger number of low and middle income Pakistanis have benefited from it. Role of this organisation is needed to be expanded.

In the light of this analysis we are constrained to say that there are no such measures for the economy in the budget 2005-06 which can be termed as the beginning of a far sighted change. This is once again a traditional annual exercise.

The benefits of much talked about economic development are reaching to a particular powerful and privileged segment of the society. But there are no chances visible for a common man to benefit from it at least in the near future. This situation creates distance between government and people, which becomes an obstacle for country’s security, stability and sustainable economic development itself.



Budget Year     Total Resources          Exp Current               Exp Develop


2005-06           1098.00                                   862.00                         272.00

Gross Recpt        980.00(CBR 690      G.Publ 337.50   F.Gov 188.00

Provn. Share       284.00               Defen 223.50   Pr.Gov 84.00

Budget Deficit       3.8% of GDP(285bn  Debt *301.00

2004-05            902.78                     700.77         202.00

Gross Recpt        796.32 (CBR 80)    G. Publ 423.84  F. Gov 184.00

Provn. Share       239.16               Defen 193.93  Pr. Gov 54.00

Budget Deficit       3.2% of GDP (202)

2003-04            805.20                     645.20          160.0

Gross Recpt        728.30 (CBR510)      G.Publ 62.90   F.Gov 148.00

Provn. Share       214.80               Defen 160.30   Pr.Gov 47.00

Budget Deficit       2.3% of GDP (160) Debt * 256.00

2002-03            742.00                     608.00         134.00

Gross Recpt        674.90 (CBR460)      G.Publ 57.90     F.Gov 90.0

Provn. share       193.50               Defen 146.00    Pr.Gov 44.0

Budget Deficit       3.7% of GDP (134)  Debt *289.70

2001-02             751.7       621.70  G.Publ 80.60         130.00

Gross Recpt         643.8 (CBR 457.7)   Defen 131.60   F.Gov 100.00

Provn. Share       190.00               Debt *329.20   Pr.Gov 30.00

Budget Deficit       4.3% of GDP (130)

(The above review has been made by the Institute of Policy Studies, Islamabad)

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