Deteriorating service delivery and spiralling prices amid policy inaction are adverse outcomes of the culture of rent seeking that has become thoroughly engrained in our systems and society. Public sector inefficiencies have persisted for decades; yet it is even more agonising to note that this culture of excluding new entrants permeates the country's private sector culture as well.
Add to this conundrum, the infrastructure bottlenecks, such as energy shortages, and productivity of human and capital resources alike is stunted and sub-par. The obsolete economic model inherited from the British Raj along with colonial laws and structures have bred these inefficiencies, while the conventional elite have colluded across departments and disciplines to maintain their hegemony over resources.
This collusion not only results in suboptimal growth but also fractures the social fabric of society; fuelling inequality among the people and excluding the masses from gaining from economic opportunities.
Though the process has taken painstakingly long there; India has cast the shadows of this colonial mindset building its key economic, political, judicial and law enforcing institutions on strong footings. Unfortunately in Pakistan, such reforms have remained a distant dream while a small minority of elite accrue all benefits under democratic governments or dictators alike.
The economy and society as a whole are not regressing; but they are not developing at any mentionable rate either. Improvements in advanced education and better dissemination of information have helped increase productivity in deregulated sectors such as telecom. But on the flipside, over one fourth of the country's children are unable to go to school or obtain a basic education.
On the productivity front, agricultural yields have remained low while the country's manufacturing sector remains stunted due to energy shortages, supply chain concerns and poor market development. Low growth and high inflation are packing a lethal one-two combination to the livelihoods of the people and the future prospects of the economy. In fact, as basic resources get more and more scarce, the social fabric of society is being threatened.
They are two possible ways ahead - one is to be like African countries with increasing poverty and hunger. The other is to revolt against this elite rent seeking culture. While the second option may eventually lead to better results eventually, it appears that taking this route is not in the interest of anyone; at least not anyone significant. The readers, writers, speakers and listeners of revolutionary ideas are directly or indirectly, consciously or sub consciously a part of this rent seeking culture and are enjoying its benefits at the cost of excluders.
As an example, the majority of the country's population is excluded from the English-medium education system. Similarly, industrialists are collectively able to exclude new entrants from competing with existing businesses. The list goes on. While circles of the elite collect financial rents, others are benefiting from intellectual rents. So ideas of a middle-class orchestrated revolution which are discussed in lavish drawing rooms over scrumptious food are little more than an intellectual romance.
The masses are too riveted in their daily struggles and too staunchly pitched against each other's ideals to form a cohesive face for change. Instead we witness sporadic incidents of violence and anarchy where groups of people collectively practice vigilante justice.
In simple economic terms, monopolistic or collusive powers create dead weight losses and wastage of potential resources. Resources are always limited and constant rent seeking will one day deplete their stock: the rents will stop flowing. Viewed in this context, the breakdown of law and order in Karachi becomes self-explanatory. Land and other lucrative resources in the city are getting dearer while wave upon wave of new migrants enters the metropolis. The ensuing power struggle to maintain a hegemony over the rents available has badly affected economic activity in Karachi.
Capital is flowing out of the country; textile players are targeting Bangladesh or even Malaysia. Dubai has always been a lucrative avenue for Pakistani investors and nowadays the rest of the world is also vying desperately to attract investments..
And Karachi is not an exceptional case in the country either. Per capita spending in Lahore is 17 times that in Rahimyar Khan. Yet government spending remains strangely skewed in the provinces. For example, residents of southern Punjab are being made to share the cost of the construction of Lahore's ring road project. This warrants closer scrutiny of the 7th NFC award and eighteenth amendment. Despite the passage of a year since the promulgation of these laws, mismanagement and lack of co-operation have limited the gains of decentralisation and devolution.
The core idea of devolution is to establish three tiers of government with more social spending responsibilities going to the lower tier. But the reintroduction of the commissionerate system in all provinces is the antithesis of this ideology. This colonial system benefits all big parties but one for their weak organisation within respective constituencies.
The rivalry within a constituency of a political party is not acceptable to leadership as this can pave way for new leaders; so once again the conventional elite have conspired to exclude any new leaders from emerging. In the absence of competitive elections within political parties, family dynasties continue to dominate the political landscape in the country.
Then there is a lack of co-ordination between additional fiscal funds being allocated to provinces versus the responsibilities being transferred to federating units through the 18th Amendment. Rather than going through careful deliberation with political stakeholders, then Finance Minister Shuakat Tarin sought to build his legacy through a quick fix.
