Report on on Pakistan's Economy
4.2pc reduction in poverty, claims Economic Survey
Per capita income $652; GDP growth 6.4pc; defence spending Rs 180bn; base year changed from 1980-81 to 1999-2000
By Nadeem Malik
ISLAMABAD: The Economic Survey 2003-04, declaring all is well, claims 4.2 per cent reduction in poverty, 652 dollars per capita income and a lower fiscal deficit of 3.3 per cent of GDP.
One key factor that helped derive such astounding set of numbers is the size of Gross Domestic Product (GDP) at Rs 5,480 billion, or $95 billion, after changing the base year from 1980-81 to 1999-2000.
As a result, all statistics calculated in relation to GDP have yielded 20 per cent better ratios straightaway. “The rising trends in poverty have been arrested and a reversal has taken place,” Finance Minister Shaukat Aziz announced here Friday at the Planning Commission Auditorium.
He said all macroeconomic indicators are heading in the right direction, with upsurge in growth, investment, reduction in deficit and debt burden. The only challenge he identified was transferring benefits of these gains to the common man, along with solidifying the recovery process.
The Survey, compiled by Dr Ashfaque Hasan Khan, paints a rosy picture of the economy, showing all round turn around. There are positive signs of recovery in the real sectors, but the claims made on social sectors, based on revised benchmarks need to be taken with caution, instead of declaring victory.
On the poverty issue, the Survey has incorporated results of a sample Survey of Household Consumption Expenditures (HCES), covering a narrow band of 5, 046 rural and urban households (one-third of the sample covered in PIHS 2000-01), which was conducted from April 19, 2004 to May 6, 2004. It shows the incidence of poverty at the national level has declined by 4.2 percentage points during the period covered.
After adjusting the base for 2000-01, the Survey says national poverty has declined from 27.30 in 2000-01 to 23.10 per cent in 2004, including reduction in urban poverty from 23.10 per cent to 13.60 per cent and rural from 30.60 per cent to 28.35 per cent.
The last two full household surveys have shown rise in poverty from 30.6 per cent in 1998-99 to 32.1 per cent in 2000-01, which is still relevant and representative number.
However, the government says that encouraging growth of last two years (5.1 per cent in 2002-03 and 6.4 per cent in 2003-04) and over Rs 860 billion of cumulative spending on the social sector and poverty-related programmes over the last five years, helped achieve this milestone.
“These results are not surprising as there has been a 35 per cent increase in the average monthly consumption expenditure of households. Notwithstanding a decline in the incidence of poverty, these results should be taken as indicative, as they do not cover the entire period of 2004,” the Survey explained.
The Official Poverty Line of Rs 748.56 per adult equivalent per month adjusted to the prices of 2004 is estimated at Rs 848.798 per adult equivalent per month.
The Survey also gives comparison of various other indicators of HCES 2004 with the actual census data of 1998, showing housing units with one room have decreased from 38.1 per cent to 25 per cent; housing units with 2-4 rooms have increased from 55 per cent to 68.3 per cent; owned housing units increased from 81.2 per cent to 84.8 per cent; electricity (as source of lighting from 70.5 to 83.7 per cent; and gas (as cooking fuel) from 20.2 to 26.1 per cent.
Similarly, the data on Population Ever Attended School increased from 51 to 57 per cent; Gross Enrolment at Primary Level (5 to 9 years) from 72 to 87 per cent; Net Enrolment at Primary Level (5 to 9 years) from 42 to 56 per cent; Gross Enrolment at Middle Level (10 to 12 years) from 41 to 47 per cent; Net Enrolment at Middle Level (10 to 12 years) from 16 to 20 per cent; Gross Enrolment at Matric Level (13 to 14 years) from 42 to 57 per cent; and Net Enrolment at Matric Level (13 to 14 years) from 9 to 12 per cent between 2000-01 PIHS survey and 2004 HCES sample.
“The results are highly encouraging as they show that strong economic growth along with massive spending on the social sector and poverty-related programmes is now beginning to yield dividends in terms of a decline in poverty, an improvement in living conditions, and an improvement in social indicators,” the Economic Survey claimed.
“The best way to transfer such gains is to provide them gainful employment, scaling up investment in human capital and maximizing the impact of existing public spending on education and health.”
