11
August

Pakistan’s Economy After Brexit

Written By: Dr. Zafar Mehmood

On June 23 this year, in a historic referendum people of United Kingdom voted for a British exit, or Brexit, from the European Union (EU). Majority people voted against remaining in the EU. As soon as the result of the vote was declared, it sent shock waves throughout the world. It created turmoil-like situation, which resulted into immediate loss of $2 trillion across the global stock markets. London stocks were down by 16%, Frankfurt lost 10% and Paris 8%. In response to the panic situation, the central banks’ governors around the globe started pacifying their investors and others by announcing that the central banks will provide needed liquidity to markets for averting volatility so that currencies do not face any major burden. Nevertheless, the pound fell to its lowest value since 1985. It depreciated by 10% against U.S. dollar, while yen appreciated by 13% against pound. These were the immediate reactions. However, few expect a full scale financial crisis like that of 2008 great recession when the financial giant Lehman Brothers collapsed.


There remains a fear that these crises may have long term adverse economic implications not only for the UK but also for the rest of the world economy. Keeping this in view, the new Prime Minister of England, Theresa May is trying to create a future for the UK out of the EU zone. She is initiating concrete actions to retain UK’s access to EU’s single market, satisfying the wishes of anti-immigration and anti-globalization voters. For this, she is creating a right balance between a control on immigration and at least partial free trade access to the EU single market zone. To avert future surprises, UK does not want to start withdrawal talks anytime soon, though the EU leaders wish this to happen quickly. EU leaders are taking hardline to exit so that anyone leaving the EU in the future will have to pay a price. Nonetheless, delay and uncertainty have already injured the UK economy.
As the UK is starting exit negotiations with the EU, it wants to assure that its economic future would be linked to the EU single market. But the UK government does understand that other countries of Europe (Iceland, Norway and Switzerland) who have not joined the EU but are given free trade access to EU area, regularly contribute to the EU budget and allow free movement of EU workers. Thus, the UK will have to accept these conditions before having free trade access to the EU single market.


For Pakistan, any major development taking place in its key markets, such as the UK and the EU, certainly have important repercussions for its domestic economy. Let’s assess how Pakistan’s markets reacted to the Brexit news and how its economy will perform in the future to developments in the UK and the EU?


With referendum results on Brexit, Pakistan’s stock market lost over 1,400 points, with textile and auto sectors bearing the major brunt. As Pakistan Stock Exchange (PSX) is now well connected with the global markets, it took a hard hit after the Brexit decision. The benchmark index was down by 2.2% from a day earlier. After losing over 1,400 points in the early trading, the KSE-100 Index recovered some of the losses but the day’s loss was 848 points.


Publicly traded textile companies at the stock market were badly affected. The EU and the UK are major destinations of Pakistani textile products. Investors foresee export-oriented textiles companies listed on PSX will be facing problems in the future, as a cheaper pound will make Pakistani exports uncompetitive in the UK market.


With the news of Brexit, yen appreciated significantly. It appreciated by about 3% against Pakistani rupee in a single day’s trading. A stronger yen inflicts the earnings of auto companies based in Pakistan, because it results into rise in cost of parts imported from Japan. But as soon as the effect of yen appreciation will get neutralized so will the cost of Japanese parts.


In the short term, fears would remain that foreign investors might pull out some of their investments from Pakistani bourses. According to the National Clearing Company of Pakistan Limited, foreign institutional investors were net sellers of Rs. 506.1 million during the trading session on June 24. If government and the central bank keep on ensuring sufficient foreign and domestic liquidity flows to the market, it will stay panic free and fears will disappear shortly.


The price of gold increased by 3% in the local market, although in international market it increased by 5.3%. With volatility remaining in the FOREX market, gold prices are likely to rise as assets holders will come out of foreign currencies and will substitute it with gold.


With Pakistani rupee becoming stronger viz-a-viz euro and pound, exports will lose competitive strength as they will become expensive for the EU and the UK consumers, causing export demand to decline. At the same time, an economic slowdown and hence a fall in incomes in the EU and the UK will also cause a decline in demand for Pakistani exports. As our major exports to the region are textiles, clothing and leather, producers of these goods will face a slowdown in their export earnings. Our exporters are concerned about developments in the UK and they look forward to the government as to how it handles its affairs after the official break away of the UK from the EU.


