State of the economy

The recently released Asian Development Outlook 2014 released during a press conference by the Asian Development Bank Country Director Liepach presents some disturbing statistics: Pakistan continues to lag behind the region in terms of spending on social sectors, growth rate and inflation rate. The usual government defence with respect to sustained failure to achieve the targeted Millennium Development Goals with respect to social sectors continues to be major allocations for current expenditure as opposed to development expenditure and within development expenditure to focus on infrastructural development which has clearly lagged behind during past decades with a resultant negative impact on productivity. In 2012-13, the federal budget envisaged 80.9 percent of total allocations on current expenditure (with total current expenditure estimated at 2396 billion rupees with a total outlay of 2960 billion rupees) while the revised total was higher at 83.5 percent (revised current expenditure was at 2907 billion rupees with a total outlay of 3478 billion rupees). In this context, it is relevant to note that the decision of the incumbent government to clear the inter-circular power sector debt no doubt contributed to a higher outlay on current expenditure. In the current year, the government budgeted 78.7 percent on current expenditure (with an estimated 2829 billion rupees for current expenditure out of a total of 3591 billion rupees). There has never been a year when the budgeted allocation on current expenditure has not been revised upward at the end of the year, including during the late 1990s when Dar was Finance Minister, and hence few consider that these figures would reflect the position at the end of the current fiscal year. However, there is a marked decline in subsidies - from the 2012-13 budgeted 134.9 billion rupees revised upward to 264.9 billion rupees and the current year's budgeted 165 billion rupees. Thus it can be concluded that the decline of around 2 to 3 percent in current expenditure as a percentage of total outlay can be attributed to a highly significant decline in subsidies - a critical IMF condition under the 6.4 billion dollar Extended Fund Facility. Public Sector Development Programme (national) as well as new development initiatives account for the budgeted 1155 billion rupees while 851.4 billion rupees was disbursed last fiscal year. However, Dar allocated 115 billion rupees for the new initiatives which were linked to taxation measures, including the Gas Development Infrastructure Cess, and it is unclear whether this aspect of the budget has even been initiated with three months remaining in the current fiscal year. Social sectors subsequent to the passage of the 18th Amendment are now a provincial subject; however, clearly the focus of the provinces remains on power and of Punjab in particular on roads rather than on education and health due to the political implications of a continued power shortfall. Khyber Pakhtunkhwa government in particular has raised allocation on education manifold with other provinces making some improvements yet by and large unfortunately social sectors are likely to remain not a priority till pressing infrastructure needs are fulfilled. Growth has been forecast at 3.4 percent by the ADB - 0.3 percentage points higher than what has been forecast by the IMF. This figure is in line with the government estimate of between 3.5 and 4.5 percent for the current year and its realisation, according to the State Bank of Pakistan's second quarterly review, premised on weaker than expected agriculture growth. Large Scale Manufacturing (LSM), the SBP report maintains, is all set to achieve the growth target even if sugar and fertilizer are to "subside in the remaining part of 2014." Agriculture continues to account for around 22 percent of total GDP while LSM accounts for 11 percent. In other words, the focus of the incumbent government on LSM with respect to tax incentives and supply of energy are unlikely to be the main determinant of the growth rate. Finally, the ADB forecasts a rate of inflation of around 9 percent this year and 9.2 percent next year (due to higher utility prices) - a figure that many in government may legitimately challenge for two reasons: (i) the rupee appreciation with obvious impact on the rate of inflation particularly on fuel imports which form the bulk of our total imports due to a 1.5 billion dollar Saudi gift, and (ii) reduction in government borrowing from the central bank again due to the same Saudi inflow with obvious positive impact on the general price level. While in defence of ADB one can state that the data is for the first seven months and does not include the Saudi assistance yet one would have hoped that appropriate riders had been included as part of the ADB instead of presenting a picture that was simply outdated.