Disparity between rich and poor declines

ISLAMABAD: The Ministry of Finance on Monday stated that the disparity between the rich and the poor has declined in Pakistan on the basis of the latest official survey.

The ministry claimed that the provisional growth figures of 3.94 per cent released by the Pakistan Bureau of Statistics (PBS) in May 2021 may exceed in the back of strong expansion in industrial activity. The monthly economic update and outlook released by the ministry stated that the Planning Commission assessed that poverty has declined in Pakistan.

The Gini coefficient is used to measure the incidence of income inequality. It is observed that the value of Gini coefficient also decreased from 0.326 in FY2016 to 0.303 in FY2019, which shows that the disparity between the rich and the poor has declined. In rural areas, the Gini coefficient has declined from 0.266 in FY2016 to 0.248 in FY2019, whereas in urban areas, inequality also decreased from 0.356 in FY2016 to 0.328 in FY2019, showing the disparity has declined in both urban and rural areas in Pakistan.

On poverty, the report stated that the Planning Commission poverty estimation is based on the cost of basic need approach estimated at Rs 3757.85 per adult equivalent per month. According to this methodology, 21.9% of the population is below poverty line in FY2019 as compared to 24.3% in FY2016 as per the Household Integrated Economic Survey (HIES) FY2019 statistics released by the Pakistan Bureau of Statistics (PBS). Poverty in both rural and urban areas has declined as poverty headcount of 11.0% in urban and 28.2% in rural areas is estimated on the basis of the survey done in 2018-19.

On other hand, the UNDP’s Pakistan National Human Development Report 2020 authored by Dr Hafeez A Pasha highlights two situations, one of the richest and the other of the poorest resulting in massive levels of income inequality in the country. There could be one reason for polls apart result as one survey was done by the PBS prior to the COVID-19 pandemic and the UNDP had done its findings afterwards.

However, the Ministry of Finance projected that the rebound in economic activity was expected to continue in the coming months on account of reopening of economic activities and acceleration in vaccination process. However, the CPI-based inflationary pressure will remain there and the ministry has projected that inflation would be hovering around 8.8 per cent to 10.2 per cent for the outgoing fiscal year. Pakistan’s inflation is mainly dependent on fiscal and monetary policies, international commodity prices, the USD exchange rate, seasonal factors and economic agents’ expectations concerning the future developments.

The expected inflation for June can be decomposed into two effects: a base effect and new MoM price impulses. If in June 2021, no new MoM price impulses occur, the YoY inflation rate would settle around 9.8 per cent. It is expected that a deceleration will occur as compared to May 2021. In June, new price impulses may come mainly from recent increase in international food and oil prices, following the observed strong recovery of the world economy. But due to government interventions, the pass-through into domestic price is expected to be limited. Thus, on YoY basis, it is expected that inflation in June 2021 will settle within probability margins of (8.8 – 10.2 per cent)

The input availability for Kharif crops is satisfactory and it is expected that the agriculture sector will continue to perform well on account of continuing support of the government. The industrial activity, measured by the LSM index, is the sector which is most exposed to external conditions. Its exposure to developments in international markets is illustrated that compares the year-on-year growth rate of LSM with the weighted average composite leading indicators in Pakistan’s main export markets. The LSM index is published with a time lag of two months, whereas the CLI is published with a one-month lag. Compared to the progress in this foreign CLI index, April’s YoY increase in the LSM (with 68.1 per cent) was exceptionally strong, also taking into account that seasonal factors usually significantly depress LSM activity in this month. This formidable industrial expansion essentially reflects two factors.

The first one is the low base effect due to the slump in LSM one year ago when the first wave of the COVID-19 pandemic hit the world economy as well as domestic activity gravely. Secondly, the strong vigor of the recovery in Pakistan’s economy was helped by prudent fiscal and monetary policies.

The April monthly economic indicators show very strong growth, mainly on the back of the strong expansion in industrial activity. This tendency is expected to have continued in May. On the basis of expected performance of LSM in the remaining months of FY2021, acceleration of the MEI is expected to continue. “Thus the annual GDP growth may exceed the provisional figure released by PBS in May 2021,” the ministry claimed. Economic growth is accelerating in the last quarter of the current FY. This is expected to continue the recently-observed positive trend in imports of goods and services. These imports may exceed the level of the previous month.

Fortunately, the growth momentum is also reflected in an expected strengthening of the export performance. Exports of goods and services are expected to exceed $3 billion in June 2021. With imports expected to be about double the level of exports, the trade balance may settle at around $3 billion. The trade deficit together with the structural deficit in the primary income balance (on average $0.4 billion per month over the last 10 months) is largely financed by the inflow of remittances (on average $2.43 billion per month in the last 11 months) and other secondary income receipts from abroad (on average $0.35 billion over the last 10 month).

Taking all these into account, the current account balance is expected to show a deficit of around $0.5 billion by the end of the current fiscal year. In the regime of market-based exchange rate, a depreciation of 1.4 per cent occurred in a week. Presently, the exchange rate is 157.05. The market adjustment of exchange rate thus has not put any pressure on foreign reserves and it is expected that in the near future, foreign reserves will maintain their adequacy level.