As long as the UK was part of the EU’s customs union, it used to practice common external tariffs as were used by other EU members. However, once UK quits the EU, it may adopt different tariff levels for the rest of the world. A new tariff structure in the UK will affect Pakistani exports depending on whether it becomes more favourable for the rest of the world or more stringent than before.


The EU awarded the Generalized System of Preferences Plus (GSP+) status to Pakistan in December 2013 for the next 10 years. It has helped the country to add over $1 billion per annum of exports. The government of Pakistan should re-negotiate at some appropriate time to get the same tariff concessions if not better from deals with the UK and the EU.


Pakistan’s exports to the UK may increase if some trade diversion from the EU takes place. This will provide an opportunity to our exporters to benefit from it. Concomitantly, as UK exporters will start looking for opportunity to export out of the EU zone, it may increase our imports from the UK. There will also be an opportunity for Pakistan to conclude its long pending Trade and Investment Framework Agreement (TIFA) with the UK, which was rather more difficult to negotiate with EU’s 27 countries.


As UK’s financial market settles and prepares itself for the non-EU regime, it is quite possible that UK investors explore foreign markets such as Pakistan for their overseas investment. At that time, depending on the strength of our capital market and incentive regime, the UK investors may opt to invest in Pakistan.


Before the referendum, a major issue was migration from the EU countries to the UK. With Brexit, the UK may not offer quota-based employment to potential EU migrants. Consequently, UK may open up its borders for workers coming from other countries either on permanent or temporary basis. This may provide an opportunity to Pakistani workers to migrate to the UK.


At the same time, fears are being expressed that Brexit has created racial intolerance that would unleash hostility among the working classes who expect immigrants to threaten British economy as well as security. This feeling is being expressed by British nationals of other origins including Pakistan. Anti-immigrant sentiments may force Pakistanis residing temporarily in the UK to leave. A domino effect may also occur if other EU countries pursue the UK policy of protecting and closing its borders for migrants. This will halt entry of our workers to European countries. Our government should remain vigilant of any development that may take place in this regard.


With fall in incomes, it is likely that remittances from the UK (our 3rd major source of remittances) will decline. But, if some British nationals of Pakistani origin return home due to a rise in prejudice then one time remittances might go up sharply.


An extended fall in pound may reduce our debt liability denominated in pound sterling. Moreover, after Brexit, the UK may not stick to the EU rules and regulations concerning Overseas Development Assistance (ODA). As a deliberate move, it may divert its ODA towards Commonwealth countries, including Pakistan, to gain diplomatic and political support and strength.


In sum, Brexit has raised a whole new set of risks for global economies. Looking forward, thus, there is a considerable amount of ambiguity that will cloud the global economic horizon for some time to come. A prolonged uncertainty can damage the UK economy as well as those who are connected with it. Our policymakers should carefully watch developments in the UK and the EU single market zone and take appropriate measures to benefit from upcoming opportunities and avert negative repercussions.

 

The writer is a Professor of Economics School of Social Sciences and Humanities, National University of Sciences and Technology, Islamabad. He can be reached at

Email: This email address is being protected from spambots. You need JavaScript enabled to view it..

As UK’s financial market settles and prepares itself for the non-EU regime, it is quite possible that UK investors explore foreign markets such as Pakistan for their overseas investment. At that time, depending on the strength of our capital market and incentive regime, the UK investors may opt to invest in Pakistan.

*****

Pakistan’s exports to the UK may increase if some trade diversion from the EU takes place. This will provide an opportunity to our exporters to benefit from it. Concomitantly, as UK exporters will start looking for opportunity to export out of the EU zone, it may increase our imports from the UK. There will also be an opportunity for Pakistan to conclude its long pending Trade and Investment Framework Agreement (TIFA) with the UK, which was rather more difficult to negotiate with EU’s 27 countries.

*****

 
29
October

Let the Minimum be Minimum!

Written By: Dr. Zafar Mehmood

The anatomy of minimum wages in Pakistan and its effects on the work force

In Pakistan, minimum wages for workers are fixed under the Unskilled Workers Ordinance 1969. The latest budget has increased the minimum wage rate from Rs.10,000 per month to Rs.12,000 per month, i.e., a twenty per cent rise. The budget document states that the purpose of this change is to raise the welfare of the labour class and in line with the increase in pay of government employees. In this article, I will examine whether this raise in any way benefits the economy in general and labour classes in particular?

