May 18, 2012
Sakib Sherani

AMONGST the many worrying elements in Pakistan’s current economic condition — faltering growth, record-low investment, historic inflation — it is perhaps a tough call to pick the one we should be most concerned about. Arguably, however, the most destabilising dynamic in the medium term is associated with the rapid accumulation of public debt that has occurred since 2008.

Using the expanded definition of public debt to capture quasi-fiscal items such as commodity operations, debt of public-sector entities and underlying guarantees issued by the government, total debt obligations on the sovereign balance sheet have touched Rs12.83tr as of end December 2011 — over 65 per cent of GDP. By comparison, this figure was around Rs6.5tr on June 30, 2008 — representing a near doubling of debt and liabilities on the public-sector balance sheet in less than four years.

More worryingly, the inability of the government to rein in high fiscal deficits, and the recourse to high-cost, short-maturity domestic borrowing has amplified the problem by reinforcing the negative feedback loop. The cost this rapid accumulation of debt is imposing can be gauged from the fact that debt servicing now accounts for over 80 per cent of net revenue (after transfer to provinces). This fiscal squeeze means that the government is progressively left with less and less to pay for all the other demands on the budget — including for making critical public-sector investments or for social-sector expenditures.

In addition, the magnitude of the government’s deficit-financing needs means interest rates in the economy are higher than they would be otherwise, and the actual availability of credit to the private sector has been sharply constricted, reducing the flow of new investment while seriously hurting Pakistan’s growth prospects.

What is the source of this unprecedented expansion in public debt in such a short span of time? An examination of sources of the increase in public debt in this period is instructive.

Increase in public debt, 2007-2011: Rs6.3tr
Sources of increase:
Exchange rate depreciation (2008-2009): Rs1.5tr
Power sector losses: Rs1.3tr
Debt servicing on incremental
borrowing: Rs1.3tr (est)
‘Legacy’ expenditures* Rs0.9tr
(* Include unbudgeted price differential claims pertaining to 2006 and 2007 paid to OMCs in 2008 and 2009, and unrecognised military-related payments pertaining to the period prior to 2008.)

From this, it is clear that a substantial part of the increase in public debt since 2008 relates to unbudgeted and unrecognised (i.e. not ‘booked’) spending pertaining to the Musharraf years. In addition, another source of increase is the unreformed power sector, whose financial viability was undermined by the acts of omission and commission by the previous government, and where the inaction of the present government has compounded the problem.

Finally, the largest impetus to the public debt stock (accounting for nearly 25 per cent of the overall increase) has come from the sharp depreciation of the rupee in 2008 and 2009. This outcome was a direct consequence of the dangerously flawed exchange rate policy followed by the government of the time between 2002 and 2007, whereby the nominal exchange rate was kept ‘stable’ against the US dollar. As a result, the rupee had become overvalued as measured by the real effective exchange rate (REER), hurting Pakistan’s international competitiveness.

The subsidy to imports and the penalty on Pakistan’s exports imposed by this exchange rate policy had begun to show in the trade figures. By 2007-08, imports had touched $40bn, with exports paying for only 48 per cent of the associated payments. The current account deficit for the year was the largest in Pakistan’s history, at nearly $14bn or 8.7 per cent of GDP.

By the summer of 2008, forex reserves were depleting at nearly $1bn a month, and by October of that year, actual, usable forex reserves with the State Bank of Pakistan had dipped to dangerously low levels. A currency crisis was inevitable, and the fall in the rupee was a natural outcome of the widening difference between hard currency payments and receipts — with no forex reserve buffers left to mitigate the pressure.

Despite all these sources of accretion in public debt, ultimately, however, the debt problem reflects a colossal failure of fiscal effort on the part of successive governments. If the tax-GDP ratio had been raised by 2005 to a passable 13 per cent from the embarrassing 9.8 per cent it actually stood at (despite vaunted claims of tax reform), by 2011 the incremental tax revenues so generated would have meant that the public debt would have been approximately 10-15 percentage points lower — at around 50-55 per cent of GDP instead of the current 65 per cent.

Lowering the fiscal deficit to a level commensurate with debt stabilisation, by a heavy emphasis on tax mobilisation as well as on expenditure reform, is the only way out of this morass. Greater fiscal discipline will slow the incremental debt build-up as well as lower the interest cost. Any resumption of external inflows that displaces high-cost domestic borrowing by the government, and a glimmer of growth, will both lend a helping hand and will be more than welcome.

Reform of the power sector will also be a critical element of the debt stabilisation strategy. The government may also need to discuss with banks holding large amounts of short-term sovereign paper, ways to increase the average maturity of their T-bill holdings. This is increasingly clustered towards the short end of the yield curve, heightening rollover risk as well as the possibility of potential disruption in financial markets.

Finally, provisions of the Fiscal Responsibility and Debt Limitation Act (FRDL) of 2005 will need to be strengthened, in particular the absence of any ceiling on government borrowing from the central bank. The absence of a hard constraint on runaway government borrowing, enforceable either by an independent central bank or a vigilant parliament, is undermining the fiscal and macroeconomic framework.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
-Dawn

May 21, 2012
S. Akbar Zaidi

BEFORE the budget of the next financial year is announced within the next few weeks, the Ministry of Finance is, as every year, expected to reveal its Economic Survey for the on-going fiscal year 2011-12.

The Economic Survey is a report card of the government’s economic performance over the last 10 months, and announces achievements in core economic indicators. These include the closely watched and much-cited annual growth or GDP rate, fiscal deficit, balance of payments numbers, the inflation rate, and a host of other numbers which allow economists to make arguments about the state of the economy and the performance of the government in power.

In recent years, however, with easy and frequent access to information and data, one does not need to wait for the last week of May to be able to assess the state of Pakistan’s economy, and economists pass judgements as and when key indicators are revealed and assessed. One usually knows what the broad trends of the economy are and this gives rise to predictions and much analysis.

