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Does the Budget Matter in Pakistan?

Most of Pakistan's economic indicators have never looked so good. But a close scrutiny reveals a different picture. Income inequality has increased and inflation remains at 8 per cent per annum. Despite this, the recent federal budget addresses the needs of only a handful neglecting the requirements of the majority.

Lattar from south Asia

Does the Budget Matterin Pakistan?

Most of Pakistan’s economic indicators have never looked so good.But a close scrutiny reveals a different picture. Income inequalityhas increased and inflation remains at 8 per cent per annum.Despite this, the recent federal budget addresses the needs of onlya handful neglecting the requirements of the majority.


n the seven years of Pervez Musharraf’s rule, Shaukat Aziz has remained unchanged as finance minister, showing the great trust that the general has in this banker from Citibank. Musharraf appointed Shaukat Aziz as finance minister in his first government (October 1999 to November 2002), and he kept that post even after the general elections in 2002 when Shaukat Aziz became a senator and Mir Zafarullah Khan Jamali the prime minister. Differences emerged between the president general and his appointed prime minister, who was sent packing in August 2004. Chaudhry Shujaat Hussain, the president of the king’s party, the Pakistan Muslim League-Quaid-e-Azam, which had a majority in the national assembly, became the interim prime minister so that Shaukat Aziz could resign from the senate and get elected as a more genuine representative of the people, as a member of the national assembly, and subsequently become prime minister. Shaukat Aziz was elected by popular vote to parliament from two constituencies, one in the north of Punjab and the other in Tharparkar. Pakistan’s richest politician – and perhaps one of the richest men in Pakistan – was elected from one of the poorest of constituencies in the desert bordering Rajasthan. When elected prime minister, despite the presence in the national assembly and in the senate, of equally competent technocrats who could easily have been appointed as finance minister, Musharraf opted for Shaukat Aziz over all other aspirants for probably the most important cabinet position after the prime minister. It is this deep-seated insecurity about someone outshining him as finance minister of a high growth Pakistan – albeit one with

growing inequality – which has meant that the prime minister holds on to both portfolios. In seven years as finance minister, Shaukat Aziz presented the annual budget five times (2000-04), and the two most recent budget speeches have been made by a junior minister, the grandson of the general responsible for Pakistan’s “golden era” of development, Ayub Khan.

There is little doubt that this year’s budget speech was one of the worst presented in recent years in parliament, both in terms of substance and of style and delivery. The minister of state, Omar Ayub Khan, made an emotional speech trashing the decade of the 1990s and those who participated as policy-makers and politicians during that decade, meaning members of Benazir Bhutto’s two governments and also those in Nawaz Shariff’s two. Omar Ayub Khan spent most of his time praising Musharraf for his vision. It is this overriding belief that the present is far better than the past, and that things have never been this good, which drives the logic of the government’s economic and other policies.

Hence, it is not by chance that the favourite cliché of the finance/prime minister of Pakistan regarding the state of the economy is that the glass is half-full, and not half-empty as his critics insist. Whenever there has been discussion and criticism about the government’s economic performance over the last seven years, the numerous unelected advisors to different ministries and to the prime minister, join the chorus reiterating the claim that the glass is half-full. Sadly, no one has looked into the contents of the glass to examine whether it contains some nectar which is the privilege of a handful of Pakistanis, or as some unfortunate families found out recently, that it contains contaminated water. What the federal budget 2006-07 does is that it continues

– and in fact accentuates – this bifurcation and difference that reminds us once again, of the times of the junior minister’s grandfather.

Tall ClaimsTall ClaimsTall ClaimsTall ClaimsTall Claims

Before we examine some of the new measures introduced in the budget, it is worth our while to examine some of the claims made by Musharraf’s government regarding the state of the economy.

Almost all economic indicators, barring a few important ones, according to the Pakistan Economic Survey 2005-06, have never looked this good in Pakistan’s 59year history. This fact is further emphasised when one contrasts Pakistan’s economic performance over the last five years since 2001-02 with that of the 1990s and even earlier. Pakistan’s gross domestic product (GDP) growth rate over the last three years 2003-04 to 2005-06, has been over 7.5 per cent, one of the highest not only in Pakistan’s history, but also one of the highest in the world. Moreover, the 6.1 per cent average GDP growth since 2000-01 compares fairly favourably with that of the 1980s and 1960s. As a result of this high growth and stable population growth rate (between 2.1 and 1.9 per cent a year), Pakistan’s per capita income in dollars has risen from US $ 582 in 2002-03 to US $ 742 in 2004-05 to US $ 847 in this fiscal year 2005-06. Hence, per capita income saw an astonishing rise of US $ 265 in just four years, a record by any comparison with the past, domestic or international.

In addition, according to recent surveys conducted by the government in 2001 and 2005 of around 15,000 households across the country, the poverty status of the people of Pakistan is also said to have improved considerably over this period. With the 2005 poverty line drawn at Rs 878.64 adult equivalent per month, the percentage of the population living below the poverty line is said to have fallen in just three to four years from 34.5 per cent in 2001 to

23.9 per cent in 2004-05. Other positives include exports which have almost doubled in seven years, as have foreign exchange reserves. Nevertheless, it is the downside of some of these very numbers which is a cause for concern.