A minimum wage is the lowest monthly remuneration that employers may legally pay to the workers. Equivalently, it is the lowest wage at which workers may sell their labour. Indicators that are normally used to set a minimum wage rate are the ones that minimize the loss of jobs while maintaining international competitiveness of domestic industries. Among the indicators are general economic conditions in the country as measured by the GDP, inflation, labour supply and demand situation, wage levels and wage differentials, growth in productivity, cost of doing business, living standards, and the prevailing average wage rate in the country.

Proponents of the minimum wage say it increases incentives to take jobs, as opposed to other methods of transferring income to the poor that are not tied to employment; increases the standard of living of the poorest workers; stimulates consumption, by putting more money in the hands of low-income people who spend their entire paycheques and hence increases circulation of money in the economy; removes low paying jobs, forcing workers to train for, and move to, higher paying jobs; reduces poverty and income inequality; boosts morale and forces' businesses to be more economically efficient.

In contrast, opponents of the minimum wage say it increases poverty; reduces quantity demand of workers, either through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs thus increases unemployment (particularly among low productivity workers); discourages further education among the poor by enticing people to enter the job market; slows growth in the creation of low-skilled jobs; results in jobs moving to informal sector which allow employment without minimum wage law; causes rise in inflation as businesses try to compensate by raising the prices of the goods being sold and hurts small business more than large business. Although minimum wage laws are in effect in many jurisdictions, differences of opinion exist about the benefits and drawbacks of a minimum wage. In this context, let us see the potential effects of minimum wage on the well-being of workers.

Evidence suggests that the most important channels of adjustment are: reductions in labour turnover, improvements in organizational efficiency, reductions in wages of higher earners, and small price increases. Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers.

Reduction in Employment: The employment effect of the minimum wage is one of the most studied topics in economics. Most studies find that the minimum wage has no visible impact on the employment prospects of low-wage workers. This is because the cost rise due to the minimum wage is small relative to the overall cost of production and low relative to the wages paid to low-wage workers.

Reductions in non-Wage Benefits: Employers might respond to a minimum-wage increase by lowering the value of non-wage (fringe) benefits, such as health insurance and pension contributions. The empirical evidence, however, points to small or no effects along these lines. Reductions in Training: Employers might reduce their expenditures for on-the-job training for low-wage employees. Empirical evidences are not conclusive: some studies find negative effects of minimum wages on training, while others find little proof of an effect in either direction. Changes in Employment Composition: Firms may adjust to a higher minimum-wage by upgrading the skill level of their workforce, rather than cutting the level of their staffing. This process could possibly work against the employment prospects of unskilled workers.

Improvements in Efficiency: Firms might respond to a minimum-wage increase with efforts to improve operational efficiency including "tighter human resource practices, increased performance standards and work effort, and enhanced customer services.” Employers might prefer these kinds of adjustments to cutting employment because employer actions that reduce employment can "hurt morale and engender retaliation." Efficiency Wage Response of Workers: A higher minimum wage may motivate workers to work harder, independently of any actions by firms to increase productivity. Higher wage increases the cost to workers of losing their job, motivating greater effort from workers to reduce their chances of being fired. Thus, workers may see higher wages as a reward from employers, leading workers to reciprocate by working harder. Any of these channels might be sufficient to eliminate the need for employment cuts.

Wage Compression: Employers facing higher wage costs for their low-wage workers may seek to compensate these costs by cutting the earnings of higher-wage workers. Sometimes firms delay or limit pay raises and bonuses for more skilled workers. Thus, minimum-wage compresses the overall wage distribution.

Reduction in Profits: Employers may also absorb the extra costs associated with a minimum-wage increase by accepting lower profits, along with those of their competitors, while some may reorganize the work process to reduce their costs of production. Minimum Wage as an Economic Stimulus: In a recessionary situation, a minimum-wage increase may increase demand for firms' goods, offsetting increase in wage costs. Since the minimum-wage transfers income from employers (high savers) to low-wage workers (low savers), it could spur consumer spending, which could potentially compensate firms for the direct increase in wage costs.