Since this is also expected to be the last budget of the incumbent government, many analysts, some of whom are not economists, have been passing judgment on the performance of the first four years of this government. If one is to believe what many of the critics of this government are writing, this is probably Pakistan’s worst-ever economic performance, for which they squarely hold the incumbent government responsible.

One such writer, Ashfaque H. Khan, a key member of the Musharraf economic team, has written that “there is a general consensus within and outside the country that the economy of Pakistan has never been in such a bad shape since its inception in 1947. Pakistan has faced serious difficulties off and on over the last 64 years but has managed to sail through because of a competent economic team and strong leadership. Now there is a general view in the country that such leadership and economic team are missing today”.

Sakib Sherani, another key Musharraf economic adviser, writing in Dawn earlier this month, stated that the finance minister “has presided over an economy whose condition has never been worse, in aggregate terms, in Pakistan’s history”. Other economists, such as former State Bank governor Muhammad Yaqub have written that “the real threat to the survival of the country was not from India, the US or from terrorism, but from an economic collapse that may be closer than people think if certain policy actions are not taken”.

Is the analysis that this is Pakistan’s worst-ever economic performance valid, or is this merely point-scoring and political posturing by those who represent different political dispensations?

Many of the key economic numbers which are to be announced later this month in the Economic Survey will show that some are, indeed, the worst ever, or at least the worst in the last 50 years. While inflation was higher during the Z.A Bhutto government, there has hardly been a month of the 51 months in power of this government, when it has not been in double digits; this is a notorious first.

Similarly, the fiscal deficit has been in the range of 4-6.5 per cent under this government, but was higher — often more than eight per cent of GDP — under Gen Ziaul Haq’s military rule. The growth rate in the pre-9/11 Musharraf three years 1999-2002, after which his government received a bonanza and huge windfall, was a mere three per cent, but it has been lower, though only slightly so, over the last four years.

Overall domestic debt, which has been growing over the last four years, is still much lower than that which was accumulated over the Ziaul Haq period and in the period between 1988-1999. However, two indicators which are considerably worse and are particularly worrying are the falling tax-to-GDP ratio and investment.

There are numerous other indicators related to the economy, which have never been this good, despite problems in slowing trends. Per capita income continues to rise albeit at a slower pace; remittances and exports have also improved; and poverty is probably lower than many were expecting, given Pakistan’s slow growth and rising and persistent food inflation.

Any fair, unbiased account of the state of Pakistan’s economy shows that while parts of Pakistan’s economy have been in a poor state, this is certainly not the worst period ever. Moreover, many of the factors which have affected the current state of affairs have their origin in the policies of the Musharraf era.

Nevertheless, what is perhaps striking about the last four years has been the poor and wavering economic management and leadership of the economic team. The absence of vision, insight and any clear idea of what needs to be done, given Pakistan’s persistent and, in many cases serious and growing, economic problems, has been the most striking aspect in the leadership of the Ministry of Finance and the Planning Commission.

A committed and more able leadership was critical to improving Pakistan’s economic situation, and in this perhaps lies the government’s biggest failure. While it is clear that the economy’s overall performance has certainly not been the ‘worst ever’, the verdict on the economic team and its leadership, is less certain.

The writer is a political economist.
-Dawn

May 21, 2012
Dr Javaid Laghari

Over the next two decades, South Asia will play an important role in the creation of a 21st century knowledge economy. With nearly 1.6 billion people, it is home to a quarter of the world’s population. One fifth of this population is between 15-24 years, which is the largest number of young people ever to transition into adulthood in the world as a whole. The region is expected to add 40 percent to the growth of the world’s working age population in the next few decades. This change in demography can be a liability or an asset, as it is from a region that is also home to 40 percent of the world’s poor.

Within South Asia, India is poised to capture the lion’s share of the knowledge economy through its initiatives and investment in education. With half of India’s 1.2 billion people under the age of 25, India is aggressively pursuing to make this demographic dividend work to its economic advantage in the coming decades.

There are three essentials to build up a knowledge economy: higher education and research, technology readiness, and innovation & entrepreneurship. Within South Asia, India has taken the lead on all three. It spends 4.1 percent of its GDP on its education sector, estimated to be about US$40 billion, which will increase by 18 percent this year and grow to over US$100 billion by 2018. It has 504 universities and an university enrolment of over 15 million. Over the next five years, India will establish 200 new universities thereby increasing enrolment to over 40 million by 2020.

Nine new IITs will be established, bringing the total number of IITs to 16. The higher education budget has increased by 34 percent just this year alone, to over $3 billion, and a sum of $16 billion, the biggest-ever allocation, has been set aside for higher education development in the twelfth five year plan. Its accessibility, which is 18 percent now, will reach 30 percent. On the other hand, Pakistan spends only 1.7 percent of its GDP on education, and has 8 percent accessibility. Its post-secondary enrolment is 1.5 million with 134 universities. Even Bangladesh, which spends 2.4 percent of its GDP on education, has an accessibility of 12 percent.

In research, in the last year alone, India produced about 9,000 PhDs and published over 50,000 research papers. But that is about to increase drastically when its spending on research and development will increase to 2 percent of the GDP from the current 0.9 percent by 2017. On a comparative note, last year Pakistan produced 700 PhDs (up from 200 ten years back) and published 6200 research papers. There is also a digital revolution taking place in India: India has already led an IT revolution, with exports exceeding $70 billion (Pakistan is under $2 billion). India’s population of Internet users is now 80 million (compared to 20 million for Pakistan), which is also about to change. The government is rolling out its National Broadband Plan, a $4.5 billion initiative to build a country-wide fibre optic network that will connect an additional 160 million Indians by 2014, almost as much as the US.

There are nearly 800 million mobile subscribers in India (73 percent penetration), compared to 130 million in Pakistan (65 percent penetration). Mobility will drive much of the expansion in Internet usage. One of every four Internet users in the country now accesses the net using a mobile device. Three of every four net users will do so by 2015 as a result of 3G wireless services introduced in 2011, expected to reach 22 percent penetration by 2015. 4G services are being introduced later this year as well. Pakistan is yet to introduce its 3G services. India has also introduced the handheld wireless tablet “Akash” which costs only about $30, and is within the reach of the common man. The vision is to connect “the last person” to the net!

