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Debt, Growth and Poverty Debt, Growth and Poverty Reduction: Reduction: A Case of Pakistan A Case of Pakistan

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Economic growth is the single most important factor influencing poverty a 10 percent increase in a country’s average income will reduce the

poverty rate by between 20 and 30 per cent.1

A stable macroeconomic environment is essential for a sustained high economic growth

Empirical evidence suggests that macroeconomics instability has generally been associated with poor growth performance and the associated rise in poverty

The persistence of large fiscal and current account deficits and the attendant rise in public and external debt have been the major source of microeconomic instability in many developing countries.

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Summary

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Existing Empirical Evidence

Rising public debt and economic growth exhibit negative relationship

Reinhart and Rogoff (2012) found weak relationship between government debt and long term economic growth under 90% of debt/GDP ratio. Negative relationship becomes stronger beyond 90% of debt/GDP ratio.

Balassone et al. (2011) found a negative and non-linear relationship between public debt and growth, with growth declining substantially when the debt to GDP ratio exceeds 100 percent.

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Summary

Overwhelming empirical evidence suggests four things

­ Relationship between public debt and economic growth is negative

­ Relationship is non-linear

­ There exists bi-directional causality between these two variables

­ Higher public debt affects growth negatively through investment

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IS DEBT CREATION BAD FOR THE ECONOMY?

Borrowing domestically or abroad is a normal part of economic activity.

As long as the borrowers can earn a higher economic/social rate of return than the cost of invested funds, creation of debt is not a burden.

Debt-servicing problems arise when the debt carrying capacity of the country does not increase commensurate with the increase in its debt servicing liabilities.

(The debt carrying capacity is defined as the ability of a country to service its external liabilities within an orderly and stable macroeconomic framework)

(Continue…)

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IS DEBT CREATION BAD FOR THE ECONOMY?

Short-term borrowing for longer-term projects can lead to serious cash flow problems.

Countries most often run into difficulties because the borrowed funds are directed toward wasteful or low economic return projects.

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Pakistan sustained a very large budget deficit in the 1990s and During 2008-12

Overall fiscal deficit (% of GDP)

Source: Ministry of Finance

* Including earthquake related expenditure

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• Current Account Deficit remained high in the 1990s despite low economic growth.

• Current Account Deficit widened recently on account of strong economic activity and rising oil and commodity prices. The same has improved in 2008-09 on account of collapse in oil and commodity prices.

Current Account Deficit (% of GDP)

Source: SBP

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TRENDS IN PUBLIC DEBT (Rs. Billion)99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 2010-112011-122012-13

a) Debt Payable

(Rs)

1576 1728 1715 1852 1979 2152 2322 2601 3266 3852 4651 6014 7638 9521

Debt payable ($) 27.5 27.8 29.9 30.6 31.2 32.1 33.9 36.4 40.7 46.4 50.0 54.6 53.2 47.9

Exc. Rate

(E.O.P)

52.5 63.4 60.1 57.7 57.9 59.7 60.2 60.4 68.3 81.4 85.5 86.0 94.5 99.1

b) Foreign Debt

(Rs)

1442 1761 1795 1766 1810 1913 2041 2201 2778 3776 4270 4694 5030 4747

c) Total Debt (a +

b)

3018 3489 3510 3618 3789 4065 4363 4802 6044 7629 8921 10709 12668 14268

GDP (mp) 3826 4163 4402 4823 5641 6500 7623 8673 1024

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12724 14837 18063 20091 22909

Total Revenue 513 553 624 721 806 900 1095 1298 1499 1851 2078 2261 2566 2969

Total Debt as %

of:

- GDP 78.9 83.8 79.8 75.0 67.2 62.5 57.2 55.4 59.0 60.0 68.1 59.3 63.0 62.3

- Revenue 588 631 563 502 470 452 398 370 403 412 429 474 494 481

• Total stock of public debt in 60 years (1947-2007) stood at Rs. 4802 billion but

we added Rs. 9466 billion in just six years (2008-13) Source: Ministry of Finance

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TRENDS IN EXTERNAL DEBT AND LIABILITIES

External Debt and Foreign Exchange Liabilities External Debt and Foreign Exchange Liabilities (Billion $)(Billion $)

•We added $1.6 billion in external debt in 8 years (2000-07) but added $19.6 billion in just 4 years (2008-11)

Source: Ministry of Finance

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MACROECONOMIC CONSEQUENCES MACROECONOMIC CONSEQUENCES OF UNSUSTAINABLE DEBTOF UNSUSTAINABLE DEBT

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Serious threat to development

Major source of Macroeconomic instability

Lower Economic Growth

Rise in Unemployment

Rise In Poverty

Raises the Risks of a Fiscal Crises

Keeps Borrowing Cost High

Discourages Private Sector Investment

Major source of discouragement for foreign investment

Keeps pressure on exchange rate

Major constraints for the government to undertake counter cyclical policies to revive economic growth

WHY SHOULD WE WORRY ABOUT RISING DEBT BURDEN

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LOSS OF FINANCIAL SOVEREIGNITY

Pakistan became the prolonged user of IMF resources.