Fiscal: The survey claims reduction in the overall budget deficit as percentage of GDP from 3.7 per cent to 3.3 per cent of GDP (based on the revised GDP base), coupled with narrowing down of the revenue deficit from Rs 76 billion in 2002-03 to Rs 13 billion in 2003-04. It claimed 65 per cent increase in tax collection during last five years. The primary balance (total revenue minus non-interest total expenditure) remained in surplus.
During the outgoing fiscal year, total revenue is estimated at Rs 780.3 billion, as against Rs 720.8 billion last year â€” an increase of 8.3 per cent. This increase is due to the substantial increase in federal and provincial tax revenues which grew by 6.7 per cent and 20.2 per cent, respectively.
The consolidated tax receipts grew by 8.1 per cent while non-tax revenue increased by 8.7 per cent. Total expenditure is estimated at Rs 957.7 billion in 2003-04 which is 6.6 per cent higher than last year. Out of this current expenditure is estimated at Rs 793.6 billion (82.9 per cent of total expenditure), while development expenditure amounted to Rs.164.1 billion (17.1 per cent of total outlay).
The current expenditure which was 16.4 per cent of GDP last year has declined to 14.5 per cent in the current year.
The share of interest payments in total expenditure declined from 32.7 per cent in 2000-01 to 21.1 per cent in 2003-04 while the current expenditure dropped from 36.3 per cent in 2000-01 to 35 per cent in 2001-02 and further to 25.5 per cent in 2003-2004.
In absolute terms, interest payments which were at Rs 243.3 billion in 2001-02 declined to Rs 202.5 billion in 2003-04, a reduction of 17.4 per cent.
Defence expenditure in 2003-04 was budgeted at Rs 160 billion â€” almost no change from last year.
However, because of increased activity along the countryâ€™s western border the defence spending is estimated at Rs 180 billion. As a per centage of GDP, defence spending remained at last yearâ€™s level of 3.3 per cent, due to massive increase in the size of GDP, both due to growth and change of base.
As percentage of total outlay, defence spending is 18.8 per cent.
However, rise on defence spending coincided with the reduction in the development outlay from Rs 160 billion to the estimated level of Rs 152 billion.
The expenditure on General Administration stands at Rs 70.5 billion which is 15.8 per cent higher than last year. It accounted for 8.9 per cent of current expenditure and 1.3 per cent of GDP during 2003-04 as against 7.7 per cent of current expenditure and 1.3 per cent of GDP last year.
The transfer to provinces increased by 11.4 per cent to Rs 214.8 billion in 2003-04 from Rs 192.8 billion last year.
The share of direct taxes in total taxes (collected by the CBR) has increased from 18 per cent in 1990-91 to 32 per cent in 2003-04; the share of indirect taxes declined from 82 per cent to 68 per cent during the same period; the share of sales tax increased dramatically from 14.4 per cent to 43 per cent of total taxes and from 17.6 per cent to 62.5 per cent of indirect taxes during the same period.
Debt: The real cost of borrowing for domestic debt increased marginally to 5.8 per cent on average against 5.7 per cent in the second half of 1990, mainly on account of a sharp deceleration in inflation.
Accordingly the real cost of borrowing for public debt averaged 3.2 per cent during 2000-04. The improvement in the real cost of borrowing on the one hand and fiscal consolidation effort on the other resulted in a sharp decline in the debt burden during 2000-04.
The real growth of debt also registered a decline of almost 0.8 per cent and at the same time revenue grew at an average rate of 5.6 per cent per annum. The combined effect of growth in revenue and debt resulted in a sharp decline (6.4% per annum) in the countryâ€™s debt burden.
Total domestic debt is estimated at Rs 2,028.4 billion by the end of 2003-04, against Rs 1, 879.2 billion in 2002-03 (an increase of Rs 149.2 billion or 7.9 per cent).
As a per cent of GDP, domestic debt is expected to decline from 39 per cent to 37 per cent this year. The share of short-term debt has declined by almost 11 percentage points â€” from 45 per cent to 34 per cent.
The interest payments as a percentage of revenue have been reduced to one-half (41 per cent to 20 per cent) over the last five years.
Similarly, share in total expenditure declined from 30 per cent to 17 per cent during the same period.
External debt and foreign exchange liabilities increased from $35.47 billion of 2002-03 to $35.85 billion by end-March 2004, showing almost one per cent increase.
The Survey says it was largely due to revaluation of the debt, as the US dollar depreciated against Yen and Euro, adding $372 million to the liabilities column.
