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Waiting for
the day
By Haroon Akhtar
Khan
Economics is a complex subject. It is an
abstract science with too many figures. The budget is a complicated
document but no meaningful analysis of the budget and the state of
country’s economy may be made without the use of figures.
There are
3 major parts of this article:
(I)
5 year economic performance of PML(Q).
(II)
How did we end up with the current economic mess?
(III)
The budget of the coalition government.
Let us briefly go through how the economy performed in
the 5 years of PML(Q) Government which ended on November 15, 2008. There
are 6 major macroeconomic indicators to judge the economic performance.
(1) G.D.P.
Gross Domestic Product (GDP) is the market value of
all final goods and services in the country. High growth was achieved
which, as measured by GDP, was 7 per cent average over five years. The GDP
has three major components: Services, Manufacturing and Agriculture.
Services sector represents 53 per cent of GDP whereas
manufacturing and agriculture around 20 per cent each. Growth in the last
five years was led by services sector. Manufacturing and agriculture grew,
but at a rate much less than the growth in the services sector.
Services
Services mainly include Transportation &
Communication (10 per cent of GDP), Retail / Wholesale Trade (17 per cent
of GDP) and Finance, Banking and Insurance (7 per cent of GDP). As the
growth in the past 5 years was led by the service sector, jobs were
created in the sectors of Transportation, Telecommunication, Financial and
Wholesale and Retail.
Manufacturing
Manufacturing sector performed well when interest
rates went down to 4-5 per cent in 2002. Over $5 billion were invested in
plant and machinery. However, as interest rates started going up, as a
result of monetary tightening, the growth in manufacturing sector came
down considerably. This is a sector which should have been focused upon
for job creation. It is labour intensive and that is why we did not see
the trickle down effect in the economy.
Agriculture
Although some effort was made to construct dams,
conserve water (through brick lining the canals), the yields of major
crops and total cultivable land remained static. In fact they have
remained static for the last 60 years. Growth in the agriculture sector in
the last five years was of a volatile nature ranging from 1.5 per cent
(this year) to 6.5 per cent (in 2004-2005).
(2) Exports / imports / trade deficit
Exports grew at historically high rates in the first 3
years but the rate of growth slowed down subsequently. Exports increased
from $9 billion in 2002 to around $19 billion this year. As the rupee was
held stable despite high inflation, at around 60, exports kept on getting
expensive and imports cheap. As a result of an appreciating rupee, the
rate of growth of exports declined whereas rate of growth of imports
increased going from $12 billion in 2002-03 to $30 billion in 2006-07.
Another factor contributing to high imports was the fact that high growth
rates in the service sector created a demand which could not be met by the
domestic supplies. The declining rate of growth of exports and the
increasing rate of growth of imports created the historically high trade
deficit (was $1 billion in 2002-03 and is expected to go up to $19 billion
this year).
(3) Current account deficit
The current account moved from a surplus of 3.8 per
cent in 2002-03 to a deficit of 5.1 per cent in 2006-07. The PML(Q)
Government continued its liberal import policy, as it could fund its
current account deficit through increasing foreign remittances, foreign
direct and portfolio investment and increasing revenues generated through
privatisation.
(4) Inflation
During PML(Q)’s 5 years, oil prices went up from $35
to $85 a barrel. The price of palm oil (used to make ghee) also tripled.
The GDP was growing at an average rate of 7.0 per cent thus increasing
demand. Increasing foreign flows were also pushing demand. Despite that
the Government managed to contain inflation which remained in the range of
3 per cent (2002-03) to 9 per cent (2004-05) reducing to 8 per cent
(2006-07).
(5) Fiscal deficit
Revenue collection improved from Rs300 billion in 1999
to about Rs1 trillion (1000 billion) this year. However, non-development
expenditure doubled in the last 4 years. Fiscal deficit as a per cent of
GDP kept on increasing (3.7 per cent in 2002-03 to 4.3 per cent in
2006-07) but was easily met by raising money from Commercial Banks,
Pakistan Investment Bonds, Privatisation proceeds and State Bank
borrowing. Debt to GDP ratio improved significantly from over 100 per cent
in 1999 to 55 per cent in 2006-07.
(6) Poverty reduction
Criteria to measure poverty is controversial
internationally. However, various indicators show the percentage living
below poverty level went down from 2002-03 until 2006-07, but then as a
result of sharp increases in food and oil prices and reduction in growth
rate, the declining trend was reversed.
Post November 2007
PML(Q) Government left on November 15, 2007. As per
SBP 1st Quarterly report (Quarter ending September 30, 2007) there was no
major change in any indicators and no major change in any targets for
2008. No alarm bells were ringing any where at that time. On November 15,
2007 a new caretaker government took over. Until end of March 2008, the
caretakers were in power. Let us determine what changed since November 15,
2007. Oil prices went up from $85/barrel to $139/barrel. The world started
to face major food shortages, especially in staples like wheat, rice,
maize and palm-oil, escalating their prices to record highs. Caretaker
governments have no mandate, thus they cannot take major decisions. They
left all major policy decisions for the new elected government to take.
