State of economy

Periodic statements by PPP chairman Bilawal Bhutto Zardari and co-chairman President Zardari reveal an understanding of the state of the economy that few analysts or, indeed, the public is able to endorse. Three major claims continue to be made. First, inflation from a high of 24 percent in 2008 has declined to a little over 11.5 percent in 2011-12.
This is indeed true: prices were rising at the rate of 24 percent in 2008 while they rose by 11.5 percent last year. So why does the common man not feel the benefit of a lower rate of inflation? Two reasons: one, the pay scale of the private sector has not kept pace with the rise in the price of utilities and food which accounts for a rising inability to meet any further challenge posed by a price rise that may have halved over four and half years.
Former Prime Minister Gilani must be held accountable for an unprecedented and unwarranted rise in an across-the-board rise in public sector salaries: it was unprecedented as no country in the world can possibly justify a 50 percent pay rise in public sector salaries one year followed by 15 percent in two subsequent years with a ballooning deficit and it was unwarranted as civil service output continued to suffer from serious governance lapses.
Thus an ever-rising wage component of the non-development budgetary expenditure went hand in hand with the inability of the private industrial and farm sector to match the salary rise due to the higher cost of doing business in the country due to loadshedding, law and order issues and high cost of borrowing. Thus a small section of the public took advantage of a pay rise higher than the rate of inflation while the rest of the public was subjected to an eroding rupee value in the domestic as well as the international market.
And, second, economists do not highlight the decline in the rate of inflation as the government's achievement because of flawed economic policies that remain in force and include heavier reliance on deficit financing with budgetary support withheld by multilaterals because of International Monetary Fund's refusal to extend a letter of comfort, and foot dragging in terms of implementing the identified tax and power sector reforms - identified by both foreign and local economists. In addition, manipulation of statistics continues with few taking the data released by Federal Bureau of Statistics (FBS), under the Finance Ministry, as non-partisan - a view strengthened after the Minister of Finance compelled the FBS to abandon the mechanism that took account of changing sectoral realities in this country while calculating the GDP thereby coming up with over 3 percent growth rate instead of the 2.2 percent growth. The process to change the mechanism is of long duration as it requires detailed studies on each sector, a process that began in 1996. Thus for the Finance Minister to claim that the change in calculation of the GDP methodology came out of the blue is grossly unfair and simply compromised his own capacity to formulate budgets that were premised on real as opposed to doctored statistics. This shows that for him as well as for his other cabinet colleagues politics comes before economics.
The two top PPP leaders also cite the growth rate of over 3 percent as a major achievement as it is in spite of global recession. The over 3 percent growth rate does not reflect the emerging sectoral strengths, for reasons mentioned above. The commodity-producing sector (crops/livestock/fishing/forestry) declined from 47.6 percent contribution to GDP in 2002-03 to 46.5 percent in 2011-12. Industrial sector grew from 23.6 percent in 2002-03 to 25.4 percent in 2011-12 which is difficult to reconcile with large-scale relocations of our factories abroad due to law and order issues and energy shortages.
Disturbingly, gross fixed capital formation in the private sector registered negative 5.6 percent in 2010-11 and negative 10.2 percent in 2011-12. Public sector performed even worse in terms of gross capital formation with negative 6.7 percent in 2010-11 and negative 13 percent last year. The increase in domestic borrowing went to fund subsidies, wages and other non-development expenditure. A credible figure is the electricity and gas distribution share in GDP which declined from 2.5 percent to 2.2 percent (provisional estimates) in 2011-12. However, a recent presentation by the Ministry of Finance estimates that overall contribution of loadshedding to the country's GDP is negative 2 percent per annum, an estimate that does not appear to be factored into the GDP calculation.
And services sector rose from 52.4 percent share in GDP to 53.5 percent in 2011-12 with transport, wholesale and retail trade and ownership of dwellings suffering a decline in their contribution while defence services remained constant at 6.6 percent and social services increased their contribution from 10.6 percent in 2007-08 to 12.6 percent last year - an increase that is difficult to swallow given the massive routine slash in development expenditure component during the past four years to contain the deficit.
The single largest growth was in net income from abroad, remittances, to the tune of 20 percent in 2010-11, and an estimated 11.87 percent last year in comparison to the previous year. This year remittance inflows are expected to decline further which would explain why the government is concerned about its current account deficit and is reportedly convinced that it will have to go for another IMF programme sometime soon. Government expenditure rose by 8.2 percent last year in comparison to the previous year while in 2010-11 it rose by 5 percent - a rise backed by a rise in domestic borrowing with its consequent impact on the rate of inflation. But the claims of the two PPP chairmen that remittance income has risen because of good government policies is correct to the extent that the State Bank of Pakistan did undertake some measures that made it more attractive to use the official channels to remit their money however part of the reason for higher inflows is the global recession and record low interest rates in the West and other countries where Pakistani emigrants are in significant numbers. Hence remittance inflows will taper off and decline once the interest rates in the West rise again.
It is critical for President Zardari and his son as well as the leadership of other parties to focus on three negative trends that will continue to define our political economy for some time to come: (i) a rising power sector circular debt that would continue to compromise the country's ability to enhance output, an indication is the decline in exports from August 2011 total of 1.94 billion dollars to 2012 August's figure of 1.91 billion dollars; (ii) a burgeoning budget deficit fuelled by domestic borrowing and printing money irresponsibly with obvious repercussions on inflation with rupee in a freefall vis-a-vis other currencies: in August 2011 rupee versus dollar was 87.43 while it registered over 95 rupees in August this year; and (iii) a tax system that is unfair, anomalous and inequitable with the latest amnesty scheme widely regarded as a financial national reconciliation ordinance as it allows whitening of black money after payment of what is a pittance.