Inflation: Some employers may raise prices of their products, particularly if their competitors are experiencing similar cost increases in response to the minimum wage. Increase in inflation ultimately offset the benefit of rise in minimum-wage level. In sum, employers and workers at the same establishment may follow more than one of the above adjustment paths at the same time. Some of these adjustment paths reduce the benefit of the minimum wage to affected workers (reductions in non-wage benefits or training), but most have an ambiguous effect (reductions in hours of work or increased work effort) or no effect (lower profits or wage compression within a firm) on the well-being of low-wage workers. And some adjustment channels arguably improve workers' well-being (lower turnover or increased consumer demand). All in all, the global experience shows that minimum-wage increase does not have a discernable effect on the well-being of low wage workers.

In Pakistan, enforcement of the minimum wage legislation has always remained lax in protecting the living standards of workers because the minimum-wage increase failed to neutralize the impact of inflation. Implementation has been lax because of weak governance. Moreover, majority of wage earners in agriculture and informal sectors do not benefit from minimum wage fixation. There is thus a need to raise minimum-wage by fully indexing it with inflation and for effective implementation of the minimum-wage law while covering all sectors of the economy.

The writer is a Professor of Economics at School of Social Sciences and Humanities at NUST, Islamabad. This email address is being protected from spambots. You need JavaScript enabled to view it.
30
December

Jinnah’s Economic Vision

Written By: Dr Zafar Mahmood

The mission before Jinnah and his associates was not only the creation of Pakistan but of a progressive modern country, which could offer socio-economic benefits to its people and ensure equal opportunities to its citizens.

The leadership, under Jinnah, was fully aware that the areas to become Pakistan were economically and industrially backward. They were mindful of the strengths and weaknesses of the country and its people. Pakistan served as the agricultural raw material supply base for the industrialized areas of British India. Therefore, Jinnah encouraged Muslim entrepreneurs to aggressively join business, industry and trade. At the same time, he identified three major areas for development and stability: education, economy and defence. He emphasized the crucial role of a strong economy for its long-term sustainability. Jinnah also emphasized to pay full attention to promote technical, vocational, and scientific education, which he recognized as a prerequisite for industrialization.

Jinnah envisioned a dualistic economic structure for the economy; that is, developing industrial potential along with agriculture, so that the agricultural sector provides an industrial base. Jinnah believed that by doing so, Pakistan would decrease its dependency on the outside world and thereby create more reliance on the domestic natural resources. In this context, a policy was implemented for cooperative farming to improve the agricultural economy and gainfully employ the refugees.

Commerce to Jinnah was extremely important. For the success of commerce, he always advised to maintain high standards of “business, integrity and practice”. Jinnah wished to see Pakistan becoming “a hallmark for standards and quality in the global market”. To-date, lack of quality, standards and, value addition remains major hurdles for export expansion from Pakistan.

Given the important role of labour in the industrial development, Jinnah always emphasized for the welfare needs of the workers. While laying the foundation-stone of an industrial establishment in Karachi, he said: “I also hope that in planning your factory, you have also provided for proper residential accommodation and other amenities for workers, for no industry can thrive without contented labour”. Unfortunately labour welfare aspect has mostly been ignored in Pakistan.

Jinnah was keen to eradicate illiteracy from the country as quickly as possible and stressed the imperative of providing the best possible training for technicians, scientists, businessmen, doctors and civil servants with a view to develop human resources for accelerating economic growth. Realizing that Pakistan had virtually no industrial base, he wanted to give impetus to industrial development by training manpower. He welcomed Aga Khan's donation of 4 million rupees for setting up two institutions in Pakistan, on the lines of the famous Zurich Polytechnic, for providing higher scientific and technical education and in this context instructed to raise 20 million rupees internally. Jinnah also agreed to a proposal to have same proportion of Muslim scientists, engineers and technicians as India, so that foreign capital is complemented with skilled manpower. Contrary to Jinnah's aspiration, Pakistan is currently spending much less on human resources, and research and development as compared to other South Asian countries.

In an address at the Dhaka University (1948), Jinnah observed: “Our experience has shown that an M.A. earns less than a taxi driver and most of the so-called government servants are living in a more miserable manner than many menial servants... government cannot absorb thousands... there is no shame in doing manual work and labour. There is an immense scope in technical education for we want technically qualified people very badly. You can learn banking, commerce, trade, law, etc., which provide so many opportunities”. Pakistan's private sector has made enormous contributions, lately, in this regard. With a focus on quality and not just quantity, the dream of Jinnah for creating technical workforce is not out of sight.