It was up to the coalition government, which took oath
by the end of March 2008, to act swiftly and take major policy decisions
to handle the food shortages and prices and the increasing oil prices.
They should have realised that rapidly rising oil prices and food
shortages were a global phenomenon and had nothing to do with the previous
government. Instead of facing the challenges of handling the new world
energy and food order, the coalition government kept on floundering. On
top of this, irresponsible statements made by government ministers about
the state of Pakistan’s economy shattered investor’s confidence
resulting in a capital flight of $10 billion from the stock market and the
nosedive of the Rupee. The fall of the Rupee exacerbated the already
increasing inflation.
Current financial crisis
The swelling fiscal deficit as a result of subsidies
given on account of diesel, WAPDA, wheat etc. has reached 7.0 per cent of
GDP (which was targeted at 4.0 per cent) and will probably be higher by
the end of June 2008. Rs550 billion of the deficit was funded by borrowing
from SBP against a budgeted figure of Rs45 billion. This compounded the
increase in inflation as it totally neutralised SBP’s monetary
tightening policy. SPI for week ending May 29, 2008 is up 26 per cent
which was only 7.5 per cent same period last year. CPI for the month of
April 2008 increased to 17.2 per cent over April 2007 and 19.2 per cent in
May 2008. This figure was around 7 per cent same period last year. As
reported in the weekly Economist, in a comparison with different countries
of CPI changes in April 2008 over April 2007, our performance was one of
the worst amongst 50 countries. This shows something is wrong in our
handling of the global energy and food crisis.
More negative news are still to come. Removal of wheat
and power subsidy will further aggravate inflation as will the removal of
petrol / diesel subsidies. Monetary tightening by SBP will stunt the GDP
growth rate. Water this year through the canal network is around 30 per
cent less than last year. World food commodity prices that have gone up
substantially are expected to remain high. Oil prices are expected to
remain at a level higher than $125.
Budget targets for 2008-09
Let us see how the government has tried to handle this
crisis through the announcement of the budget. The government has set the
following growth targets in the 2008-09 budget; GDP 5.5 per cent, services
6.1 per cent, manufacturing 6.1 per cent and agriculture 3.5 per cent. Let
us analyse if these targets can be met.
Services
Growth in services sector bailed the government out
this year. Next fiscal, transport is going to be affected because of high
diesel prices and the fact that subsidy on diesel may be withdrawn. Banks
will be squeezed because of tight monetary policy and a number of other
tightening measures taken by SBP. Retail / wholesale is going to be
affected because of loss of purchasing power. We will not achieve the 6.1
per cent service sector growth target.
Manufacturing
Interest rates have shot up considerably for industry.
No development financial institutions exist in the country. No long-term
fixed project financing is available. L/C margins are high. Long power
outages, no investment in human capital are other obstacles in growth of
this sector. No new major incentives for new industries have been offered
in the budget. The manufacturing target is definitely not achievable.
Agriculture
No major steps to increase crop yield or acreage have
been announced. There is 30 per cent less water in canals than last year.
Input cost (fertiliser, diesel, pesticide) are high despite increasing
subsidy on fertiliser and removing sales tax on urea and DAP. National
commercial seed production programme is a good step but the programme has
yet to be launched and nothing can be said of its success. More emphasis
should have been given on crop insurance to remove farmers’ worries
about crop failure due to floods, frost and natural calamities. No steps
on water conservation have been taken like sprinkler and drip irrigation.
The only positive thing for agriculture is the high international prices
of most food commodities. But because of shortage of water and shortage of
cultivable land, farmers will move from low paying crops to high paying
rather than increasing yields. Very important sector to which no
significance has been given in the budget is livestock and dairy. It
engages 35 million people and contributes 10 per cent to GDP.
Inflation (CPI)
CPI in 2006-07 was 7.8 per cent. In the first 10 month
of this fiscal, it is 11 per cent but will definitely rise by end of June.
It has been projected at 12 per cent for fiscal 2008-09. CPI has three
components, food, energy and non-food non-energy, which is called core
inflation. When subsidies on wheat are removed, prices will go up. In
order to grow other crops in relation to wheat, higher prices will have to
be offered for those crops. Palm oil prices are going up internationally.
Prices of maize are going up as it is used to make ethanol. Food inflation
will keep on going up at a rate much higher than the targeted rate. Diesel
/ petrol subsidies will have to be removed. Natural gas, which is linked
to oil, will also be up. LPG will be up as it has been linked to oil too.
Power tariffs will go up as furnace oil prices increase and are passed on
to consumers by reduction of subsidies. Energy inflation will also keep
moving up at a higher than targeted rate.
