Further growth can be assured by removing infrastructural bottlenecks and implementing the next generation reforms

May 08 - May 14, 2006

In the recently released quarterly report the State Bank of Pakistan has hinted towards some external factors having the potential to affect its economy negatively. It has also been reiterated that Pakistan cannot remain immune to the geopolitical happenings, particularly the oil driven inflation. It further says, "Given the fast growing trends of aggressive globalisation and increasing regional competition, Pakistan can ill afford to derail its macroeconomic stability, which besides political stability, has been the lynchpin of restoring both domestic and foreign investor confidence. Macroeconomic management today is complicated by Pakistan's need to continue growing which does require it to strength its both financial and physical resource. The country will have to carefully gauge its priorities to meet the emerging challenges."

While reviewing the performance of the economy in May most of the analysts should be more than happy because Pakistan has been able to achieve most of the targets fixed for the current fiscal year. Some of the analysts may also say that the actual results may exceed the targets. However, there is no room for complacency. It was the lady luck, which was more than kind to Pakistan, because the country successfully withstood the earthquake shock. Some of the critics may still say that the life in quake-hit areas has not back to normal. However, they must remember that it was not easy to cope up with devastation of such a magnitude.

Some of the cynics say that the economic managers had fixed easy to achieve targets, whereas the others may applaud the hard work. In the recent past Pakistan used to fix ambitious target but also often failed to achieve those. It was only recently that most of the targets were achieved. According to some analysts the economic managers not only fixed realistic targets but also worked hard to achieve those. While achieving the revue target seems possible, the growing trade deficit should be a cause of concern. Despite huge influx of remittances and foreign direct investment, Pakistan's foreign exchange reserves are on the decline. However, if one excludes the oil import bill the import export equation has been pretty comfortable.

One of the positive factors has been that exports are growing both in terms of overall volume as well as product diversity, particularly that of value added items. Textiles and clothing exports have grown at a faster pace after quota phase out, only because the industry has invested heavily for achieving higher production and quality standards, it is only beginning of the story. As the import of textile machinery continues it is expected that over the next five years Pakistan would be able to realize US$ 20 billion exports from textiles and clothing alone. The cotton policy being followed by the government has been yielding positive results. However, the sooner the government introduces 'No duty no rebate regime' the better it would be.

While there is all the appreciation for the Central Board of Revenue (CBR) for increasing the overall revenue collection, it is regrettable that bulk of the taxes fall under indirect tax classification. Collection of duties and taxes on machinery means frontloading, pushing up the project cost, financial and depreciation charges and leading to higher cost of production. Similarly, collection of surcharge on POL products and gas adds to the cost of production of virtually every product and tantamount to penalizing even the poorest. As against a number of sectors and groups of people continue to enjoy exemptions. One such group is feudal lords, who despite earning millions of rupees from agriculture and orchids do not pay a penny as income tax.

In the decade of nineties most of Pakistan's industrial units were suffering from poor capacity utilization. They key sectors suffering from this contentious issue were textiles, automobiles, PSF and cement. Telecommunication was also a subdued sector. Lately, substantial investment has been made in all the sectors to add new capacities. However, it is regrettable that Pakistan has not been able to add urea production capacity, despite enjoying ample supply of gas. Investors demand guaranteed supply at a price indexed with Middle East gas prices. The delay in adding production capacity has led to a point where at least one million ton urea will have to be imported this year to meet the demand. This would be extra burden on country's eroding foreign exchange reserves.

The privatisation process has moved rather smoothly baring a few bumps. Though, some complications were faced in case of PTCL, KESC and Pak American fertilizer but ultimately the Privatisation Commission was able to conclude these transactions and transfer the control to new strategic private sector investors. There is some criticism on privatisation of Pakistan Steel. There are two points of view 1) government has succeeded in obtaining an attractive price, 2) Pakistan Steel has been sold at a heavy discount. It is imperative that the government should respond to this criticism, rather than saying that the opponents are spreading incorrect information.


















2004-05 (July-Feb)




2005-06 (July-Feb)




Source: Federal Bureau of Statistics

It is also important to point out that the Monetary Policy being followed by the State Bank has not really helped in containing inflation. Having said this, it is also important to highlight the fact that the higher inflation rate is an outcome of a number of external factors, beyond the control of the central bank. However, it must be recognized and applauded that the central bank has been striving hard to contain interest rates and foreign exchange reserves. Lately, there was news that the central bank has once again started accumulating dollars from the local market.

There was also a suggestion for devaluing the rupee from certain quarters. Their point of view was that devaluation would help in boosting exports. However, they completely ignored that devaluation would also lead to hike in inflation rate, particularly because of huge oil import bill and ongoing import of plant and machinery and raw materials.