Later on the political parties developed the 18th Amendment under of the auspices of Senator Raza Rabbani, but this document also failed to attach any meaningful pre-conditions on the provinces that would mandate capacity building to receive higher shares of revenues secured through the award.
There was little co-ordination between the centre and the provinces or even within different departments at the of the actual transfer to the provinces, of ministries and relevant departments as well as staff Consequently, provinces refused to accommodate many of those employed by the federal government while provincial budgets are also likely to be strained in the ongoing fiscal.
Unless the provinces are facilitated in establishing their newly acquired, broader domains the delivery of many services may collapse. A vast majority of the departments that were to be devolved have been centralised further by being handed over to the PM secretariat or cabinet division. Although government officials argue that these are stop gap measures, one wonders just how these steps are taken under the guise of decentralisation and devolution.
The federal government appears hell bent on retaining if not adding further to the swelling payrolls of public sector enterprises and government departments. Where voluntary separation schemes are introduced, they are mainly used by the relatively more efficient workers who cash out and move to the private sector, leaving behind the least diligent workers.
These self addressing political decisions have deep economic repercussions. Bureaucrats and politicians alike are averse to privatisation and corporatization of public sector entities as it hinders their patronage. Reportedly, the country's leadership is against the emergence of entrepreneurs like Mian Mansha. Across the border in India, business leaders are building the country's economic image and generating employment and economic opportunities while also contributing to government revenues.
Under the present government, there has not been a single privatisation or restructuring of any public sector enterprises. In fact , the management of recently privatised KESC has also been facing extreme pressure from the government in matters that are actually completely outside the government's domain.
Given these circumstances, it is very difficult to imagine what kind of deal the country would get for selling the remaining family jewels such as PIA, Steel Mills and Pakistan Railways. We need to take leafs from the Malaysian model of Khazana that formed a holding company to take all of the sick SOEs, and revamped them through an independent board of directors that ran the enterprises without any direct influence of the relevant ministries in routine matters. In short, we must do away with political patronage within these organisations.
This may not be a long term solution considering the political economic structure. However the best solution is to privatise SOEs to reap maximum benefit. This would also stop the haemorrhaging of the fiscal balance to the tune of Rs 500 billion per year.
Circular debt has become an acute problem for the economy, as for the first time in its history two IPPs have called sovereign guarantees as a result on non payment of their dues. Banks are issuing debt to quasi government operations at higher rates than those charged to big corporations. Is lending to the government risk free anymore?
Roughly half of banks' deposit money - saving of households- is being used to finance government borrowing to bridge the fiscal deficit. No wonder the current account has not reflected the fiscal gap. The savings of households are being used by the government to spend on defence, debt servicing and of course, the inefficient public sector enterprises.
The managers of big banks are relaxing on leather seats while vast pools of low cost deposits are handed to the government which virtually requires no efforts from the banks. While the boom in rural areas has taken roughly a trillion rupees out of the banking system and away from urban dwellers, creating shortage of funds for private and public credit. Whatever is available, is largely being consumed by the government.
There has to be some carrot and stick combination by regulators on commercial banks to penetrate in rural areas and have a cap on putting money in treasury bills. The current practice not only crowds out private investment but also results in suboptimal return on household savings. Without delving into a debate about whether it is good or bad, the question arises, how long can it last?
Sooner or later running high fiscal deficit is going to hamper the current account and balance of payments. There are already ominous signs on this front as the foreign currency reserves have not risen significantly despite surpluses in the current account.
There are strains on the capital account, FDI is drying up and capital flight is slowly but surely increasing. The current account was propped up by high cotton and rice prices, but these commodities appear to have lost their steam while the trend of rising remittances to the country may soon stutter too.
IMF is not happy with the policy inaction of the government in terms of broadening the tax base, autonomy of SBP, power and other public sector reforms and doing away with subsidies. The only good omen is that lately the government has stopped printing money to pay its bills, although this burden has now been shifted on to the commercial banks.
The country's tax to GDP ratio stands at 8.6 percent compared to the same comparison over the previous year and this ratio has been worsening throughout the tenure of the current government.
