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Price of Pakistan's economic woes

14 April 08 15:27 GMT
By M Ilyas Khan
BBC News, Karachi

Sughra Jamal, a 45-year-old Koran teacher in Pakistan's southern city of Karachi, is caught between the country's twin problems of inflation and unemployment.

Her husband, a carpenter, had a heart attack 10 years ago and cannot work.

One of her two sons is asthmatic and cannot hold a steady job. The other works as an assistant at a medical clinic for 1,500 rupees ($24) a month.

That leaves Ms Jamal as the sole breadwinner of the family, with a monthly income of roughly $89 that she receives in fees from her students.

How does she spread this income across various demands for food, medical care and education of her family?

"Health problems are out, I simply have no money to pay the doctors," she says.

She does pay roughly $3 in monthly school fees for her seven-year-old daughter, and another $20 to $25 a month in bus fares as she travels from door to door to give lessons.

Not alone

"The rest is taken up by food, although we hardly have two square meals every day of the week," she says.

Ms Jamal is not alone in her ordeal.

Tens of thousands of people around the country try to fight off food inflation through endless queues outside government-run low-price outlets called Utility Stores.

Most people standing in the queue outside one such store in Karachi intend to buy wheat flour at discounted prices.

Others are lining up to buy cooking oil, which is being given at discounted rates to only those customers who make purchases of a certain amount from the store.

They wait in the queue for hours, holding invoices of their purchases in their hands.

A World Food Programme (WFP) report last week said nearly half of the country's 160 million people are at risk of going short of food due to a surge in prices.

Food prices rose at least 35% in 2007, compared with an 18% rise in minimum wages, cutting the purchasing power of the poor by almost 50%, WFP said.

The question is, where are the benefits of an economy that has been growing at between 7% and 8% during the past five years?

After 9/11, Pakistan has received between $65bn to $70bn in terms of remittances, international debt rescheduling, aid inflows and foreign direct investment, says Asad Sayeed, an independent economist.

Slow down

This windfall fattened the bank deposits and coupled with low interest rates during 2002-06, sparked an unprecedented monetary expansion in the shape of consumer financing.

Easy credit lines created nearly 25 million buyers of houses, motorbikes, cars and larger vehicles, mostly in the urban centres.

But the policy hardly created any jobs. Instead, it created inflationary pressures in the economy, pushing more people below the poverty line.

Since the middle of 2007, the economy has started to slow down and defaults on consumer loans have gone up from less than 1% in 2002 to over 8% today.

The economic slowdown has also hit the automobile industry, which was the chief beneficiary of economic growth during 2002-07.

"Car sales went up from 35,000 units a year in 2000 to 180,000 in 2007, but they are now down to 120,000 and we expect further cuts," says Sibtain Allibhai, one of Karachi's major Honda car dealers.

Also, domestic food production is unlikely to satisfy demand over the next year.

This bodes ill for the poor.

It is also making the new government nervous, given the belief in some quarters that the previous government, headed by then Prime Minister Shaukat Aziz, was routed in the February elections due to the food crisis.

The new government faces the impossible task of bridging a yawning trade gap of $8.4bn in the short term.

Part of the task involves withdrawing subsidies on oil - a bitter pill the government will have to swallow in the face of rising international oil prices.

In the medium term, it needs to promote manufacturing with the focus on export diversification on the one hand and job creation on the other.

Economic sense

It also needs to expand agricultural services in order to increase domestic food production.

Both these steps will require quick decisions in the energy and water sectors.

A major reason for the current slowdown in manufacturing is said to be frequent power outages due to low electricity production.

Coal-based power generation may be one option given the country's huge coal deposits in southern Sindh province.

Water conservation projects, focusing on the paving of watercourses to prevent 40% of irrigation water that is lost due to seepage, have also become imperative.

But none of these projects have a gestation period of less than three years.

"We will have to make more economic sense than the previous government, and do it quickly," says Kaisar Bengali, an independent economist who is currently working with a team of experts to help the new government overcome the immediate challenges.

He worries that emphasis on relief to the people may lead to economic imbalances in the medium term, but says the government has no choice.

"It has to get results in three years, whatever the cost. If it doesn't, it may not survive."

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