INCOMING GOVERNMENT IS TO HAVE STRONG BALANCE SHEET

CHALLENGES AHEAD TO SUSTAIN MACRO-ECONOMIC ACHIEVEMENTS

AMANULLAH BASHAR
Feb 25 - Mar 02, 2008

The incoming government, which might be installed in the middle of March when the formal sworn-in ceremonies are administered in the national and provincial assemblies, is being inherited with a strong balance sheet but at the same time the strong economic indicators are accompanied an uphill task to sustain the growth level in days to come.

The noticeable macro-economic indicators during last 7 years include GDP growth from $73 billion to $146 billion, growth rate from 3.9 percent to 7 percent, foreign exchange reserves from $1.9 billion to 414 billion, Direct Foreign Investment from $470 million to $5.1 billion, workers home remittances from $984 million to current level of $5.4 billion, debut to GDP from 88 percent to 56.2 percent and debt servicing from 8.4 percent to 2.1 percent of GDP

The incoming government has to take some harsh decision pending for quite sometimes such as rise of oil prices, which are heavily subsidized by the government for over a year proving a serious burden on the economy. However, increase in oil prices is feared to open a floodgate of price inflation; which is already on the higher side despite constant efforts by the state bank of Pakistan to control the inflation pressures through tightened monetary policy in the country.

INTEREST RATES

In the process of containing inflationary pressures the interest rates of the commercial banks have been doubled from around 7 percent to almost 14 percent at present. This increase in interest rates whether helped controlling the inflation or not but the fact remains that it has seriously affected the domestic economic.

The trade and industry has been raising hue and cry over increasing cost of inputs and they are feared to miss the export target at the end of the current financial year. In the face of this situation, the central bank might be taking some corrective measures and there were strong indications and the increase in discount rate of the banks might be taken bank when the central bank comes out with its next monetary policy.

It is interesting to note that on one hand the trade and industry in general have a strong concern over increasing interest rates while on the other hand the banking industry must be happy to harvest a rich crop on the back of growing interest rates as they were not passing on the benefits to the depositors in general except a few small banks. Though the governor State Bank has taken some corrective measures by asking the commercial banks to reduce differential between lending and deposit rates yet things are yet to take a visible shape. Most probably, the trade and industry having a strong say in the new government, might be able to convince the people at the helm of affairs to bring down the level of interest in future.

The central bank however has initiated a brilliant step to enhance the area of banking operation to farm sector, which was beyond the reach of a large number of small farmers.

Besides the commercial banks, state bank has also advised Islamic Banking players to expand their operation to the agriculture and rural sector, which has the potential to give a strong supporting shoulder to the economy.

According to some analysts, the forthcoming government despite a robust balance sheet, will be forced to take some tough economic decisions very soon after taking over, which include long over due correction of domestic oil prices, which have not been changed since January 2007. The new government will have to take decisions on the privatization of key public entities like PSO and Pakistan Steel to ensure external deficit financing. While the most crucial decisions might be on the construction of high dams which are vital to meet future energy needs as well on upcoming independent power projects (IPPs) to ensure long-term growth.

There is no second opinion that Pakistan has made noticeable economic growth in the last 5-8 years primarily on the back of good macro economic policies and friendly attitude from the EU and the US and that friendly global environment also contribute to strengthen the macro-economic fundamentals in Pakistan.

The policies of the new government will have an impact either one way or the other on macro fundamentals. So far, the economy has shown resilience in the face of both domestic and external shocks, indicating strength of the underlying economy. The changing environment calls for an immediate attention on higher subsidies to domestic sector, declining exports and low tax collection. It is also amazing to note that the government coming with the support of the popular will of the people will have to protect the interest of the people in general to address the issue of price hike, poverty reduction through new job openings and on the other hand it has to meet the economic obligations by removing the subsidies as well.

The investors are now naturally have focused on the forthcoming government to see as to how the next government conducts and deals with economic policies and issues besides handling of the political issues, and the relationship with the allies in all the four provinces because it is the peace and stability alone which is required to ensure growth momentum in the country.