Given the rather dismal performance of the government in terms of meeting self-specified reforms under the IMF program, it appears that the government will have to renegotiate a new package with the fund. However any new deal will come with a host of much more stringent conditions compared to the existing program. Simultaneously it must be remembered that general elections are set to take place in mid-2013 and as these draw closer, government would be further inclined to please the masses with populist measures. How well will the current leadership juggle the urgently needed reforms with their pro-poor agenda remains to be seen?
The writer works as Head of Research at Business Recorder.
He can be reached at ali.khizar@br-mail.com
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ANNUAL GROWTH OF MAJOR ECONOMIC GROUPS
==============================================================================
% FY06 FY07 FY08 FY09 FY10 FY11
==============================================================================
AGRICULTURE 6.3 4.1 1 4 0.6 1.2
Major crops -3.9 7.7 -6.4 7.8 -2.4 -4
Minor Crops 0.4 -1 10.9 -1.2 -7.8 4.8
Live stock 15.8 2.8 4.2 3.1 4.3 3.7
INDUSTRY 4.1 8.8 1.4 -0.1 8.3 -0 .1
Large scale 8.3 8.7 4 -8.1 4.9 1
Small scale 8.7 8.1 7.5 7.5 7.5 7.5
Mining & Quarrying 4.6 3.1 4.4 -0.5 2.2 0.4
SERVICES 4 4.7 3.8 3.6 2.8 1.3
Transport & Communication -2.4 5.8 5.3 -1.4 4.6 3.9
Whole sale & Retail 42.9 14.9 11.1 -7.6 -11.3 -6.3
Finance & Insurance 3.5 3.5 3.5 3.5 3.5 1.8
==============================================================================
============================================================================
REVENUE AND EXPENDITURE
============================================================================
Rs (bn) FY06 FY07 FY08 FY09 FY10 FY11
============================================================================
Total Revenue 1,077 1,298 1,499 1,851 2,078 2,574
Tax revenue 804 890 1,051 1,205 1,499 1,889
Direct 224 338 391 445 534 667
Indirect 580 552 659 845 964 1,222
Non tax revenue 273 408 449 646 580 686
Total Expenditure 1,402 1,800 2,277 2,531 3,007 3,257
Current 1,035 1,375 1,853 2,042 2,481 2,641
Development 365 434 452 480 518 610
Overall deficit 325 378 777 680 929 683
External financing 149 147 151 150 138 92
Domestic financing 176 230 626 530 741 499
============================================================================
===================================================================================
STRUCTURE OF SAVINGS & INVESTMENT
===================================================================================
FY06 FY07 FY08 FY09 FY10 FY11
===================================================================================
Growth in Total Investment (%) 36.1 15.7 15.6 2.6 -1.6 6.2
Fixed Investment 38 15.9 15.4 0.9 -3.4 4.4
Public Investment 30.3 30.9 15.2 -0.5 -3.9 13.9
Private Investment 40.5 11.5 15.3 1.4 -3.2 1.1
AS % OF TOTAL INVESTMENT
National Savings 82.4 77.3 61.5 68.5 85.5 103.1
Foreign Savings 20.4 22.7 38.5 31.5 14.5 -3.1
AS % OF GDP (CURRENT MP)
Total Investment 22.1 22.5 22.1 18.2 15.4 13.4
Fixed Investment 20.5 20.9 20.5 16.6 13.8 11.8
Public Investment 4.8 5.6 5.4 4.3 3.6 3.3
Private Investment 15.7 15.4 15 12.3 10.2 8.5
National Savings 18.2 17.4 13.6 12.5 13.1 13.8
Foreign Savings 4.5 5.1 8.5 5.7 2 -0.4
Domestic Saving s 16.3 15.6 11.5 9.8 9.3 9.5
===================================================================================
===========================================================================
KEY TRADE FIGURES
===========================================================================
$ (mn) FY06 FY07 FY08 FY09 FY10 FY11
===========================================================================
EXPORTS 16,451 16,976 19,052 17,862 19,570 24,827
Textile and Garments 10,211 10,782 10,530 9,577 10,294 13,805
Rice 1,158 1,126 1,836 1,982 2,175 2,156
Petroleum Products 826 858 1,259 771 1,041 1,345
IMPORTS 28,581 30,540 39,965 34,823 34,710 40,413
Machinery 8,323 9,005 9,604 6,613 5,369 5,270
Crude Petroleum 3,794 3,601 5,222 3,994 3,172 4,808
Petroleum Products 2,881 3,734 6,241 5,511 6,914 7,274
