Economic Challenges for the new government

Inheriting multiple deficits
By Kaiser Bengali, Dawn, MArch 1, 2008

THE general elections are over and the electorate has voted for a new dispensation that is democratic and people-centred. However, the new government will have a full roster of challenges to deal with, ranging from healing political schisms to repairing the damage to the economy.

The latter has gained urgency, given that the economy is in a state of deep crisis on some fronts and impending crises on others.

The situation is somewhat akin to 1988, when Gen Ziaul Haq’s military regime bequeathed a debt mountain to the successor governments. The Musharraf regime, commencing with the promise of the seven-point agenda, is bequeathing at least seven deficits to the incoming government on the economic front alone.

The first deficit, demanding the most urgent attention, relates to food. Food deficits have been a recurrent event over the last eight years. Crises emanating from shortages have been experienced with respect to sugar, onions, tomatoes and, now wheat and wheat flour. The latest crisis has been manufactured, first, by incorrect estimation of wheat crop output, secondly, by mismanaging wheat export and import deals, and thirdly, by failure to enforce the writ of the state on the country’s borders. The regime’s performance with respect to earlier food shortage crises has been similarly marked by incompetence.

Underlying the wheat crisis is the second deficit with respect to the erosion of the integrity of economic data. The fact is that the position of the director-general of the Federal Bureau of Statistics (FBS) – the country’s principal data collection agency – has been left vacant since June 2003, raising questions across the board about the accuracy of data. Allegedly, the absence of the organisation’s head allowed senior finance ministry officials to pressure lower ranking FBS officials into doctoring the data.

Allegedly again, it is understood that the regime’s fetish with showing high GDP growth rates led it to ‘demand’ that output figures be padded upwards somewhat. Accordingly, it appears that while food ministry officials ‘prepared’ the estimates of wheat output, commerce ministry officials — unaware of the extent of the padding – used the estimates to allow export of wheat. The shortage signals that went out in the market from the belated realisation that initial announcement of a bumper crop were incorrect laid the basis for the crisis to erupt.

The third deficit the country is beset with is energy, particularly electricity. In 1999, installed capacity for electricity production was 15,663 MW, which increased over a five-year period by 23 per cent to 19,252 MW by 2004. The 3,500 plus MW addition occurred on account of power sector investment initiatives undertaken during the much-maligned 1990’s. There has been no attempt since 1997 to increase electricity output capacity. The current power outages can be seen in this context.

The fourth deficit, which is serious from the perspective of macroeconomic stability, is the budget deficit. The bailout provided to Pakistan in the wake of 9/11 created a large fiscal space that led to halving the fiscal deficit from an average of seven per cent of GDP in the 1990s to an average of 3.5 per cent over 2002-04. Now the budget deficit has crossed the five percentage mark and continues to rise.

The fiscal deficit encompasses the revenue deficit and the resulting public investment deficit. One reason for the rising deficit is the shortfall in revenue collection, the other is rising current expenditures. The Musharraf regime has decided to meet the fiscal crisis by cutting development expenditure by Rs70bn; thereby impacting employment creation adversely. The growing fiscal crisis that the incoming government will face will also constrain its capacity to meet the large backlog of unmet demand for housing, health, education, and social security of the people – unless a programme of expenditure switching is put in place.

The fifth deficit, which is also serious from the perspective of macroeconomic stability, is the current account deficit. The current account deficit ranged between 2.8 per cent to 7.2 per cent of GDP over the 1990s. Thanks to 9/11 again, Pakistan recorded current account surpluses during 2002-04. The deficit returned from 2005 onwards, has now crossed the five-percentage point mark, and continues to rise. The current account deficit is fuelled by rising imports and stagnant exports, leading to a record trade deficit that is now almost equal to the country’s official foreign exchange reserves.

The deficit on the services account has also begun to rise sharply due to the rapidly rising reverse remittance of profit by foreign companies operating in the country. Unfortunately, foreign investment has not been channelled into sectors that would enhance exports. Rather, it has been channelled into sectors where revenues are earned in rupees and profits are remitted in dollars. Resultantly, the incoming government is likely to face a balance of payments crisis within a year or two.

The sixth deficit, erosion of purchasing power, is a product of the sum of monetary and fiscal policies that led to increase in money supply and raised inflation rates from an average of 3.5 per cent during 2000-03 to over 10 per cent during 2005-07. A 10 per cent inflation rate in any one year means that a family that can purchase Rs1000 worth of commodities at the beginning of the year can purchase only Rs900 worth of commodities at the end of the year.

Over the same period, average food inflation jumped from less than three per cent to over 12 per cent. Given that food comprises between 60-80 per cent of the household budgets of the poor, higher food inflation hurt the poor more. The purchasing power deficit arising out of inflation is thus greater for the poor. Claims about reduction of poverty have then to be seen in the light of the data deficit mentioned earlier.

Last, but not the least, is the employment deficit. Official statistics claim that the unemployment rate has declined from 7.69 per cent in 2004 to 5.35 per cent in 2006 on account of additional employment of five million workers in the two years. A disaggregated view of this statistic exposes the fiddle. In 2002, 20.5 per cent of the non-agricultural labour force was employed in the formal sector and 37 per cent in informal sectors. In 2006, the share of formal sector employment had declined to 15 per cent and that of informal sector increased to 41 per cent.

The decline of formal sector employment is not a positive development, given that informal sector jobs are generally low wage, lacking in job and income security, and environmentally more hazardous. And in any case, there do not exist any firm mechanism to measure informal sector employment; as such, the estimates are open to manipulation. The same is true of unpaid family labour, which is shown to have grown a phenomenal 88 per cent. Clearly, growth in informal and unpaid family labour has been manipulated to cover up for the growing employment deficit created over nearly a decade.

The Musharraf regime’s gift of the seven deficits to the incoming government is a tribute to the ‘management by gimmickry’ style of his economic managers. As in 1988, it will be left once again to the representatives of the people to begin the task of cleaning the messed up stables. A complete reappraisal of the economic policy framework is clearly in order.