SURGE IN POVERTY

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
July 05 - 11, 20
10

While people in Pakistan are forced to commit suicide due to widespread poverty, the ruling elite, reluctant to give up their perks and privileges, continue to enjoy luxurious life. At least three incidents of collective suicide of a family due to poverty in the country have been reported by local media last month. Poverty has risen to 50 percent in Pakistan, according to independent experts. Majority of country's 170 million population is at the mercy of a few people who have and control the resources of the state.

Critics say that the government's ill-conceived policies has stagnated the growth and consequently closure of industries is drying up government revenue. Poverty level would increase in the coming days as dependence on IMF would hurt economy, ultimately pushing more and more people below the poverty line.

The frustration with the worsening socioeconomic and unemployment situation is creating a breeding ground for social unrest and militancy in the country. Desperation among people is growing due to rise in poverty. Everyday the newspapers carry the stories about the poor parents, who have put their children on sale for they cannot meet their basic needs of life. The gap between rich and poor is widening; rich is becoming richer and poor getting poorer.

The cash-strapped country was forced to turn to the International Monetary Fund (IMF) for a loan package of $7.6 billion that was agreed in November 2008, as the country was facing a serious balance of payments crisis and 75 percent of its forex reserves had shrunk. The IMF increased the loan to $11.3 billion in August last year. Despite meeting IMF tough demands of hiking interest rate and withdrawing subsidies on petroleum products, the government has failed to tame inflation, which has so far remained at a higher side. The country's entry into an IMF program caused a significant economic slowdown and the government faced a major challenge in managing a slowing economy.

The per capita income witnessed negative growth during the fiscal year 2008-09 owing to the slowest Gross Domestic Product (GDP) growth in 10 years and 30 per cent depreciation of the rupee against the dollar. The per capita income, which is an important benchmark to determine the health of an economy, rose from $410 to $1085 from 1999 to 2007-08 in the country of 170 million people. The fall in per capita income has made the nation of 170 million people poor.

Soaring inflation is not only affecting the macro economic indicators but also severely disturbing social life of the country's poor. The inflation has hit poor consumers harder than the more affluent ones, as for each one percent increase in inflation, more and more people fall into poverty. Under the IMF demands, the government has already hit the poor by eliminating subsidies on wheat, cooking oil, petrol, diesel and kerosene oil. The government however could not reduce its borrowing from the central bank even after withdrawing subsidies.

Critics say that present government still excessively depends on foreign aid and loans to run the country without having any plan to lead the nation to the goal of self-reliance and to alleviate poverty.

Though the IMF programme will conclude in the current year fiscal year 2010-11, yet the government has already indicated that it will seek further budgetary support from the Fund. The Finance Minister Dr. Hafeez Sheikh has warned that the country could go bankrupt if the government did not sign a deal with the IMF for another loan.

There is no way out of the economic crisis other than to sign a deal with the IMF, reported a private TV channel, citing Finance Minister Dr. Hafeez Sheikh while taking part in a debate on the budget in Senate last month. He stated that if the deal had not taken place, it could have been the government's biggest economic mistake and Pakistan could have gone bankrupt. Under IMF demands, the government raised interest rates that caused slump in the industrial sector leading to a decline in revenue collection and slowdown in exports proceeds.

Pakistan's total debt-to-GDP ratio has crossed 61 percent this fiscal year, breaching the 60 percent limit set under the Fiscal Responsibility and Debt Limitation Act. The country's external debt-to-GDP ratio has hit 30 percent, while domestic debt-to-GDP ratio has mounted to an alarming level of 31 percent, according to the State Bank of Pakistan.

The country's 65 per cent of the budget goes to debt retirement, defense expenditures and the current expenditures of the government and almost 60 percent of the economy is out of the tax net. The tax system still needs to be reformed and more sectors need to be brought into the tax net to achieve a tax-to-GDP ratio at 16 to 17 percent.

War on Al Qaeda and Taliban strained the country's budget, as allocation for law enforcement agencies had to be increased significantly. This resulted in erosion of resources for the development projects, particularly in the northwestern tribal areas in addition to human sufferings and resettlement costs. Analysts believe that the security issue is hitting the economy at every level, as the foreign businessmen and investors remain afraid to visit the country where they cannot move freely and where heavily guarded hotels also remain the prime target of terrorists.

The country's exports were also hurt as the trade delegations have been reluctant to visit the troubled country, according to the experts. The export orders are either diverted to other countries or foreign buyers hold meeting at other destinations, which increases the cost of production and leaves the country uncompetitive in the international market

The country's economy has paid heavy costs in terms of flight of capital, closure of industries, loss of employment, economic slowdown, loss of inflow of foreign direct investment (FDI). The foreign investors are reluctant to invest in Pakistan due to worst law and order situation.

The country witnessed a decline of 15 percent in the net foreign investment during the first eleven months of the current fiscal year 2010-11, according to the central bank. The FDI has posted a decrease of 39 percent to $2.031 billion in July-May of fiscal year 2010 as compared to $3.33 billion in corresponding period of last fiscal year, depicting a decrease of $1.3 billion.