RECENT numbers depict a painful picture of the economy, the relative prosperity of the farm sector notwithstanding. Private investment has sunk to an all-time low, while the surge in inflationary pressure is at a historic peak.

The economy has recorded its second lowest per-capita income increase (close to zero) in any three-year period since independence. While a substantial contribution to this state of affairs has been made by external developments, weak governance and poor management have exacerbated the challenges. A review of the numbers makes the story clearer.

The economy is estimated to have grown 2.4 per cent in the current year, well below the long-run trend rate of growth of over five per cent. The commodity-producing sectors of the economy have posted an anaemic 0.5 per cent increase. While last summer’s unprecedented floods affected the economy, the impact on growth was far less than initially feared — and more ambiguous. Other than major crops, all other sub-sectors of agriculture have done well.

Similarly, other than urea production, many manufacturing sub-sectors have benefited substantially from the rural economy’s prosperity due to a surge in crop prices. Nonetheless, despite strong output growth in important sub-sectors such as cars, motorcycles and sugar, the overall tone of large-scale manufacturing is one of weakness, with growth slowing down to a mere one per cent.

In fact, public administration and defence has provided a significant fillip to the overall growth number, without which the economy’s performance would have been even weaker. In addition, the use of a fixed inter-censal growth rate of 7.5 per cent for small-scale manufacturing, a ‘plug’ number which has increasingly appeared out of sync with reality, provides a false signal on the economy.

The average expansion in the economy over the past three years is down to 2.6 per cent a year. With a population growth rate of around 2.1 per cent, per-capita income has grown, on average, at less than 0.3 per cent since 2008, the lowest increase since 1951 (barring 1998-99). While export performance has been a bright spot, it is already unravelling with the ongoing price crash in textiles.

The situation with regard to investment, especially private investment, is even more alarming. While overall private investment grew by 1.1 per cent in 2010-11, as a per cent of GDP it has sunk to a new low of 8.5 per cent. More worryingly, investment in large-scale manufacturing, the driver of job-creation in the economy, has contracted 27 per cent in the current year, over and above a contraction of 14 per cent the year before.

Were it not for a purported big jump in investment in the electricity and gas sector, notorious for the fickle and unsubstantiated numbers it produces, total fixed investment would have shown a net decline in the current year.

Controlling inflation constitutes one of the principal challenges for the government. While there has been some relative respite in inflationary pressure over the past few months, with non-food inflation pulling back into single digit, inflation continues to be in uncharted territory, in my view. For the past three years, monthly inflation has remained stubbornly in double digits, strongly entrenching inflationary expectations. It is no coincidence that a large part of the public sector is out on the roads demanding higher wages. While public-sector employment does not constitute as large a part of the total as it did in Latin America when it tipped into a wage-price spiral, and trade union activity is fairly restricted by comparison in Pakistan, the current wave of demonstrations for higher wages by public-sector employees is nonetheless a dangerous marker of sorts on the slippery road to yet higher inflation. The uncertain outlook for public finances, as well as global commodity prices, adds to the concern on the inflation front.

Clearly, in an environment of falling growth, rising inflation and contracting investment the economy is unlikely to be creating many new jobs. Official data depicts an increase in unemployment (to 5.7 per cent), but only a muted one. As in previous years, the category of ‘unpaid family help’ has managed to contain the rise in reported unemployment. Nonetheless, unemployment in urban areas and among women has shown a sharp rise over the past two years.

While official data on poverty has not been released for several years, it is natural to expect a fairly significant increase since 2007. However, the situation is not as unambiguous as suggested by some commentators with regard to poverty, since those rural households not affected by last year’s floods, have benefited from sharply higher crop prices as well as a dairy boom.

Other households appear to have benefited from rising remittances from abroad, while deserving beneficiaries of cash transfers under the Benazir Income Support Programme and the Watan Card scheme have been provided an important offset.

Nonetheless, if early results from the poverty scorecard exercise being conducted in the rural areas is anything to go by, the next official number on poverty could depict a shocking increase.

Taken together, this is amongst the ‘weakest’ economic data recorded in Pakistan’s 64-year history, confirming the view that Pakistan’s economy is stagnating compared to its own past record, while it is firmly in ‘relegation league’ when compared to other dynamic economies.

While the economy is operating under several constraints, prima facie, the two major constraints are the internal security situation and the energy deficit. In reality, weak governance, which is amplifying the energy crisis, is the single biggest constraint to higher growth and investment. The magnitude of this constraint can be gauged by an examination of financial losses in just three areas where it operates with the greatest impunity under the current regime: tax administration, the power sector and public-sector enterprises. This issue will be examined in greater detail in a subsequent piece.

The writer heads an economic consultancy based in Islamabad.