The year end review
By AMANULLAH BASHAR
Dec 31, 2001 - Jan 06, 2002
Despite having passed through unusual political and economic ups and downs in the region mainly due to Afghan crisis, the economic profile of Pakistan seems emerging on sound foundations at the end of the year 2001.
The economy gained an unprecedented height in terms of foreign exchange reserves fast approaching to $5 billion, successful debt rescheduling and enhanced accessibility to the world market altogether seem to have taken out the national economy from a suffocative atmosphere.
Earlier, the economic managers had set a target of $2.9 billion foreign exchange reserves with a deadline of June 2002. That target was being described as a wishful thanking by some of the economic critics in view of persistent depressed economic conditions and unfriendly attitude of the multilateral and bilateral donors at that time when the target was dreamed.
Today, not only that target has been achieved much earlier to the deadline but is set to be doubled in view of the playing space the economy has gained due to financial restructuring and to use the available resources with the sincerity of the purpose. With effect from January 1, 2002 the EU has increased textile quota by 15 per cent and has reduced duty on clothing exported from Pakistan to 7 per cent. This concessions and other incentives given in the package of preferential treatment to Pakistan has given the textile products an edge over the competitors in terms of price. It is estimated that as a result of these concessions Pakistan's textile export to EU may touch a level of one billion pound sterling during next two to three years.
The United States besides removal of all sorts of sanctions against Pakistan has given financial assistance plus incentives to Pakistani products in terms of accessibility to that market. The US has also lifted quota on export of combed cotton yarn from Pakistan with effect from November 9, 2001 which levied on March 16, 1999.
While the strained nerves of the people have not yet calmed down due to dreadful events after September 11, fast changing border situation between Pakistan and India has again started mounting pressures both on the economy as well as on the social life of the people. Although President Musharraf has ruled out war with India despite the present escalation of tension between the two countries, yet the tension continued to mount especially in the sensitive economic areas reflected in the drop of business in the capital market.
Indian leadership still licking their wounds due to humiliating political and diplomatic defeats on the issue of Afghanistan has come out with fabricated plans to shift the responsibility of terrorist attack on Indian Parliament last month on Pakistan. First they recalled the staff of Indian Commission to Pakistan and suspended train and bus services between the two countries to invite the attention of the targeted quarters. Although Pakistan has categorically denied any possibility of nuclear war between the two countries the tense border situation however telling its effects reflecting in "Black Monday" declared on Karachi Stock Exchange last week. Stock values plunged by 81 points on the capital market on Monday last adversely affecting major investment and blue chips down by as much as 9 per cent. Foreign institutions sold off large holdings, however domestic institutions remained optimistic of an amicable solution between the two countries. This was the second crash during 2001. The first had occurred after September 11 when the house remained out of business for over a week. Responding to the Indian move, Pakistan has also announced that it wanted the Indian High Commission staff cut by half, its movements restricted to the municipal limits of the capital and as of January 1, 2002 banned all Indian aircraft from using Pakistani airspace. Earlier India had decided to halve India's diplomatic mission in Pakistan and Islamabad's mission in New Delhi, restrict the movement of Pakistani diplomats and halt Pakistan International airlines rights to fly over Indian airspace. The exchange of hot words between the two countries however is causing concern for a big war between the two countries.
The visit of President Musharraf to India was also one of the major event of the year.
Pakistan had taken a step forward to resolve the Kashmir issue and President Pervez Musharraf had visited India in July 2001. The visit of President Pervez Musharraf had raised hopes for a major breakthrough towards solution of the root cause for a conflict between the two nations. The international media in general and the Indian Press in particular gave a massive coverage to the visit and in a way supported the instance of president Musharraf to consider the conflict in Kashmir as the core issue between India and Pakistan. Though no joint communique was released on that occasion as the two sides could not reach on a point of agreement, it is however internationally believed that Pakistan scored a winning point by making Kashmir issue as the focal point around the world.
It is however unfortunate and failure diplomatic norms on the part of India that by hook or crook it is out to take advantage of the US-led campaign against terrorism and using all unethical tactics to give a color of terrorism to the freedom struggle of Kashmiris. Indian leadership by ignoring the UN resolution to give the right of plebiscite to the people of Kashmir is trying to throw dust in the eyes of the world. On the other side, Pakistan however has advocated the Kashmir issue in its true perspective. President General Pervez Musharraf has not only highlighted the Kashmir issue but also in fact advocated the case of Muslim Ummah effectively in his address at the United Nations this year.
September 11, 2001.
The fateful day of September 11, 2001 which claimed lives of thousands of innocent citizens in New York and Washington as the sequel to terrorist attack on World Trade Center and Pentagon, was the event of the year which not only changed the entire scenario in Pakistan but resulted in radical changes in a large part of the globe.
