It should really come as no surprise that the government missed most of the macroeconomic targets that it had set for the fiscal year 2011-12 that has just ended. According to the Economic Survey of Pakistan, released by Finance Minister Dr Abdul Hafeez Shaikh on May 31, the main determinant of how a national economy is performing — the GDP growth rate — was 3.7 per cent, half a percentage point lower than the target of 4.2 per cent set by the government at the presentation of the budget for 2011-12 last year. Before delving into a closer look at these figures, it should be said that given the financial mess the country presently finds itself in, with chronic power cuts, poor law and order and a thoroughly inhospitable investment climate, the achievement of even a 3.7 per cent GDP growth rate would make some cynics question the authenticity of the figure itself.
As expected, one primary factor for the sluggish growth has been the very serious power shortage that has badly afflicted manufacturing and industry. The brunt of the prolonged power cuts and loadshedding has been felt in Punjab, especially its central and northern regions which, other than Karachi, have the bulk of the country’s industrial units and factories. This also suggests that factoring out the impact from the floods of August 2011 (which the Economic Survey says compelled a downward revision of GDP growth estimates), resolving the chronic energy crisis could significantly help in the achievement of robust growth. That said, what the government has done to tackle the power shortage in 2011-12 — zilch — does not provide any optimism for the coming year. By now, even lay observers know that a major reason for the power crisis is not necessarily that there isn’t enough installed generating capacity but rather that the arrears owed to power generation and distribution companies by their customers — the majority debtors being public sector bodies — are so high that the companies find it difficult to operate at full capacity. This is the oft-quoted issue of circular debt and nothing that the government had done in the outgoing fiscal year would make even its most ardent supporter think that it is serious about addressing this problem.
At his press conference, the finance minister spent considerable time talking about tax collection and the tax-to-GDP ratio, which is a key macroeconomic indicator and crucial to any government’s plans for socioeconomic development. The finance minister said what is already known, that its tax-to-GDP ratio is below 10 per cent — compared to between 13-18 per cent for most developing countries and dwelt at length on the need for people to pay their share of tax so that the country wouldn’t have to seek aid from foreign lending organisations or countries. This is a valid argument and one that needs to be made with increasing frequency. However, the problem lies in its realisation, due to the current government’s serious credibility issue, with many Pakistanis believing that they are being led by a regime made up mostly of corrupt individuals. Law and order is another issue which perhaps explains the significant decline in foreign investment in 2011-12.
As for inflation, the Economic Survey 2011-12 says that the figure was lower than that forecast for the year, and the finance minister did make it a point to tell the reporters assembled at the press conference, in a somewhat school master-like tone, that the best way to curb inflation was for the government to reduce its borrowing. These are — again — well-intentioned words but one would expect the government to act on them as well, and actually reduce its borrowing. That is precisely where, on matters of macroeconomic policy (and in fact policies in general), it has been found sorely lacking. To borrow a much-used cliché, but which is entirely apt in the case of Pakistan, the proof of the pudding is in the eating and that is something which will decide how 2012-13 will be any different financially, not just for the country’s economy but for ordinary Pakistanis in terms of the quality/standard of the lives that they lead.
Published in The Express Tribune, June 1st, 2012.