Jan 07 - 13, 2008

The year 2007, specially the second half, has not been a good year for the economy of Pakistan. National economy is passing through critical times these days. During the past 4/5 months the growing trade and fiscal defects and rising food inflation have posed serious threats to the economy challenging its fundamentals. It has been also a year of growing poverty and income inequalities in the country.

The political crisis and resultant uncertainty starting with the removal of chief justice in March has badly disturbed the pace of economic development. According to the reports, foreign investment after a long gap has shown a decline by almost a 25 percent as compared to year 2006. According to economic experts major reasons behind drop in investment were falling port folio inflows as the foreign investors were reluctant to invest in an atmosphere of political uncertainty. According to them the investors are on the hold under "want & see policy" and this trend would prevail until next Government takes over peacefully and effectively.

The international donor agencies like the World Bank, IMF and the Asian Development Bank as well as the independent economists of the country have been warning the government and the economic managers that the rising poverty, widening income gap, high inflation and growing trade and current accounts defect are posing serious threats to Pakistan's economy. In May 2007, at a meeting of "Pakistan Development Forum" in Islamabad the representatives of donor agencies as well as observers including economists of international repute did not agree with the Prime Minister Shaukat Aziz who painted a rosy picture of Pakistan's economy. The Vice President of World Bank for South Asia in his speech, while agreeing with the Prime Minister that Pakistan was making economic progress, warned that high inflation and extreme economic inequality created during the process can lead to dangerous consequences.

Three of the most important fiscal indicators which have drawn attention of all those who have been watching the performance of the economy very closely during the current fiscal year are: trade deficit, inflation and fiscal deficit. According to the latest report released by the FBS, during the first five months of the current fiscal year trade deficit has widened to $7.2bn against government's trade deficit target of $10.6bn for the whole fiscal year. It is 32.4per cent higher than trade deficit during the corresponding period of last fiscal year. It was $5.44bn. The analysts are of the opinion that in case existing trend persisted during the remaining period of the current fiscal year, trade deficit might increase to $14bn that is likely to give a quantum increase to current account deficit that stood at 5.7bn, around 4.8 percent of GDP by the end of the last fiscal year. It is understood that one of the factors for huge trade deficit is increase in crude oil prices in the global market and increase in its use in the domestic market.

The other fiscal indicator that is drawing attention of SBP and general public is CPI. During first five months it was recorded at 7.85 per cent and for the month of November it was recorded 8.67 per cent. It was 0.60 per cent higher than the CPI inflation recorded during corresponding month of the last fiscal year. Notwithstanding the fact that the SBP has recently raised interest rate from 9 per cent 9.5 percent along with both the bank's cash-reserve requirement ratio and their statutory liquidity requirement ratio, inflation still remains untamed. The reasons for it are multiple and one of the conspicuous factors among them is expansionary fiscal policy pursued by the government. This factor is also the cause of increase in fiscal deficit.

Target for fiscal deficit was fixed at 4 percent for the current fiscal year despite the fact that actual fiscal deficit for last fiscal year was higher than by 0.2 per cent than the target. There was a strong possibility that, had current fiscal year not been an election year and political spinning had not taken place, it would not have been a difficult task for the government to achieve the fixed fiscal deficit target. But there are strong indications that fiscal management has slipped out of the hands of the government. It is being anticipated that fiscal deficit could be close to 5 per cent of GDP. There are a number of factors contributing to it.

The first and foremost factor is expansionary fiscal policy of the government about which the SBP has been voicing its concern in its annual and quarterly reports because it ran contrary to its tight monetary policy. The latter has not succeeded to deliver the results as was expected for this very reason. PSDP expenditure for the current fiscal year, projected in the budget estimates at Rs 500bn which is quite high in case one has to take into account target of total revenue of Rs. 1.1 trillion. There is showdown in revenue collection and FBR first quarterly report released on 17 December 07 stated that although downward revised target for the first quarter had been achieved but it might put pressure on individual taxes performance during second quarter. In such a situation the government has limited option to pursue high expenditure on PSDP. Apart from this there has been substantial increase in both domestic and external debts during the year under review.

As per State Bank's Annual Report FY07, Pakistan's total debt and liabilities (TDL) increased to Rs 5.02 trillion in FY07. The major causative factors of this increase in TDL were; rising level of country's current account deficit and a large fiscal deficit that raised the financial needs of the country. Another aspect was the sharp rise of 57.1 per cent in interest payments on domestic debts.

Pakistan's external debt rose to $ 40.1 billion during FY07, increasing from $35.2 billion in FY04, and showing a $2.9 billion increase over the stock of FY06. The rise in EDL stock constituted inflows from IDA, ADB and the issuance of a new Eurobond. In the coming years Pakistan is likely to face higher burden of debt servicing as repayment of the rescheduled non-ODA Paris Club. Debt stock will resume from FY04 and Sukuk is sued in FY05 will become due in FY09 and FY10 respectively. In addition, interest payments on various Eurobonds issued recently are likely to add to debt servicing burden in the coming years.

The year 2007 has witnessed the fastest rate of food price increases in the history of Pakistan in the last 3 months of the year (October - December 2007) the inflation rate was escalated at over 11 percent making lives of the majority of population miserable with no signs of relief. Policy makers in the caretaker setup fear that food inflation may be difficult to manage in the coming months. It would be the most sensitive issue to be faced by the elected Government likely to take over this month.