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Opinion Economic management: promises vs performance
Dr Muhammad Yaqub
Wednesday, February 23, 2011
The website of the Federal Ministry of Finance states that its mission is to pursue sound and equitable economic policies that put Pakistan on the path of sustained economic development and macroeconomic stability with a view to continuously and significantly improving the quality of life of all citizens through prudent and transparent public financial management carried out by dedicated professionals.
It is worthwhile to review the ground realities to determine whether or not the government is any closer to achieving the economic objectives of sustained economic development, macroeconomic stability and improvement in the quality of life of the people, or at least is seriously pursuing prudent and transparent public financial management policies that it promises to adopt to achieve those objectives.
During the last three years, real GDP increased at an annual average rate of three per cent whereas commodity producing sectors recorded even a lower annual growth rate of only 1.9 per cent in the same period. Poor performance of the commodity producing sectors would have led to shortage in supply of strategic commodities and a rise in their prices even if prudent demand management policies were pursued. But the emerging supply shortages were persistently reinforced by excessive aggregate demand. Money supply increased by an annual average rate of about 13 per cent during the same period mainly due to an annual increase of about 40 per cent in government borrowing from the banking system. As a result, during this period, Sensitive Price Index went up by an annual average rate of 17 per cent, Whole Sale Price Index by 16 per cent, and Consumer Price Index by 15 per cent. Obviously, instead of realising sustained economic development and macroeconomic stability, as promised in the above statement of the government, the country suffered from low growth and macroeconomic instability during this period.
The third objective of achieving a continuous and significant improvement in the quality of life of all citizens remained an unfulfilled dream. Not only has there been no steady and significant improvement in the quality of life of the majority of the population, there are indicators that in fact show deterioration. According to the latest UN report, Pakistan ranks 125 out of 169 countries in UN human development index, placing it just above Congo. About 31 per cent of the population lives below the poverty line, and more than 60 per cent live on less than two dollars a day. 75 per cent of the population does not have access to safe drinking water. One in ten children dies before the age of five, and 38 per cent of the children are malnourished. The primary school enrolment rate is the lowest among the South Asian countries. One third of the children who do get enrolled in primary schools drop out by Grade 2.
Recently, more people have fallen below the poverty line, there has been recurring shortage of essential goods of daily use, gas and electricity load shedding is a daily phenomenon, rising costs of electricity, petroleum products, gas and other items of daily use have caused economic hardship to a large segment of the population, there are increasing incidences of suicide due to economic hardship, children are put on sale by parents unable to feed them , and frustration is finding its way in increasing theft, robbery, kidnapping and general breakdown of law and order. The law abiding citizens feel increasingly more insecure, and there is widespread exploitation of the poor majority by the rich and powerful minority. The writ of the government is being challenged and laws are not applied universally. In short, all indicators show that the quality of life has been deteriorating rather than improving for the majority of citizens of Pakistan. It is obvious that the government has failed to achieve its third economic objective of improvement in the quality of life of the majority of the people as well.
But let us see whether or not the outcome reflects the impact of unsound economic management. Looking at the situation from the policy side, it is clear that imprudent and inequitable management of the public finances is mainly responsible for low growth, high inflation and poor economic and social conditions of the majority of the people. On the taxation side, the tax to GDP ratio has gradually declined to about nine per cent in Pakistan, which is the lowest in the world. If the underground economy that is not captured in the national account statistics, and is reported to be around 55 per cent of the recorded economy, is taken into account the tax to GDP ratio would fall to 6-7 per cent of recorded and unrecorded GDP. The bulk of the tax revenue is collected through indirect taxes which fall heavily on the poor and leads to increase in prices and income inequality. Direct taxes constitute only about one third of total tax revenue. Moreover, direct taxes are collected only from a small segment of the population consisting of salaried class and those engaged in the corporate sector. The landlords, professional groups, service sector and people operating in the underground economy mostly escape direct tax payments. Narrow tax base, inefficiency in tax collection and corruption make direct taxes very regressive in effect. Such a taxation policy is anything but sound, prudent or equitable and could not help promote social and economic objectives set by the government.