Pakistan being the immediate neighbor of Afghanistan, the point from where Osama Bin Laden, the main accused for the terrorist attacks at the World Trade Center and the Pentagon was allegedly operating, had to bear the aftermath of the retaliation launched by the US-led forces.
Pakistan had to take probably history's most critical decision to be the friend or foe of the United States in the military campaign launched against Afghanistan to weed out what it is called the central point of terrorism. The leadership in Pakistan in the backdrop of strong opposition especially by the religious parties decided to go with the rest of the world against the terrorism. The time however proved that the decision taken by President General Pervez Musharraf in the larger interest of Muslim Ummah in general and for Pakistan in particular was the right one.
The post September 11 scenario witnessed Pakistan's foreign exchange reserves touching the unprecedented height of $4.7 billion and are expected to reach the milestone of $5 billion within a couple of months, recently said by President Gen. Pervez Musharraf.
Pakistan's foreign exchange reserves rose by 3.9 per cent to $4.631 billion from $4.56 billion for the week ended December 8, 2001.
The President has said that the foreign exchange reserves with the State Bank of Pakistan would increase from $4.7 billion to $5 billion in the next couple of months.
The country has received the first installment of $109.5 million from the International Monetary Fund. Of the total reserves, about $2.966 billion were held by the central banks and $1.665 billion by other banks. The reserves were improved as the result of improved cash inflow from the US that is worth $600 million last month as a reward to join the coalition to fight against terrorism.
Paris Club also approved loans rescheduling worth $12 billion. The favourable terms approved under the Paris Club and the new International Monetary support program are expected to improve the net debt versus gross domestic production ratio to below 100 per cent from its current level of 121 per cent with sovereign rating expected to climb up to "B" positive from the current level of "B" stable. According to report prepared by Nauman Naeem head of research at BMA Capital Management in January 2001, following the approval of Standby Arrangement worth $596 million by IMF, the Paris Club creditors rescheduled 1.8 billion dollars of debt under non-concessional terms.
Naeem has pointed out that Pakistan's relationship with its creditors has largely been driven by political developments. The goodwill of official creditors is crucial in maintaining inflows of bilateral and multilateral funds. The Musharraf government's decision to back the international coalition against terrorism has significantly strengthened Pakistan's relationship with EU nations, the USA and Japan who are its principal creditors. With President Musharraf likely to continue in office even after the elections planned for October 2002, there is a greater likelihood of policy continuity even as elected civilians assume a greater political role in Pakistan. As a result of good political relations as well as competent economic management, Pakistan is likely to be viewed positively in the short term by all creditor nations, which was not the case before September 11. With the favourable terms, the report added that under the Paris Club and new IMF support program, the net Debt/GDP ratio is expected to improve to below 100 per cent from its current level of 121 percent during the next decade.
Additionally, Pakistan's ability to tap the international market remains intact, which is not available to countries under Naples terms.
Whilst difficult to sustain, the fiscal space provided by the IMF and Paris Club agreements is likely to reverse the stalled economic growth, reduce poverty and increase employment by enabling Pakistan to devote more resources to neglected infrastructure and human resource development efforts.
According to IMF estimates, under the new agreement Pakistan would reduce its external debt servicing to 25 per cent of exports by 2004 versus about 38 per cent of exports at present. Whereas under the traditional Houston terms, the debt servicing will have declined to 32 percent of exports by 2004. The greater reduction is achieved by calculating two separate factors of expected cash out flows by discounting them by 5.8 per cent and 2.4 per cent. The difference is written off as grant. This, whilst the outstanding debt stock remains unchanged, the discounting methodology allows relief in absolute terms. Thus, Pakistan will save about one billion dollars per year from its annual debt servicing of 3.7 billion dollars during the next three years. The debt servicing cost after declining in 1999 has risen by 15 per cent annually for the past two years despite rescheduling. The primary reason has been a 21 per cent depreciation of Pak rupee since 1999 the annual debt servicing figure of domestic and international debt is about 45 per cent of Pakistan's annual budget. With defence spending taking about 30 per cent of the national budget, there is very little left for development expenditure. In such a situation, Pakistan's main concern is to service its large external debt always pressurize the forex market, with multiple effects on the economy. The resultant tight fiscal squeeze has reduced average annual development expenditure from 7.3 per cent of GDP in the 1980s to 5.3 per cent in the first half of 1990s and a mere 3.3 per cent of GDP in the second half of 1990.