The government has announced that borrowing from SBP
will be minimised. It is unlikely to happen as other resources of funding
the fiscal deficit will not be readily available. State Bank has tightened
monetary policy by increasing its discount rates by 1 ? per cent. Further
tightening is also expected. One per cent increase in sales tax will also
add to inflation. CPI in April was 17.2 per cent, May was 19.2 per cent.
It is an increasing trend. Inflation will more than double in next fiscal
year.
Exports / imports / trade deficit
No package for textile, which is 60 per cent of total
exports, has been announced. No package for tourism is to be seen. We can
develop resorts on our 1,000 km coastline and our mountain areas which are
the highest and the most beautiful in the world. However, since Rupee has
depreciated by about 12 per cent, exports have become cheaper and the 16
per cent target may be met.
High petrol prices are expected to stay. Imports grew
at a rate of 30 per cent last year. Inspite of a somewhat restricted
import policy, it will still be difficult to keep import growth rate at
6.5 per cent. Trade deficit target may not be met.
Current account deficit
If remittances keep on increasing and meet the target
of $7.7 billion, current account deficit will come down and may achieve
its target. Problem will be funding the balance of payment deficit. We
need foreign direct investment, foreign portfolio investment and an
ability to raise money in the International market. This depends on
political stability, law and order and Pakistan’s rating in the
International markets. All three are questionable and therefore it will be
impossible to finance the balance of payment deficit.
Fiscal deficit
Revenue target of Rs1,250 billion is 25 per cent more
than what was achieved this year. GDP growth will not be as good as in
previous years. High tax rates and interest rates will slow growth.
Capital gains and agriculture income taxes have once again been ignored.
Revenue target is very aggressive and will not be met. Some good steps
have been taken to reduce non-development expenses. Forty per cent
reduction in PM Secretariat expenses, National Assembly and Senate
expenses will freeze as will the non-development, non-salary expenditure.
In expenses, the main challenge will be controlling the subsidies
expenditure. Fiscal deficit target is not achievable.
Poverty reduction
Some good steps have been taken for poverty reduction.
Rs34 billion targeted subsidy to the poorest of the poor has been
provided. Rs2 billion revolving fund for 1 million housing scheme is good
but is a drop in the bucket. Major focus should have been on job creation,
jobs in manufacturing and agriculture in particular. That is not seen in
the budget. Cash hand outs to targeted sectors is a good policy but they
have to be handled by tested institutions, otherwise a substantial portion
will be pilfered.
Rather than adhoc measures there should be a long-term
policy of providing free medical insurance for the poor, unemployment
insurance, mandatory pension plan in private / public and an employment
guarantee scheme on the lines of Indian (Maharashtra State) employment
guarantee scheme. There is a need for such social security schemes as the
lowest tier of the population cannot catch up in a rapidly growing
economy.
Bottom line in this year’s budget is that it is a
classic case of treating the symptoms without treating the disease. All in
all, it is a run of the mill effort based on overly optimistic
assumptions. Like this year, most major targets will be missed next year.
The future
No matter how many bankers and economists we use in
budget making, Pakistan needs a visionary to bring about an economic
revolution. Destiny of countries is changed by leaders who have a vision
and the will to make their vision a reality. Our job as politicians is to
provide that vision and that leadership which our country painfully lacks.
The case of Pakistan is not one of a failed state but one of failed
leadership.
Let us sit back and see where we stand in this fast
changing, rapidly progressing, and competitive world. Where are we
heading? Where did we go wrong? Are we on the right track? Where will our
country be in 25 years with a population of around 300 million? Would we
have enough food and water for everybody?
While the world makes microchips, we are proud of
making potato chips. While the world makes space shuttles, aeroplanes,
computers and other high-tech machinery, we are proud of just assembling
imported parts to make motorcycles, cars and appliances. While the
economies of a number of countries in the world depend primarily on
tourism, we have kept tourists away from our country as we specialise in
fighting and killing each other and scaring foreigners away. While the
world tries to approach 100 per cent literacy, we take pride in having 75
per cent population illiterate. While the world’s universities are
centers of excellence in education and research, our universities are
centres of petty politics and infighting. While the world gives justice to
a common man, we are proud of our leaders who are trying to pick and
choose a judiciary of their liking.
We are proud of taking hasty and impulsive decisions
by deciding to fight a war that we can never win. We are proud of fighting
against somebody else’s enemy and in the process making enemies out of
our one time friends. While the world has successfully driven terrorism
out of their borders, we brought terrorism inside our borders. While Islam
promotes patience, tolerance and forgiveness, we are proud of burning
robbers to death as the crowd cheers while human beings burn.
We feel proud of having incompetent and incapable
people around us for fear of competition because we love sycophants and
because we hate to hear the truth. We feel proud of abusing the West from
where we have received Billions of dollars in aid, from where we import
life saving drugs, from where we import machinery that runs the wheels of
our industries, from where we import wheat when we run short and where we
send our children for higher education. But we are proud to love those
brotherly countries which have made trillions of dollars in the oil boom
and yet do not come for our help.
— (The author is a Member of the Senate of
Pakistan.)
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