ACHIEVING DOUBLE-DIGIT GDP GROWTH RATE
The envisaged strategy is to overcome shortages, congestions and bottlenecks, which can possibly slow down the growth process
By SHABBIR H. KAZMI
Aug 22 - 28, 2005
The government has fixed a 7.5% gross domestic product (GDP) growth target for the current financial year, as against an actual growth of 8.4% achieved during 2004-05. Over the next five years various targets to be achieved are an average annual growth rate of 9%, per capita income growth of 6.5% and investment growth of above 5%. The government aims at achieving these targets through enhanced spending on education, health care and infrastructure development. The envisaged strategy is to overcome shortages, congestions and bottlenecks, which can possibly slow down the growth process. As the government suffers from budgetary constraints, it is actively pursuing public-private partnership with resource to capital markets.
The immediate question is why the government has fixed a lower GDP growth target after having achieved a growth rate of 8.4%? Apparently, there seems to be two possible rationalizations 1) fixing a realistic and achievable target and 2) avoiding any failure arising out of lack of capacity to implement the public sector development program. In the year 2000 the government has initiated a plan for the devolution of administrative and financial powers to the local governments. This program ran into some snags due to uneven distribution of powers between the provincial and the local governments. However, there is consensus that for bringing about demand-driven balanced regional development and delivering services to the vast majority of people, there cannot be a better option than the local governments.
Over the past five years Pakistan has traversed the road from facing a near-default situation on its external payments to foreign exchange reserves growing by 12 times and bidding farewell to the IMF program and attaining successful access to international capital markets. However, the point for deliberation is, can these impressive achievements be sustained? Yet another point to dwell upon is, will the situation reverse with the change in the regime? Only evaluating the potential and threats can help in finding the replies to these basic questions. Usually the analysts first talk about the good things and then mention the bad things by just giving passing remarks. However, the prudent approach should be to first identify the threats and then explore the potential to come up with a sustainable strategy to face these challenges.
One of the key threats confronting Pakistan's economy is record high price of crude oil. However, this is not unique to Pakistan because most of the developing counties are facing this problem and economies of developed countries are also facing the crunch. High oil prices are contributing to persistent hike in inflation and also adding to the cost of production and eroding competitiveness of "Made in Pakistan" products in the global markets. As the government aims at achieving export-led growth any erosion in competitiveness becomes a drag.
The present regime has shown some consistency and coherence in its policies and avoided following popular policies to attain political mileage. The efforts have yielded positive results as investment in the creation of new productive facilities has shown considerable growth. More importantly the influx of foreign direct investment is on the rise. However, the point of concern is that this inflow is towards only a few sectors. The adaptation to the changing external and internal conditions has placed Pakistan in the same vein like China and India. However, Pakistan faces direct competition with these countries, which enjoy enormous domestic market size.
The growth in Pakistan's exports is led by textile sector, where a lot of investment has been made in the recent past, to achieve higher value addition and diversity in product mix. While the country enjoys improved market access, the tariff discrimination and imposition of anti-dumping duties on goods of Pakistani origin have tilted the field against the country. The diplomatic efforts have helped in containing the adverse impact but a lot more remains to be done. The country has to reduce its dependence on textiles and clothing and explore new markets to achieve broad-based exports, which can also match imports or at least minimize the trade deficit. Higher oil prices and growing import of plant and machinery and raw materials are adding to the trade deficit. This is eroding foreign exchange reserves of the country and can also make exchange rate vulnerable.
Structural reforms such as privatisation, liberalization and deregulation are contributing towards macroeconomic stability and growth. The successive governments have pursued the process initiated in early nineties. Prudent macroeconomic management and sound fiscal and monetary polices have helped in achieving higher growth and maintaining stability. A number of checks and balances have been built in the system, which have minimized the risk of slippages and reversal and ensured prudence and implementation of the reforms agenda.
Gradual pullout of the government from the business of managing business and encouragement of the private sector has ushered in competition, promoted efficiency and benefited the consumers and users of products and services. The financial sector reforms have extended its outreach and access to the middle and lower income groups and underserved sectors like agriculture and small and medium enterprises.
Globalization, financial market integration and access to global capital markets demand further improvement in the performance because indulging in infractions could lead to instantaneous heavy penalization by the markets. While the government is required to adapt its policies to the changing internal and external development, the private sector also has to play its due role in achieving the Millennium Development Goals set by Pakistan.
The ultimate objective is poverty alleviation. Growth alone will not suffice to reduce the incidence of poverty. It has to be accompanied by poverty-targeted interventions and social safety nets. Government cannot achieve the target alone due to budgetary constraints and at the maximum allocate half of the desired amount. The other half has to be raised through public-private partnership with recourse to capital markets.
COMPONENTS OF BALANCE OF PAYMENTS (AS PERCENT OF GDP)
Current Account Deficit#
^ Based on the data compiled by FBS.
# Based on the data compiled by SBP.