India’s political leadership is putting out all the right signals. India has a knowledge commission headed by a world-renowned expert serving as an adviser to the prime minister; a ministry of human resource development, and a strong and centralised university grants commission. Going beyond the Pakistan experience, the Indian cabinet last year approved the “National Commission for Higher Education and Research” which will consolidate and further strengthen the higher education sector, and the bill is now in parliament. Even Bangladesh and Sri Lanka, learning from Pakistan’s experience, are in the process of establishing their own HECs in place of the UGCs. However in Pakistan, there are conspiracies afoot to devolve and demolish the HEC. Whatever gains have been made in Pakistan in recent years will reverse if this so happens and we will fall to the levels of Rwanda and Chad. It may even become difficult to have Pakistani degrees recognised worldwide should such a move materialise.

For South Asia, to capitalise on its demographic dividend and build up a knowledge economy, it is essential that the countries invest in their knowledge based infrastructure on war footing. Most South Asian countries, with the exception of Pakistan, are already doing so. Pakistan, if it does not invest in its youth through facilitating education, technology and research, risks being left behind and becoming a failed state.

The writer is chairperson of the Higher Education Commission of Pakistan. Email: jlaghari@ hec.gov.pk
-The News

May 22, 2012
Dr Muhammad Yaqub

The IMF has been off-and-on involved with Pakistan for more than thirty years. At present, Pakistan has no operational arrangement with the IMF. However, it owes the IMF about $8 billion: $1.8 billion is due to be paid to the IMF in 2012, $3.9 billion in 2013 and $2.1 billion in 2014. Thus, in the absence of a new arrangement, Pakistan will have to repay a total net amount of $7.8 billion to the IMF in a period of less than three years.

The foreign exchange reserves of the State Bank of Pakistan (SBP) at present amount to $11.8 billion. The country is running an annual current-account deficit of around $5 billion, to be financed largely by drawdown of reserves.

It is obvious that any time in the next two-three years the country will default in its payments to the IMF and/or other creditors, in the absence of another borrowing arrangement with the IMF or substantial net lending by other foreign sources. If there is a run on reserves in anticipation of external debt default or to meet future import requirements, the SBP will exhaust its reserves earlier than indicated above. No wonder that there is again a talk in official circles of going back to the IMF for another borrowing arrangement in the foreseeable future.

The past borrowing arrangements made by various governments with the IMF were based on a commitment by the governments to adopt certain economic policies to achieve balance of payments viability. Those policies were made by the IMF a part of its conditionality for disbursement of its loan, but those were the policies willingly accepted for implementation by successive governments.

The IMF staff presented those policy programmes to its board, assuring it that those policies will indeed work to improve the balance of payments during the programme period so that the country will be able to pay back the loan to the IMF on due dates, and, after a stabilisation of the economy, will attain a higher rate of growth with relative price stability and balance-of-payments viability.

The ground reality is that the IMF programmes only bailed out particular governments in periods of crisis, and avoided international financial turmoil emanating from potential defaults, but the underlying state of the economy has gradually gone from bad to worse in all that period.

The fundamental question is as to why the economic policy programmes worked out with the IMF have not led to an improvement in the economy and strengthening of the balance of payments, and why is it that the IMF and Pakistan have remained engaged with each other in spite of the fact that their long association and successive policy programmes have failed to produce any positive returns for the country? The answer lies not in deficiency in policy prescriptions but in motivating factors on both sides behind these programms.

The governments knocked at the doors of the IMF in critical times not to reform the economy but to borrow from the IMF, supplemented by additional lending/debt relief by other international financial institutions and bilateral sources, to meet their immediate foreign exchange requirements. There was a lack of genuine commitment by successive governments to carry out the necessary policy reforms.

The real purpose, indeed, was to dodge the bullet and mark time by relying on borrowing from the IMF. In implementing the policy package, the easier policy actions were taken on time, some of the targets and ceilings were met on paper only through statistical manipulations engineered by bureaucrats, and when it came to hard policy choices either waivers were requested or programmes abandoned. Successive political leaders were thus able to save and sustain their governments by borrowing from abroad without any genuine effort to undertake the needed difficult reforms.

The role and behaviour of the IMF was less clear and more intriguing. It appears that the IMF adopted its accommodative approach of granting waivers and agreeing on repetitive arrangements in spite of the poor track record of implementation of policies for any or all of the following reasons:

First, the IMF played in the hands of its major shareholders who used it to help sitting governments at critical times to keep them floating by using its clout in the IMF and thereby to promote their own security and other national objectives. Unlike the UN General Assembly, the IMF has a weighted voting system in which the US and its European allies have voting majority.

Second, the IMF wanted to remain engaged with the country to avoid the consequences for the international financial organisations and for world financial markets of a debt default by a major debtor country of Asia. It may be recalled that major debt of Pakistan is owned to the IMF, the World Bank group and the Asian Development Bank.

Third, the IMF staff did not do its job properly and misled its board in presenting the economic programme that met the board requirements but was based by the staff on unrealistic estimates relating to the budget, the balance of payments outlook and some other aspects of the economy.

Viewing the IMF-Pakistan relations in the historical perspective of more than thirty years, the most important conclusion that emerges is that every government approached the IMF for financial help, after the economy has been mismanaged for some time, only to avoid foreign exchange shortage, external debt default and an economic crisis. They succeeded in getting external financial assistance and avoiding a crisis, but failed to undertake important economic reforms.

Given the past record of broken promises and abandoned programmes both the government and the IMF should seriously review their track record for a more meaningful future arrangement that helps the country out of its deep-rooted problems, rather than bailing out a sitting government or avoiding turmoil in the international financial system. For the sake of Pakistan, both should change their approach.

