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Tsunami of stagflation

It’s a bloody tsunami of stagflation – a lethal combination of hyperinflation and economic stagnation. The prospects of economic revival are doomed for at least three years with inflation (CPI: 9.41 percent) projected to go up to 14 percent, GDP growth down to 3.5 percent, investment drowning and revenues plummeting (by Rs 318 billion), both high-cost items of debt-servicing (Rs2 trillion) and defence (over Rs1.7 trillion) touching Rs4 trillion and unemployment surging to 8 percent, etc.

Consequently, as promised by Prime Minister Imran Khan, instead of creating two million jobs every year, one million people will be rendered jobless and high inflation and low growth will add up to four million people to the mass of poor people already living below the poverty line, according to Dr Hafiz Pasha.

Another member of the Economic Advisory Council, Dr Ashfaque Hasan Khan, has estimated that gross GDP is going to be reduced by 15 percent and will shrink from $330 billion (equal to Indian exports) to $280 billion. He has warned that after signing the IMF programme and with a growth rate of 4 percent of GDP, the prime minister’s promises to create 10 million jobs and 5 million houses will remain a farfetched dream; he may rather have to face social unrest. Due to the 34 percent depreciation in the rupee and the skyrocketing prices, purchasing power has drastically reduced for various consumers; the hardest hit are the poor and fixed income groups.

Recourse to a delayed IMF bailout is yet to bring further belt-tightening to chase the illusion of sustainable growth under a macro-economic stabilization programme that has never succeeded with its tinkering with fiscal sphere, which is an alienated symptom of the crises in a dependent and primarily rent-seeking economy. Pleasantly surprising are the late warnings of those economists and the World Bank whose recipes have been reinforcing unsustainable growth in a neoliberal framework.

Finance Minister Asad Umar is now finding himself between the devil and the deep sea. His two half-baked supplementary budgets failed to make any difference. Indeed, the current account deficit has been brought down to a billion dollars a month with the borrowed billions of dollars from Saudi Arabia, UAE and China (over $11 billion), but fiscal deficit will still go beyond what was projected due to borrowing, a steep fall in revenue collection and increasing expenditure on debt and defence. Yet again, without a quantum jump in exports and drastic reduction in unessential imports, the current account deficit would be back to square one in the next year.

Interestingly, Asad Umar, Dr Hafiz Pasha and the World Bank agree on a principal hurdle to political economy – the hegemony of a parasitic elite that grabs all resources and shares nothing. The finance minister meekly resents the ruling elite that has taken over the state and grabbed all resources and has felt “the heat of the elite capture due to the onslaught launched by the civil-military bureaucracy against a particular decision”.

Dr Pasha, in his book ‘Growth and Inequality in Pakistan’, has identified seven elite groups that have grabbed resources and control the economy: they include the establishment, real-estate developers, multinational companies, commercial banks, civil services and large landowners. The recent World Bank Report, ‘Pakistan@100: Shaping The Future’, also points to such powerful groups, including the security forces, bureaucracy, businesspersons and landlords, who are not only responsible for our economic woes but are also a hurdle in the way of much-needed reforms. Christophe Jaffrelot, editor of ‘Pakistan at the Crossroads’, refers to Stephen Cohen who has elaborated the domination of an establishment, which is made up of only some 500 people belonging to various circles, as much civilian and military, as observed by Mushahid Hussain.

Thanks to these dominant groups, which seek rent, tax exemptions, loan waivers, perks, privileges, entitlements and indulge in resource grabbing, tax evasion, money laundering, snuggling, black-marketing, Pakistan has been turned into a conglomerate of powerful fiefdoms and mafias. Rent seeking is universal, whether in the form of kickbacks, bribery, un-documented economy, land-grabbing by civil or defence housing schemes, strategic dividends for a client state, benami properties/accounts, tax rebates/exemptions or misappropriations.

Not even one percent of the rich pays any or little tax. There are universally two balance sheets, one to deceit tax collectors, the other to perpetuate the cash economy. On account of exemptions on income tax alone, Rs400 billion are siphoned away and other tax concessions cost the exchequer Rs850 billion annually. Yet, our half-revolutionary Asad Umar is lifting all restrictions on non-filers for the second time and mulling over yet another amnesty scheme to whiten black money.

Most privileged are the one percent large landowners, who own 22 percent of land and pay nominal or no taxes, low water charges, enjoy tremendous subsidies and hide their other huge incomes for being agriculturalists. Yet Jehangir Tareen, a big landlord, has been asked to propose a Rs230 billion package for elite farmers.

‘Pakistan@100: Shaping The Future’, though ideologically tied to neoliberal economics, has come up with some interventions to accelerate and sustain growth for us to become an upper-middle-income country with a $2 trillion economy by 2047. It has proposed eight reform focuses to achieve till 2047: One, reducing fertility rate from 3.7 percent to 1.8 percent and population growth rate from 2.4 percent to 1.2 percent.

Two, early childhood development: reducing the stunting rate in children from 38 percent to 10 percent. Three, business environment: improving the ‘Doing Business’ ranking from 136th to 25th. Four, increase trade openness: regional merchandize trade to increase from $18 billion to $58 billion, including all neighbours. Five, tax revenues: increase tax-to-GDP ratio from 13 percent to 20 percent. Six, water management: water productivity to be raised from $1 to $12 square meter.

Seven, transparency: right to financial information, timely disclosure of all budgetary allocations, accounts of all state institutions, including PSEs, monitoring of service quality according to performance metrics. And, eight, accountability: full devolution of power to strengthen local governments, improve public-sector management and checks and balances.

The World Bank thinks that Pakistan’s economic crisis is not cyclical but structural. But to do all these good things, you will have to raise revenues from the rich, drastically cut all unproductive expenditures and spend on the people for their all-sided development. This is, however, not possible without changing the power structure of the elites and empowering the people. The World Bank, Finance Minister and Mr Pasha have no solution to this fundamental challenge since this is the sphere of political economy and not of econometricians. For now, suffer the shenanigans of Naya Pakistan and the tsunami of stagflation it has unleashed.

Imtiaz Alam, "Tsunami of stagflation," The news. 2019-04-05.
Keywords: Economics , Economic stagnation , Social unrest , Parasitic elite , Civil services , Security forces , Economic revival , Growth rate , Debt servicing , Unemployment , Inflation , Bureaucracy , GDP , IMF