Poverty and inflation

Babban Miyan Ding Dong · #1 Friday, December 09, 2005

Assalam Alaikum,

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Poverty and inflation

By Sultan Ahmed

PAKISTAN’s economic future is bright despite the setback caused by the October 8 earthquake, says a senior IMF official. In saying that he rhymes with the optimistic predictions of the World Bank and the Asian Development Bank, which have made intense studies of Pakistan’s economy.

The budgetary resources may, however, be strained and the balance of payments may come under stress, says senior IMF official Mohsin Khan. But these are problems that can be overcome, particularly if more of the international assistance comes in the form of grants. And the advisor to the prime minister on finance Dr Salman Shah says that 60 per cent of the over four billion dollar soft loans will be converted into grants. But it is premature to say so before the total soft loan aid is received which is spread over three years or more.

Diverting financial resources from the long-planned development to rehabilitation and reconstruction following the rendering of nearly four million people homeless and finding jobs for many among them may reduce the economic growth rate target of seven per cent by up to one per cent, according to Mohsin Khan. The IMF on its part is ready to help Pakistan to the possible extent. The World Bank and the ADB have estimated the cost of construction to be at around 5.2 billion dollars spread over three years or more.

He has already warned the government of the problem of inflation as large external funds are used for rehabilitation and reconstruction and also cautioned against increasing the external debt after it had earlier been reduced to 60 per cent of the GDP.

The Pakistan Millennium Development Goals report is also ready by now and it says one-third of the people of Pakistan are poor and 12 per cent of them face acute poverty and a great deal has to be done to eradicate the poverty. The report says that economic growth is essential for poverty reduction, but that alone may not be sufficient to do so because of the existence of high inequalities inherent in the socio-economic structure of the country.

The unequal socio-economic structure results in unequal opportunities for the neglected segments of the population, says the report. It adds, the people are deprived of the right to education or consigned to poor health because they are born poor in the remote regions of the country.

The report says inequality in capabilities shapes the chances of individuals for achieving prosperity in life. Therefore, the over-arching goal of development is to enhance people’s capabilities. The report stresses that enhancing human capabilities requires the basic right to participate in society and its political process.

The government made a commitment to raise pro-poor budgetary expenditure significantly. Notably despite containing the budgetary deficit, the pro-poor budgetary expenditure rose from Rs 151 billion in 2000-01 to Rs 278 billion in 2004-05.

The pro-poor expenditures as percentage of the GDP increased from 3.63 per cent in 2000-01 to 4.59 per cent in 2003-04 and then declined to 4.25 per cent in 2004-05. These ratios have remained short of the targets because of the larger GDP base in 2004-05. The report says that over the large five years, the pro-poor expenditures increased by an average of 16.6 per cent per annum. And the large part of these expenditures (50-54 per cent) is allocated to human development, mainly in education and health sectors.

Despite a rise in expenditure on education in Pakistan, it is still, if compared with the past, low by South Asian standards.

The report says that following the decision of the Supreme Court to make payment of Zakat voluntary, the Zakat collection has declined to Rs 5.3 billion in 2004 as compared to Rs 8 billion in 2003. While Zakat payment suffers from a low public coverage, there is a also a great deal of leakage. Both need to be improved to make Zakat more useful for the one-third of the poor.

Now a major new measure is being undertaken that can help reduce poverty in the Saarc region as a whole. That is the South Asia Free Trade Area (Safta) which is to come into effect from January 1, 2006. It was agreed to by the technical committee of the Saarc which recently met at Kathmandu. The Safta will eventually double the volume of trade in the region.

The Saarc summit in Islamabad on January 6, 2004 had decided to make Safta effective from January 1, 2006. The Saarc council of ministers wants to take the economic cooperation among its member countries several steps further and ultimately form an economic union on the lines of the European Union.

Now the first scaling down of the tariffs in the region will take place from July 2006. It will begin with the non-LDC countries in the Saarc — India, Pakistan and Sri Lanka — reducing their tariff from the existing level to 20 per cent within a two year period. By July 2008, the tariff in all member countries, including the LDCs, will be reduced to 20 per cent.

Is Pakistan ready for the liberalization of trade with India although its leaders have been equating such measures with the settlement of the Kashmir issue? It can be embarrassing for Pakistan to press for liberalization of the global trade under WTO and calling for larger trade among the OIC members if it opposes the implementation of Safta‘s liberal provisions.

Or does Prime Minister Shaukat Aziz hope that within two and a half years when the first tariff reduction becomes fully effective, the Kashmir issue would be on its way to a solution? He wants open trade with India and political talks to move in tandem. Pakistani leaders have been talking of two-year period for a settlement of the Kashmir issue or to get to grips with it prior to a solution.

While Pakistan is negotiating free trade agreements with various countries including the US and several Middle Eastern countries, president Musharraf has been calling for a far larger mutual trade between the 57 OIC member states. This is acceptable in principle to all the members of the OIC, but in fact there has been little of mutual trade for a variety of reasons.

The Islamic Development bank, a financial arm of OIC, was also set up primarily to finance trade between Muslim countries and it has been doing that job on a modest scale. The major problem is transportation, shipping in particular. Muslim countries have to develop their own shipping lines jointly to promote larger trade between them.

While president Musharraf has been calling for larger trade between Muslim countries, he is thinking of increasing Pakistan’s exports to them first. But the fact is we have very little exportable surplus. We have hardly any cotton left to export after our mills consume the available quantity. Our occasional sugar surplus needs large and uneconomic subsidies.

We have rice to export in which we have stiff competition with many countries including Thailand and India. China now wants our quality rice which is indeed a welcome development. Too much of their leather exports are under-processed. We have lost our leading position in sports goods and surgical goods, which we earlier enjoyed.

Textile products now form two-thirds of our exports. We have to produce not only far larger exportable surpluses but also seek a larger variety in exports to various new markets. And they have to be marked for their higher quality consistently, hence the appeal of the government to the industry to develop their own brands and improve their image steadily.

And we have to fight inflation at home constantly so that the exporters will not call for rebates too often. Power, oil and transportation should be cheap if we want more of the manufactured goods to be exported. In a heavily populated country with a large number of poor, the people will not accept low priced oil and cheap power only for the industries and later for the agriculturists.

Federal minister for Petroleum Amanullah Khan Jadoon promised, at the floor of the National Assembly, an early revision of oil prices, but Mr Shaukat Aziz has ruled out any reduction in oil prices. The price in the US has now risen to 60 dollars a barrel because of excessive cold there.

We have been told that President Musharraf will request King Abdullah of Saudi Arabia to resume the oil facility costing around a billion dollars when they meet for the OIC summit in Makkah. If more revenues are needed why choose only the motor car owners who have been forced to buy a car only because they have no other means of transportation? Why aggravate the inflation for the upper and the middle classes?

That the high economic growth rate leads to higher inflation, unless effective counter-measures are taken, was evident even before the Oct 8 earthquake. The quake has made the situation far worse as external funds are pumped into the country without producing anything to balance it. Fighting inflation is all the more necessary now to fight poverty particularly when food prices are the hardest hit. The challenge of fighting poverty and inflation was there even before the earthquake.

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Thanks.

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