The government does not need the IMF to diagnose Pakistan’s problems and find the solutions. Any economist of standing can formulate a correct policy package: control government expenditure, raise the tax/GDP ratio, reduce the budget deficit, dismantle the underground economy, eradicate corruption, privatise or restructure public-sector corporations, free the SBP to conduct a prudent monetary policy to encourage private sector activities and control inflation, have an export-led growth strategy financed by mobilisation of domestic savings, build strong economic institutions and ensure good governance. The SBP should be able to help the government to cast its own home-grown program in the IMF mould, ensuring consistency, viability and balance-of-payment sustainability, by using its macroeconomic framework that is very similar to that of the IMF.

A home-grown programme so developed to tackle the country’s structural problems, keeping in view the financial programming framework of the IMF, can be “sold” to the IMF to galvanise the necessary external financial assistance by a technically competent economic team. But statistical trickery and false promises should be replaced by a genuine effort to address the deep-rooted economic problems of the country.

The IMF should accept for financial assistance a genuine programme developed and owned by the government to stabilise the economy and promote a higher rate of growth with relative price stability and balance-of-payment viability, even if it is modest in its contents. It is better to support a programme that is owned by the country and implemented seriously than to impose an ambitious programme on paper that is likely to fall apart at the implementation stage.

If a government is not committed to implementing its home-grown programme with full ownership of policies, visits to the IMF headquarters and agreement on a programme paper with the IMF may be helpful once again in saving a government, but not in improving the fundamentals of the economy.

The writer is a former governor of the State Bank of Pakistan.
-The News

Shahid Khalil

Now, even the industrialists realize that the way to go forward in Pakistan is to exploit the agriculture potential of the country. While they are setting up big corporate farms and dairy enterprises, the real improvement will come when poor farmers' incomes are increased.

Farmers' incomes in Pakistan are low because of low per acre yield. An increase is absolutely necessary, because after manufacturing goods, the world trade in agriculture is also opening up. We should devise strategies immediately to ensure that our farm products stay competitive globally. The farmers are already feeling the heat of vegetable and fruit imports from India through the Wagah border. The rates of these commodities are lower on the Indian side.

While one might argue that the Indian farmer gets higher subsidies from their government that keeps the cost of production low, then in that case, our government should invoke WTO countervailing rules to stop unfair pressure on our farmers. Another reason for lower Indian agricultural prices could be higher
yields.

There are two ways of helping farmers, of which one is that of subsidy. The subsidies always distort the market and promote inefficiencies. Moreover the subsidies in Pakistan are not distributed fairly. Most of the fertilizer subsidies are simply not passed over to the farmers by vested interests that create artificial shortages to raise the prices very high and sell this important input in the black market.

The other way to help the farmers is to facilitate them in increasing their yields. If we look on our production averages of various agricultural commodities they are much lower than the global benchmarks. However, there are numerous instances when a farmer obtains yields higher than global averages while his real brother, having the adjacent farmland of the same quality, gets half the yield. This shows that the fault does not lie in the soil or the weather but with the way the crop is looked after and nurtured by the farmers.

It is a matter of record that the yields of all major crops in Pakistan are lower
than world averages. Sugarcane yield is 40 per cent lower, wheat 20 per cent lower, non-basmati rice 40 per cent lower, cotton 20 per cent lower, milk per animal 90 per cent lower.

It is interesting to note that the farmers obtain from 20 maunds to 70 maunds per acre in Pakistan. The national average is only 30 maunds per acre. The farmers that obtain above 50 maunds per acre from their land are well off, while the farmer obtaining the national average yield hardly covers his cost of production.

Similarly, in cotton per acre, yield varies from 500 kg per acre to 1,350 kg per acre. It is obvious that farmers obtaining low yield remain poor and under debt while those with very high yield prosper.

Apart from per acre yield, there are many other flaws in the agricultural management system that adversely affects the income of the farmers. Post harvest losses in Pakistan range from 40-80 per cent. The global benchmark for tractors per square meter is 20-25. In Pakistan, it is 10 times lower. Water losses are as high as 40 per cent even before the water reaches the farm. Then there is another 20 per cent loss due to flood irrigation that could be eliminated by using water conservation technologies like drip irrigation.

The most pressing problem of the farmers is the availability of agricultural credit. Most of the farmers are forced to obtain credit from the informal sector at very high mark up. Agricultural credit disbursed to farmers declined from $3.4 billion in 2007-08 to $3.1 billion in 2010-11. During the same period the agriculture credit disbursement in India increased from $63.3 billion to $103.4 billion.

Agriculture credit availability from the formal sector is the key to higher productivity. It enables the farmers to buy the inputs of their choice on cash at market prices. In case they go to the informal sector, the credit first is provided at very high mark up and the inputs are arranged by the financer at higher than market price. The quality of inputs is also doubtful.

The commercial banks have valid reason to deny credit to the farmers. Since the amount of credit is low, they cannot take the risk of going to remote villages for recoveries if the farmers default. Instead of disbursing agriculture credit as per direction of the central bank, they prefer the penalty imposed on them for violating the directive.

Experts point out an inherent flaw in our agriculture is the absence of cooperatives. The banks would readily lend to the cooperatives as the size of the loan would be high and the collateral would be sufficient to cover the risk. Experts say that cooperatives were never tested in Pakistan. They point out that people have bad memories of the cooperatives in the 90's which, in fact, were financial institutions and had nothing to do with agriculture. Farm cooperatives were never formed in Pakistan.

India, our next door neighbour, is a shining example of farm cooperatives. The largest dairy supplier in India is a cooperative. Indian cooperatives contribute around 50 per cent of the total agricultural credit disbursement. More than 60 per cent of the sugarcane procurement is done by the cooperatives.
In France, 75 per cent of all agricultural producers are members of at least one cooperative and cooperatives handle 40 per cent of the food and agricultural production of that country.

Existing legislation in Pakistan allows formation of farmer cooperative bodies which can buy inputs, sell produce and obtain credit for member farmers. What is required is the commercial banks lending to the cooperatives and crop insurance for the cooperative sector.

