Tag Archives: inflation

‘Change comes from policy, not budgetary handouts’- Nadeem Ul Haq, Planning Commission Chief

Saadia Gardezi talks to Dr Nadeemul Haque, deputy chief of Pakistan Planning Commission and chancellor of Pakistan Institute of Development Economics, about the new budget and the new growth strategy- The Friday Times, 11th June, 2011

TFT: To what extent do you think the Ministry of Finance has been successful in making a budget that can draw Pakistan out of its current downslide? Economists like Shahid Javed Burki have said it is a disappointing budget. Are these concerns well founded?

Dr Nadeemul Haque: I think the ministry did as well as they could with the situation they have. We tend to think that the budget solves all problems of the economy. It cannot and it does not. That’s what the finance minister also said: the budget is just one part of government policy. The budget is just there to clarify expenditures and revenues. In Pakistan, we expect too much of the budget and seldom focus on the policy.

TFT: Do you think the current budget removes barriers to private investment mobilisation?
NH: I don’t know if it is the responsibility of the budget to do this. The budget is about what is and what is expected to come. For the impediments in the private sector you need a good growth strategy. And nobody reads the growth strategy.

TFT: One proposal of the budget is slashing subsidies, including those to the power sector, from Rs395 billion in 2010-11 to Rs166 billion. In the current fiscal, power sector subsidies alone remain more than Rs200 billion. What problems do you foresee with regards to cutting subsides?
NH: If the cutting of the subsidies means creating efficiency, it’s not going to cause problems. With subsidies to the power sector there’s a lot of wastage and theft. Line losses have to be decreased. On the other hand, subsides to the agriculture sector have not been touched.
The creation of efficiency and the movement away from protecting and subsidising is an important part of a reform we are trying to push for. Yes there will be opposition and some short term problems with cutting useless expenditures but hopefully we will grow.

TFT: The budget speech also promises to reduce inflation by half, to 9% in 2011-12. Do you think this is possible or is the government being too optimistic?
NH: Yes it can, I don’t think there is anything to stop us from moving in the right direction. If we control money supply, stop printing more money and keep the deficit small, inflation can come down. This requires strict fiscal discipline, but why not? Just because you get into trouble doesn’t mean you can’t grow up.

TFT: There has been a lot of discussion in the media that this is not a pro-poor budget. What is a pro-poor budget and is this budget pro-poor?
NH: I don’t think the budget allocations can be thought in terms of being less or more pro-poor. There a set amount that has to be given out. Now there is a huge allocation made for the Federal Public Sector Development Programme (PSDP), and I suppose you could call that pro-poor. The budget makes allocations for these sorts of development expenditures. It doesn’t make policies to tackle poverty, unemployment or underdevelopment.
For policy you have something like the growth strategy. A policy strategy that can guide the government towards better growth and expansion. With growth, employment will be created so that people can benefit. Making a concerted effort to reform the economy to encourage investment, entrepreneurship and growth to create new jobs is what is pro-poor. Handouts given in the budget are not pro-poor, creation of new jobs is. It doesn’t make sense to rely on budgetary handouts for poverty alleviation.

TFT: In the Planning Commission’s new growth strategy, the private sector is the growth-driver in an open market environment. Do you think the budget is structured according to this growth strategy?

NH: Yes it is. The budget simplifies the tax structure and the tariff structure and so encourages the private sector. This fits very well with the strategy to build an open economy. We have an economy that is often closed down for the sake of a few and we protect sections without viable economic reasons to do so. If we can stop doing that, stop regulating the economy for the sake of a few people, then we can create more space and create competitive markets. The budget is complementary to the growth strategy.

TFT: Are the provinces on board with the growth strategy?
NH: The growth strategy does not operate in a command economy, where we tell people what to do. It is a vision and a way forward. It talks of creating space for knowledge, for entrepreneurship, technology and capital formation. With the strategy we talked to the government and various ministries and everyone seem to largely support it and appreciate it.

TFT: Previous governments have also focused on growth led by the private sector. What is different about this growth strategy?
NH: Simply advocating private sector growth does not mean much. We have been talking about private sector-led growth for a long time. We are talking about entrepreneurship in this report. Encouraging entrepreneurship is going to create much more innovative competition.

TFT: How long are the reforms outlined in the growth strategy going to take? 
NH: A time frame has not been specified in the strategy. Reforms will take a long time, and at the end of the growth strategy we have defined the process. The government will need to stop competing with the private sector and provide public goods that have a higher social rate of return than the private rate of return, as well as transparent rules.
If the leadership takes an interest, then reforms can be implemented successfully. We have to create an open economy and society. The old 3-year and 5-year plans don’t work. They only worked in the Soviet Union. We are talking of gradual reform.

