Poverty levels have risen from 34.2 percent in 2022 to 39.4 percent in 2023, pushing 12.5 million people below the poverty line as per data shared by World Bank officials during a seminar titled “Time for a Brighter Future: Time to Decide.”
And, disturbingly, the poverty rate of 39.3 percent is applicable only while using the lower middle income poverty rate of 3.2 dollars per day while the upper middle income poverty level of 5.5 dollars per day would bring in 78.4 percent of Pakistanis under the poverty level.
There are three obvious contributors to the rise in poverty levels. First, inflation estimated by Pakistan Bureau of Statistics (PBS) at 26.1 percent for 2022-23 (with the monthly rate higher in February at 31.5, March at 35.4, April at 36.4 and May at 38 percent).
The lower average for the year is due to lower inflation during July to September 2022 (prior to Ishaq Dar’s appointment as the country’s finance minister) that brought the average for the year down – 24.9 percent in July 2022, that rose to 27.3 percent due to the devastating July/August floods and before the implementation of the seventh/eighth review staff -level agreement under the then ongoing Extended Fund Facility programme followed by 23.2 percent in September.
The one full month of the caretaker setup has led to a rise of 4 percentage points in September against August – from 27.4 percent to 31.4 percent - a rise in a single month that Ishaq Dar achieved in with all his flawed policies failed to achieve though he came close with inflation at 3.9 percent in February and March 2023.
While supporters of the Caretakers may legitimately point out Dar’s penchant for data manipulation, especially data with political implications.
Second, salaries in the public sector, paid for by the country’s taxpayers’, were budgeted to rise by 15 percent in 2022-23 (lower than the rate of inflation) and by 30 to 35 percent in the current fiscal year (higher than the rate of inflation) - a decision that took no account of the very narrow fiscal space which, in turn, necessitated heavier reliance on borrowing from the domestic market – a highly inflationary as it not only crowds out private sector borrowing with a consequent negative impact on national output but is also inflationary as the bulk of borrowing is projected to be re-injected into the economy under the head of current non-development expenditure that is not backed by an increase in output.
External borrowing dried up after September 2023 as Ishaq Dar persistently violated the agreed IMF conditions resulting in inflows from all sources, including friendly countries, drying up till a staff-level agreement on the Stand By Arrangement (SBA) was reached with the IMF on 29 June 2023.
Salaries in the private sector have stagnated for the two years, an outcome of low growth (0.5 percent) in Gross Domestic Product for 2022-23.
However, independent economists contend that the actual growth rate was between negative 0.5 to negative one percent – a claim backed by negative 10.3 percent growth in large scale manufacturing (LSM) as acknowledged by the Finance Division in its monthly economic update and outlook for September.
The June 2023 figure is negative 15 percent which prompted the Monetary Policy Committee and the caretaker finance minister to maintain that output is on the rise though they did not dwell on the obvious: that it remains negative and the lower negativity maybe due to the sector reaching a low base rather than any upswing in output.
Third, the unemployment rate has risen which has also contributed to rising poverty levels. Dr Hafiz Pasha, former finance minister and an academician, has provided some disturbing unemployment figures: in 2018-19 unemployment was 6.9 percent with total national labour force of 68.75 million out of which 64.05 million were employed - 4.70 million unemployed.
In 2022-23 the total labour force rose to 74.41 million (1.4 million added onto the labour force each year) and 67.23 million were employed with total 7.18 million employed, giving an unemployment rate of 9.6 percent. However, very few employment exchanges in the country especially in the rural areas and smaller towns make this a rough estimate at best.
While the Shehbaz Sharif-led government met all prior SBA conditions before the SLA was announced yet some politically as opposed to economically feasible allocations remain part of the budget documents to this day: (i) a 26 percent rise in current expenditure from the revised estimates of last year inclusive of the significant pay raise to public sector employees (civilian and military); (ii) disbursements to parliamentarians in the run up to the 2024 elections; and (iii) sustaining a revenue base that relies on indirect taxes whose incidence on the poor is greater than the rich with obvious negative implications on poverty levels.
Post-SBA the administrative measures notably to raise tariffs to achieve full cost recovery (passing on the buck to the consumer instead of improving governance) and a steady hike the petroleum levy (an indirect tax) further burdened the middle to lower middle income levels pushing hundreds of thousands below the poverty line.
The caretakers/stakeholders appear to focus on two crackdowns to deal with inflation and therefore indirectly with poverty levels: on currency speculators, which has led to rupee strengthening that would reduce imported inflation and on commodities smuggling.
The rupee has been persistently gaining strength against the dollar as the crackdown by law enforcement agencies that began on 6 September continues to this day with a daily strengthening of the rupee. On 5 September 2023 the interbank rate, as noted by the State Bank of Pakistan, was 307.10 per dollar while the open market rate on offer was 328 per dollar.
On the last working day in September the interbank rate registered 287.74 (a 6.3 percent rise in the rupee’s external value) and the main driver, the open market rate, was 286.95 – (the rupee strengthened by 12.5 percent).
The argument that imported inflation, a component of the Consumer Price Index, should have declined as a consequence but instead it rose by 4 percent, indicating that domestic factors continue to exert pressure on the general price level and one can only hope that the caretakers turn their attention towards reforms and improving governance instead of infighting that is reportedly ongoing between the caretaker finance minister and the advisor on finance to the caretaker prime minister.
To conclude, the Caretakers need to focus on dealing with rising poverty levels which would require a massive, ideally voluntary, slashing of current expenditure by all recipients, reforming the inequitable, unfair and anomalous tax structure by shifting reliance from indirect to direct taxes, reforming the pension system through seeking employee contributions like in most other countries and raising the budgeted allocation from the existing 3.2 percent of total expenditure to at least 5 percent to accommodate those being pushed below the poverty line due to rising inflation and unemployment.
Copyright Business Recorder, 2023
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