Poverty alleviation and trends
in fiscal and monetary policies
The government is committed to the poverty reduction programme and is implementing policies for reducing poverty to half by 2015. By this standard, poverty is to be reduced to around 18 per cent of the population
By M. Sharif
There is a general consensus among analysts, IFIs and government official that at least one-third population, that is, around 50 million people in Pakistan live in poverty. Reducing poverty is government’s top priority. The government is committed to the poverty reduction programme and is implementing policies for reducing poverty to half by 2015. By this standard, poverty is to be reduced to around 18 per cent of the population. In case government and private sector are to do ‘Jihad’ against poverty then it would require huge finances, firm policies and quality governance to produce results. Eleven years long journey to 2015 is economically and politically uncertain environment and without quality governance is really a tough commitment. On the optimistic note, one should hope that poverty alleviation programme would deliver the results. But the economic uncertainty emerging out of global economy and, monetary and fiscal constraints faced by the government are raising many questions about the possibility of combating poverty and ultimately achieving the target of 2015. We need to look at the constraints and the real challenge of poverty alleviation in the current economic perspective.
Poverty alleviation
How do we define poverty? There is no single yardstick to define and measure it. Different yardsticks lead to different results. For example, WB and ADB measure poverty from the

poverty line of one US dollar or two dollars a day, whereas the Government of Pakistan has fixed a poverty line at Rs750.00 a month or under Rs25 per day. The differential between these two sets of measurements is quite substantial. The latter yardstick reduces poverty level in the country while WB and ADB’s yardstick increases it. There is yet another measure: number of calories consumed by a citizen per day. Unemployment, Human Development Index (HDI) social sector expenditure, economic growth rate, personal income, exports, investment profile — all these indicators give a somewhat clear picture as to how a country was heading towards alleviating poverty.
Increase in unemployment rate from 5.37 per cent in 1995 to 8.27 per cent in 2004, according to Economic Survey 2003-04 has sustained. Pakistan was placed 142 on HDI by UNDP report released in August. It moved up from 144 to 142 but was placed the lowest among South Asian countries, the Maldives (84), Sri Lanka (96), India (127), Bhutan (134), Bangladesh (138) and Nepal (140). Education consumed Rs111.0 billion (inclusive of federal and provincial governments expenditure), 2.5 per cent of GDP during 2003-04 and federal government’s expenditure for education was projected at Rs24.76 billion for current FY. Expenditure on health during FY 2003-04 was Rs32.8 billion, 0.73 per cent of the GDP and 2.96 per cent of total expenditure of provincial and federal governments.
These low budgetary allocations on education and health simply reflect that there are serious financial constraints and reservations also to spend more money on social sector. This can’t help to improve HDI and poverty alleviation in any substantial way. It is to be appreciated that there is a reciprocal relationship between expenditure on human development and decrease in unemployment and poverty alleviation. This reciprocal relationship has worked in increasing poverty. Latest figures on the quantum of poverty are not available through an independent and authentic source. The government maintains that because of increased economic growth rate particularly during past two years more jobs were created and per capita income also increased from 526 dollars in 1999-2000 to 652 dollars in 2003-04. This had certainly a positive effect to address poverty in the country.
Despite the fact that during past two years economic growth has averaged more than 6.0 per cent of GDP, it has remained lacklustre to increase jobs. High economic growth is considered as one of the necessary conditions to address poverty. Pakistan needs to achieve minimum 8 per cent economic growth rate and sustain it along with decrease in population growth rate for poverty alleviation. More important than them is the need of creating a pro-people growth: higher investment in labour intensive sectors like construction, SMEs and agriculture coupled conscious effort to increase wages which are very low for skilled and semi-skilled labour in the country. Unless there was visible effort and results, poverty alleviation, a daunting task will remain un-addressed.
Monetary and fiscal policies
Monetary policy till beginning of this year worked well, kept inflation low to around 4 per cent and stabilised rupee. Thereafter, if has come under pressure because of a number of factors. SBP had anticipated building of pressure on rupee and increase inflation because of change in global economic environment. The government’s monetary policy statement for July-December 2004 had cautioned about "measured" increase in interest rates. The other factor i.e., increase in oil price in global market that has risen beyond $55 per barrel during past one month has increased pressure on rupee. Consequently it has lost 3.6 per cent of value since 1st July. On 19th October US dollar flew past Rs60 and breached the psychological barrier. SBP has been intervening intermittently previously not to let rupee slip down on way to massive depreciation. Looking at the present picture, it seems that it has resigned to the market forces and perhaps may opt to let the market determine rupee-dollar parity.