TFT: Can these reforms happen in the current political scenario? Will there be political opposition?
NH: Political opinion does not exist in isolation from public opinion. If the society wants change, then it cannot be stopped. I am looking towards ownership of these ideas in the society. If you accept these ideas, if universities buy into this type of a strategy, if people are wiling to talk about reform, then the political leadership will as well.

Pakistans Growth strategy can be downloaded as a pdf here



‘Not a panacea’- Inflation, private investment and growth in the new Budget 2011-12

Published in the Friday Times, June 10, 2011 in their issue on the budget. 

Current GDP growth estimates for Pakistan are at 2.4%. A figure insufficient to create jobs for the 2 million strong that join the labour force every year. According to IMF estimates an annual growth figure of 8% is needed to absorb the labour force while our target is 4.2%. Inflation, the evil twin of growth, is likely to increase with soaring oil and food prices threatening the current account into deficit. And then with the sad state of our finances, what of foreign donor confidence and private investment?

The budget has come under heat from major economists. Syed Akbar Zaidi for one said that “the finance minister’s speech yesterday was empty and disappointing. It was devoid of merit and failed to identify or address any of Pakistan’s numerous problems.” He went on to say that the budget panders to politicians due to its proximity to the election. Former Finance Minister Shahid Javed Burki was of the view that Hafeez Shaikh’s team consisted of brilliant minds, yet didn’t do much with the budget. Burki is of the opinion Hafeez Shaikh did well with the privatisation portfolio under Pervez Musharraf’s government and should have used his experience to hand over some of the poor performing public sector corporations. “Where will this budget take the economy over the next financial year? Not very far. It will not revive economic growth, not reduce the dependence on foreign flows, not reduce the incidence of poverty, nor integrate the economy with rest of the world.” But as Finance Minister Hafeez Shaikh says, it’s a budget not a panacea.

Key problems identified in the current Economic Survey released by the State Bank are persistent and high inflation, low growth, low revenue collection leading to a high fiscal deficit that continues to add to the overall debt, and a dramatic fall in the investment rate. As Dr Sohail Zafar, Dean of the Business School at the Lahore School of Economics put it, “It’s a gloom and doom scenario, and all attempts to be consciously optimistic are not supported by sane logic and data.”

Of deficits, inflation and other sins: Consider the 4.2% growth target for instance, not impossible to achieve, not enough for our needs and yet a bit ambitious considering last year’s performance. Other targets like decreasing inflation to 9% seem too optimistic. The idea here is that the smaller deficit target will reduce the printing of money and reduce inflation. All this requires strict fiscal discipline, and actually meeting the 4% fiscal deficit target which we bounded over last year.

The central bank has the same view, that the government tightening its belt will decrease inflation, reduce borrowing costs and encourage consumer demand. However, government borrowings have increased 55% since the end of the last fiscal year. In an interview with Bloomberg (June 4), director of the monetary policy department, Hamza Ali Malik said that further tightening would be difficult, “Low growth, high inflation, rising debt. It’s a nightmare for any economy.” Furthermore, Dr Sohail Zafar says that expectations about foreign resources to meet the deficit seem are not likely to be realized.

The core problem facing Pakistan that affects the situation of government expenditures is of taxation and revenues. The tax policy has been somewhat contradictory. On the one hand the finance minister said that only 1.5 million people have filed their tax returns this year, only half of those who are registered and over 70,000 have been given notices. On the other hand the budget raises the taxable income level by Rs 50,000 to give relief. Then there’s a 15% pay increase for government employees, above the 50% increase given last year. How’s that for fiscal discipline?

The one percent decrease in the GST rate, from 17% to 16% will hardy impact inflation. As Irfan Hussain writes in Dawn (7 June), “If international prices of sugar are rising in Chicago, not even a Supreme Court suo motu notice will keep them down in retail outlets across Pakistan. Artificially low prices enforced by the state will only succeed in driving stocks underground, and encourage the creation of a black market.” Which brings us to the issue of subsidies and price control.

Does subsidy removal cause inflation? The decrease in GST is to offset the effect of the withdrawal of exemptions in fertilisers, pesticides, tractors, leather, surgical items, sports goods, carpets and some other sectors. There has been much hue and cry over this cut that this would cause inflation. Speaking at a post-budget press conference on 4th June, Dr Hafeez Shaikh said this would not happen because the subsidies would be made more targeted so they were not misused by wealthy people.

