Is Pakistani Economy Recovering?

Guest Post by Dr. Ashfaque H. Khan, Dean of NUST Business School, Islamabad.

Pakistan's economy has grown at an average annual rate of 5.0 per cent over the last 62 years despite numerous impediments to its growth. By any standard, this has been a major achievement in terms of raising real incomes and alleviating poverty. The economic growth, however, remained uneven and interrupted by a variety of factors for a prolonged period. It was during 2000-07 that Pakistan's economy experienced the longest spell of strongest growth due to sound economic policies, structural reforms and a benign international economic environment.



Economic growth has slowed considerably in Pakistan over the last two to three years owing to a variety of domestic and external factors. What is worrisome is the new development where the growth number is being manipulated to paint a rosy picture. There was a story about the manipulation of growth number for 2009-10 in The News on May 16, 2010. The usual methodology to post a higher economic growth for the current year is to reduce the growth of the previous year. In other words, reduce the base to get a higher growth for the current year.



The growth number for 2007-08 was provisionally reported to be 5.8 per cent. The year 2008-09 was the most difficult year for the world economy as global financial meltdown triggered a full-fledged economic crisis. Strong economies like Hong Kong, Malaysia, Singapore, Taiwan and Thailand witnessed negative growth. Pakistan, on the other hand, posted a positive growth of 2.0 per cent and outshined the strongest economies of the region in 2008-09.

How was this positive 2.0 per cent growth achieved? The 5.8 per cent provisional growth of 2007-08 was drastically revised downward to 4.1 per cent and as such the base was reduced to arrive at a higher number of 2.0 per cent for 2008-09. Some methodology for the calculation of value-added for some sectors was also changed without bringing to the notice of the National Accounts Committee.

The same process has been repeated according to the newspaper story for the year 2009-10. The Federal Bureau of Statistics (FBS) – the institution responsible for compiling the country's national income accounts, has revised the last year's (2008-09) growth of 2.0 per cent to 1.1 per cent and that too, by further trimming the growth of 2007-08 from 4.1 per cent to 3.7 per cent. Since the base of 2008-09 was trimmed to 1.1 per cent, the growth for the current fiscal year (2009-10) has risen to 4.1 per cent.

Not only the growth of last year was reduced but also growth of some components of the GDP was outlandishly jacked up in 2009-10. As reported in the news item, the growth of the construction sector was pushed up to an unbelievable level of 15 per cent. Only a lunatic would expect the construction sector to grow by 15 per cent in 2009-10 when the public sector development programme of the federal government has been slashed to one-half and the private sector construction activities are at near standstill. The production of cement adjusted for exports and that of iron and steel has been used as a proxy for calculating growth in value-added in construction.

The interesting paradox here is that while cement production unadjusted for exports, grew by 11.2 per cent and iron and steel registered a high negative double digit growth, the construction industry seems to have thrived and grew by 15 per cent. This is simply unbelievable. Furthermore, the growth of the livestock sector, which accounts for over 11 per cent of the GDP, has been jacked up as well according to the news item.

Though the FBS' staffers are technically weak, they are surely honest. My appeal to them is to do their job professionally as they have been doing in the past. The revision in growth numbers is common in every part of the world but unfortunately the extent of revision has grown significantly in Pakistan over the last few years. The provisional growth of 5.8 per cent in 2007-08 has been revised downward to 4.1 per cent and further to 3.7 per cent – a downward revision of 2.0 percentage points is simply unacceptable and has perhaps never happened before.

Should anyone accept that the economy has grown by 4.1 per cent in 2009-10 in the midst of deteriorating security environment, crippling impact of power shortages and mismanagement, persisting double-digit inflation and a higher interest rate environment? If the growth is really 4.1 per cent in 2009-10 – up from 1.1 per cent in the previous year, then the government and its economic managers will have to answer the following questions. Should we believe that the spate of suicide bombing and heightened political tension have had no impact on economic growth? Should we believe that the long hours of power outages have had no adverse impact on the economy? Should we also believe that the higher double-digit inflation and the higher interest rate environment have had no adverse effect on the economy? Should we re-write our own economic theory?

Economic theory armed with extensive empirical evidence suggests that the declining rate of investment, high inflation and interest rate, large fiscal deficit, armed conflicts, wars, political instability, corruption, absence of rule of law, high poverty rates, rising debt burden, and weak infrastructure will have negative effects on economic growth. How come economic growth accelerated from 1.1 per cent in 2008-09 to 4.1 per cent in 2009-10 in the midst of all the above-listed factors? Economic managers will have to answer these questions.

Related Links:

Pakistan's Economic Performance 2008-2010

Incompetence Worse Than Corruption in Pakistan

Pakistan's Circular Debt and Load Shedding

US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance

India Pakistan Contrasted 2010

Pakistan's Foreign Visitors Pleasantly Surprised

After Partition: India, Pakistan and Bangladesh

The "Poor" Neighbor by William Dalrymple

Pakistan's Modern Infrastructure

Video: Who Says Pakistan Is a Failed State?

India Worse Than Pakistan, Bangladesh on Nutrition

UNDP Reports Pakistan Poverty Declined to 17 Percent

Pakistan's Choice: Talibanization or Globalization

Pakistan's Financial Services Sector

Pakistan's Decade 1999-2009

South Asia Slipping in Human Development

Asia Gains in Top Asian Universities

BSE-Key Statistics

Pakistan's Multi-Billion Dollar IT Industry

India-Pakistan Military Comparison

Food, Clothing and Shelter in India and Pakistan

Pakistan Energy Crisis

IMF-Pakistan Memorandum of Economic and Financial Policies

Comments

swastyk7 said…
Well, now thats an interesting revelation. Earlier I used to think that Pakistan is among the leaders in south asia regarding economic growth and market rise. Can you please also throw some light on the evaluation process of economic growth of India by its statisticians and whether they also do such revision of figures to inflate the current year growth rates.
Riaz Haq said…
swastyk7: "Can you please also throw some light on the evaluation process of economic growth of India by its statisticians and whether they also do such revision of figures to inflate the current year growth rates."