Funding is also needed to develop physical infrastructure for the cooperatives; to pull farmers out of poverty, the government should encourage a network of standard warehouses across the country for agricultural produce. These warehouses should be linked to the commodity exchanges such as Pakistan Mercantile Exchange Limited.

There is a need to establish an authorized quality grading system for produce brought to the warehouses. Warehouse receipts given to the farmers and traders can then be used to get loans from the banks as commodity, as accessible collateral at warehouses, would be acceptable to the banks. These receipts could also be used to trade on commodity exchanges.

-Cuttingedge

May 28, 2012
By Shahid Javed Burki

Staying with the Punjab story as told by the Institute of Public Policy (IPP) in its 2012 annual report, I will today begin to look at what has kept the province’s southern districts persistently poor compared to those in other parts of the province. There is a high level of correlation between the incidence of poverty and the level of district development. There is nothing surprising about this result. The incidence of poverty in the southern districts is 43 per cent of the population while that for the province as whole is 27 per cent. It is even lower in the districts in the province’s center and north.

Poverty is much more severe in small towns and cities than in the countryside. Migration it appears has played an important role in this context. One reason for this may be that the rural poor choose to relocate themselves in the urban areas in the expectation that more jobs will be available in the urban economy. Economists call this the ‘push factor’ when poor economic conditions in the place of residence persuades people to move to the areas where there may be better prospects for finding jobs. Opposite to this is the ‘pull factor’ when it is known that better paying jobs are available in a particular geographic space some distance away from the place of residence.

The push factor is independent of the amount of distance travelled by those who choose to move out. Short distance migration especially in southern Punjab is an example of the push factor. One result of this is that poverty simply gets exported from one place to the other. Just by moving out, the migrants help those who remain behind. However, they bring down average incomes by moving into the urban areas that don’t have many opportunities to offer. This appears to have happened in the case of the southern districts of Punjab.

For some reason, those discouraged by their circumstances in the countryside as are the people in the southern districts of Punjab province, have preferred to relocate in the nearby towns and cities. They seem to avoid long-distance migration. There are, accordingly, relatively few people from these districts in the well-populated Pakistani diasporas in the Middle East, Britain and North America. A good example is out-migration from Gujrat district situated on the border of central and northern Punjab. The people from this district are to be found in many distant places. They constitute the bulk of the Pakistani population now resident permanently in Norway. I was once told by the Norwegian ambassador to Pakistan that one percent of her country’s population was made up of Pakistanis. In Oslo, the country’s capital, Pakistanis accounted for 10 per cent of the population. Most of these people were from Gujrat district.

Outmigration from Gujrat to Europe offers some interesting insights not only for understanding why people move but also of the choice of their destinations. Once it was appreciated in the district that migration was an important and effective contributor to poverty alleviation, people began to look actively for the opportunities that were available. The Gujratis took advantage of the path discovered by illegal migrants from North Africa to Spain to join this stream of migration. There is now a fairly large community in Barcelona of the people from this district.

Karachi’s growth, on the other hand, is a good example of the pull factor. Millions of people who have left their homes in such poor areas as the tribal regions of Khyber-Pakhtunkhawa (K-P) and the barani areas of north Punjab and Azad Kashmir and moved to Karachi. By doing so, they have generally improved their economic situation. They also help the places from which they come by sending back remittances. These have become important contributors to the incomes of the areas such as North Punjab and K-P. Although in its Punjab study the IPP did not do work on the impact of remittances on economic and social development, there is good reason to argue that this must have been positive.

For some reason, which sociologists and anthropologists need to ponder on, is that there are areas that send out more migrants compared to other places. In the case of Pakistan, the people from K-P and northern and central parts of Punjab have been more inclined to travel long distances in search of jobs than those who live in South Punjab, Baluchistan and Sindh. Demonstration affect may be one reason why people from some areas find long-distance migration to be a reasonable way for addressing their poor economic circumstances. Once remittances from those who have gone to distant places begin to arrive they provide incentives for those who are under stress for economic reasons to also contemplate migration. Also, once people from a particular area have formed communities of their own in places such as Karachi, Oslo and Barcelona, it is easier for the newcomers to get settled. Pioneering migrants have much more difficult time in creating opportunities for themselves in their adopted homelands. It is much easier for those who follow them.

Pakistan’s economists, in particular those who study the country’s history, have not paid much attention to how migration has contributed to development. A better appreciation of the links between the movement of people and its impact on economic development and social change will lead to the making of better public policy.

The Express Tribune,

Tahira Mansoor

The track record of this government is so disappointing that people have no positive hopes in the next budget, that would be its fifth and final budget before the next general elections.

The budget deficit that was Rs. 250 billion when the present regime assumed power in 2008-09, has soared to Rs. 1,456 billion. This includes Rs. 391 billion that the government has parked in a holding company that was provided credit on sovereign guarantee of the government to reduce the circular debt. The fiscal deficit has increased to an unmanageable 6.9 per cent of the GDP. The figures quoted are from the Ministry of Finance.

The government is mainly borrowing from the domestic sector to fulfill its financing needs at a very high interest rate. The foreign borrowing or inflows in the Rs. 1,456 billion additional debts created this year is less than 10 per cent. The foreign debt is at low mark up while the domestic borrowing ranges from 12 per cent to 14 per cent. This means than on the debt created this year alone, the government would need an addition over Rs. 150 billion for debt servicing. This huge deficit means that the government revenues are much less than its expenditure. In fact, the tax revenues this fiscal would be around Rs. 1,950 billion if the budgetary target is achieved. Now the government will have to mobilize an additional Rs. 150 billion in revenues in the next budget to keep the deficit at last year's level. Moreover, it will have to cap its expenses at last year's level.

The question is that would it be possible to cap the expenses at last year’s level in an election year? The prime minister is promising the moon to the electorate, stating that the next budget would be a relief oriented budget. The finance minister has said that the burden of additional taxes would be passed onto the existing taxpayers particularly the corporate sector. With businesses already under stress the expected revenue generation might not be possible. Higher taxes would increase prices and reduce consumption that would affect production.