Subsidy removal, without spending the associated savings, may increase poverty due to the rise in input costs relative to the selling prices of products sold by most firms and farms. But the government’s fiscal policy will ultimately determine the effects. Inflation resulting from subsidy removal can be reduced with a conservative fiscal policy. Inflation comes from two sources: the initial increase in general prices due to the higher cost of inputs and more spending by the government as funds are freed up. Therefore, if their goal is to reduce the inflationary effect, the government has to keep spending to a minimum, focusing only on areas that can increase the country’s productive capacity. Our focus is defence (Rs 495 billion) and interest payments (Rs791 billion).

Even with an expansionary policy, to keep inflation low, government spending of associated savings needs to increase purchasing power and raise production. Wasteful public projects which do not add much to the country’s productive capacity should be avoided and private production encouraged. The new growth strategy by the Planning Commission of Pakistan focuses solely on the private sector as an engine of growth.

Pakistan and the private sector: Private investment in Pakistan has been shrinking for some time. Investment in the large-scale manufacturing has declined by 32% (compared to 17% last year). The investment-to-GDP ratio dropped to below 17% last year because of decreasing private investment. The manufacturing sector has been hit the hardest.

An improvement in electricity generation will also have a large impact on production levels and costs in the country. It should kept in mind, however, that such investments may take years to materialise.

It seems that some efforts have been made in this budget to aid private sector growth by reducing some taxes and duties, but they may be too lean. All special excise duties have been abolished. Regulatory duty on 392 items have been abolished. It is now limited to luxury vehicles, cigarettes, arms and ammunition, betel nuts and sanitary ware. Federal excise duty on cement will be phased out in three years. The federal excise on beverages has also been reduced from 12% to 6%. The tax rate on interest income from government securities will be 10% with no tax return requirement. The finance minister also announced on June 4 a five-year tax holiday on loan-free equity investments.

It is unclear whether this budget will do well for industry. Dr Zafar is of the view that there is a disconnect between monetary policy and the fiscal policy embodied in the budget. “Interest rates may be low theoretically, but are too high practically to push the private sector. New investments in the industry are not likely to show improvement during the next year.” But at least no new taxes were imposed to hurt investment.

Saadia Gardezi is a political economist

State of the economy- Towards recovery?

The state of the economy is shaky but not unsalvageable according to State Bank reports. Below is a summary of the recent issues and policies under the State Bank

The Friday Times, November 19-25, 2010

Macroeconomic indicators: According to State Bank (SB) reports, the economy showed an improvement in macroeconomic indicators during the 2009-10 fiscal year. The economy grew at a rate of 4.1 percent, compared to 1.2 % in 2009. Other signs for improvement seem to be a decline in annual inflation and current account deficit.
The decline in the current account overshadowed worsening of the financial account and thus allowed the external account balance to record a surplus in FY10 (after a gap of two years). Foreign exchange reserves rose to $16.9 billion by end-June 2010. The combination of declining imports and higher reserves meant that the import coverage improved.

Yet the 4.8 percent depreciation of the rupee during FY10 is a puzzle. According to the Business Recorder (Oct 26) the explanation lies in the fact that the larger part of the financing for the current account deficit was in the form of loans from multilateral agencies (predominantly the IMF), which do not enter the interbank market. Moreover, the SB had also stopped the provision of liquidity for oil purchases, with the interbank market shouldering this additional demand as well.

Economic Indicators (2009-2010)

Indicators 2006-07 2007-08 2008-09 2009-10 (Jul-Sep)
(Billion $)
17.01 19.22 17.79 19.63 5.24
(Billion $)
30.54 39.96 34.82 31.05 8.21
Trade Balance
(Billion $)
-13.53 -20.74 -17.03 -11.42 -2.97
(Billion $)
5.13 5.15 3.72 2.21 0.39
Foreign Investment
(Billion $)
8.42 5.19 2.67 2.14 0.46
Worker Remittances
(Billion $)
5.49 6.5 7.81 8.91 2.65
Forex Reserves
(Billion $)
15.18 10.83 12.23 16.07 17.10
Exchange Rate
(Rs. / US$)
60.50 71.0 88.90 86.21 85.94
GDP Growth 7.00% 5.80% 2.10% 4.10% 4.10%
Inflation 7.90% 10.30% 13.10% 11.17%

Source: State Bank of Pakistan (SBP), Federal Bureau of Statistics (FBS) Continue reading State of the economy- Towards recovery?