Briefing Notes for the Launch in Islamabad, April 2007
Sustained strong economic growth but inflation and trade deficit genuine concerns
- Pakistan's economy grew at an average of more than 7.5% over the last three years, although it moderated to 6.6% in 2006. The slowdown in 2006 reflected the extraordinary surge in oil prices, the devastation caused by the October 2005 earthquake and adverse weather conditions. Agriculture grew at just 2.5% in 2006, down from 6.7% in 2005, with negative down-stream impacts on the textile and sugar industries. Large-scale manufacturing grew by 9%, down from 15.6% in the previous year. Services improved from 8% in 2005 to 8.8% in 2006 and investment hit a record high of 20% of GDP.
- Growth prospects for Pakistan are fairly promising and an increase to 7% or even higher in 2007 is expected following a recovery in agriculture and improved performance of the manufacturing sector. To sustain future growth rate of 7-8%, more investment is needed to develop human resources and physical infrastructure.
- Most countries in South Asia felt inflationary pressures in 2006 on the back of high oil prices. Consumer prices in Pakistan rose to 7.9%, as a result of higher aggregate demand compounded by shortages of principal commodities. Food prices also rose significantly, hurting the poor particularly. Prices of some essential food items such as sugar, pulses, milk, beef, mutton and some vegetable items witnessed sharp increases. Most of the items are part of minor crops, livestock and dairy products. The lesson is that these subsectors of agriculture should be given due importance as these play an important role in stabilizing overall inflation in general, especially food inflation.
- To contain inflation, most countries in the subregion pursued tighter monetary policies. In Pakistan, the Government's anti-inflationary policies included effective managing supply and demand for essential consumer goods and raw materials by means of a liberal imports policy and strengthening the public distribution system through the Utility Stores.
- In fiscal 2006, Pakistan's fiscal deficit was estimated at 4.2% of GDP, higher than the 3.3% of GDP in the previous year. The higher deficit in 2006 owed to an increase in expenditure following the October 2005 earthquake. Following the debt reduction strategy, the public debt-to-GDP ratio fell from 85% in June 2000 to 65% by June 2005 and to 59% by June 2006.
- In Pakistan, exports and imports continued to grow at double digit rates in 2006. The trade deficit widened to a record $8.4 billion in 2006, with 45% of the increase due to a higher import bill for crude oil and petroleum products. Imports of raw material and machinery also increased sharply. The current account continued to benefit from large remittances from expatriate workers, estimated at $4.6 billion in 2006. On the financial account, foreign direct investment, at $3.5 billion in 2006, was the highest ever recorded.
- Reform needs to be maintained to sustain high growth and rapid poverty reduction. With fiscal adjustment still a challenge, more progress is needed in tax collection and resource mobilization to reduce large budget deficits. This will allow redirecting resources from servicing public debt to economic development and social programmes, while at the same time creating an enabling environment for private investment.
- Increase in consumer prices is a genuine concern in most countries in South Asia. Striking an appropriate balance between promoting economic growth and price stability remains a challenge because inflationary pressures accompany rapid economic expansions. As the current account deficit is becoming a serious concern, this will have implications for the balance of payments. If oil prices remain high, there will be need to devise ways to contain the current account deficits.
Rural physical infrastructure for rapid poverty reduction in South Asia
- Physical infrastructure reduces poverty in two ways. It promotes growth, which generally benefits the poor. And it directly benefits the poor by improving their incomes and the quality of their lives. Since most of the poor in countries of South Asia still live in the rural areas, rural infrastructure is key to reducing poverty rapidly.
- Rural physical infrastructure covers roads, electricity, irrigation, telecommunications and much more. The impact of various types of infrastructure on rural economies and poverty reduction is maximized when provided in unison. The research feature in the Survey is focused on rural roads and electricity.
- In South Asia, only 65% of the rural population lives within two kilometers of an all-weather road, far less than the 95% in East Asia. Only 43% of the population has access to electricity, far less than the 88% in Eat Asia. The situation in rural areas is much worse.
- Numerous empirical studies concluded that rural roads and electricity improvements had a significant impact on poverty reduction. In India, a million rupees spent on roads led to seven times the poverty reduction as a million rupees spent on specific anti-poverty programmes. In China, the situation repeated itself, though the gain was of a smaller magnitude. The logic is simple: roads are the arteries that go where poor people live, improving their lives in concrete, immediate ways.
- To distribute electricity to smaller populations scattered over vast rural areas through conventional means, such as extending the electricity grid, can be complex and expensive. More preferred is distributing energy by using locally available resources, mainly renewable resources such as small hydropower, solar power, wind power and biomass power.
- Countries in South Asia are aware of deficits in physical infrastructure and making efforts to close those. It is important to remember that mega projects may be essential to accelerate growth, but projects that directly benefit the rural poor should be given equal importance, if not more. In the absence of interest from the private sector, more public investment should go to rural infrastructure.
- Pricing of electricity is complex because of efficiency and equity considerations. Tariff rates should be competitive and reflect market conditions, with some provisions for poor households. All the countries have been raising tariff rates over the years, which are increasingly becoming unaffordable for the poor.
- Tariff rates of electricity should be kept low, affordable for small consumers. To cover the losses of public utilities on this account, the Government can allocate a certain amount of subsidy in its general budget and pass it on to public utilities distributing electricity. A more targeted approach of giving vouchers to the poor so that they can pay electricity bills at market rates is worth considering. Poor households can be asked to pay a fixed percentage of the electricity bill, with the remainder covered through the voucher.
- Transmission and distribution losses of electricity are enormous in most countries, mainly due to theft. By improving accountability and governance, losses if not eliminated can certainly be reduced substantially, which will reduce constant pressure of raising electricity tariffs.
Gender inequality continues – at great cost
- Gender discrimination has widespread ramifications and clear economic and social costs. The Asia-Pacific region has made good progress in reducing gender discrimination in recent years, but appalling disparities remain. The region is losing US$42-US$47 billion per year because of lower labour force participation rates of women – and another US$16-US$30 billion per year because of gender gaps in education resulting in lower productivity of women. Those are just the economic costs – added to them are social and personal costs.
- Gender discrimination in the region is most visible in the low access of women and girls to education and health services, to economic opportunities and to political participation. In South Asia, female school enrolment ratios in most countries tend to be lower than in other subregions of Asia. The female-to-male ratio in the population is deteriorating, partly reflecting women's inadequate access to health services. Meanwhile, violence against women continues, unabated, indicating how voiceless women are in households and in countries.
- One of the fundamental reasons women are subject to discrimination is that they do not have a voice in decision-making at home or in society, even when the matters are directly related to themselves.
- To overcome barriers for women in decision-making positions, particularly at the local levels, the Governments of Bangladesh, India, Nepal and Pakistan have introduced quota systems for women in elected bodies of local governments. Pakistan is among the six countries in entire Asia having shares of women in parliament equal to or exceeding 20 per cent.
- The Survey proposes several specific recommendations in four critical dimensions: economic participation, education, health and empowerment. It recommends provision of free primary education, addressing safety and privacy concerns and provision of scholarships for girls. Governments should improve health services for women and involve NGOs and civil society organizations to improve health outcomes. They should ensure that women are not discriminated against in recruitment, wages, or promotions. The public sector should be a model for the private sector.
- Best practices highlighted from across the region and elsewhere show that gender balance can be achieved with limited resources, but this requires changes at the household, societal and national levels. In particular, political leadership and commitment will go a long way towards correcting abject discrimination against women.