At Jinnah's behest, Muhammed Ali Habib analyzed the economic potential and prospects for rapid industrialization. He recommended that the government borrow only for financing public enterprises, which were productive, such as canals, dams, railways, steel and cement plants, etc., and in no case for meeting current account deficits. Contrary to this, Pakistan for a long time has been borrowing to meet the current expenditure needs. A study assigned by Jinnah to Rowlands opposed the exemption of agricultural income from taxation. He noted that in East Bengal such taxation had been introduced, while West Pakistan provinces failed to do so. Rowlands recommended to transfer agricultural income tax from the provincial to the central list, a proposal still not been implemented. This is one area in which Pakistan has miserably failed because no concerted effort is made to attain fiscal discipline.

In 1948-49, by pursuing a policy of self-sufficiency and making certain structural adjustments in the scheme of federal finance, the first surplus budget of Pakistan rebutted all the adverse predictions made about Pakistan's economic viability by its foes. In fact, it helped creating a climate conducive to investment and growth. The austerity measures seen in the early era are no longer part of any current planning exercise. This is simply because of lack of political will on this account.

In his broadcast to Australian citizens, Jinnah observed that Pakistan has scarcity of both capital and industrial know-how. He also told the Australians: “We know our present weaknesses in these directions and we should certainly welcome any investment from you which would strengthen our economy”. Pakistan did manage to attract FDI in the mid-2000s but lately due to energy crisis, law and order situation, and lax enforcement of laws and policies this much desired source of capital is virtually dry.

Jinnah truly believed that the adoption of Western economic models and practices would not help in achieving the goal of creating a happy and contented people. “We must work out our destiny in our own way and present to the world an economic system based on the true Islamic concept of equality of manhood and social justice”. At present a large proportion of population is living below the poverty line and social injustice is widespread. In the light of Jinnah's vision, where we stand today? During the 1950s and 1960s Pakistan maintained quite high growth rates. This was the time when a growth strategy was pursued with vigour. Unfortunately, that momentum was lost in the early 1970s after the advent of the policy of nationalization. Some recovery was accomplished in the 1980s but due to pending structural problems faced by the economy the golden economic age of the 50s and 60s vanished sadly from the scene. But in the 1990s onward, both due to precarious domestic political environment and hostile external environment, the Pakistan economy was derailed from its higher path of growth and its direction became blurred.

Over the time, Pakistan made enormous achievements in terms of developing quality human resources and creating best managed institutions. Yet again due to wrong policies of different governments human resources were lost to the international community. Brain drain caused sharp deterioration in left-behind human resources, which is responsible for institutional decay. With a shift in priority in government spending, institutional capacity building was ignored for a very long time. Pakistan is currently facing a huge deficit in quality human resources, which is affecting the ability of existing management to properly run institutions. Unless urgent attention is paid to correct these problems, Pakistan would not be able to achieve success that was accomplished by our earlier generation to realize Jinnah's vision.

To realize Jinnah's vision of a self-reliant, progressive and prosperous Pakistan worthy of a place of honour and dignity within the community of nations, Pakistan needs to develop quality human resources, improve institutional capacity, ensure fiscal discipline, overcome energy crisis and improve law and order situation.

The writer is an HEC Foreign Professor and presently on the faculty of NUST Business School, Islamabad. This email address is being protected from spambots. You need JavaScript enabled to view it.
30
December

Inflation and Price Control Management

Written By: Asad Elahi

Inflation is defined as the rate at which the general price level of goods and services is rising, causing purchasing power to fall. This is different from a rise and fall in the price of a particular good or service. Inflation occurs when most prices are rising by some degree across the whole economy. According to Gardner Ackley “A persistent and appreciable rise in the general level of prices is called inflation”. Inflation is broadly classified as 'demand pull inflation' and 'cost push inflation'.

Cost-push inflation basically means that prices have been "pushed up" by increases in costs of any of the four factors of production (labour, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level.

Demand pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the economy viz, households, businesses, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers in essence "bid prices up” causing inflation. This excessive demand is also referred to as "too much money too few goods”. Thus inflation is generally associated with an abnormal increase in the quantity of money resulting in abnormal rise in prices.