On the spending side, defence and debt servicing expenditures consume almost all the government revenue. Given the low tax-GDP ratio, expenditure squeeze has been applied in those areas that adversely affect the lives of the poor. As a result, expenditure on health, education, social services and development as a percentage of total expenditure and of GDP has remained way below the levels prevailing in other developing countries or those recommended by UNO. According to UNICEF, expenditure on education is about two per cent of the total federal government expenditure in Pakistan as compared to 17 per cent in Bangladesh, 10 per cent in Sri Lanka and four per cent in India.
Expenditure on health is one per cent of the total federal government expenditure in Pakistan, as compared to seven per cent in Bangladesh, six per cent in Sri Lanka and two per cent in India. Additionally, total spending on development as a percentage of total government expenditure has been on the decline. Development expenditure as a percentage of total provincial and federal government expenditure declined from 26 per cent in 2007-2008 to 21 per cent in 2009-2010. Moreover, whatever is spent on development is financed by internal and external borrowing. In 2009-2010, total federal government expenditure was about 17 per cent of GDP, whereas total federal government revenue receipts were about nine per cent of GDP leaving a gap of about eight per cent of GDP that was filled through internal and external borrowing. Internal borrowing, mostly from the banking system, is by nature inflationary and leads to increase in prices which hurt the poor most. External borrowing in reality is a deferred tax to be paid with interest by the next generation. Such a pattern of expenditure distribution in public financial management cannot be considered sound, prudent or equitable and it could not help achieve the objectives of sustained economic development, macroeconomic stability and improvement in the quality of life of people.
There is thus an inherent contradiction between the stated economic objectives and the current financial and economic management that could help achieve them. The ground reality is that the country is on a wrong path in terms of economic trends and economic policies. In the interest of consistency, the government is well advised to either change the course of its policies or revise its stated objectives. The public also should be aware that there is no evidence that lofty promises made by the government are meant to be fulfilled and accordingly they need to manage their own expectations realistically, and exercise proper choices in the election of their leaders when given an opportunity.
The writer is a former governor of State Bank
Dr Muhammad Yaqub
Wednesday, February 23, 2011
The website of the Federal Ministry of Finance states that its mission is to pursue sound and equitable economic policies that put Pakistan on the path of sustained economic development and macroeconomic stability with a view to continuously and significantly improving the quality of life of all citizens through prudent and transparent public financial management carried out by dedicated professionals.
It is worthwhile to review the ground realities to determine whether or not the government is any closer to achieving the economic objectives of sustained economic development, macroeconomic stability and improvement in the quality of life of the people, or at least is seriously pursuing prudent and transparent public financial management policies that it promises to adopt to achieve those objectives.
During the last three years, real GDP increased at an annual average rate of three per cent whereas commodity producing sectors recorded even a lower annual growth rate of only 1.9 per cent in the same period. Poor performance of the commodity producing sectors would have led to shortage in supply of strategic commodities and a rise in their prices even if prudent demand management policies were pursued. But the emerging supply shortages were persistently reinforced by excessive aggregate demand. Money supply increased by an annual average rate of about 13 per cent during the same period mainly due to an annual increase of about 40 per cent in government borrowing from the banking system. As a result, during this period, Sensitive Price Index went up by an annual average rate of 17 per cent, Whole Sale Price Index by 16 per cent, and Consumer Price Index by 15 per cent. Obviously, instead of realising sustained economic development and macroeconomic stability, as promised in the above statement of the government, the country suffered from low growth and macroeconomic instability during this period.
The third objective of achieving a continuous and significant improvement in the quality of life of all citizens remained an unfulfilled dream. Not only has there been no steady and significant improvement in the quality of life of the majority of the population, there are indicators that in fact show deterioration. According to the latest UN report, Pakistan ranks 125 out of 169 countries in UN human development index, placing it just above Congo. About 31 per cent of the population lives below the poverty line, and more than 60 per cent live on less than two dollars a day. 75 per cent of the population does not have access to safe drinking water. One in ten children dies before the age of five, and 38 per cent of the children are malnourished. The primary school enrolment rate is the lowest among the South Asian countries. One third of the children who do get enrolled in primary schools drop out by Grade 2.