At a time when Pakistan's central bank foreign exchange reserves have already hit their June 2002 target of 2.9 billion dollars and the government is able to cover over 50 per cent of its projected gross financing requirements for the current fiscal year, the restructuring of the country's debt stock can only further enhance the country's investment and economic profile both domestically and internationally. The successful debt restructuring will be a major facet of Pakistan's economy, as it would allow the use of available money on education, health and basic infrastructure in the country.
The increase in the flow of home remittances from non-resident Pakistanis was another factor, which help improvement in the forex reserves. The remittances in the five months upto November 2001 amounted to $709 million against $384 in the corresponding period a year ago.
Total home remittances, including cash flows, en-cash of FEBC & FCBCs, Haj remittances and remittances from Iraq-Kuwait war affectees amounted to $789.10 million from July to November 2001 as compared to $535.47 million during the same period last year showing an increase of 47.37 per cent. Due to reports the investigating agencies have been empowered by the US government to check any body's bank account they suspect for involvement in the acts of terrorism also forced Asians specially Pakistanis to send their bank reserves to Pakistan which they feel safe for their hard earned money. Another reason for high rate of remittances was America's strict policy to put a ban on the cash transactions through Hundi system, which channeled dollar inflow towards the banking system and notified each dollar coming into Pakistan.
The year 2001 also witnessed the reverse trend of conversion of dollar into Pak rupee for the first time in the financial history of Pakistan. The US dollar, which had an ever-expanding role in economy of Pakistan, had to lose eight per cent against rupee in a couple of months. According to Malik Bostan, the Chairman of Association of Pakistan MoneyChangers, it is for the first time that the people who used to convert their rupee holding to dollars are converting their dollar holdings into rupee due to declining value of dollar against Pak rupee. The new trend however not because the Pakistani currency was getting stronger against the US dollar but it was the dollar which was weakening due to economic recession hitting the US as a result of hair raising act of terrorism in the United States bringing the economic activity to the lowest ebb.
It may be recalled that the rupee dollar parity which was around Rs67-68 to a dollar before the events related to September 11 has come down to the level of Rs60.10 at inter-bank market while it is being sold at Rs61.10 kerb rate. The narrowing down of the rates between inter-bank and the open market also helped improvement in home remittances through official banking system.
Constant decline in oil prices is yet another significant event of the year. According to an estimate, Pakistan's import bill on account of POL products would drop at least $ one billion this year due to low international prices plus unprecedented drop in oil consumption especially by the manufacturing sector. Despite the fact that saving of one billion dollar on account of oil import seems a significant factor for saving the precious foreign exchange, yet the drop in oil consumption is also an alarming factor indicating stagnant economic activity in the country.
Since Pakistan has linked the domestic oil prices with the international prices after deregulation of oil import and its marketing, the price regulation committee of oil prices announced downward revision of different POL products for the fifth time recently. Consequently, the road transporters have reduced the transport fare to the level of year 2000. It is perhaps for the first time that the transporters have revised the fares downwardly. The actual benefit of the price decline has however not been passed on to the consumers in the price of other oil-related products. It may be mentioned here that the various oil based services and manufacturers have increased the prices of oil based products due to increase in oil prices. The airlines operating in Pakistan including national carrier PIA, Railways, a number of oil based industries had raised the prices accordingly. However when the prices have come down sharply they are unmoved and charging the same prices. When this correspondent talked to a senior officials of an airline, power generating company and a cement manufacturing plant, they argued that they had to suffer losses due to sharp rise in fuel oil prices which have gone up from Rs5500 per ton to Rs11000 per ton during the course of time. They pleaded that they have to recover their losses they had to suffer due to increase in oil prices. They however insisting on their irrational argument because whenever the oil prices registered an increase they immediately passed the extra cost to the consumers. The losses they had to suffer were on account of their inefficiencies and rampant corruption prevailing in their organizations.
A.Q.Khalil, President of Karachi Chamber of Commerce and Industry (KCCI) has however regretted that price of oil related services, utilities and products are not coming down due to absence of an effective price mechanism ensuring the increase and decrease of prices in accordance with the cost of inputs and not on the will of the manufacturers.
It is worth mentioning that the POL prices have registered a price cut of 25 per cent during last three months, but this significant decline does not reflect in overall price index of various commodities directly related to oil prices.
There are strong signals that the poor of this country who are paying price for the huge foreign and internal debt out of their hard earned money may get a sigh of relief if the favourable situation was used for debt retirement sincerely. One of the favourable elements is the absence of the corrupt, greedy and selfish people from the helm of affairs.
People at the grass root level, after seeing the positive signs the economy has started to show, are pinning hopes for some relief in the cost of daily living especially in the prices of utilities in Pakistan which have been officially admitted to be the highest in the region.