23RD MARCH—THE DAY OF RECKONING
By SHABBIR H. KAZMI
Mar 25 - 31, 2002
This year, Pakistan Day celebrations are being held with a new spirit. In the post September 2001 era, Pakistan has emerged with a new identity offering enormous opportunities as well as challenges. Many international lenders who were skeptical about the economic revival plan, presented by the present economic managers, when they assumed power, acknowledge that they (critics) were wrong. The fact has been recognized at the recently organized conference of International Chamber of Commerce. Presence of a large number of foreign delegates and officials was a clear indication that Pakistan was being explored as a major destination for foreign direct investment. However, it is also a fact that observers are keenly monitoring the process of restoration of democracy in the country.
The September 11 incident and following events have brought a drastic change in the attitude of people and governments. Therefore, it is also necessary that, we the Pakistanis, should take into account what they have gained and/or lost over the five decades. It is the most appropriate time to elucidate the objective for which thousands of people laid down their lives. On this day the Muslims pledged to start a movement for an independent country, free from all types of exploitation.
However, when one looks at the history spread over five decades, two facts are established. First, that India never accepted division of the sub-continent. India not only imposed wars on Pakistan but also patronized anti-state activities in Pakistan. Second, that the successive governments implemented short-term plans to attain political mileage. The war hysteria prevailing in both the countries led to accumulation of arsenals at the cost of deprivation of their population. Lack of continuity of policies in Pakistan resulted in not only very low economic growth rate but widen the disparity gap between haves and havenots.
If one explores the reasons for disintegration of the USSR, it is also evident that a huge quantity of armaments, including those equipped with atomic war-heads, could not stop its splitting into small states. Though, most of us are proud of Pakistan having acquired atomic capabilities, must keep in mind that this power alone cannot guarantee the sovereignty of the country. In present time, the best defence against all types of aggressions is strong and sustainable economy.
A point of satisfaction is that since the present economic managers have assumed power, efforts are being made to address the key issues. They have, at least, two points on their credit — recovery of non-performing loans and successful re-profiling of Pakistan's external debt. While the first factor has strengthened the local financial system, the second has brought debt servicing to a sustainable level. The positive impact of, both the factors put together, is that the country will not be forced to borrow more to pay off its debt but will be able to spend more on development projects. Greater spending on development projects not only have a snow-ball affect on the economy but also paves way for industrial development.
Those who are still skeptical about the achievements must accept that Pakistan has joined the main stream of international community of nations. Its external debt has been re-profiled. Foreign investors who had written off Pakistan, at one time, are now actively considering it as the destination for their investment. However, it should also be kept in mind that once again deteriorating law and order situation has become a serious impediment. Some analysts say that the present wave of killing is being sponsored and proliferated by those who want to destabilize Pakistan.
SBP QUARTERLY REPORT
The second quarter report of State Bank of Pakistan (SBP) has been received with mixed feelings. The pessimistic analysts say, "No signs of improvement". Whereas people having optimistic attitude term the performance, "Above satisfactory level in the prevailing circumstances". While the world is going through synchronized recession, due to shrinking purchasing power, the overall performance of Pakistan's economy cannot be termed unsatisfactory.
There has been drastic improvement in balance of payment. Current account shows surplus of US$ 1.27 billion as against a deficit of US$ 262 million for the corresponding period of year 2000. Forex reserves increased from US$ 3.2 billion in June to US$ 4.8 billion in December 2001. The other eye-catching facts are, a 2.5 per cent growth in agriculture sector and 2.9 per cent growth in large scale manufacturing sector. However, collection of taxes at Rs 174.5 billion and non-tax revenues fall short of target. Even this should not be considered disappointing because of 9.8 per cent fall in import, the main source of tax.
Although, Pakistan posted current account surplus in year 2000-2001, it was primarily driven by purchases from the curb market and change in the accounting treatment of Saudi Oil facility. In contrast, the upturn in July-December was broad-based as all subcategories of the current account showed marked improvement. In effect, excluding inflows under official transfers, the current account showed a surplus of US$ 335 million as against a deficit of US$ 744 million for the corresponding period of last year. Trade deficit reduced to US$ 48 million, showing a contraction of US$ 718 million. This was mainly due to reduction in oil import bill.
