Today Pakistan is no doubt the fastest growing economy of the South Asian region, accelerating at 8.4 percent in real GDP terms. The only country in the region, which comes close to Pakistan in its growth performance, is India growing at a rate of 7.3 percent. In larger Asia, Pakistan stands with the likes of Singapore, Honk Kong and China which are the contemporary economic giants and have followed a growth pattern much similar to that of Pakistan this year.
 
However before riding too high on the horses of confidence and optimism, we should understand that the growth figure of 8.4 percent does not mean much in itself. It is important to know the actual economic story behind this figure. Whether this growth was endogenous or exogenous to the economy, or whether the benefits of growth are distributed fairly among different strata of the society are key questions to be answered in order to know how real is this economic achievement?
 
First let us look at the sectoral contributions to the GDP growth. This fiscal year 1.74, 4.65 and 4.16 percent growth has come from Agriculture, Manufacturing and Services sectors respectively as oppose to last year’s sectoral contributions of 0.53, 5.05 and 3.16 percent from the same sectors. The above figures show that Pakistan exceeded its growth target of 6.6% mainly because agriculture sector witnessed a significant recovery as it grew by 7.5 percent this year as oppose to 2.2 percent last year. This is good news for 68 percent of Pakistan’s population who live in rural areas and who are directly or indirectly dependent on agriculture for their livelihoods. Though the government has promised to increase agricultural productivity in order to raise farmers incomes, the recovery in agriculture owe it to good monsoons after several years and there is no evidence as yet that agriculture productivity has improved. In other words the contribution of agriculture sector in growth has been exogenous to government policies
 
 
The other sector which enabled Pakistan to exceed its growth target was high performing services sector in the country. However if we look into the services sector, we come to know that the major contribution comes from finance and insurance sector which grew by 21.8 % this fiscal year as oppose to  4.5% in 2003-04 and -3.2% in 2002-03. Though a growing financial sector does indicate that Pakistan is witnessing significant financial development which is definitely good for growth as one can see its significant contribution to Pakistan’s growth performance this year, one has to look at the movements in general price level, some monetary aggregates and interest rates to know whether financial development is real and the subsequent growth has been good for the common man.
 
The most commonly used measure of financial development is a ratio of some broad measure of money stock, usually M2, to the level of nominal income. This indicator basically measures the degree of monetisation in the economy, whereas monetisation captures the real size of financial sector of a growing economy in which money provides valuable payment and saving services. Well in Pakistan, M2/GDP has shown some improvement as the ratio picks up from 42.2 in 2003-04 to 42.9 this year.

However interest rate movements in Pakistan tell a different story. Last year it was expected that interest rates and general price levels in Pakistan would rise as a consequence of global economic comeback and rise in international prices. As per expectation and despite government claims last year to curb price hike, Pakistan is witnessing steep inflationary trends this fiscal year. As far as interest rates are concerned, the lending rate has been on a constant rise as compared to the deposit rate which is relatively stagnant. The interest rate spread between lending rate and deposit rate has picked up since July2004 when it was only 3.44, and has been raised to 5.14 by March 2005.

This is not so good news for the common man in Pakistan especially when one looks at the food inflation which has climbed to 12.8 percent this fiscal year from only 6 percent and 2.9 percent in 2003-04 and 2002-03 respectively. The sluggish performance of deposit rates amid steep rise in CPI means that consumer savings are being eroded. The major brunt has again been born by small deposit holders who comprise mainly of senior citizens or lower and middle income groups.
 
Taking into account current inflation rates, it seems Pakistani economy is entrapped in a financial bubble and excess money is circulating in the hands of the few urban elite. This has artificially boosted the overall demand in the economy enabling the country to follow a higher than expected growth pattern. In short 8.4 percent growth doesn’t tell much about the plight of the common man in Pakistan. If anything, not only has it failed to trickle down to the poor, but it might have worsen the plight of the common Pakistani as we have seen in case of the growing financial sector and a consequent price hike.
 
Surprisingly, the government has been very high on rhetoric vis-à-vis poverty alleviation and its commitment towards development goals. Last year the Governor Sate Bank of Pakistan, Ishrat Hussain claimed that Pakistan would transform the macroeconomic stability into a viable development strategy. Well, the 2004-05 fiscal budget allocation undermines government commitment towards poverty alleviation and social sector development. The total expenditure for this fiscal year is estimated at 1050.4 billion which is 9.9 percent higher than last year. However, the development expenditure has been raised by a meagre 1.9 percentage points whereas defence expenditure has been increased by a staggering 7.5 percent when compared to 2003-04. The fiscal deficit has been raised to 3 percent of GDP as oppose to only 2.3 percent and 3.7 percent of GDP in 2003-04 and 2002-03 respectively.
 