Price changes in Pakistan are computed by the Pakistan Bureau of Statistics through the indices namely Consumer Price Index (CPI), Sensitive Price Indicator (SPI) and Whole Sale Price Index (WPI). CPI measures changes in the cost of buying a representative fixed basket of 487 goods and services, selected through a family budget survey, consumed by inhabitants. Prices are collected through nearly 148,000 quotations in 76 representative markets in 40 towns/cities. CPI is currently worked out with variations from base year 2007-08 on overall basis as well as in categories of population in five income quintiles i.e. up to Rs. 8000, Rs. 8000-12000, Rs. 12000-18000, Rs. 18000-35000 and above Rs. 35000. CPI is used in economic policy formulation, cost escalation in business applications and wage adjustment. Average weight of food and non-alcoholic beverages group and housing, electricity, gas and other fuels of goods and services constitute 43.24% and 27.72% respectively.

The State Bank of Pakistan uses Core Inflation and Trimmed Mean Core Inflation figures for its monetary policy. Core inflation is worked out by excluding prices of food and energy from CPI as these administered or are volatile. Trimmed mean is also a measure of core inflation worked out by excluding changes in items in CPI that rank amongst the smallest and largest.

SPI is computed on weekly basis to assess the price movements of essential movements at short intervals. 53 items are covered and computed for 4 income groups and on the overall basis. WPI is designed to measure the movement of prices for a set of selected items in the primary and wholesale markets. Items covered are those which could be precisely defined and offered in lots. Prices used are generally those which conform to the primary sellers realization at ex-mandi, ex-factory or at an organized wholesale level. WPI covers over 400 items. Groups of items include food, raw materials, fuel, lighting and lubricants, manufactures and building materials.

In Pakistan inflation has arisen during last few years. As per PBS monthly review of price indices and State Bank of Pakistan's (SBP) inflation monitor of June 2013 during the period 2007-08 to June 2012-13 CPI, SPI and WPI arose from base of 100 to 179.9, 191.15 and 199.21%, respectively, showing an average annual growth of 15.98%, 18.23% and 19.8% respectively. Food and nonalcoholic beverages group which constitute 34.8343% of CPI grew at annual average of 20.42% per annum. Prices of essential food items like meat, wheat, flour, chicken, milk fresh, fresh vegetables, sugar and onion registered average annual growth of 24.68%, 19.9%, 22.3%, 25%, 21%, 18.9% and 27.9% respectively. In the WPI prices of agriculture, forestry and fishery products which comprise 25.77% of WPI, recorded annual average rise of 21.8% while food products, beverage and tobacco constituting 20.07% of WPI recorded average annual increase of 19.12%.

However there was a decline in inflation trend during the years 2011-12 and 2012-13 compared to the previous three years, mainly due to administered energy prices by the government. In view of overall impact of inflation during the period has led to decline in private household savings from 12.07%of Gross Domestic Product(GDP) in 2007-08 to 6.2% of GDP in 2011-12, while Public and Private sector Gross Fixed Investment(GFI) declined from 5.4% to 3% and 15% to only7.9% respectively, during the same period. Overall GFI declined from 20.5% to 10.9% of GDP.As a result of decline in Public sector investment expenditure on health and education sectors as % of Gross National Product (GNP) declined from 0.6% to 0.3% and 2.4% to 1.8% of GNP from 2007-08 to 2011-12. Net external resources inflow declined from 8.5% of GDP to 2%. The country showed lower growth rate in the region during FY 09 to FY13 as per Pakistan Economic Survey 2012-13.

The main reasons for rise in inflation during the last few years include the twin internal and external deficits. Tax-GDP ratio of around 9% in Pakistan is currently perhaps the lowest in the region. Budgetary deficit that reached 6.4% of GDP during FY12 has led to deficit financing which has increased money supply. This has led to debt servicing of nearly Rs 1.2 trillion in the budgetary allocation for 2012-13. As per SBP, Budgetary borrowings of the government from the banking system grew by an average of 35% during the last five years. It has also reduced development outlays in both economic and social sectors. Public sector enterprises like Pakistan Steel, PIA and energy sector are huge burden on the exchequer. Black economy generated through tax evasion, monopoly, hoarding and smuggling increases the demand and price goods. Government's reliance on indirect taxation contributes to price increase as the incidence is directly passed on to the consumer irrespective to his income level. Increasing external deficit has caused depreciation of rupee thereby increasing cost of imported goods and materials leading to increase in costs. Exchange of dollar has risen from Rs 62 in 2008 to over Rs108 currently. As a result prices of imported machinery, raw materials and energy commodities have become expensive thereby contributing to rise in costs of output, fueling inflation.