Recently, more people have fallen below the poverty line, there has been recurring shortage of essential goods of daily use, gas and electricity load shedding is a daily phenomenon, rising costs of electricity, petroleum products, gas and other items of daily use have caused economic hardship to a large segment of the population, there are increasing incidences of suicide due to economic hardship, children are put on sale by parents unable to feed them , and frustration is finding its way in increasing theft, robbery, kidnapping and general breakdown of law and order. The law abiding citizens feel increasingly more insecure, and there is widespread exploitation of the poor majority by the rich and powerful minority. The writ of the government is being challenged and laws are not applied universally. In short, all indicators show that the quality of life has been deteriorating rather than improving for the majority of citizens of Pakistan. It is obvious that the government has failed to achieve its third economic objective of improvement in the quality of life of the majority of the people as well.
But let us see whether or not the outcome reflects the impact of unsound economic management. Looking at the situation from the policy side, it is clear that imprudent and inequitable management of the public finances is mainly responsible for low growth, high inflation and poor economic and social conditions of the majority of the people. On the taxation side, the tax to GDP ratio has gradually declined to about nine per cent in Pakistan, which is the lowest in the world. If the underground economy that is not captured in the national account statistics, and is reported to be around 55 per cent of the recorded economy, is taken into account the tax to GDP ratio would fall to 6-7 per cent of recorded and unrecorded GDP. The bulk of the tax revenue is collected through indirect taxes which fall heavily on the poor and leads to increase in prices and income inequality. Direct taxes constitute only about one third of total tax revenue. Moreover, direct taxes are collected only from a small segment of the population consisting of salaried class and those engaged in the corporate sector. The landlords, professional groups, service sector and people operating in the underground economy mostly escape direct tax payments. Narrow tax base, inefficiency in tax collection and corruption make direct taxes very regressive in effect. Such a taxation policy is anything but sound, prudent or equitable and could not help promote social and economic objectives set by the government.
On the spending side, defence and debt servicing expenditures consume almost all the government revenue. Given the low tax-GDP ratio, expenditure squeeze has been applied in those areas that adversely affect the lives of the poor. As a result, expenditure on health, education, social services and development as a percentage of total expenditure and of GDP has remained way below the levels prevailing in other developing countries or those recommended by UNO. According to UNICEF, expenditure on education is about two per cent of the total federal government expenditure in Pakistan as compared to 17 per cent in Bangladesh, 10 per cent in Sri Lanka and four per cent in India.
Expenditure on health is one per cent of the total federal government expenditure in Pakistan, as compared to seven per cent in Bangladesh, six per cent in Sri Lanka and two per cent in India. Additionally, total spending on development as a percentage of total government expenditure has been on the decline. Development expenditure as a percentage of total provincial and federal government expenditure declined from 26 per cent in 2007-2008 to 21 per cent in 2009-2010. Moreover, whatever is spent on development is financed by internal and external borrowing. In 2009-2010, total federal government expenditure was about 17 per cent of GDP, whereas total federal government revenue receipts were about nine per cent of GDP leaving a gap of about eight per cent of GDP that was filled through internal and external borrowing. Internal borrowing, mostly from the banking system, is by nature inflationary and leads to increase in prices which hurt the poor most. External borrowing in reality is a deferred tax to be paid with interest by the next generation. Such a pattern of expenditure distribution in public financial management cannot be considered sound, prudent or equitable and it could not help achieve the objectives of sustained economic development, macroeconomic stability and improvement in the quality of life of people.
There is thus an inherent contradiction between the stated economic objectives and the current financial and economic management that could help achieve them. The ground reality is that the country is on a wrong path in terms of economic trends and economic policies. In the interest of consistency, the government is well advised to either change the course of its policies or revise its stated objectives. The public also should be aware that there is no evidence that lofty promises made by the government are meant to be fulfilled and accordingly they need to manage their own expectations realistically, and exercise proper choices in the election of their leaders when given an opportunity.
The writer is a former governor of State Bank