Indians do some bizarre stuff in reporting errors in GDP. Here's an example as reported by Seekingalpha in Sept 2010:

Yesterday, we had written about the controversy over GDP numbers. What has happened since is even more bizarre. Now the government has issue new numbers. All within some 24 hours. The government has revised consumption numbers quite dramatically, claiming the earlier low numbers were simply a result of a calculation error.

The size of revision is dramatic. The consumption size GDP growth estimate is now 10%, compared to 3.7% earlier. Pvt consumption growth is now 3.7% compared to 0.3%, while the government expenditure growth is now 14.2% compared to -0.6% earlier.

Contrary to making us feel better about government data, this makes us feel even more uncomfortable. Yesterday, we had believed the explanation behind the low consumption numbers were systemically less efficient calculation methods. We understand quarterly data on GDP has started coming out only in the last 1-2 years, so we thought, the government still has to get its act right on the number collection mechanism.

So our point was: just ignore these consumption numbers, focus on the supply side numbers, where the data is being collected for several years, so more reliable.

Do we feel better now, given that the government claims it was an error and not systemic issues? No. Our point is this: how do we know the current numbers are not simply something pulled out of a hat?

That is what it seems to us. Reacting to the front page story in The Economic Times, it appears to us, that the finance ministry may have simply directed someone at the CSO to come out with palatable numbers forthwith.

We have for long said Indian WPI numbers are incorrect. The Wisdomsmith guage for WPI shows far different numbers (and much higher) to official numbers.

Indian government needs to get some more method into its statistics. Since the last 12 months, official data is becoming increasingly suspect.
Riaz Haq said…
Here's an excerpt from a piece by Lawrence MacDonald of Center for Global Development on flood recovery in Pakistan:

..Molly (Kinder) adds that aid money could make a real difference in how well and how quickly Pakistan is able to recover from the floods. As Molly, Nancy (Birdsall) and Wren have written, redirecting unspent aid money towards flood reconstruction could bolster Pakistan’s economy at a critical moment and lay the foundation for poverty-reducing growth when and if the necessary domestic policy reforms are enacted. We discuss ways to make that aid transparent and to ensure that it isn’t diverted for other purposes.

As Molly and I spoke, top officials from the Pakistani government were in in town for the third set of so-called Strategic Dialogue meetings with their American counterparts. We at the Center got just a taste of those meetings when we hosted Pakistani Finance Minister Abdul Hafeez Shaikh for a private breakfast with members of Washington’s Pakistan policy community and U.S. government representatives. Shaikh’s talk and his savvy about both economic policies and politics impressed all those who attended, but Molly warns that while Pakistan has a full team of skilled economists in the top ranks of government, knowing what needs to be done and managing to overcome the substantial obstacles to reform are two separate issues. Molly adds: the finance minister “rightly identified the challenge, which is how can you create the political momentum within Pakistan to enable these very difficult reforms to happen?”
Riaz Haq said…
Pakistan's top tax man paints gloomy picture of economy, reports The News:

KARACHI: Chairman of the Federal Board of Revenue Salman Sidiqqui has said that the government cannot provide a bailout to the industrial sector as the regime is facing an unannounced economic emergency.

He stated this while addressing a ceremony under the aegis of the Karachi Chamber of Commerce and Industry here on Saturday.

Talking to the media on the occasion, the FBR chairman said that the government was trying to curtail loans to control inflation.

The current amount of loans stands at Rs140 billion not 500 billion rupees, he added.

He said in the first phase, the Islamabad Electric Supply Company (Iesco) would be privatised, adding that the economic sector was facing a crisis and the government could not meet its expenditures.

He questioned how it could be possible to provide resources to the business community in these circumstances.

The FBR chairman pointed out that no one would come forward from abroad to provide a bailout package for the restoration of the economy.

"We should resolve our problems and every citizen should be brought into the tax net," he added.

The FBR chairman suggested that a ban had to be imposed on the government from borrowing from the State Bank.

Policymaking is not the responsibility of the FBR but its function is its implementation.

He advised tax defaulters to contact the actual department for the solution of their problems. The FBR is working for the welfare of various departments.

It is not difficult to overcome the issue of economic deficit through local resources, he underlined.

To a question, he said that the economic downfall started after the government borrowed loans from banks.

Salman Sadiqqui urged businessmen not to attach any expectations to the government as it was facing economic problems.

He suggested traders should set up representatives of the business community for the solution of their problems regarding tax.

On this occasion, a KCCI member, Qasim Teli, said that traders were facing several problems about tax, adding that the traders wanted to pay tax but the policy of the government should be clear in this regard.

The government should improve the tax system. He demanded an end to corruption in the FBR.

Referring to various complaints on export refund claims, the FBR chairman said that a committee of the KCCI should be formed by the chamber office-bearers, who could help the board in resolving the claims of exporters.

"I assure you that all the refund claims will be made expeditiously as compared to the past and non official malpractices will be tolerated," he added.

The FBR chief said that the Board's Revenue Advisory Council will be asked to have a working relationship with the KCCI and further gave an assurance to the business community members that functions of the FBR will be restructured after consultation with the members of the chamber.

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