For example, the poverty survey in 2001 was undertaken at the time of a drought

Economic and Political Weekly June 24, 2006

across Pakistan and hence overreports the true, structural, levels of poverty in the country, and the 2004-05 survey was undertaken at a time when there was a particularly buoyant agricultural sector with a growth rate of 6.7 per cent. Hence, the true underlying long-term poverty levels are bound to be lower than 2001 and higher in 2005. It is very likely that the poverty levels may already have gone up even after just one year following the survey, since in the current fiscal year 200506 agricultural growth has been a mere 2.5 per cent. Moreover, a one-time improvement or damage to conditions – drought or prosperity – can change the poverty levels in a year. Clearly, some words of caution are required in interpreting any set of poverty figures.

Government data show that between the high growth periods of 2001 and 2004-05, income inequality has increased. Consumption has increased at a faster pace for the top 20 per cent of the population compared to the growth rate for the bottom fifth. Government figures show that inequality is greater in urban areas than rural, which seems a little surprising, given extremes of poverty and highly iniquitous landholding patterns in rural Pakistan where around 60 per cent of Pakistan’s population lives. The gap between the richest 20 per cent of the population and the poorest, has also widened. Inflation too, remains at 8 per cent per annum and affects people perhaps more than income inequality.

Growing DiscontentmentGrowing DiscontentmentGrowing DiscontentmentGrowing DiscontentmentGrowing Discontentment

Despite many impressive macro numbers, there seems to be growing discontentment about economic conditions, and this when the economy has been doing well. Clearly, what matters to most people is the price of dal, sugar and petrol, and not Pakistan’s stock market index which has been increasing faster than most other global markets. Moreover, the government had created a great deal of pre-budget hype about the “relief measures” it was going to announce on June 5, the absence of which has caused further frustration.

One of the most important concerns of citizens in Pakistan is inflation and its damaging consequences on the life of the people. The budget does not offer any respite from inflation at all. The decision to import dal and sugar will lower the price of both items and the lowering of their price is welcome, but both commodities form a minuscule component of a household’s budget. The price of petroleum and its use in almost every sector of the economy is a far greater component than any other. The government collects around 40 per cent from the price of each litre of petrol sold and this is one area where it could have provided some genuine relief to consumers in Pakistan. However, the deteriorating fiscal condition of the government does not allow it to let go of such lucrative sources of revenue.

The constituency, which will benefit the most from this year’s budget, is that of government employees who will see their salaries rise by 15 per cent and will also benefit from allowances and other concessions granted to them, including an increase in overtime rates. However, it is worth emphasising that not only will this benefit be varied for government servants, but it will have only a small impact on lower grade employees. Another category of beneficiaries will most certainly be teachers at all levels in the education stream who have been given monthly allowances ranging from Rs 500-1,000. There are also numerous benefits for workers, including an increase for funds for the marriage of their daughters, stipends for their children, and a rise in special grants on their death; similar measures for government employees, including free angiography facilities, a relief package in case of sudden death of an employee, continued access to government housing in case of death, etc. Given Pakistan’s labour market structure, these measures even if properly implemented, will affect only a small segment of the labour force.

The agricultural sector, and in particular dairy farming, has also been given considerable incentives in this budget. The agricultural industry as a whole will benefit, but it is improbable that most farm workers will. With 21 million workers in the agricultural sector, forming 50 per cent of the workforce, many are landless workers and many small peasants who will not benefit from any of the measures meant for the agricultural sector as a whole. The rise in minimum wage announced in the budget from Rs 3,000 to Rs 4,000 will have no impact on farm workers since even basic rules and regulations do not apply to the agricultural sector. Moreover, with labour, even in the urban areas, disproportionately working in the informal sector, where most laws are also not applied, the rise in the minimum wage will be effective only for a small proportion of the labour force in the formal sector.

The government has also announced that it will provide free textbooks to students up to class VIII. One can expect that many parents will benefit from this measure, if the books are available and are actually distributed free. Given past practices and high levels of bad governance, to expect this to happen requires the triumph of hope over experience and the state of Pakistan’s schooling and educational system leaves a lot to be desired. Nevertheless, if effective this too is a positive measure.

A cruel joke has been played on the majority of Pakistanis by the introduction of the concept of medical tourism. At a time when the government spends only 0.5 per cent of GDP on the health sector and when a huge majority of Pakistani citizens do not have even very basic healthcare, to propose the development of up-market health products and services, is a slap in the face of the common Pakistani. Rather than propose such policies, it would have been far more appropriate for the government to ensure the provision of adequate and quality health services and products in every tehsil council in the country.

No Relief for MajorityNo Relief for MajorityNo Relief for MajorityNo Relief for MajorityNo Relief for Majority

Clearly the federal budget 2006-07 does not provide any real relief to the majority of Pakistanis. With the exception of a few people, largely those employed in the public and formal sectors, most citizens of Pakistan can be very disappointed by this budget as it fails to address their basic problems. The perception that this government is more interested in the welfare of the rich and well-to-do rather than the common people, is reinforced by the fact that the government could have taken some measures which would have had a bigger tax incidence on the rich and well-to-do. For example, the tax of 1/10,000 per cent imposed on stock market transactions or the minuscule tax on property, are seen by many as lost opportunities to raise desperately needed revenue for the government.

In addition, if the pace of economic growth in Pakistan slows – and signs suggest that it might not be sustained at recent rates – then a worsening situation can lead to the return of poverty along with social unrest. With expectations rising in an environment of affluence for some, those who have been left out of the race for the acquisition of material goods will resent this unequal growth under the banner of an outdated, outmoded, trickle down approach. Unless a redirection of the priorities of government regarding the economy takes place, Pakistan could be faced with troubled times ahead.



Economic and Political Weekly June 24, 2006

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