A huge trade deficit during first quarter of current fiscal year primarily because of soaring
oil price, higher domestic oil consumption, import of machinery and other goods including wheat and fertilizers and trend of dollarisation had cumulative effect on weakening of rupee also. SBP’s measured policy of increasing interest rate, siphoning of billions of rupees from the market through T-bills and tightening of monetary policy earlier than SBP would have wished, has neither helped rupee to stay table to the extent desired by SBP nor has it contained inflation which has soared to 9.18 per cent during first quarter of current fiscal year.
A high rate of inflation coupled with increase in interest rates and a depreciated rupee have created constraints for the government to contain their negative effect on poverty alleviation which by itself is an elusive target to hit and quantify because so many economic factors, as highlighted earlier play role to address it. The most important role played so far by the government in the context of changing monetary situation has been to freeze the prices of petroleum products. It has helped containing the spiral effect of inflation which would have hit poor and middle class segments rather badly as inflation could have run into two digits by now.
Where does government’s fiscal policy stand as SBP struggles to make monetary policy result-oriented. Perhaps it might be a bit difficult to be very specific. Two important factors are, however, important to highlight in this regard.
One, freezing of petroleum product prices has hit government non-tax revenue substantially during first quarter of current fiscal year. The government has lost Rs18 billion on this account and if it remained determined which it should, not to de-freeze petroleum products price during second quarter, it would lose another similar amount. Obviously, the government would try to balance her accounts either by cutting down expenditure on PSDP, which was the tradition till FY-2002 or, alternatively it might miss fiscal deficit target raised to 4.7 per cent. The third option of generating tax-revenue seems remote because current fiscal year’s target of generating Rs580 billion is high notwithstanding the fact that prospects of meeting the target seem to be satisfactory in view of achieving tax revenue target during first quarter. It is to be appreciated that sales tax has emerged the main source of tax-revenue collection and it hits vulnerable sections, the most.
Two, the government faced with the shortage of wheat this year, has made a conscious effort to give boost to its production in the forthcoming season. It has also adopted a number of measures like decrease in interest rate on agricultural loan from 14 per cent to 9 per cent, to boost agriculture sector which did not do well (2.6 per cent against 4.2 per cent target) during last fiscal year. The government has increased the support price of wheat from Rs350 per 40kg to Rs400 per 40kg. It is feared that it would fuel inflation; whereas the farmer community has spoken loud that even this increase was not satisfactory because cost of inputs, water, seeds and fertilizers was high. Their argument is: if government can go ahead to import wheat at Rs506 per 40kg and subside it by Rs5 billion to sell it to public at cheap rate, why it does not help domestic farmers to get good wheat price. Wheat price is spiralling upward. It was increased from Rs240 per 40kg in 1998-99 to Rs350 per 40kg in 2002-03, to Rs350 per 40kg in 2003-04 and now to Rs400. It will hit vulnerable sections badly because it is doubtful if their income will increase proportionately.
External helpGovernment itself spends substantial amount on poverty-reduction projects. If this expenditure is any yardstick to measure poverty alleviation, during FY-2002-03 and 2004, an amount of Rs239 billion and Rs252 billion was spent respectively. It has been raised to Rs278 billion for the current fiscal year. The increase is 16 per cent. Will it make even a small dent in poverty reduction keeping in view high inflation, high population growth and unemployment rate, and low wages? It is doubtful.
Secondly, the government has been getting paltry amount for poverty alleviation; the latest being $300 million credit approved by WB. There has also been quite a bit of paper planning to reduce poverty under IMF sponsored Poverty Reduction and Strategy Paper (PRSP) programme over last three years. The result in Pakistan and other developing countries has not convinced the richest countries of the world - the G-8 during their latest meeting last month to go along with a proposal by Britain’s Chancellor of Exchequer to increase their share from $50 billion to $100 billion (0.7 per cent of their GDP) per year to reduce world poverty by half by 2015. This trend simply shows that we need to depend upon ourselves to alleviate poverty.
Conclusion
Notwithstanding the fact that SBP and the government have taken monetary and fiscal measures to contain and balance the negative effects of inflation, depreciating rupee and to boost economic growth, the policies are under stress. They are affecting vulnerable segments of society in general and those living below poverty line in particular, without affecting over all macro-economic scenarios in the country. Part of the solution lies in the measures that have been adopted so far and further strengthening them and part of the solution lies in introducing the second generation reforms effectively relating to judiciary, civil service devolution and police. Their poor performance contributes a lot to make people poorer.
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(Courtesy : Daily The News [Redirected to me by Mr Naveed sobriquet Alamgirian])