Inflation causes poverty resurgence
LAHORE (May 07 2008): The burden of high prices, especially of basic food items, has become intolerable for poor households while poverty is consequently on the rise again and whatever decline was achieved in poverty appears to have been wiped out. Also, structural problems impeding growth have come dramatically to the forefront with major power shortages and massive loadshedding.
This was stated in the report titled "State of the Economy: Challenges and Opportunities," launched by the Institute of Public Policy (IPP) of the Beaconhouse National University here on Tuesday. The report was prepared by a team of eminent economists-Sartaj Aziz, Shahid Javed Burki, Dr Hafiz A Pasha, Dr Parvez Hasan, Dr Akmal Hussain and Dr Aisha Ghaus-Pasha.
Former chief minister Shahbaz Sharif was scheduled to grace the occasion as Chief Guest but he did not turn up due to his pre-occupations out of the city. However, the Punjab Minister for Excise and Taxation Mujtaba Shuja ur Rehman represented him at the function. Shahid Javed Burki, Dr Hafiz A. Pasha, Dr Parvez Hasan, Dr Akmal Hussain and Dr Aisha Ghaus-Pasha highlighted their views depicted in the report while Sartaj Aziz, Saqib Sheerani and Ameena Syed their views regarding the report.
Addressing on the occasion, Shahid Javed Burki said macroeconomic balances have deteriorated very sharply while inflation has touched record levels this year on the back of three previous years of high single-digit inflation. He was of the view that inflation is the result of two developments ie bad economic management and enormous rise in food prices. He called for evolving a mechanism to provide protection to poor while there must be significant involvement of people in policy formulation.
Burki said the major instrument of economic adjustment, however, must be the fiscal policy. Fortunately, fiscal adjustment can take place in an environment much more favourable than in the 1990s when elected governments had little fiscal space because of the extraordinary burden of interest payments on public debt. He said real public non-interest spending which had shown no increase in the decades of 1990s because of the growing burden of interest payments, has expanded, adjusted for inflation, by over 60 percent during the period 2004-07 and would show a further increase this year because of huge subsidies on oil.
Dr Akmal Hussain said on the occasion that Pakistan is in the grip of gravest poverty circle where some 57 million people are living below poverty line. During the last three years, 11 million people were pushed into ranks of poor. He said the poor in Pakistan continue to face markets, institutions and local power structures which discriminate against their access to resources, public services and governance decisions.
He said for the Musharraf period as a whole (1999-2008), the percentage of population below the poverty line increased from 30 percent in 1998-99 to almost one-thirds currently, with an additional 16 million people being pushed into poverty during this period.
Dr Akmal said the central policy lesson of the economic performance of the Musharraf regime is that poverty levels increased in spite of high GDP growth in later years because of the fact that growth has heavily tilted in favour of the rich and high food inflation was not controlled. He was of the view that policy challenge is to change the composition and structure of growth and take immediate policy decision to address the poverty problem. He proposed extending loans to rural population for buying the animals and giving unused agriculture land to farmers.
Dr Hafiz A. Pasha said that there are major problems that relate to the private sector development and public sector priorities. There is a crisis in the power sector while insufficient investment in generation and distribution and inefficiencies not only increase the costs for the private sector by requiring alternative generating capacity but also result in big large losses for public entities which are a significant drain on public resources, he added. On a year to year basis the inflation in food prices is currently running at 20 percent, he added. He suggested that the government must provide relief to poor masses and middle class, contain non-developmental expenditures, introduce a comprehensive petroleum policy, impose regulatory duty on non-essential imports, levy sales tax on services and also impose capital gains tax on property and stock exchange profits.
The Punjab Minister for Excise & Taxation Mujtaba Shuja ur Rehman said the PML-N government will accord priority to the development of less developed districts of the province while relief will be extended to the poor ensuring food security to them.
He said the PML-N is determined to address the problem of poverty and also take steps for the welfare of public. Sartaj Aziz highlighted salient features of the report while Begum Nasreen Kasuri also graced the occasion. Sartaj said the main objective of the report is to outline a comprehensive economic and governance strategy that will facilitate the tackling of the above mentioned challenges that require the urgent attention of the new leadership.
The report says that Pakistan's economy is once again at a critical juncture. After a period of strong economic expansion, relative macroeconomic stability, and increased foreign investor confidence, over the years 2003-2006, the country is facing very serious economic strains and social challenge across a broad front. Macroeconomic balances have deteriorated very sharply. The erosion of competitiveness of the country's main exports, textiles and clothing, and an upsurge in imports, especially due to high oil prices have led to a large increase in the trade imbalance. This has led to a continuing decline in the level of foreign exchange reserves and in the value of the rupee, the report adds.
In attempting to assess the present position, the report analyses the short-term causes of the economic unravelling as well as the underlying longer term factors that continue to impede our economic and social progress. The main message of the report is that growth, equity, and financial soundness must be pursued simultaneously. The strategic shift being recommended has several mutually reinforcing elements as summarised below:
-- Making a radical macroeconomic adjustment by a sharp cutback and a restructuring of public spending that has grown sharply during the last five years, a determined effort to mobilise tax revenue from segments of society whose contribution to tax revenues has come down sharply and those who escape the tax net; improving incentives for savings and discouraging luxury consumption.
-- Expanding the safety net for the poor by allocating at least Rs 50 billion to minimise the impact of rise in food prices.
-- Making expansion and diversification of exports a central plank of growth revival strategy with special focus on agriculture and promising labour-intensive manufactured exports, based on geographical comparative advantage.
-- Strengthening decentralising by devolving governance and expenditure from the center to provinces and from provinces to local governments.
-- Expanding education at all levels, by improving the quality of public education upto secondary level and increasing outlays for research and development, especially for agricultural research and extension.
The report stresses that the required macroeconomic adjustments must fully safeguard the livelihood of low-income families. Adjustments have to be combined simultaneously with measures that improve governance and service delivery, increase participation and genuinely empower the people, following the return to democracy. In particular, food security of the poor must be protected in order to avoid a big fall in nutrition levels.
This can best be achieved through implementation of well-designed and targeted social safety nets for the poor like income supplements, employment guarantees and food for work program.
The Prime Minister has announced in his 100 day package the intention of his government to launch an employment guarantee scheme in the more backward districts of the country. Initiatives like these have to be implemented on urgent basis, the report added.
The report is in eight parts focusing respectively on the state of the economy, on the strategy for accelerating sustainable growth, on the institutional imperatives for poverty reduction, on the distribution and stabilisation role of fiscal policy, on provincial imperatives for development, on fiscal federalism, on decentralisation of governance and on the promise and potential of Pakistan's exports.
The authors of report believe that, not withstanding the difficulties faced at this time, the economy has the potential for getting back to a high growth path, but one which is more sustainable and inclusive. For this to be realised the state will need to be strongly engaged, but in ways different from the approach adopted earlier. Concerted effort and strong leadership will be required at federal, provincial and local levels, they added.
Business Recorder [Pakistan's First Financial Daily]
