Rising poverty

The incidence of poverty has skyrocketed in Pakistan since the Covid-19 pandemic and the disastrous floods of 2022. The years 2019-20 and 2022-23 both saw negative GDP growth. Therefore, since 2018-19 up to 2022-23, the average GDP growth rate annually over the four-year period has been 2.7%, compared to the annual population growth rate of 2.5%. This implies that there has only been a less than 1% cumulative increase in real per capita income since 2018-19.

There are varying estimates of the incidence of poverty today in Pakistan. This variation is due largely to the approach adopted for measurement of the extent of poverty among households in the country. There is also a tendency for official estimates to grossly understate the level of poverty and to show a decline in incidence during the tenure of an incumbent government.

The Pakistan Economic Survey of 2021-22 highlights the trend in the incidence of poverty. This is based on the percentage of population with income below the poverty line. The poverty line is based on the cost of ensuring the provision of basic nutritional requirements.

The incidence of poverty is reported at 29.5% of the population in 2013-14, with a decline to 21.9% in 2018-19. If true, then this represents an outstanding performance in alleviating poverty in Pakistan.

The World Development Indicators database of the World Bank gives the estimates of the incidence of poverty in Pakistan, based on an international poverty line of $3.65 per day, measured in 2017 PPP. The incidence is reported at 44.6% in 2013-14 and falling to 39.8% in 2018-19. Not only are the World Bank estimates higher, but they also indicate a more moderate rate of decline.

The Social Policy and Development Centre (SPDC) has been engaged in doing research on poverty since 1995. According to the SPDC, the incidence of poverty was almost 38% in 2013-14, based on the analysis of household data from the Household Integrated Economic Survey (HIES) of the Pakistan Bureau of Statistics. Projection of the SPDC estimates indicates that it is likely to have fallen to 37% by 2018-19.

Therefore, the range of estimates of the incidence of poverty is from a low of 21.9%, according to the official estimate, and to a high of 39.8% by the World Bank. The SPDC estimate falls within this range. Therefore, the incidence of poverty is taken as 37% in 2018-19.

The next question is what has happened to the level of poverty after 2018-19, in the presence of COVID-19 pandemic in 2019-20 and following the disastrous floods in 2022-23. The BNU Macro-econometric model quantifies the role of different factors in impacting on the level of poverty in Pakistan. The findings are as follows:

(i) On average, 1% rise in real per capita income reduces the incidence of poverty in percentage terms by 1.3%.

(ii) The level of poverty is, as expected, sensitive to rising food prices. A 1% higher increase in food prices in relation to the overall consumer price index leads to a big percentage increase in the level of poverty by 2.2 %.

(iii) A 1% rise in the real level of pro-poor spending reduces poverty by 0.7%.

(iv) A 1% rise in inequality increases poverty by 1.3%. Inequality is measured as the ratio of the income shares of the top income quintile and the bottom income quintile in the population.

Based on these impact coefficients it is possible to project the incidence of poverty from 2018-19 to 2022-23.

The cumulative change, over these four years, in the magnitude of the above four impacting variables is as follows:

Real per capita income: 1%

Relative food prices: 21%

Real pro-poor spending: 46%

Level of inequality: 8%

Based on the above magnitudes and the respective impact coefficients the estimated percentage increase in the incidence of poverty has been derived as 23% between 2018-19 and 2022-23.

Therefore, the likely percentage of the population below the poverty line in 2022-23 is 45.5 percent. This indicates that 110 million people are below the poverty line today, with an increase in number of over 31 million during the last four years. This indeed is the highest ever rise in the number of poor and has never been witnessed before.

An effort has also been made to quantify the ‘poverty gap’ in Pakistan. This is the difference between the income required to take all poor households out of poverty and their actual total income. The estimated magnitude in 2022-23 is large in absolute terms at Rs 1950 billion.

The budgeted allocation for pro-poor spending in 2023-24 is Rs 687 billion. This includes Rs 475 billion for the Benazir Income Support Programme and Rs 212 billion under different heads, including the subsidy to small domestic electricity consumers. Therefore, the social protection programme in 2023-24 covers only 35% of the poverty gap existing already in 2022-23.

Surely, the message is clear. The size of the anti-poverty interventions will have to be increased substantially. But this can only be sustained in the already existing situation of a large budget deficit by substantive measures of progressive taxation and simultaneous sizeable cutbacks in current expenditure.

Fortunately, the need for providing substantial relief to the poor has featured strongly in the election campaign of especially the Pakistan People’s Party and to some extent of the PML(N). Free electricity of up to 300 kwh per month is proposed to be offered. In addition, the PPP has proposed the doubling of salary and allowances of government employees in an overall 10-point agenda for alleviating poverty in Pakistan.

There is no doubt that a sizeable social protection programme is needed with the poverty incidence having gone up from 37% to over 45% of the population in the last four years. As highlighted above, 110 million people of Pakistan are below the poverty line today.

However, it would have been appropriate if the election manifestos had also clearly indicated the major steps of progressive taxation and expenditure cutting to financing the relief program. This would have greatly enhanced the credibility of the claims of providing substantial relief to the poor and ensured its sustainability.

We await the elections next week and hope and pray that the newly inducted government will adopt progressive and structural reforms to enable substantial alleviation of poverty in Pakistan.

Copyright Business Recorder, 2024