The dilemma for the government is that besides salaries and pension its fixed liabilities include high debt servicing than cannot be avoided, high subsidies that can be avoided but the government lacks the political will to reduce them particularly in an election year. Then the increasing defence expenses are again unavoidable in view of ongoing war against terror.

These expenses account for 8.6 per cent of the GDP out of which 3.9 per cent are debt servicing expenses, 2.2 per cent subsidies and 1.5 per cent defence expenditure. In rupee terms it translates into around Rs. 1,600 billion.
Adding another 150 billion expenses of the newly acquired debt these non development expenses soar to Rs. 1,750 billion. With tax collection of Rs. 1,950 out of which the federal government has to disburse around Rs. 900 billion among provinces it is not left with enough money even to cover the defence, debt servicing and subsidies expenses from the tax revenues. The non-tax revenues might enable the government to cover these expenses but from where the other expenses would be met? The government needs over Rs. 500 billion for its day-to-day expenses and the salaries of its employees. It needs over Rs. 500 billion to cover the losses of the state owned enterprises. It needs at least Rs. 400 billion for the development expenses.

The heavy internal borrowing is being monetized and fueling inflation. The exports at over $33.5 billion in the first ten months of this fiscal are $13.5 billion higher than the $20 billion exports during the same period. Though the trade deficit stands at $13.5 billion but thanks to higher remittances from overseas Pakistanis the current account deficit has narrowed down to a little over $3.5 billion.

The foreign inflows in shape of foreign direct investment have dried down in last five years. A year before this government assumed power the FDA was well over $7 billion. In 2008-09 the FDI dipped to 43.4 billion, in 2009-10 it further declined to $1.50 billion and in 2010-11 the FDA was only 1.15 billion. During the first ten months of 2011-12 the FDI merely reach $598 million. This shows how the foreign investors systematically shied away from Pakistan.
The energy shortages have reached their historical high during the last five years. The manufacturing sector as percentage of the GDP has shrunk to its lowest in last three decades. According to the World Bank Its was 24.9 per cent of the GDP in 1980 that declined to 23.5 per cent of the GDP in 2010 and must have gone lower till now keeping in view the acute energy and power shortages. It is interesting to note that according to official statistics manufacturing sector generates 65 per cent of the total tax revenues in the country. With declining industrial growth it would not be possible to generate more revenues next year.

Inflation depicts an interesting picture the consumer price index that remained above double digit throughout the tenure of this government. This year it is expected to remain relatively low at 12 per cent but the IMF predicts it to range at 12.5 per cent in next fiscal. This Fiscal the CPI inflation declined to 11.3 per cent in April from a peak of 13 per cent in July.

The wholesale price index showed high volatility. It was at peak of 23 per cent in July 2011 that declined to only 3.8 per cent in April 2012. This shows that the increase in prices at the wholesale level has tamed to a manageable level. It was probably due to subdued demand that the wholesale prices remained low and it was the retail sector that kept the prices high by retaining high profit margins.

The maintainability of foreign exchange reserves would be a challenge for the economic managers. Pakistan has to retire foreign debt worth $5 billion in next 3-12 months including a part of the IMF loan. The foreign inflows in the country are almost nonexistent. The exports do not cover even half the imports. The huge remittances are utilized for financing imports. The foreign exchange reserves are already down from a peak of $16 billion 54 months back to $11.98 billion. In fact, there has been a depletion of $1.8 billion in foreign exchange reverses since May last year. How government copes with this problem must be giving nightmare to the economic managers. It could have grave implications on rupee stability that is already being traded at very low values against the dollar.

-Cuttingedge

Shahid Khalil

Smallholding families account for a large share of vulnerable and food insecure populations. To help poor farmers reduce and manage the risks that come with farming, a range of measures are currently being evaluated worldwide.
The impact of climate change on the livelihood of small farmers has been beyond expectation. Continuous two years of floods in different regions of the Pakistan have uprooted millions and they are struggling to recoup the losses.
Measures that have already been shown effective can be used to build resilience against agricultural shocks, provided that smallholder access to the necessary related products and services is facilitated. Such measures include investments in technologies and practices that reduce yield variability; access to financial services and insurance schemes; and policies that help mitigate and adapt to climate change. For instance, investments in the development and dissemination of disease-resistant crop varieties have helped reduce the vulnerability of smallholders to devastating crop losses and have accordingly improved food and nutrition security.

While short-term interventions in the aftermath of a crisis are crucial to maintain food and nutrition security, there is also a clear need for development investments to help poor and vulnerable groups build capacity, manage shocks, and develop resilience to future shocks. Yet donor funding for disaster prevention and enhanced resilience remains low. While official development assistance to agriculture has seen a substantial increase in 2010, it remained at just 6 per cent of the total. Nearly 80 per cent of people in the world's poorest countries or even mid-income countries like, India and
Pakistan still lack effective safety-net coverage.

Both global and national actors are currently scaling up investments in agriculture, food security initiatives, and social protection systems - not least in response to the food price crises of recent years. These responses are often of a short-term nature, however; the long-term view needed for resilience-building has been lacking, although there has been increasing attention to longer term perspectives in the past few years. To the extent that short-term interventions can help protect the assets and savings of the poor, who would otherwise be more vulnerable to subsequent shocks, these efforts represent important first steps.

In developing countries themselves, the focus is shifting to longer-term aspects of food security. Emerging economies such as Brazil, China, and India are expanding their investments in agriculture and social protection, while investment in agriculture is on the decline in Pakistan.

Breaking the cycle of hunger and food assistance requires focusing on disaster prevention and resilience building in vulnerable populations. Scaling up investments in disaster-risk reduction makes economic sense, as they have higher returns than either relief operations or the provision of humanitarian assistance in the aftermath of disaster. Such efforts have shown, by one account, internal rates of return ranging from 20 to 50 per cent.
Mechanisms that enhance poor people's resilience to shocks also have the potential to increase their productivity and overall economic growth, by helping to create productive assets for individuals, households, or communities and by protecting them when shocks occur.