Increase in remittances from overseas Pakistanis have risen to US $13.92 billion during 2012-13 which is cash flow, utilized mainly for consumption, creating demand for goods. Little efforts have been made to diversify this source into productive goods and services producing avenues. There is a need to channelize a large component of this inflow of funds into productive reproducible investments.

Current system of fixing of procurement prices of main crops does not encourage increase in yield in crops which, currently in most of the crops, is below international levels. There is a need to adopt policy framework linking price inducement with increase in yield of each crop. Electricity shortfall and rise in prices of diesel has contributed to increase in cost of farmers. There is a need to provide energy to farmers at low prices in addition to encouraging water saving irrigation technologies like drip-irrigation through incentives/subsidies. Unwieldy and unplanned expansion in cities has led to shrinkage in farm areas surrounding the cities which has reduced output and supply of vegetables and milk products from these areas increasing price level. There is a need to control this trend.

Agro-climatic conditions of Pakistan ranging from tropical to temperate, allow growth of 40 different kinds of vegetables and 21 types of fruits. The major factor limiting increase in area and production remained high investment and low return to the growers. Post-harvest losses in fruits and vegetables range from 25-40% that lead to consumer prices rise in addition to the hidden quality losses. Primary factors responsible for post-harvest produce losses are: poor pre-harvest techniques employed, outdated storage measures as well as lack of information delaying the sale of crops. In order to preserve the produce quality, different post-harvest techniques are recommended for variety of products. Investment and incentives with state support are needed for application of these technologies.

As per SBP Annual Report 2011-12, population of the country is estimated to have risen from 166.41 million in 2008 to 178.91 million in 2012 thereby creating additional aggregate demand while unemployment rate has increased from 5.2% to 6% during the same period. According to Pakistan Economic Survey 2012-13, during FY 12 and 13 the power shortage became so severe that it wiped out 2% from GDP. Energy shortages affected output thereby creating supply shortages with closures or production shortfalls. Deteriorating law and order, and energy crisis badly affected investment, which as per Pakistan Economic Survey FY 13 nose dived to 14.2% of GDP as compare to 2008 when it was hovering around 19.21%. This apart from reducing output affected growth and employment. The government needs to adopt policy measures to improve investment climate both for local and foreign investment. There is also a need to curtail twin deficit by boosting exports, curtailing import of luxury items and encouraging import substitution industries. Loss-making Public Sector Enterprises need to be made profitable by running on commercial lines or privatized.

An important issue in check on inflation is the importance assigned to it as a part of macro-economic management by the government. Some years ago there was a regular review of prices by the PM secretariat, of essential consumer items on data daily collected by FBS, in addition to review of foreign exchange position and supply and demand situation of essential items. The prices of essential items were also conveyed to provincial and district governments to enable them to adopt necessary measures against any price manipulation or unfair practices by middlemen in the mandis/markets. There were also two committees namely Prime Minister's Committee on prices and a Secretaries' Committee both headed by the Minister/Advisor for Finance. The former Committee addressed medium and long-term issues while the later addressed short-term issues. The Secretaries' Committee which met regularly, sometimes more than once in a week, would cater to anticipated shortages and take decisions for augmenting shortages by arranging imports or changing structure of tariffs. The ECC of the Cabinet discussed issues relating to price changes, production and supply issues and export and import data as well as Foreign Exchange reserve related issues. While the Economic Coordination Committee (ECC) has continued discussion on these issues while there is a National Price Monitoring Committee (NPMC) but the Secretaries’ Committee needs to be revitalized and made effective and price stabilization should be a major pillar of economic stabilization plan of the government. The NPMC should concentrate on long, and medium-term issues, the Secretaries’ Committee should work on short-term issues. The Provincial Governments as well as district administrations also need to actively monitor prices and adopt measures against hoarding and illegal profiteering.

The writer is a former Federal Secretary and had been on the faculty of National Defence University (NDU). This email address is being protected from spambots. You need JavaScript enabled to view it.

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