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Old Sunday, June 10, 2007
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Economy: revisiting the basics

Sunday, JUNE 10, 2007

WHILE the tempo of economic growth has been sustained this year, it is losing much of its lustre because of a double-digit food inflation, high unemployment and heavy indirect taxes that affect the common people. According to the Economic Survey 2006-2007 released on Friday, the Consumer Price Index at 7.9 per cent exceeded the estimated GDP (national income) growth rate of seven per cent. Food prices surged despite an impressive 7.5 per cent rise in output of major crops, a robust agricultural growth of five per cent and record foodstuff imports worth $2.3 billion during the first nine months. The price spiral can be attributed to fiscal expansion, heavy government borrowings, rising foreign capital and financial inflows and market abuse. On the eve of the budget, prices of such sensitive items as wheat flour, milk, rice, vegetable ghee, etc rose significantly. Convinced that “food inflation is less responsive to monetary policy”, the State Bank “depends on market dynamics and administrative measures” by the government to take care of the problem. In the event of market failure, the government has intervened on a case-by-case basis, though belatedly, but has so far failed to update the competitive law or set up the proposed competition commission. The decision to allow export of wheat without building up strategic reserves and the supply chain further fuelled inflation. The worst sufferers are the low-income groups, the poor and the vulnerable who have no means to hedge themselves against the effects of inflation. Combined with high interest rates, inflation is also eroding the savings of the middle-income groups, as is evident from a sharp fall of 42 per cent in consumer loans in the 10 months ending April 2007 compared to the same period last year. Now it is investment at a high level of 23 per cent of the GDP (rather than consumption) that is the leading factor contributing to GDP growth. The rise in the per capita income to $925 billion this year has come more from $4-5 billion remittances per annum than from the GDP growth.

While the government claims that it has brought down the unemployment rate to 6.2 per cent, it is actually higher than at the time General Musharraf took over in 1999. According to the Asian Development Bank, joblessness in the last two years was higher than the unemployment rates during 1990-1998. Over the last six years, the share in GDP of agriculture that employs more than 43.4 per cent of the workforce has declined by 3.2 percentage points. This belies the official claim that it has designated agriculture “as the engine of economic growth and poverty reduction”. The capital-intensive large-scale manufacturing (LSM) driven by sophisticated technology grew by 8.8 per cent against 10.7 per cent last year while the overall manufacturing growth was lower at 8.4 per cent. It shows that the growth in labour-intensive small and medium industries continues to lag behind LSM. Employment generated from high growth is not evenly distributed, province-wise or household-wise. The government’s development spending on physical and social infrastructure offers mainly temporary jobs. In these conditions, the trickle-down theory has lost much of its validity. As lifetime employment managed by changing jobs is the preferred choice of a flexible labour policy, the quality of human skills in all fields of economic activity needs to be improved on a war footing so that abundant and idle manpower can be utilised to realise a transforming economy’s full potential. Economic growth has to be socially sustainable. That the gender gap in labour participation ratio is 50 per cent against the average of 35 per cent in South Asia shows how much Pakistan lags behind in developing human resources.

Apart from price stability and a high rate of employment, low tax rates are also an inseparable part of any economic success story. With the present narrow base, taxes remain high and concentrated in the manufacturing sector which contributes well over 60 per cent of the total tax revenue and the bulk of the export earnings. The services and agricultural sectors which account for nearly 80 per cent of the GDP are lightly taxed as in the case of large land holdings, the share market and real estate business. The exemptions on capital gains tax and concessions to various sectors and investors are fast approaching the Rs200 billion mark. Besides, the bulk of the tax revenue comes from indirect taxes that puts a disproportionate burden on the low-income groups. However, one positive development this year has been a healthy growth in direct taxes which more than made up for the weak growth in customs duty and sales tax, resulting in the tax revenues rising by 21.9 per cent to Rs597 billion during July-March 2007.

A gradual increase in tax-to-GDP ratio, achievable by widening the tax net, is required to sustain an accelerated pace of governmental development spending. A record of Rs520 billion public sector development programme will help realise a 7.2 per cent GDP growth targeted for the next year. In the first three quarters of this year, the government’s domestic borrowings of Rs190.5 billion are four times the debt recorded in the same period last year. According to the Economic Survey, the revenue balance (revenue minus current expenditure) has suffered a deficit of 0.3 per cent as against the stipulated surplus of six per cent of the GDP. The primary balance (total revenue minus non-interest total expenditure) turned negative since last year after remaining in surplus for the previous seven years. The sovereign debt of $750 million, raised on the eve of the budget, is expected to be used to retire a part of the domestic debt and to stick to the budget deficit target of 4.2 per cent of the GDP. While the foreign debt-to-GDP ratio has declined sharply over the years because of a high growth over the last four years and rebasing of the national accounts, it has risen faster by $1.6 billion to $38.86 billion this year. The increased debt is a source of concern when GDP growth is driven by domestic demand and the growth in exports of merchandise has plummeted to 3.4 per cent.

While the external sector, with its huge capital and financial flows, indicates buoyancy, it is actually not robust, carrying as it does long-term risks to the economy. Of nearly 50 per cent of the six billion dollars estimated in foreign investment, $1.8 billion was portfolio investment or hot money and over one billion dollars came from the sale of two enterprises Paktel and Lakson Tobacco. After the Supreme Court judgment in the Pakistan Steel Mills case, the pace of privatisation has slowed down sharply. In the nine months to March, privatisation proceeds have decreased to $133 million as compared to $919 million in the same period last year. Imports estimated at $30 billion for this year continue to outpace exports, resulting in a record trade deficit projected at $13 billion and a current account deficit at seven billion dollars.

According to an independent economist, many worsening macro-economic factors linked to the GDP growth “are incongruent to their behavioural relationship with the GDP.” Apart from robust agricultural production which has made a seven per cent growth possible, the growth in key sectors is receding, whether large-scale manufacturing, exports or services. Even last year’s buoyant growth of 7.5 per cent in livestock, which contributes nearly 50 per cent of the agricultural output, is down to 4.3 per cent. With mounting macro-economic imbalances, it is time to revisit the basics.
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.
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