Economic Policy making circles around IMF/IFIs Programs.

Influence of IMF and IFIs in policy making increase substantially.

We went to the IMF in November 2008; IMF Program remained suspended since May 2010 and until the completion of the program in September 2011.

Pakistan Entered in a new program with the IMF in early Sep 2013

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Barring two years the real GDP grew at an average rate of 3.8% p.a in the 1990s

Source: Various Issues of Economic Survey

Growth recovered during 2002-07 to an average of 6.8% p.a.

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Significant Reduction in Unemployment

•Unemployment declined … •13.5 million jobs created in seven years

•Source: Economic Survey 2006-07

•Source: Labour Force Survey, FBS

Labour Force Survey

Employment (in

millions)

Number of New

Employment (in millions)

FY 97 35.16 -

FY 00 37.32 2.16

FY 02 39.64 2.32

FY 04 42.24 2.6

FY 06 47.37 5.13

FY 07 49.68 2.31

FY 08 50.75 1.07

FY 09 52.71 2.0

FY 10 54.05 1.34

FY11 54.68 0.63•We need to create 3.5- 4.0 million jobs per year in the next 10 years for new entrants

7.8

8.3

7.7

6.2

5.3 5.25.5 5.6

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4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

1999-002001-022003-042005-062006-07 2007-082008-092009-102010-11

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Percent of people living below the poverty line reduced

Area1998-99

2000-01

2004-05

2005-06

2007-08

Overall 30.6 34.5 23.9 22.3 17.2

Rural 34.7 39.3 28.1 27.0 20.0

Urban 20.9 22.7 14.9 13.1 10.0

Source: Center for Research on Poverty Reduction and Income Distribution (CRPRID)

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Poverty; trends, causes and solutions

Towards 1980’s ample evidence that poverty falling for two decades

Early 1990’s decline slowed down/reversed

Mid 1990’s debate that poverty returned to Pak.

What does poverty mean?

Literate: male/female, children out of school, univ edn., female lit,

Mortality rate, access to adequate health care/safe drinking water (data 1)

We often consider income/eco poverty/consumption poverty, but the underlying scheme of

justice, equality, and power have to be understood and recognized.

Poverty line is usually based upon the concept of consumption poverty,Whereas, min. daily rec. calorie allowance determine the poverty line.

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Multidimentional poverty (edn. Health, sanitation, water supply) 60% of pop. (58.7%) Live below poverty (2 US $/day) (World Bank in a report WDI),

Every third Pakistani caught in poverty bracket.

Pak. HDI 0.572 lower than India 0.612

> 50% of pop live below poverty line in Balochistan, 33% Sindh, 32% kpk, 19% Punjab.

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Percent of people living below the poverty line reduced

0

5

10

15

20

25

30

35

40

1998-99 2000-01 2004-05 2005-06 2007-08

30.6

34.5

23.922.3

17.2

34.7

39.3

28.127

2020.9

22.7

14.913.1

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OverallRuralUrban

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Progress is reflected in the ratings momentum on Pakistan

Moo

dy’s

S&

P

B+

B-

CC

CCCCCC-

SD

B-

B

Outlook: stable

Outlook: Negative

B+

B2

B3

Caa1

B3

B2

Aug, 2009

Aug, 2009

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B1

CCC

CCC+

B

B2

B3

B-

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Ratings Scale

STANDARD&POOR’S

Moody’s InvestorsServices

Investmentgrade

NonInvestmentgrade

AaaAa1Aa2Aa3A1A2A3Baa1Baa2Baa3

( Long-Term ) ( Long-Term )

AAA primeAA+AA high gradeAA-A+ under medium gradeAA-BBB+BBBBBB-

Ba1Ba2Ba3B1B2B3Caa1Caa2Caa3Ca

BB+BBBB-B+BB-CCC+CCCCCC-

Pakistan’s Ratings in 2007 (H.speculative

Current Ratings

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What Needs to be Done?

– Newly Elected Government must bring a strong economic team

– Political Leadership must provide full support to the team

– No Room for Business-as-usual Policy

– Extraordinary situation Demand Extraordinary Measures

– Financial Discipline is the key to success

– Strike a balance between stabilization and Growth

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Undertake wide-ranging structural reforms

– Taxation side

– Expenditure side

– Accelerating Privatization

– Power Sector Reform

– Circular Debt Issues

– Correcting the Manufacturing defects of the NFC

– Strengthening of Infrastructure

– Strong Linkages with Private Sector

Challenging Time Ahead but Surmountable

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THANK YOUTHANK YOU