June Issue 2010

Early in his budget speech, Finance Minister Abdul Hafeez Shaikh described the troubled economic waters Pakistan has been forced to navigate:

“Pakistan’s economy also suffered due to the global downturn, the security situation in the neighborhood, and policy weaknesses. The fragility in our fiscal and balance of payments situation was exposed. The economy recorded an inflation rate of 25% — the highest in the last three decades. Economic growth fell to 1.2 percent — the lowest in three decades. Pressures mounted on reserves. The exchange rate had to depreciate.”

It is a depressing but accurate summary of the Pakistani economy over the last two years.

One correspondent, writing for the UAE-based newspaper The National, described the budget that stemmed from these difficult realities this way:

“The bill tabled in parliament . . . at once aspired to the strict fiscal discipline demanded by international creditors, and sought to arrest a sharp decline in the standard of living.”

In terms of addressing the standard of living, some of the moves put forth by the newly sworn-in finance minister to help the poor and the low-income salaried class are definitely in the right direction:

• The proposed GST reform that will levy a 15% flat tax will not apply on health, education and food items consumed by the poor
• The exemption limit for salaried taxpayers is to be enhanced from Rs200,000 to Rs300,000 benefiting approximately 430,000 taxpayers
• Additional tax relief of about two billion rupees have been provided to benefit 300,000 taxpayers of Khyber Pakhtunkhwa, FATA & PATA
• Federal government employees will be allowed an ad hoc monthly allowance equal to 50% of one month’s basic pay. This benefit would not be available to such federal government employees who are already in receipt of a monthly allowance equal to one month’s basic pay

But are steps like these enough?

Probably not, especially given that subsidies designed to “give relief to the citizens” have been slashed by Rs102 billion to a mere 0.8% of GDP for 2010-2011 from the estimated 1.5% of GDP for the current fiscal year ending on June 30, 2010. Total expenditures as a percentage of GDP are budgeted to slowly fall from now until 2013 as well.

Within this framework of belt-tightening, the best way to arrest a sharp decline in the standard of living would be to ensure sound, consistent economic growth that doesn’t involve huge spikes in inflation — inflation that we already have in the double digits. Pakistan was already in stagflation territory with inflation over 20%, practically zero growth and high unemployment in late 2008. Can the government engineer a turnaround where its forecasted growth doesn’t bring increases in inflation that put further pressure on the poor?

In Pakistan, everyone was witness to the tremendous pain felt by lower-income families in early 2008. The press was filled with stories of desperate parents killing themselves, and sometimes their children, after being unable to afford food.

And Karachiites won’t forget a stampede in late 2009 at a market in Karachi where several women and girls scrambling to get their hands on free sacks of food supplies were crushed and trampled to death.

The budget speech reflected the government’s acknowledgement of the inflation problem and its risks. The finance minister said that the government still needs to bring inflation down further. “We must check inflation,” he said. “High inflation is devastating, especially for the poor.”

But this seemed to be a segue into a political statement. “Why did inflation rise?” asked Finance Minister Shaikh. “This issue is debated all the time. Different points of view are forwarded by experts. But on one point all agree — that ‘inflation is primarily a monetary phenomenon.’ What this means, and is true for Pakistan, is that it is caused by excessive credit expansion. In our case, we have borrowed heavily, our borrowing continues to increase rapidly, including from the State Bank of Pakistan. All of us know such borrowing from the State Bank means a rise in the rate of inflation.”

In other words, the government is saying two things: i) the central bank needs to shoulder some of the blame as their monetary policy was to loose in the past; and ii) we will borrow less and thus we will spend less too, as such don’t expect big spending programmes for a while.

Still, in the federal budget 2010-2011 unveiled on June 5, the government seems to be painting a near-perfect future scenario of economic management under its watch (given certain constraints and realities) over the next three years. It is predicting that it can lower inflation to 9.5%, 8.0% and 7.0% in each of the next three years respectively, while growing the economy by 4.5%, 5.0 and 5.5% over the same time frame.

