AI: Assalam-o-Alaikum and welcome to Aaj Special with Anjum Ibrahim. This is Pakistan's Economic Survey, which is a very important document as it contains data on how the Pakistan economy fared during the year sector wise as well as macroeconomic data. The data is till March and the government projects it till June when the fiscal year ends.
Data released by the Economic Survey allows the Ministry of Finance to formulate the budget and determine what policy changes are required on the basis of which poor performing sector requires be strengthened. It is prepared at Finance Division's Economic Advisory Wing, which is subordinate to the Finance Minister and eventually the Minister is responsible for the data.
Sadly, however, Economic Survey's data integrity is in question.
I have a document with me, published in Business Recorder on June 7, post-dating the release of the Economic Survey which was one day earlier than the budget speech. You challenged the data. On what basis?
Hafeez Pasha: Before answering this question, I would like to state two things. First I have been very ill after my surgery. After the budget was announced a number of channels tried to get my interview but I apologised to them because physically I could not do this. Thanks God, I am better now. As I am a professor my effort has always been to give an interview to a channel which pays more attention to economic and business. Business Recorder is behind Aaj TV and anchorperson is an MSc from London School of Economics (LSE) and asks good questions.
Second thing refers to your question. Calculation of macroeconomic data was undertaken by me and six of my fellow economists three of whom are my students. Because of my illness we had to undertake this exercise in my bedroom. We had no political objective.
After our report was published in newspapers, we tried thrice to request senior people at the helm of affairs that we should be allowed to sit with Pakistan Bureau of Statistics (PBS) officials, which is the source of data, and Economic Advisory Wing to discuss as to what are the issues in the data. But, I have to say with regret that no reply was given. Now, as you want to ask technical questions, this interview will be slightly technical but I will try to make it comprehensible for your viewers.
AI: To collect or compile national income data is a very difficult, time consuming task and requires considerable manpower, which the private sector does not have. So what was your source of data that makes you feel comfortable that it is accurate?
HP: There are different sources and our findings are based on thirty (30) sources of data. These sources are industry's own data, for example OCAC, Oil Companies Advisory Committee maintains very good data of petroleum sector, which is a very important sector and on textile you get data from ginners APTMA etc. These are original sources so that data can be crossed check.
Secondly, Pakistan Bureau of Statistics almost every year or every second year conducts very important surveys, which include Labour Force Survey, Pakistan Household Income and Expenditure Survey, Pakistan Social Standards Measurement Survey. These are very important surveys and you get authentic primary data. I have to say with regret that PBS does not use these surveys to the extent that they should have been used. Overall, we have used 30 sources and at any stage if you need I can provide a list to you. Our maximum effort was to give benefit of doubt wherever possible to the government and this was given.
I would like to say two things at the outset. When farm economy declines to negative growth and, especially if an important crop declines, its economy-wide impact is very wide because of its linkages. Around 60 percent our economy is agro based and almost 40 percent trade, wholesale retail and transport is accounted for by the farm sector. If agriculture sector fails, its own direct impact is 21 percent but these linkages make its impact greater. I give you an example, we carried out research of 40 years (one of my gold medallist student) and our conclusion was that when the growth rate of agriculture sector was negative growth in economy was lower than 4 percent. Last time it happened about fifteen years ago due to drought when growth in agriculture sector was negative 2 percent and GDP growth was 2 percent. So to state that despite failure of agriculture sector, economic growth has increased to 4.7 percent is inappropriate.
AI: According to government's own figures growth in agriculture sector was negative 0.19 percent.
HP: Yes and our estimate was that growth in agriculture sector was (-) 2 percent and growth was overstated in several sectors and this was mentioned in the report we published in the Business Recorder.
We have done research and detailed work in every sector and there are 18 sectors in our economy and of these, six are in agriculture, six in industry and six in services. As per our estimates, there was overestimation in ten sectors. I have 100 pages of calculations and as you deem appropriate you can ask about any sector.
AI: Let's discuss industry first, as there is a perception that PML-N is pro-industry and when it comes to power, the growth of industrial sector increases.
HP: Let's come to Large Scale Manufacturing (LSM) first because it is a very important sector. Three things need to be noted. First the government has stated 5 percent growth when exports have declined by 12 percent, power generation grew only by 2 percent, and availability of cotton declined by 34 percent. Second one of the biggest plants, Pakistan Steel Mills, which itself is 1 percent of the industry, registered a growth last year (in 2014-150 as it was operation. This year it was shut but PBS has not fully accounted for its impact in the growth rate. The government has stated growth in textile sector. Cotton yarn export declined by 32 percent while the government is claiming production has increased by 1 per cent! How this can happen?
