By Huzaima Bukhari and Dr. Ikramul Haq
Release of annual report by the State Bank of Pakistan (SBP) on the state of economy has repudiated with authority the tall claims by stalwarts of the present regime that they "performed excellently" during the fiscal year 2009-10 and economic results for first nine months of the current financial year were "satisfactory".
The SBP has concluded that all the fiscal targets were missed, governance in all spheres was poor, structural flaws continued and overall economy was in thick soup. The findings of SBP have been endorsed by Pakistan Institute of Development Economics (PIDE) in a report made public on October 26, 2010 stating that "there is a serious threat that Pakistan economy could get entrenched into a prolonged and deep stagflation unless decisive and concerted action is taken by policy makers".
Both the SBP and PIDE reports predict that at least in the foreseeable future the economy will witness low economic growth and high double-digit inflation — the classical characteristics of an economy in stagflation. The real challenge, therefore, is to devise a coordinate strategic response to break out of stagflation by rekindling growth and checking inflation.
The SBP report noted with concern "persistent disagreements led to the deferment of a proposed expansion of the tax net through the introduction of a broad-based GST". It says the "proposed restructuring of public sector enterprises, to improve efficiency and lower the fiscal burden, did not take place," and that "there was little or no progress in either resolving the energy sector debt chain or substantially improving electricity supply".
The most worrisome area, according to SBP, is the government’s expenditure — the "principal structural problem". It pointed out that "the fiscal deficit bounced back to 6.3 per cent of GDP in fiscal year 2009-10 having climbed 110 basis points within 12 months. Echoing the complaint of various private sector enterprises, SBP said that increasing expenditure of the government "crowded out and otherwise undermined private sector activities".
The SBP in categorical terms opined that fiscal expansion is responsible for persistent double-digit inflation as well as substantial increases in total public debt and liabilities which jumped from 68.7 percent of GDP in fiscal year 2008-09 to 69.5 percent in fiscal year 2009-10. For the first time using strong words, the annual report said "slippage on the expenditure side was more disappointing". The SBP, while acknowledging that the government has limited options to cut down spending on "debt servicing, defence, the government salary bill, etc.", noted that "there appears little evidence of efforts to contain the growth in even the discretionary components".
SBP has aptly mentioned that subsidies and losses of public sector enterprises increased by 10 percent compared to the previous fiscal year and "to put this in perspective, in Fiscal year 2009-10 these expenditures, as a percentage of GDP, were almost equal to the combined total budget for health and education". According to SBP, this was by no means "an acceptable situation".
The SBP highlighted improvement in real GDP growth which, "rose to 4.1 per cent compared with an anaemic 1.2 per cent in FY09". The current account deficit, it noted, also narrowed to "only 2 per cent of GDP in FY10 from 5.7 per cent in the previous year". The country’s trade deficit also continued to narrow for the second consecutive year and exports grew by a remarkable 9.4 percent over the previous fiscal year, SBP noted. However, it pronounced conclusively that, "investments fell for the second consecutive year", and, "all fiscal targets of the government were missed during the year".
According to SBP, inflation is expected to continue in the range of 13.5 and 14.5 per cent for the current fiscal year — this is higher than SBP’s own forecast of 11 to 12 percent issued earlier. SBP has expressed the fear that persistent double-digit growth in inflation may be fuelled further by "any weakness in the exchange rate". It also added that recent 50 per cent hike in government sector salaries, anticipated rise in energy tariffs and removal of GST exemptions to broaden the tax base are also likely to exacerbate the already sky-rocketing prices. The SBP asserted that losses to agriculture, livestock and other sectors have limited prospects of GDP growth for FY11 to the range of "2 to 3 percent".
According to SBP report, in the wake of devastating floods nearly 20 million people were displaced and forced to live without shelter, food, clean drinking water and basic health facilities". It is predicted by SBP that despite international assistance and public support, "the resources available are likely to be quite inadequate against anticipated needs". It has thus warned that immediate attention is needed to improve economic governance and to build social safety nets given the increasing incidence of poverty in the country.