Iron & Steel 1,367 1,192 1,330 1,417 1,290 1,210
===========================================================================
=====================================================================================
PUBLIC DEBT
=====================================================================================
FY05 FY06 FY07 FY08 FY09 FY10 FY11
=====================================================================================
Domestic Currency Debt 2,178 2,337 2,610 3,267 3,852 4,651 5,461
Foreign Currency Debt 1,856 1,973 2,140 2,780 3,736 4,284 4,559
Total 4,034 4,310 4,750 6,047 7,588 8,935 10,020
As a % of GDP
Domestic Currency Debt 33.5 30.7 30.1 31.9 30.3 31.3 30.2
Foreign Currency Debt 28.5 25.9 24.7 27.1 29.4 28.9 25.2
Total Public Debt 62.1 56.5 54.8 59.0 59.6 60.2 55.5
As a % of revenue
Domestic Currency Debt 242 217 201 218 208 224 228
Foreign Currency Debt 206 183 165 185 202 206 191
Total Public Debt 448 400 366 403 410 430 419
=====================================================================================
-- As of March 30
===================================================
ENERGY CONSUMPTION BY MAJOR SECTORS*
===================================================
Oil Gas Electricity Coal
===================================================
House holds 0% 20% 46% NA
Industry 7% 24% 28% NA
Agriculture 0% 0% 12% NA
Transport 48% 9% NA 0%
Power 43% 27% NA NA
Other Govt 2% 0% 6% NA
Fertiliser 0% 18% 0% 0%
Cement 0% 0% 0% 43%
===================================================
-- Based on provisional FY 10 data
===========================================================================
STATUS OF EMPLOYMENT
===========================================================================
(millions) FY09 FY10
===========================================================================
Total Urban Rural Total Urban Rural
===========================================================================
Employers 0.6 0.46 0.14 0.65 0.49 0.16
Self employed 16.91 4.59 12.32 17.75 4.78 12.97
Unpaid family helpers 15.1 1.84 13.26 15.1 1.77 13.33
Employees 18.18 8.36 9.82 18.37 8.5 9.87
Total 50.79 15.25 35.54 51.87 15.54 36.33
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% Total Male Female Total Male Female
---------------------------------------------------------------------------
Employers 1.2 1.5 0.1 1.3 1.6 0.1
Self employed 33.33 38.7 13.1 34.2 40 13.6
Unpaid family helpers 29.7 20.2 65 29.1 18.7 66.3
Employees 35.8 39.6 21.8 35.4 39.7 20
===========================================================================
============================================================
CRUDE HEALTH INDICATORS : A REGIONAL COMPARISION
============================================================
Life Infant Mortality Population
Expectancy Mortality Rate* Growth (%)
Rate *
============================================================
Pakistan 67.2 63.3 89 2.1
Bangladesh 66.9 50.7 54 1.6
China 73.5 16.1 21 0.5
India 64.4 47.6 69 1.3
Indonesia 71.5 27.1 41 1.1
Malaysia 74.3 15 6 1.6
Nepal 67.5 44.5 51 1.6
Philippines 72.3 19.3 32 1.9
Sri Lanka 74.4 9.7 15 0.9
============================================================
-- per 1000
=======================================================
SOURCES OF REVENUE
=======================================================
Rs (bn) FY11-B FY11-P FY12
=======================================================
DIRECT TAX 657.7 628.9 743.6
In come tax 633 602.5 718.6
INDIRECT TAX 1,121.01 1,052.46 1,330.58
Custom s 180.8 173.3 206.4
Sales tax 674.9 654.6 836.7
Federal Excise duty 153.6 132.9 165.6
Petroleum levy 110 90 120
NON - TAXREVENUE 632.2 556.52 657.96
SBP profits 185 185 200
Profits from PTA 50 0 75
Dividends 64.2 43.48 64.38
TOTAL FEDERAL REVENUE 1,377.34 1,238.18 1,525.82
=======================================================
======================================================
CAPITAL RECEIPTS
======================================================
Rs (bn) FY11-B FY11-P FY12
======================================================
PERMANENTDEBT 61.4 148.8 129.26
Pakistan Investment Bond 30 -25 50
Ijara Sukuk Bonds 40 182.3 80