The third factor I would like to mention is that when production and prices of agriculture sector decline the purchasing power of rural households also declines. Seventeen industries have registered negative growth. There is 46 per cent negative growth in tractors, bicycle 15 percent, and sewing machine 12 percent. People do not have money to buy these things and 58 percent consumption of these goods is from rural areas and this factor was not taken into account while projecting for March. You have only received data for March in the Survey and from March till June many of these sectors would decline further. These are major factors which affected the LSM and we have very carefully estimated decrease of between 4.6 to 3.6 percent in LSM.
AI: In the budget the government claims it has targeted the farm sector and Dar Sahib stated during his budget speech that the farm sector should be happy as it has won a lottery in the budget. Do you think that the credit scheme offered in the budget and subsidy to be equally contributed by federal and provincial governments on fertiliser (urea and DAP) will be sufficient to fuel growth in the agriculture sector?
HP: Prime Minister had announced a very big Kissan Package in September which was very well designed and the package was of Rs 341 billion. However the government in a report to the International Monetary Fund (IMF) stated that only Rs 30 billion were disbursed as opposed to Rs 341 billion. This means that the IMF stopped the package. Now the failure in the farm sector is visible, because till September crop position was unknown, and the government has revisited the same package. The good thing is now I see a strong commitment of the government and hopefully the package will be implemented. But two to three things in the package were very important and I have spoken to various people in power and also talked to speaker National Assembly.
In the 90s when Nawaz Sharif and Benazir Bhutto were in power, growth in agriculture sector was 4 percent and now average growth of agriculture sector is 2 percent. One of the major reasons for growth at that time was support price on all the major crops - cotton, rice, sugar cane and in fact we gave support price to some vegetables as well so that the farmer knew that if he produces these crops, he will get a minimum price. Now when prices have collapsed internationally, the least that should have been done was to announce support price of two more crops, cotton and rice. Believe me cotton sowing is much less than before and seed failure and weather conditions are further reducing cotton production. Most important policy initiative should have been support price to cotton and rice.
AI: Dr Sahib you have suggested support price to cotton and rice but where is the money going to come from as our concerns with respect to revenue are huge?
HP: It's an issue of priorities. When this government came to power, in the first year's budget Finance Minister promised to the country that non-salary expenditure will be slashed by 30 percent, which sadly during the last three years has increased by 40 per cent. Now the agriculture sector is in crisis and hundreds of thousands of farmers have suffered loss of between Rs 10,000 to Rs 15,000 per acre. It is a question of priorities and belt tightening which can generate minimum space of Rs 50 to Rs 60 billion and the amount can be diverted to the agriculture sector. Throughout the IMF programme entire focus was on increase in taxes and not reduction in expenditure. 75 per cent increase in revenue is from indirect taxes.
One of my PhD students came to me in the morning and asked me, sir do you know what the real share of indirect taxes is. I asked him, how much. He said sir if those items are taken in the withholding tax, whose taxes are on electricity, telephone etc then on each RS 100 that is collected Rs 80 are indirect taxes. This is the situation in our country.
AI: These are taxes which are being paid by common people like us.
HP: The concessions which are being given to rich people, figures given by the FBR in this report are about Rs 60 billion. Another student's calculation reveals that the exemptions given to rich people are about Rs 500 billion.
AI: Would that promote productivity?
HP: Exemption was give on capital gains during Musharraf period. Thanks to God market is growing now and our index is also accepted in emerging market. Not a single penny was collected on capital gains during Musharraf period. Some years ago Rs 15-20 billion was brought as revenue with great difficulty. Do you know market capitalisation went from where to where? Do you tax properties? You are doing nothing.
AI: I will mention Dr sahib your study where you had mentioned that if we tax our stock market like India does there is great potential. We are generating currently Rs 1-2 billion only from this.
HP: the potential is Rs 100 billion. Our stock market did not grow speedily last year because the economy was doing well. It was because people were divesting from industry and going in other areas like property and trade.
AI: And that is unfortunate. I would now want to focus on GDP growth. According to you GDP growth is 3.1 percent while the government is claiming that it is 4.7 percent. Other macroeconomic indicators are linked to the GDP growth rate, like debt to GDP ratio, percentage of revenue to GDP. I would also like you to focus on borrowing. The biggest charge levelled at this government is that borrowing has crossed all limits.