With limited new government spending, though, any benefits from continued economic growth need to trickle down to the 60% of the population that lives on less than $2 a day if the standard of living for people is to improve in any concrete fashion.

So far, the “beginning of an economic recovery” that the finance minister describes isn’t bearing fruit for all levels of society. “I also remain conscious that job creation is less than adequate,” said Finance Minister Shaikh in his address to parliament.

The agricultural sector is the main employer in Pakistan. But the pre-budget economic survey showed a disappointing performance for agriculture in 2009-2010. “For the outgoing year, the agriculture sector grew an estimated 2%, against a target of 3.8%, and previous year’s growth rate of 4%,” read the report. The federal budget aims to improve productivity and growth by allocating Rs40 billion to the “water, food and agriculture, livestock and dairy development sectors.”

Improving agricultural productivity is only part of the problem, though, and the government acknowledged as much via Dr Shaikh’s speech:

“In addition to food availability we seek to ensure that the poor have the means to purchase food, and this is critical in supporting the vulnerable. Without adequate purchasing power the poor may starve in the midst of plenty.”

The Benazir Income Support Programme is one way to redistribute economic wealth to the poor but it remains a band-aid measure. Giving Pakistanis the skills and opportunities to work is the key. The finance minister raised some employment initiatives, but many seemed superficial and lacked details, such as this one:

“The government is fully conscious that beneficiaries of BISP need to graduate into income-earning individuals. We are designing a comprehensive exit strategy based on international best practices. Several initiatives have already been taken. For example, Waseela-e-Haq provides self-employment through setting up of small businesses. Vocational training to one person of a beneficiary family is also been launched.”

But in terms of these programmes, the finance minister did not say how many people are expected to benefit, how much money is being allocated and what type of vocational training is being offered.

Dr Shaikh did, however, provide some details about another proposed move that is meant to get some Pakistanis working:

“ . . . Unskilled workers in rural areas would be guaranteed employment for one hundred days in a year. The main feature of this scheme would be carrying out of small local level works with a guaranteed daily wage equal to the minimum wage. A pilot scheme will be launched in 120 union councils in 12 least developed districts, and others that have suffered the most due to the security situation. A training element will also be added to provide skills that would facilitate absorption into the labour market. An amount of Rs 5 billion shall be provided for this programme . . .  .”

While, it is a step in the right direction, earning the minimum wage of Rs7,000 a month for 100 days will hardly carry a worker through those 100 days let alone the other 265.

Still, the real long-term measure to help reduce poverty and improve standards of living will always be education. While the total education budget has been increased to Rs34.5 billion (1.2% of the total budget), only Rs3.2 billion of federal money is being directly alloted to pre-primary and primary education. The finance ministry explains the situation this way:

“The additional transfer of financial resources to the provinces means more money for law and order, education, health, drinking water and municipal services. Correspondingly, this means reduced fiscal space for the federal government and an incentive for better management of its diminished resources. It also means that federal government spending on social sectors would be limited generally to tertiary levels of education and health with major responsibility for these sectors shifted to the provinces.”

According to the federal budget, the provincial share of federal revenue receipts is estimated at just over one trillion rupees during 2010-11, which is 57.9% higher than the budget estimates for 2009-10.

It comes down to political will to implement strong provincial initiatives to improve education during key early learning years. Those initiatives will need to ensure modernised curricula are taught by well-meaning and well-trained teachers. And the government has to ensure that there is a short-term incentive for low-income parents to keep their kids in school rather than pulling them out so the little ones too can find work and contribute to the household expenses (or pulling them out and placing them in dubious madrassahs preaching militancy where there is no cost burden). Pakistan’s literacy rate still hovers around 56%. If almost half of its population can not read the newspaper or write a simple letter, how can the government expect them to benefit meaningfully in any medium- or long-term economic expansion?

Resources on the 2010-2011 federal budget for Pakistan:

• The 2010-2011 Budget in Brief
• The Budget Speech for 2010-2011 by Finance Minister Abdul Hafeez Shaikh