Addressing an Average Citizen's View of the Economy

Author:Mr Nasim Beg
Profession:Arif Habib Investment Management Ltd

The television news channels and the news papers are constantly reporting about the good things happening to the economy. Pakistan has its highest foreign exchange reserves ever, the unthinkable has happened with Pakistan becoming the save haven for keeping one's wealth and the Pakistan Rupee constantly appreciating against the all mighty US Dollar, our exports are for the first time set to exceed the hitherto elusive mark of ten billion dollars; one cannot remember if interest rates were as low as the current levels ever before and there is talk of these going down further; banks and financial institutions are bending over backwards to lend you money to buy a car, or a house or even a television set; the stock market, the barometer of economic health, is the best performing market in the world.From all accounts, it appears that Pakistan is the land of opportunities and the young and old should be happy. Any young person seeking a job should have one and all retirees should have the ability to live out old age comfortably. There should be a spate of new businesses being set up and scores of new companies being listed on the stock exchanges. Poverty should be on the decrease if not nearing elimination; there should be enough in the government's coffers to extend social security to all citizens. Yet, this does not seem to be the case. The what is the explanation? And is there hope?Let us first try and address as to why, in practice, life isn't as good as we would expect from the economic indicators. We should start with looking at why we have a very high level of poverty, which many reports say, has increased rather than having decreased. Never mind how the economists measure poverty, to an average citizen's way of looking at it, if we were to simply take the per-capita income or in simpler words the average income of the citizen, it is stated to be under $500 per year or in Rupee terms, under Rs. 30,000 per year, which translates to under Rs. 2,500 per month. This to an ordinary mind seems to be well below subsistence level. If we recognise the fact the average means that some persons have a much higher income bracket and most if not all readers of this article will indeed have a much higher income, it then only means that the persons on the other side of the average must be at a much lower level. Thus, there is not doubt that a very large segment of the population is living well below the poverty line. This is a curse that we, in this subcontinent, have not been able to break out of over the centuries. It is not simply the economic managers of today or that of the past several governments that can be held responsible but the very socio-economic structure of society; It is the power structure that is at fault. In our society, opportunities are some thing that one is born into and only a handful born outside the privileged circles can find their way out of poverty. There is a lot of talk about poverty alleviation but results will be very difficult to come by. This perhaps will be the single largest challenge that the new government will face and if the political process continues without interruption, with several successive elections, we may see this issue truly being addressed. The issue is really of empowerment of the average citizen and, credit to the Musharaff government, that the process of transfer of power from the all powerful bureaucratic servants of the elitist class has started in favour of higher empowerment of local governments but a lot more needs to be done to ensure that the power actually transfers out of the control of the elite at the local level too. Unfortunately, the pressure of those elected to the national and provincial assemblies is and will remain in favour of taking back the budgetary allocations from the local representatives - they would not wish to see the economic power shift away from themselves to the local Nazims etc and thus and closer to the citizens. This brings us to the other very important issue, why are the government's coffers not spilling over? Very simply, when you are stuck in an unfair system, where taxes are collected for the benefit of a few. It is like in the times of foreign rulers, when the rulers collected taxes from the local population and in turn used the money to pay turncoats to help rule the local population. Clearly it was not out of love for the rulers that the population paid taxes out of its meagre earnings but simply out of fear. The average citizen will gladly pay taxes if he is treated as the taxpayer who bankrolls the salaries and privileges of all government employees (civil and military) and the members of the assemblies, i.e., those paid by him are his servants and not his masters. When these servants make sure that the taxes collected are spent judiciously on looking after the less fortunate members of society and not frittered away on self-grandeur. This then is the government's second most challenging task, the tax-paying culture will only emerge when the population sees evidence of the taxes being spent judiciously; all other measures will only have limited success.As to why are we not seeing new business being set up and new companies being listed? Unfortunately, for us, the decade of the nineties was when we saw a major abuse of the financial sector. Hundreds of factories were set up, not because these were considered viable businesses but so as to siphon off money while setting up these factories. This resulted not only in removing money from the system in Pakistan or of its reckless spending on Pajeros etc., but it also resulted in excess capacity being created in almost all industrial sectors. Thus, there is not much room today to set up new factories despite the otherwise business friendly conditions. The job market will remain stagnant unless the government takes measures to kick-start the economy and get the basic industries such as cement and steel making going by spending on mega-projects. Such projects would also be a source of large scale employment. Once the economy gets going, the excess capacity would be filled and further jobs would be created and, hopefully, we would get into a virtuous cycle. Here again the non-elected government had started on some projects; the elected government needs to make this one of its main objectives despite the constraints it will continue to have due to low tax collection and large military spending.One area that was discussed during the Musharaff government was that of substantial spending and reform in the agricultural sector. Some work has been done but a lot more needs to be done. Although the statistics show that agriculture contributes between 25 to 30% of our Gross Domestic Product, it is pretty obvious that this is the base on which the rest of the totem pole stands - we need to address water management, quality of seeds, mechanisation, use of technology, protection of the soil and environment, land distribution, transportation and storage and an assured off take of the produce through a strong capacity to grade, process and export. Here again the new government shall have a gigantic task on its plate. One doesn't expect miracles but we certainly need a sincere and devoted effort. We have already mentioned abuse of the financial system during the 1990s and are glad to have witnessed a major move towards making it independent of the government functionaries. One must admit that the process stared in the 1990s and has been aggressively pursued during the Musharaff government not only through privatisation and listing of some banks but also through the revamping of the two regulators the State Bank and the Securities and Exchange Commission. A lot of good work has been done by both these regulators and the ground has been laid for genuine investment. One major abuse of the financial system in the past was that of it being used by the government to meet its budgetary shortfall. It used to borrow from the financial sector at exorbitant interest rates and this not only deprived trade, commerce and industry from funds at reasonable cost but it also gave the average saver a false sense of security of a high interest rates resulting in the saver putting away less than he should have for old age. Now that this interest rate structure is being brought to more realistic levels (still higher than the competitive world environment), it is causing great hardship for pensioners etc. The government will have to find a way of providing a social safety net for persons faced with this predicament but the, in all fairness, it must deal with all members of society living below the poverty line and not only those who have some savings - a daunting task in a difficult budgetary environment. We would end this article on a positive note, the economic indicators have not looked as good in a long time, the stage is set for the new government and the private sector to benefit from these conditions. As the quotas on our exports to the first world disappear under the WTO our textile sector should benefit tremendously and the benefit should translate right down to the cotton growing agricultural sector. Add to this some government spending on mega-projects and some on poverty alleviation; these should have some positive effect on employment and consumer spending and in turn on increased industrial output and further job creation. Also very importantly, we are not likely to see some of the bad governance and corruption of the past, not because we have angels in the assemblies but more so because of a quiet revolution that has taken palace in the electronic media, which is likely to act as a check on most of what is undesirable. The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.Mr Nasim BegArif Habib Investment Management LtdF-61/6, Block 4CliftonKarachi75600PAKISTAN

To continue reading