The SBP’s report testifies that euphoria of rapid growth — much talked about by Musharraf regime — was nothing but a ‘great delusion’. The present government suffers from the same malady as its predecessors — self-praise typical of Musharraf-Shaukat duo creating hyperbola of "economy’s performance" without any long-term sustainability. In the light of latest SBP’s findings and conclusions, the government should be worried about burgeoning fiscal deficit — the mother of all ills.
On the revenue front, failure of FBR in tapping actual potential of Rs4 trillion, inability to curb wasteful expenditure of over Rs8500 billion by central and provincial governments, which include heavy cost of perks and perquisites of rulers, and unabated corruption, are real issues that require tackling on a war-footing.
The government should seriously consider concerns relating to ever-rising inflation and employment, widening trade, fiscal and current account deficits, rising cost of doing business, burden of new taxes, price-hikes of petroleum products, increases in utility bills, economic stagnation and industrial slow down. People’s purchasing power is diminishing, banks have less liquidity, lending rates are getting high and activities at stock markets are sluggish. Investors are shy and afraid, mainly due to perpetuation of political instability and economic uncertainty.
Although we claim to be an agricultural economy yet a vast majority of the people do not have enough to eat. It is tragic that we even import agricultural products and have miserably failed to develop any worthwhile agro-based industry in the last 63 years.
The policy of appeasement towards tax evaders, money launderers and plunderers of national wealth is showing its impact in all spheres.
Undoubtedly, governance problems have precipitated a vicious circle in Pakistan. Historically, fiscal policies were formulated that de-emphasized social spending; implemented with excessive leakage and insufficient attention to efficiency and equity; that eventually led to serious fiscal and social gaps. A different strategy, focused on governance reforms, could have created a virtuous circle, in which growth accelerated and resources freed for spending, helping to effectively close both the social and fiscal gaps. It was due to sheer failure in good governance and better fiscal management that Pakistan is still faced with acute economic problems.
If the $98 billion in development assistance provided to Pakistan from 1960 to 2009 had been invested during this time to yield a moderate real return of 8 percent, it would have grown into assets equal to $619 billion in 2008, many times Pakistan’s current external debt. Instead, this debt now stands at over 70 percent of GDP, and is in and of itself a constraint on growth.
The most troublesome sector of economy is agriculture. The rural population is constantly being pushed below the poverty line making all the targets of growth unachievable. Keeping in view the fact that nearly one-fourth of the total GDP and 44 percent of total employment is generated in the agricultural sector, the country can never progress unless the rural population (constituting 65 percent of the total population of 180.4 billion according to SBP report) is taken care of. If we have to develop economically, agriculture will have to play a critical role in the fight against poverty.
The dismal performance in agriculture during the last 30 years has affected the entire economy of Pakistan. Vital areas like mechanisation, irrigation, plant protection and improved seeds have not been given proper attention although on paper there are many departments (including agricultural universities) spending millions and millions on claiming to have achieved wonders. In reality, even the issue of loans to small farmers is nothing but just another scandalous affair where a few are making huge money in the name of poor farmers. The planners have never bothered to look forward and provide for an efficient irrigation system. The result is acute water shortage.
Experts sitting in the ministry of finance talk about more revenues without determining the incidence of taxation and transparent spending of taxpayers’ money on public welfare. Industries are already over-taxed but instead of getting any relief, these are being asked to pay exorbitant taxes. There is no political will to tax the mighty sections of the society, especially absentee landlords, and the entire tax burden is being shifted on the poor.
This does not end the list of problems: avoidable imports continue, trade deficit remains worryingly large, inflation persists as a major headache, no acceleration in exports, and domestic industry remains both high cost and uncompetitive, while growing steadily obsolete. Overall growth strategy is lop-sided as it does not take into account the role of rural population in the economy. The single-most factor that 65 percent of the country’s population living in the rural areas are directly or indirectly linked with agriculture for their livelihood, has been totally ignored by the planners and economic managers.
All the governments pretend that serious economic problems can easily be disguised by statistical sleight of hand — this has now been exposed by the excellently-prepared report by SBP.