HP: During the last three years this government's gross external borrowing to finance the budget deficit is $21 billion.
AI: Would you like to tell the viewers how much is our foreign exchange reserves?
HP: currently $16 billion or $16.5 billion. To finance the budget deficit the government borrowed $7 billion annually from abroad - some were expensive loans, others not that expensive. To make it clear let's make a comparison. Last government of PPP borrowed $17 billion in five years. This government borrowed $21 billion in 3 years. The annual rate of borrowing is double. Our children will have to return this money.
AI: And the government did not put this money into productive sectors?
HP: They put it in reserves. Your question about key macroeconomic indicators linked to GDP growth rate is a very good question. If GDP rate changes what will be its effects on macroeconomic indicators? It brings improvement in something like tax to GDP ratio because its base decreases and in others it is bad. You mentioned debt. Have a look at the State Bank of Pakistan (SBP) figures on public debt. It reached 66 percent of the GDP in the month of March while the government is claiming 63 percent by the end of the year and I believe it may reach up to 68 percent by end June. When this government came into power it was around 63 percent or over 62 percent. Debt has increased massively which is worrisome. Finance Minister wants to change the definition of public debt in Finance bill that would automatically reduce it. He wants to reduce it through definition.
AI: Do you remember it was done by Hafeez Sheikh as well. He had changed the food basket to reduce the inflation figure.
HP: Fiscal responsibility and debt limitation act is a good act of 2005 where public debt limitation definition has been given. We have to follow that definition. They want to oust (take out) two things from debt - debt of public sector enterprises which you know where it has been reached like in power sector and, secondly, liabilities. This is not right. Of course the bill will pass as the government is in majority. It is regretted that people like us are left in the country to reveal such things otherwise such matters would remain concealed.
AI: As you stated at the start of the programme you asked senior government officials to come and sit and discuss all the issues relating to data with you and your team and they have not come back to you. Wherever the ministers go they insist that their figures are right.
HP: Foreign ambassadors of big countries in Pakistan wished to meet me. IMF people also tried but have not succeeded. I would like to talk inside my country. I would not meet these people. It is clear.
AI: The debt to GDP ratio figures given by you show that the situation would become worse in time. When do you think we will reach the stage of un-sustainability as did Italy and Greece?
HP: European Union Central Bank has been following an expansionary policy and supported these countries (Italy and Greece). If European Union was not there what would these countries do? The problem with us is that Paris debt rescheduling is expiring this year. You will be surprised to hear that the government wants to procure $4 billion commercial borrowing in the upcoming year.
AI: For the outgoing financial year government had budgeted $200 million loans from commercial banks abroad while it has taken $1.6 billion from them so far and this is commercial borrowing with low period of repayment and high interest rate.
HP: The second surprising thing is that after the IMF, World Bank and ADB are also reducing their support. Program loans and projects loans would become less than half for the coming year. These are development loans which have a grace period as well.
AI: We come back to CPEC. That is the only way out for us and remittances.
HP: We all pray that CPEC is a success. It is a big achievement of the Prime Minister and the government. But I have to say with regret that implementation is very slow. For the outgoing financial year Rs 340 billion was earmarked for different CPEC related infrastructure projects. Till the end of next year only 20 percent of the allocation will be spent ie 20 percent in two years. Will it take ten years to implement CPEC? In fiscal year 2017 you are giving Rs 40 billion for projects of Rs 340 billion. These people are not giving priority to CPEC it deserves.
AI: Last disbursement of the IMF is expected some time September and till their leverage budget applicability will remain in place but as the Fund programme ends, the government may start pumping money as they are going in election mode.
HP: You can do it if you are sovereign. If you are going for $4 billion commercial borrowing and people come to know that you are on the brink it would not happen.
AI: We are running out of time, you said you had some breaking news for our viewers.
HP: It is regretted that after further research it has been proved that our economy has entered a deflationary phase, it means that prices have declined, which is good from one point of view but it shows that dynamism of the economy has ended. If we take 3.1 percent growth, productivity has further declined.
Government stated that inflation is 2 percent of deflator but according to our estimates it is negative 2.5 percent. If you combine 3.1 percent and negative 2.5 percent together it shows growth is zero or very nominal. No wonder purchasing power is ending. It is regretted and my last words are that I am a professor and have no political agenda, just talk to us. We tried three times at highest level, but they did not bother to reply. We are working for our country. I thank you and Aaj TV for putting good questions and giving me a chance to show the importance of our research.