Exports amounted to US$ 4.5 billion, as against a target of US$ 5.05 billion. The shortfall can be attributed to global economic slow down and particularly in the major markets for Pakistani products. Maintaining the last year's export level, with just a small decline of less than half a per cent, is itself a significant achievement. However, it is necessary to note that despite moderate to impressive quantitative increase over last year there was deterioration in unit price realization.
Imports amounted to US$ 4.87 billion, registering a 99.6 per cent decline. POL import bill registered a significant reduction of US$ 493 million. Import of machinery except textile, has been declining over the years. Continuation of BMR in textile industry resulted in import of machinery worth U$ 233 million, showing an increase of over 42 per cent.
Agriculture sector was the most important determinant of overall growth. However, looming specter of drought continue to haunt farming activities. In the current fiscal year, some shift occurred from rice to cotton cultivation, mainly due to limited water supply. Analysts say that despite the shift the desired results could not be achieved due to the decline in per hectare yield of the crops. However, based on the latest available data, growth prospects of major crops are consistent with the targeted growth of agriculture sector as a whole.
Large-scale manufacturing sector registered nearly 3 per cent. The major sectors that showed increase in production are, textiles, petroleum refining, fertilizer and pharmaceuticals. Contrary to earlier expectations textiles showed only a slight loss of momentum. Production of textiles increased by 3.2 per cent compared to 3.3 per cent increase last year.
Petroleum refining has not only shown a robust growth but also significant improvement over last year's performance. Its production increased by over 25 per cent compared to nearly 15 per cent increase last year. This was reflected by higher import of crude oil and higher export of POL products.
The realization of the proposed reconstruction activities in Afghanistan is expected to benefit cement sector, which has been suffering due to over capacity. There are reports that Pakistani cement is being sold at premium in Afghanistan. For the local cement manufacturers it is an excellent opportunity to improve capacity utilization and optimize cost of production through export of cement.
Tax collection was lower than projected due to a number of factors, economic slow down being on the top. Lower import and higher refunds also edged down the tax collection. Similarly, reduction in maximum tariff rate could not accelerate imports and only resulted in intensification of decline in custom duty collection.
The capital market came under severe pressure in September-December 2001 period. It not only recovered but KSE-100 index registered significant growth since the beginning of year 2002. There is a forecast that index may cross 2000 points by end March. The upward trend is mainly due to active participation of local as well as foreign investors.
The KSE-100 index continues to be the best-performing markets in Asia as well as globally, driven by much improved macro fundamentals. The presence of specific embedded options available offer enormous potential. These are privatization, better relationship with India, the election in 2002 and the Afghan reconstruction.
The successful bidding for the sale of 90 per cent shares of Pak Saudi Fertilizer for a total transaction price of Rs 7.3 billion paves the way for the timely privatization of other state-owned enterprises. These include Pakistan State Oil Company (PSO), Pakistan Telecommunication Company (PTCL), United Bank (UBL) and Karachi Electric Supply Corporation (KESC).
President Pervez Musharraf has taken several important decisions, which have been unpopular with a very vocal minority. It may have been difficult to implement those decisions had there been a democratically elected government. This is something that the West has become aware of. Therefore, it is expected that Pakistan will continue to benefit over the intermediate to long-term from a more benign attitude of the US.
More directly, Musharraf has steered Pakistan through a process of important reforms and good governance measures. Therefore, it is crucial that he stays in the driving seat for another term. These accomplishments have enabled Pakistan to get through one short term with the IMF and into a longer term programme — PRGF. This enabled Pakistan to avert a serious financial crisis. Many financial analysts expressed apprehensions about the ability of his team to avert a near-default situation.
The indicators provide sufficient signals for expected turn around. This is a daunting agenda and temporary gains should not distract from pursuing reforms vigorously. There is need to build institutional strengths and economic fundamentals, the best defence against all types of aggressions.