Poverty alleviation has become a buzz word indicating universal concern for mass poverty and the urgent need to alleviate it. International financial institutions are more than willing to lend support to national efforts.

Pakistan has introduced poverty related and social sector programme whose main elements are pro-poor budget expenditures, by way of community services, human development, rural development and safety nets, and availability of institutional credit through micro finance. As a result, the government claims to have succeeded in significantly reducing the number of people below the poverty line. The conclusion is based on household surveys, which are suspect on technical grounds for insignificant size of the sample and choice of respondents.

The numbers are questioned by international financial institutions. Looking around one can find enough anecdotal evidence that there has been no apparent improvement in the poverty profile. If anything, the rich appear to have become richer and the poor poorer.

The increasing gap between haves and have-nots is reflected in official statistics. The Economic Survey for FY 07 reveals that according to PIHS 01 and PSLM 05, ratio of the highest quintile of share in consumption to the lowest quintile had increased from 3.76 to 4.15. This resulted from a decline in the share of the first quintile from 10.1 to 9.5 per cent whereas the share of the fifth quintile rose from 38 to 39.4 per cent.

The million-dollar question is: Why the benefits of impressive growth over the last seven years have not trickled down to the common man? Without appreciating this phenomenon, there can be no realistic approach to poverty alleviation.

For an answer, the sources and structure of economic growth must be looked into. In this connection, it must be recognised that Pakistan’s economy is not monolithic but dualistic. There is what Dr Ishrat Hussain has very rightly termed as an “economy of the elite” with the state of the art products and facilities and the economy of the non-elite not getting even rustic environment. In other words, there are economies of haves and have-nots or urban and rural economies with different resources, problems and responses to economic factors. This makes the different sectors of the economy of greater relevance to different classes of the population.

It should be obvious from the following table that the rate of economic growth has been quite uneven in terms of basic sectors of the economy. There is the traditional distinction between commodity producing sectors and services sectors. At the present stage of economic development, the former is more important than the latter as it provides the wherewithal for the welfare of the common man and the much-needed exports to meet the yawing trade gap, leading to current account deficit, which is being more than met by external resources carrying liability by way of investment income on loans and foreign investment.

The last element is unfortunately treated with benign neglect even though remittances on this account are increasing rapidly. The economic mangers announce with glee, the increased inflow of foreign investment but seem to conveniently ignore the fillip side of the coin, that is the external liability piling up. Under the present policy, foreign investment can be freely repatriated any time.

The growth of various sectors of the economy has been quite uneven. Commodity producing sectors have lagged behind services sectors with a marked difference in impact on poverty. It would be stating the obvious that commodity producing sectors are pro-poor in terms of providing employment and meeting the basic needs of the common-man, apart from supplying tradeables for export. This cannot be asserted for services sectors. If anything, the latter, by confining themselves mostly to the elite, aggravate the distribution of income and wealth.

The growth of commodity producing sectors not only lagged behind social sectors but has also been inadequate to meet the requirements, hence frequent serious crises. Among these sectors, agriculture stands out, less said the better. Over the past seven years, while the economy grew in real terms by 47.1 with 54.4 per cent increase in social sectors, the rate of growth for commodity producing has been 39.6 per cent, agriculture increasing by 18.6 per cent as against the population growth of 15.1 per cent.

To support the premise that social sectors can by no stretch of imagination be taken as pro-poor, only two sub-sectors may be taken, namely public administration, defence, finance and insurance, which between them account for 25.9 per cent of the growth in social sectors and 15.2 per cent of the overall economic growth. Here is an interesting sample of administrative expenditure in the federal government. Over seven years, the annual expenditure on the staff and household of the president has risen from Rs75 million to Rs309 million, on the prime minister from Rs98 million to Rs367 million.

On the National Assembly (NA), it has risen from Rs250 million to Rs1,006 million and on the Senate from Rs111 million to Rs577 million. Hordes of ministers, advisors, special assistants, etc cost Rs155 million as against Rs24 million earlier As such, a member of the NA costs the tax payer almost Rs3 million a year and that of the Senate twice as much. The Higher Education Commission is reported to have spent Rs180 million on foreign tours. These expenditures can be better appreciated in relation to the income in the country. The annual average per capita income in current factor cost was Rs25,551 in fiscal year(FY) 2000, Rs46,850 in FY 06 and Rs52,027 in FY 07.

Finance and insurance, a preserve of the elite, has recorded a phenomenal growth, thanks to the monetary policy currently pursued by the central bank. As a result, their relative share in total GDP has almost doubled from 3.7 in FY 00 to 5.7 per cent in FY 07. The number of employees of scheduled banks increased from 86,030 calendar year (CY)2001 to 130,848 in CY 2006, an addition of 50.3 per cent. Their administrative expenditure, the bulk of which was staff salaries and related benefits, almost doubled from Rs54.5 billion to Rs95.6 billion, giving average expenditure per employee of Rs0.73 million, or 8.4 times the per capita income compared with Rs0.62 million, or 7.1 times earlier.