Other avenues to serve the long-term needs of vulnerable groups include creating the legal and administrative infrastructures that facilitate the expansion of social safety nets, which also help build resilience to economic crises. Depending on the context, programs like cash transfers, food stamps, in-kind transfers of food, work-for-food, and nutrition education campaigns can help raise household income and consumption. Social safety nets need to be incorporated into national social protection agendas and risk-management strategies.

Mainstreaming risk reduction, resilience enhancement, and food security requires incorporating these efforts into the preparedness, relief, recovery, and development policies of all stakeholders, including local communities, nongovernmental organizations, national governments, and humanitarian and development agencies. Ensuring mutual learning and collaboration among these partners is vital to advance a coherent and coordinated reduction of risks. Risk assessments and cost-benefit analyses relating to specific projects can produce insights for policymakers.

Predicting and monitoring of natural disasters, extreme weather events, and price volatility are crucial tools for reducing vulnerability. Advance warning enables individuals, civil society organizations, governments, and international organizations to take necessary actions to reduce people's exposure to risk while preparing for effective responses and recovery. At-risk populations may have developed coping strategies based on local knowledge of their environment, socioeconomic situation, and livelihood strategies. Nevertheless, community-based early warning and monitoring systems, as well as modern methods of disaster prediction and hazard mitigation, can play a critical role in saving lives and livelihoods by allowing populations to better understand the risks they face. Therefore, forecast and response capacities must be strengthened and the dissemination of early warnings must be improved, both globally and locally.

More general resilience-building measures, like social safety net programs, help reduce the vulnerability of many poor groups. In order to reduce the risks of food and nutrition insecurity among vulnerable populations, rural and urban poor people must have access to instruments that not only help them manage risks and respond to shocks in the short term, but that also improve their resilience and promote their food security in the long run. Accordingly, governments, donors, and the private sector must develop and scale up approaches that are specifically adapted to the needs of vulnerable populations.

Investments designed to reduce smallholders' vulnerability to food and nutrition insecurity and increase their coping capacities should be developed and scaled up. These investments must translate into tools and services adapted to the specific types of risks and shocks faced by vulnerable people. Agricultural market risks and shocks can be reduced through promoting access to key services such as insurance and finance. Equally important, however, are investments to enhance food productivity in the long run. Such investments include increased research and development spending to develop crop varieties resistant to abiotic stresses, as well as stronger livestock breeds; diversification of crop production, horizontally and vertically; improved input use; and introduction of alternative farm-management practices.

A single framework is essential to integrate relief interventions with relevant initiatives in agricultural development and food and nutrition security, and to enhance knowledge about ways to combine disaster risk reduction with support for food security, nutrition, and livelihoods. In addition, aid organizations should seek a global consensus on aid financing that allows a certain percentage of aid money and donations to be used for resilience building, as an essential corollary to relief efforts.

-Cuttingedge

May 31, 2012
Khurram Husain

IT’S budget time and the channels are abuzz with activity. For the next three days this will be all there is on air, an annual ritual that comes with a flurry and disappears just as quickly.

Once a year a window opens on the economy, and that’s all the media talks about. What you don’t see, however, is what goes on behind the scenes as the transmissions are planned and executed. Since I’m no longer involved in television, I stand released from my vow of secrecy. So here’s the lowdown.

First of all, the line-ups. In all the channels, a list is created with the names of all the people who must be called as guests and booked before someone else gets to them first. Some names are fixtures and are hounded by all the channels. Others are called mainly for their entertainment value, and they are flagged as such. “Call XYZ for sure! He’ll go on about taxes on his sector, and make sure ABC is sitting there too. He’ll shut XYZ up and it’ll be funny.”

But what many outside the industry don’t know is that there is what we call a “10-minute list.” These are the names who’ll be ready to come on 10 minutes’ notice, so eager are they to be on television. (I’ll leak that list someday, but this is not that day.)

Others come but bicker over trivial matters, such as their designation. This gets tricky because the ‘nameband’ that appears on screen under the guest’s name has room only for a limited number of characters. And some of the characters that are brought on as guests have designations that rival those from a Mughal court, and won’t fit. At some point, some associate producer makes the mistake of asking the person to choose which designation they want and an argument ensues because the fellow wants all of them.

One person, for instance, insisted that he be credited as “Immediate past chairman of the XYZ Association.”

Could we do without the “immediate past” bit and just write “former” instead?

“No. There’s a difference. There are many former chairmen but only one immediate past chairman,” came the reply.

“What difference does it make?”

“Well, if it makes no difference, then maybe I should just leave. That will make no difference either, I’m sure.”

The solution was simple. We reassured the fellow that his full designation would appear on the screen, and then we just wrote “former chairman” anyway. He never knew.

The big problem is the economists. There are only a handful of them in Pakistan, and they don’t get along with each other. Their views are well known to channel insiders, but there are hardly any alternatives. And many of these economists censor themselves heavily on air for fear of angering government or donor-community representatives and thereby putting their consulting contracts in peril.

Those who can speak a little freely are in high demand and need to be booked early. But the other thing is, the media will label anybody an economist. Retired bankers often come on air and talk about fiscal deficits and GDP growth rates, for instance, and their ‘nameband’ will announce them as an economist. I tried on a number of occasions to explain to my erstwhile team that a banker is not an economist, but to them it sounds like I’m splitting hairs.

“What’s the difference, sir? Who really cares?” used to come the response. Indeed, that’s the bottom line that permeates the entire budget transmission: who really cares anyway?

While industry representatives are tripping over each other to get on the screen, bankers are almost impossible to get — unless they’re retired, in which case you have to be careful because mostly they’re using their appearance as an opportunity to butter up someone who is still in the game in the hopes of landing a plum post-retirement gig.

Chartered accountants are in hot demand too, but it’s incredible how inarticulate they are. There is one who is articulate, deeply knowledgeable of fiscal affairs, speaks without fear and enjoys an unblemished reputation. And he’s in such high demand during this time that he literally spends his days going from one channel to the next.