Here the irony is that last year IMF and World Bank urged the government to increase the budget deficit in order to allocate adequate funds to the development sector as higher budget deficit is not a bad thing in itself. At that time the government refused to entertain IMF and World Bank’s advice as it appeared that officials at finance ministry were fixated with the era of Structural Adjustment Plans of the last decade. One official, while talking to the Pakistan newspaper Dawn dated March 4, 2004 justified the position of the government by saying that since the World Bank and IMF pressured the country to reduce its fiscal deficits in the 1990s in order to lower the debt burden, the recent emphasis on a significant increase in the development budget by these agencies contradicts their earlier stance and forces Pakistan to incur a high budget deficit and a subsequent increase in the debt burden. The official went on to put it as a plot against Pakistan: "It is a conspiracy to ask Pakistan to go back to the regime of unsustainable debt." Well this fiscal year the interest payments on overall debt has witnessed 8.5 percent increase as Pakistan made Rs 213 billion worth interest payments to foreign and domestic lenders in 2004-05 when compared to only Rs. 196 and Rs. 209.7 in 2003-04 and 2002-03 respectively. If anything the trend shows that the debt burden in Pakistan is again on rise. Consequently, despite the government refusal to increase budget deficit by channelling more funds to development sector, this fiscal year the budget deficit did increase.
 
 The worse part is that the increase in budget deficit owes it to defence and debt instead of social development. Clearly the government has preferred defence over development. In this context, it also comes as no surprise that the Economic survey 2004-05 published recently is silent about poverty in Pakistan. The chapter on poverty entirely eludes any discussion on the conventional poverty measures leaving the question open whether poverty is increasing or decreasing in Pakistan. But a lot of rhetoric is present in the document apropos government commitment towards PRSPs. Well in a country where development budget is increased by Rs 4 billion and defence budget is increased by Rs 14 billion, the government should not claim it is serious about PRSPs or poverty alleviation for that matter. It is clear that at this point in time, the preference of Musharraf government does not lie with the poor of this country.
 
The obsession with growth has also resulted in an education policy which sets out to favour the rich as more and more resources have been allocated to higher education because it is considered to be closely linked with growth than primary education. Last year higher education budget has been increased to Rs 5 billion from a meagre amount of Rs 800 million five years ago, an increase of nearly 400 percent. For 2004-05 the government has doubled this figure to an impressive amount of Rs 9.5 billion. However, investment in primary and secondary education has been far less. In comparison to Rs 9 billion allocated to Higher Education Commission (HEC), the government has allocated Rs 3 billion only to Ministry of Education. Since higher education is mainly seeked out by the affluent segments of the society, more funds to higher education means that government is providing indirect subsidy to the rich and excluding the poor as they are largely uneducated. Further more higher education is an urbanised phenomenon in Pakistan. As a consequence, the skewed education policy is further elevating the disparities between the rural and urban which is again a direct threat to the success of PRSPs in Pakistan.
 
The above discussion clearly shows that 8.4 percent increase in growth is an illusion than a reality if it is a proxy and a barometer for Pakistan’s social development. There are few immediate steps the government needs to take to align these growth trends with pro poor outcomes.
 
First and foremost the government has to control the inflation rate which has reached to alarming proportion. Pakistan cannot even think of any pro poor strategy if such inflationary trends are continued. The State Bank needs to follow a more stringent monetary policy whereby it should control the current financial (currency) bubble which might burst anytime soon.
 
Secondly, the government needs to take its development strategies seriously. Mere talking won’t change anything on ground. Pakistani government led by the man in uniform should know that investment in defence would not bring Pakistan any closer to MDGs or any successful PRSP. Any growth is irrelevant for the poor and the common man if government finds itself handicapped against allocating sufficient funds to the development sector.
 
Pakistan and India have come a long way since December 2003 and the two nations are at best of their relations.  Regional trade blocks to a Kashmir solution all look viable possibilities. In this scenario, growing Pakistan with growing armed forces looks a bit of out of place. Despite their potential, it is really unfortunate that Pakistan and India are still low income economies.
 
As far as Pakistan is concerned, with a bit of luck and outside help, it has got another opportunity to change its destiny only if the leadership can rise up to the occasion by sacrificing its personal interests for the larger interests of its people. Indeed the common man should be the prime beneficiary of growing Pakistan and if not 8.4 percent growth is meaningless.