Even this marginal increase in external debt, despite prepayment of $1.65 billion during the year, and rescheduling of the entire Paris Club debt stock is significant.
As a percentage of GDP, total external debt is about 37.8 per cent, against 43 per cent of last year.
A data sheet in the Survey maintained that real cost of borrowing external debt came down to 0.7 per cent; rate of growth totaled 0.8 per cent; and real foreign exchange earnings increased by 13.9 per cent.
During 2003-04, Pakistan paid a total of $5.2 billion external debt, including $4.1 billion actual payments and $1.1 billion rollovers.
This year the pace of accumulation of public debt slowed to 2.8 per cent. Public debt has declined from 75.2 per cent of GDP last year to 69.7 per cent this year – a sharp decline of 5 percentage points in one year.
Growth and Investments: The composition of the Gross Domestic Product (GDP) during the last five years has changed, with the share of the services sector at around 52 per cent, while there has been a slight adjustment in the shares of the industrial and agriculture sectors with the industrial sector gaining the share lost by the agriculture sector.
The industrial sector improved its share from 22.6 per cent to 24.5 per cent whereas; agriculture declined from 26.2 per cent to 23.3 per cent between 1999-2000 and 2003-04.
Due to tremendous growth in the recent past the share of the manufacturing sector has increased from 14.8 per cent in 1999-2000 to 17.5 per cent in 2003-04.
During 2003-04, the real GDP grew by 6.4 per cent during the current fiscal year against 5.1 per cent last year.
This higher growth is underpinned by a buoyant industrial sector, which grew by a record 13.1 per cent, and a services sector which grew by 5.2 per cent.
The agriculture sector lagged a bit by growing at 2.6 per cent.
Lower interest rates and the easy availability of consumer financing helped keep consumersâ€™ demand for industrial goods strong while a relatively better monsoon helped the agriculture sector to grow at a modest 2.6 per cent.
The commodity-producing sector is the main contributor with a growth rate touching 7.7 per cent in 2003-04 against 4.9 per cent last year.
The largest contribution to the real GDP growth rate of 6.4 per cent came from the commodity producing sector (3.6 percentage points).
The growth in real GDP and increased economic activity in the country has led to a reversal in the savings and investment gap.
National Savings touched 20 per cent of GDP for two years in a row while investment reached 18.1 per cent of GDP during 2003-04.
National savings as a per cent of GDP witnessed considerable improvement over the last four years (2000-04) and averaged 18.9 per cent of GDP.
The rise in national savings can be attributed mainly to a significant turnaround in the current account balance which moved into surplus trajectory from an historical deficit.
Total investment picked up sharply to 18.1 per cent of GDP in 2003-04 against 16.7 per cent last year.
Fixed capital formation also rose sharply to 16.4 per cent of GDP against 14.8 per cent last year.
The upward trend in investment was spearheaded by the public sector where the improvement is significant and moving from 3.6 per cent of GDP last year to 4.6 per cent of GDP this year.
Private sector investment also increased form 11.2 per cent to 11.7 per cent of GDP.
In an environment of unutilized capacity within different industries, investment by the private sector can rise only gradually.
The tremendous growth in credit to the private sector disbursed by banks and the additional demand available in the market has given a boost to investment in the current fiscal year.
Real gross fixed capital formation has increased by 7.9 per cent during 2003-04 against 5.2 per cent last year which means private sector investment is growing at a faster pace than the real GDP growth.
Three other sectors registered stellar increase in overall investment. These include construction (15 per cent), transport and communication (32.7 per cent) and ownership of dwellings (25 per cent).
Per capita income: The per capita income grew at an average rate of 13.9 per cent per annum during the last two years (2002-04) and 12 per cent during 2003-04.
The per capita income in dollar terms increased from $ 526 in 1999-2000 to $652 in 2003-04 â€” an increase of 24.0 per cent in the last four years.
Though there was real increase in the GNP per capita, the number mainly reflects the impact of changed base. The real GNP exhibited a deceleration in growth from 7.9 per cent in 2002-03 to 5.2 per cent in 2003-04 mainly due to a decline of 30.5 per cent in net factor income from abroad.
The slowdown in the inflow of workersâ€™ remittances during 2003-04 affected net factor income from abroad.
Shaukat said the non-food non-oil imports are up by almost 32 per cent this year. The government expects remittances of $ 3.8 billion during the year, against $4.24 billion of last year.