Having listened to industry leaders of all stripes talk on and off the record for years now, it’s clear to me now that most of them have nothing to say beyond their specific vested interest. A few can talk about larger issues, but that class of businessmen which has the vision to take a wider view usually doesn’t like coming on screen and is rarely heard from in our media.

The worst is the politicians. If businessmen can’t talk beyond their vested interests, then politicians seem incapable of speaking at all. They deliver only speeches, and only rhetorical ones. Try this exercise: name one person from any of the political parties that you think is credible and knowledgeable about economic matters. The best such panel that I was able to put together in all my years in television comprised of Naveed Qamar, Ishaq Dar and Omar Ayub Khan. And even here, most of the discussion remained rhetorical.

One person you’ll never see discussing the economy on screen is the finance minister — in fact, nobody from government at all. I really wonder what’s up with that. This is the key time to engage with the media, give those interviews and shape the discussion around the important issues. Instead, our economic team prefers to keep its head down and let the blowhards have all the say. Any surprise, then, that the state of discussion on economic matters is so dismal in our public discourse?

The writer is a Karachi-based journalist covering business and economic policy.

Twitter: @khurramhusain

khurram.husain@gmail.com
-Dawn

June 1, 2012
Aasim Sajjad Akhtar

HIS voice is likely to be drowned out by the (symbolic) protests of the opposition, but the federal minister for finance will nevertheless present the budget today in the National Assembly.

Much has been made of the fact that this elected government will be the first of its kind to have completed the (highly overrated) budget formalities five times. I concur with those that emphasise the political significance of this exercise. Its economic significance is much less clear.

The story is a familiar one — Pakistan’s macroeconomic situation is dire, the chief executive believes in printing currency for fun and there is no respite on the horizon. When such circumstances become the norm rather than the exception, the budget scarcely matters; or at the very least, its significance lies in how well those putting it together can dress up the old as new.

I am not suggesting that the exercise is useless, only that the limited fiscal space that has been afforded to the government since the first structural adjustment programme in 1988 — and arguably since finance minister Ghulam Mohammad announced in the Constituent Assembly in 1948 that 70 per cent of outlays would be dedicated to defence — allows for very little in the way of policy shifts from one year to the next.

In any case I am of the opinion that the subject of the budget exercise — the formal economy — is of far less importance than what I, following an increasingly large number of writers, prefer to call the ‘real’ economy. In much of the world (and here I include the countries in which advanced capitalism reigns) scholars and policymakers alike now recognise that real markets, real producers and consumers, and real notions of well-being cannot be understood without interrogating those economic activities that are otherwise not included in formal accounts.

What is otherwise known as the ‘informal’ economy is estimated by some to be that where not only the majority of people engage in economic exchange but also where the majority of economic activity takes place. The informal is part of popular and mainstream political discourse in Pakistan only vis a vis discussions of our puny tax net. In fact, tax evasion is just the tip of the iceberg.

Most of our daily experiences take place in the real economy; our exchanges with the pakora vendor, domestic servant and wagon conductor are very real, and amongst the large number of economic activities that are neither accounted for nor, perhaps more importantly, the subject of government policy.

Other countries have not necessarily devised ingenious ways to provide support to informal economic activities per se or even more crucially to the millions who toil in the real economy without recognition, living wages or humane working conditions. However, we have not even started the long process of accounting for these activities and the workers who perform them.

Next door in India the government created the National Commission for Enterprises in the Unorganised Sector (NCEUS) in 2004 to map the scale and nature of the real economy. A substantial budget was allocated to a distinguished panel of social scientists — not just economists — and a series of comprehensive reports followed over the next five years or so. The NCEUS estimated that 93 per cent of India’s total workforce is located in the informal economy.

Similarly serious initiatives have been taken by governments and academics across much of the world in recognition of the fact that the ossified theoretical models found in mainstream economics textbooks tend to obfuscate more than they illuminate. There is also now more than anecdotal evidence that multinational corporations prefer to hire workers who are not legally protected so that they can fleece them in ways that the trade union movement at the height of its powers three decades ago simply would not have countenanced.

But in Pakistan, the real economy concerns very few policymakers and academics. This is, sadly, the case with a host of vitally important issues, so in this sense the paucity of information on the real economy in Pakistan is hardly surprising. But the case of economic policy is perhaps most indicative of the complete lack of concern of our ruling classes with the fate of those who make this country tick.

In a rather circuitous way this brings me back to the budget: given that our holy guardians decided long ago that we would use our ‘strategic’ location to generate rent from the American Empire, our economic managers — trained in the best international financial institutions the world has to offer — are quite content to not concern themselves with the millions that are being ruthlessly exploited in the informal economy. It’s just much easier to attract foreign direct investment if one can guarantee the money men that they will not have to contend with a restive labour force harbouring pretensions of constitutional rights.

So to those who will tune into Finance Minister Hafeez Shaikh’s speech later today, I would advise a critical think about all of the figures that are presented and attendant promises made, and not because politicians are inherently corrupt. It is not just politicians who thrive on tired and repetitive shows of expertise and evince little concern for the people and processes that actually constitute this society.

I wish to make one last point: understanding the real economy is necessary not just to address the plight of the long-suffering working people of this country, but also to account for those that are quickly rising through the ranks. Estimates of the number of Pakistanis who can be categorised as ‘middle class’ now range from 40 to 70 million. Yes, we know that there has been a consumption boom in Pakistan over the past decade or so. But we also know that very few jobs are being created and very little real (as opposed to speculative) investment is taking place. So where is all the money coming from?

Those who are consuming more and more are surely not making all their money abroad and simply spending it here. Pakistan is awash with cash and it is high time we put some time and effort into identifying its sources and its mode of circulation. That the new high rollers do not pay taxes we already know. Where they are getting it is what really matters.

The writer teaches at Quaid-i-Azam University, Islamabad.
-Dawn