Since the PTI government took charge in 2018, Pakistan’s economy has been struggling– to say the least. No, it didn’t all start with covid-19. Well before that, the PTI government was carrying out demand compression measures rather akin to shock therapy
In 2018, immediately after taking charge, the government halved PSDP spending. The State Bank of Pakistan, on the other hand, increased the policy rate from 6.5 percent to 12.25 percent, one of the sharpest jumps in our recorded history. Despite these measures (or perhaps because of them) inflation remained uncontrolled, while growth crumbled. In 2019, the GDP growth rate had already fallen from the earlier 5.8 percent to 1 percent. Suffice it to say that Pakistan’s economy was already in dire straits when covid-19 hit in March 2020,
Covid-19 further exacerbated the situation. In one quarter of 2021, we experienced an actual contraction of GDP, a calamity which has not afflicted us since 1952. The purchasing power of the Pakistani population in 2020-2021 dwindled by an estimated 30 percent in real terms. These are not just numbers. This roughly means people on the street having two meals instead of three.
It is in this backdrop that Prime Minister Imran Khan recently announced a Rs 120 billion subsidy under the umbrella of the Ehsas programme. The details that have been shared so far suggest that the subsidy would be given on three food items: sugar, pulses and flour. The subsidy would be provided to around 20 million families who would be identified through their poverty score card based on the poverty survey conducted back in 2010-2011. The distribution would happen through around 700,000 karyana merchants across the country.
The food subsidy programme is a welcome measure because it seeks to help those whom the government’s economic policies have hurt the most. However, a few questions arise about the programme, which are raised in the sincere hope that perhaps the government might be able to answer them.
Firstly, how does the government propose to get buy-in from the karyana stores?
No administrative step by this government, or any other, offers a real solution. In a country of Pakistan’s size, meaningful subsidies cannot be provided. The only thing which can help ease the pain of inflation is economic growth. It is economic growth which has lifted hundreds of millions of people out of poverty in China, India, Bangladesh and many other countries. Nothing else can work. Unfortunately, the government has gotten it all wrong and wants to treat the symptoms and not the disease. The sooner it realizes this, the better.
Bear in mind that most businesses are simply not registered with the government at all – especially the small, sole proprietors like karyana merchants who are closest to the life of ordinary citizens. These numbers will give you some idea. Out of an estimated total of over five million non-agriculture businesses in Pakistan, less than 100,000 private businesses have been registered with the SECP. While the active taxpayer list has grown fast in recent times, it still has less than 500,000 businesses on it. This reluctance to get registered is probably a result of the long-term adversarial relationship which the state has maintained with businesses, especially the small fish. How does the government propose to change that relationship now? Without such changes, the government may not be able to get buy-in from the karyana stores who are supposed to deliver the subsidy. The simple prospect of getting government discounts and getting an added footfall appears may not be enough to counter the threat of added tax-visibility and fleecing by state officials.
Second is the issue of accountability in the process. How would the registered businesses be vetted both for their financial viability to deliver such large amounts of subsidy?
Thirdly, would the stores have the capacity and infrastructure to verify the credentials of the recipients? In this regard we are told that a simple mobile application would be developed. But little planning seems to have been done otherwise. Onboarding of businesses and making them financially and technologically capable is an uphill task. The closest approximation we have is that of the likes of Easypaisa agents which currently number around 300,000. It has taken telecom companies almost a decade of efforts to develop this delivery network; yet they are still finding it hard to retain businesses in the delivery system.
And last but not the least, would the government be able to actually implement it? Unfortunately, the PTI’s track record of delivering large-scale projects is dismal. One is reminded here of the grand plan launched three years ago for construction of 5 million or more houses. Only 20,000 appear to have been built so far. Another failure seems to be the Kamyab Jawan project which was recently slashed to a quarter due to low interest. There is a significant capacity problem within the government machinery in Pakistan, which is a challenge not unique to the PTI government. How do they propose to address that?
While the food subsidy project is a welcome step, it is important to emphasize that it does not address the root cause of rising economic deprivation in the country. In another country, a Rs 120 billion food subsidy spread out over 6 months, might be large. But in the world’s 6th largest country, that’s not the case. Here’s some figures for context. The average household in Pakistan spends around Rs 40,000 a month and 40 percent of it goes to food. This means around Rs 600 billion being spent by households on food purchases every month. In a year, it comes to Rs 7.2 trillion. The subsidy therefore covers only about 5 percent of the food budget of the people. Moreover, the amount is to be spent on just three items of sugar, pulses and flour. If you look at the HIES 2018, these items account for only 5 percent of the total food consumption in a particular household. Subsidizing 30 percent, a 5 percent budget item means less than 1 percent reduction in the household monthly food bill. In all, the food subsidy will lead to about 1 percent reduction in the food budget of the average household. That’s assuming all the Rs 120 billion is disbursed and reaches the beneficiaries without any leakage. Far too little. A drop only.
To sum it up, the food subsidy initiative by the government is a good start, as it reflects a belated realization about the pain of those who have been hurt most by inflation. But it’s too small to address the issue in any major way. What then is the solution to the issue?
No administrative step by this government, or any other, offers a real solution. In a country of Pakistan’s size, meaningful subsidies cannot be provided. The only thing which can help ease the pain of inflation is economic growth. It is economic growth which has lifted hundreds of millions of people out of poverty in China, India, Bangladesh and many other countries. Nothing else can work. Unfortunately, the government has gotten it all wrong and wants to treat the symptoms and not the disease. The sooner it realizes this, the better.