In spite of this enhanced bill, the banks’ pre-tax profit improved from Rs1.34 billion to the record level of Rs1.23.7 billion. Their post-tax profits went up from minus Rs9.6 billion to plus Rs84.2 million, a turn around of Rs93.8 billion.. The improvement is explained by the widening bank spread from 5.5 in January, 2004 to 7.9 per cent in December,2006.This has resulted from a larger increase in their interest charges than their return to the depositors. While their weighted average return on advances rose from 6.91 to 11.55 per cent , the weighted average return on deposits improved from 1.34 to 3.66 per cent.

In absolute terms, the banks’ income from mark up\return\interest earned almost doubled from Rs167.9 billion to Rs307.0 billion when the expense incurred by them under this head rose from Rs103.6 billion to Rs133.6 billion, an increase of only 28.9 per cent. The gap thus widened from Rs64.3 billion to as much as Rs173.4 billion, or almost doubled. In this perspective, it would be a fair conclusion that the banks have served as an effective institution of ruthlessly exploiting the depositors especially the poor with small balances.

Foreign banks have been quite outstanding. This is very significant as their profits, are a drain on the foreign exchange resources to the extent of the actual remittance abroad.

Poverty in rural areas, where two-third of the population resides is much more acute. There the incomes, particularly of small farmers, are quite low to begin with and they are required to make large pre-emptive payments, which further reduce their actual disposable incomes.

On top is servicing of wide spread rural debt owed to informal sources of credit. Interest rate charged on cash loans is simply atrocious. In some parts of Sindh it may be as high as six per cent per month. Small farmers find it difficult to even pay interest regularly, not to speak of repayment of principal, hence the famous saying that they are born in debt, live in debt and die in debt leaving it for their future generations. They also go under debit in form of supplier credit for purchase of inputs. When desperate, they would commit their future crops at throwaway prices.

According to the Punjab Economic Research Institute (PERI) the cost of tied loans for cotton and wheat is 45 and 47 per cent respectively. It can be even higher for urea (76 per cent) and DAP (68 per cent). In case of weedicides and pesticides it is as high as 83 percent. Cotton ginners and sugar mill owners add insult to injury when they delay payment for very long forcing them to sell their ‘chits’-receipt for the supplies made, at deep discount. Farmers are quite extravagant, in relation to their meagre incomes. This is mostly financed by borrowing.

Perhaps the last straw that breaks their back is not infrequent land dispute ending up in litigation, which drags on for decades, if not generations. What is needed is to enhance the holding power of the small farmer. This is not possible without easy availability of institutional credit in rural areas where it is at present totally non-existent. There is no dearth of effort to increase bank credit to agriculture and there has a significant increase due to persuasion of the State Bank. The real problem, not recognised by policy makers is that agriculture is identified with big farm holders and all development effort stops at their doorsteps. The small farmer, for all practical purposes, is left in the cold.

The State Bank has been exhorting banks to step up lending to agriculture and an increase is in evidence. This is however, not adequate. The current ratio of bank advances to value added in agriculture is 13.94 as compared with the similar ratio of 96.8 per cent in case of manufacturing industry. Total outstanding bank advances to agriculture, hunting and forestry increased from Rs97.4 billion in June 2000 to Rs142.9. billion as of December 06. However, the number of borrowers as reflected in loan accounts has not increased correspondingly.

In December 06, they stood at 1.27million.A sum of Rs23.9 billion was disbursed to 754,585 borrowers with subsistence holdings during FY 2000. This increased to Rs64.2 billion to 930,732 borrowers during FY 05. In CY 05, the amount was Rs34.7 billion to 431,072 borrowers out of total disbursements of Rs53.7 billion to 500,103. During CY 06, for subsistence holdings, this went up to Rs.40.8 billion to 455,627, giving an average of Rs89.5 thousand per borrower, when total disbursements of agricultural loans were Rs.62.01 billion for 519,331 with an average amount of Rs120 thousand..

Banks have an important role in agricultural credit but urban based as they are, they cannot be expected to reach out small farmers in rural areas. What is needed is an institution meant only for small farmers and artisans in rural areas. Instead of creating a new institution, ZTBL be converted into a rural bank for small farmers.

A ceiling may be placed on individual loans to ensure availability of loans to small man and to keep out the big framers who in any case have easy access to commercial banks. A serious effort is needed to free the small farmer from the clutches of poverty. Institutional credit would be most potent measure and a meaningful step toward poverty alleviation in the rural areas and the country as a whole.