With population growing at a rate of 1.9 per cent, estimated to be 148.72 million people, the real per capita GNP at market prices increased by 4.9 per cent in 2003-04 against an increase of 7.7 per cent last year.
Re-Basing the National Accounts: Rebasing the National Accounts series captures structural changes in the economy and thus gives a more accurate description.
The government changed the base year from 1980-81 to 1999-2000 to capture the changes in production and consumption.
As a result of re-basing, the coverage of data has engulfed a new range of products, enterprises and economic activities (like IT, courier services, travel agencies, mobile phones, etc.). For instance, large-scale manufacturing has now been estimated according to the Census of Manufacturing Industries of 2000-01 instead of 1980-81 and the number of manufacturing items has been increased from 91 to 128.
As a result of re-basing, Gross Domestic Product (GDP) estimates for 1999-2000 have improved from Rs. 2,952 billion to Rs 3,529 billion, showing an increase of 19.5 per cent over the old base estimates.
Estimates of the agriculture sector improved by 18.5 per cent, the industrial sector by 18 per cent and the services sector by 21.8 per cent over the old base.
Per capita income has been estimated at Rs 27,234 ($526) for the re-based year 1999-2000 compared to Rs 22,811 ($441) on the basis of the 1980-81 base.
Similarly, estimates of fixed investment have improved by 34.3 per cent to Rs 607 billion over 1980-81 based estimates of Rs 452 billion, mainly due to improved coverage.
Shaukat Aziz said, “Pakistanâ€™s economy has gathered greater momentum during the year, with all macroeconomic indicators exhibited marked improvements over last year.”
He said higher growth; rise in industrial production; a double-digit growth in per capita income; upsurge in domestic investment; sharp increases in the consumption of electricity and gas; further fiscal consolidation; strong growth in exports and imports; strengthening of the external balance of payments; and a sharp decline in the countryâ€™s debt burden have been the major achievements of the outgoing fiscal year.
Overall inflation averaged 3.9 per cent during the first 10 months of the fiscal year as against 3.3 per cent last year of the same period.
Food inflation averaged 4.9 per cent as against 3.1 per cent of last year. Much of the surge in the food inflation over last year has been due to both demand and supply factors resulting in an increase in the prices of wheat, wheat flour, rice, meat, edible oil and onion.
“The government has taken various measures to improve the supply situation of wheat including the import of one million tons of wheat with a concurrent wheat export ban,” Aziz said.
The State Bank of Pakistan (SBP) continued with an easy monetary policy stance during the year with a view to reinforcing the growth momentum that had picked up last year.
Accordingly the interest rate environment remained investor-friendly.
During July – March 2003-04, money supply grew by 12.3 per cent as against the target of 11.1 per cent and last yearâ€™s growth of 12 per cent in the same period.
As a result of the easy monetary policy stance, the weighted average lending rate declined from 7.58 per cent in June 2003 to 4.69 per cent in March 2004.
The private sector credit amounted to Rs 245 billion during the first nine months of the fiscal year against an increase of Rs 107 billion during the same period last year.
“This reflects a renewed private sector confidence in the basic macroeconomic fundamentals of the country,” the minister claimed.
The share index of the Karachi Stock Exchange (KSE) increased by 2,027 points or almost 60 per cent – rising from 3,403 points on June 30, 2003 to 5,430 points on April 30, 2004.
The aggregate market capitalization also increased by 92 per cent – rising from $12.9 billion to $25 billion. Exports grew by 13.1 per cent during July – April 2003-04 and are expected to cross the target of $12.1 billion.
Imports grew by 19 per cent during the first 10 months of the fiscal year.
Given the rising level of economic activity, the import target of $12.8 billion is likely to be surpassed with a projection of over $14 billion for the entire year, Aziz said.
The current account balance excluding official transfers remained in surplus at $1369 million or (1.4 per cent of GDP) during July – March 2003-04.
Pakistan has succeeded in attracting $760 million in FDI during July – April 2003-04 against $696 million in the same period last year.
By the end of the fiscal year, FDI is expected to cross $1 billion on account of the issuance of two cellular phone licenses amounting to $291 million each (50 per cent already paid).
The bulk of the FDI has come in the oil and gas, transport and communications and banking sector.
By end-April 2004, foreign exchange reserves stood at $ 12.5 billion. During the year Pakistan has added $1.8 billion to its reserves.