FLOATINGDEBT 55 112.5 119.1
Treasury Bills 20 76 82.1
PUBLIC ACCOUNT 216.1 201.2 164.2
Saving Schemes 213 186.6 149.2
TOTAL 325.38 459.3 395.65
======================================================
======================================================
EXTERNAL RESOURCES
======================================================
Rs (bn) FY11-B FY11-P FY12
======================================================
A - LOANS OF WHICH 286.9 254.7 287.2
Project loans 64.7 94.0 67.5
Programme loans 80.3 39.0 117.6
Euro Bonds 43.3 42.9 44.0
Tokyo Pledges 55.3 10.1 13.9
Islamic Development Bank 43.3 0.0 44.0
IMF 0.0 68.7 0.0
B - GRANTS OF WHICH 99.7 35.1 126.7
Project grants 13.5 11.7 9.3
Tokyo pledges 26.7 3.6 3.7
Privatisation proceeds 0.0 0.0 70 .4
Kerry Lugar 51.9 11.1 34 .2
Total ( A+ B) 386.6 289.8 413.9
======================================================
======================================================
SHARE OF PROVINCES IN FEDERAL REVENUE RECEIPTS
======================================================
Rs (bn) FY11-P FY12
======================================================
Income Tax 337.3 407.9
Sales Tax * 330.39 437.4
Federal Excise (net of gas) 69.12 85.97
Customs Duties (excluding EDS) 95.34 112.62
GST on Services 65.98 72.58
Royalty on crude oil 19.21 14.87
Royalty on gas 34.4 32.12
Gas Dev. Surcharge 31.07 24.42
TOTAL 997.70 1,203.32
======================================================
-- Excluding GST on services
===================================================================
PUBLIC DEBT
===================================================================
Rs (bn) FY11-B FY11-P FY12
===================================================================
General Public Services 1,387.66 1,655.58 1,659.97
Defence Affairs & Services 442.17 444.64 495.21
Public Order and Safety Affairs 51.26 58.73 59.60
Economic Affairs 66.89 79.96 50.30
Education Affairs & Services 34.50 40.32 39.51
Environment protection 0.45 0.45 0.58
Housing & amenities 1.84 1.65 1.60
Health affairs & services 7.28 7.45 2.64
Recreation, culture & religion 4.35 4.19 4.24
Social protection 1.46 2.94 1.16
TOTAL 1,997.80 2,295.92 2,314.85
===================================================================
=====================================================================
MAJOR SUB SIDIES
=====================================================================
Rs (bn) FY11-B FY11-P FY12
=====================================================================
Wapda/ Pepco 84 295.82 122.7
Inter- Disco Tariff differential 30 238.82 50
Interest on TFCs 40 40 55.7
KESC 3.3 47.31 24.58
KESC on account of tariff differential 2 46 24
TCP 17.13 17.13 4
on sugar imports 4 4 4
on wheat imports/exports 12 12 0
Utility Stores Corp 4.2 4.2 2
Others 15 28 13
TOTAL SUBSIDIES 126.68 395.8 166.4
=====================================================================
==========================================================
AVENUES OF FEDERAL DEVELOPMENT SPENDING *
==========================================================
FY11-B FY11-P FY12
==========================================================
Cabinet division 1.2% 0.9% 0.9%
Defence division 1.3% 1.0% 1.3%
Education 1.7% 1.4% 0.0%
Higher Education Commission 5.4% 7.7% 4.7%
Food & Agriculture 3.7% 2.9% 0.0%
Health 5.8% 5.2% 0.0%
Planning & Development 3.2% 2.6% 10.7%
Railways 4.7% 3.6 % 5.0%
Pakistan Atomic Energy Commission 5.2% 5.5% 7.3%
Water & Power 9.8% 8.8% 12.0%
==========================================================
-- As a % of total Federal PSDP
===============================================================
STRUCTURE OF EXPENDITURE*
===============================================================
CURRENT DEBT
OPERATIONS DEVELOPMENT DEFENCE SERVICING
===============================================================
2004-05 77.4 20.4 19 26.2
2005-06 73.8 26 17.2 24.4
2006-07 76.4 24.1 13.9 25.4
2007-08 81.4 19.9 12.2 25.4
2008-09 80.4 19 20.5 34.8
2009-10 7 8 20 15 26
2010-11 9 0 10 17 28
2011-12 8 3 16 18 28
===============================================================
-- As a percent of total expenditure
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