NEW GOVERNMENT TO FACE ECONOMIC CHALLENGES
SHAMIM AHMED RIZVI
Mar 10 - 16, 2008
The newly elected government likely to take over in the next 2/3 weeks will face many serious challenges especially on the economic front. Rising inflation, rising debt burden, alarming trade deficit and rising budget and current account deficits are the some on the economic front while energy crises and unsatisfactory law and order situation are other serious issues on which the new government would have to focus its attention with courage and determination. By any standard it is the toughest job for the new government.
According to Citi Group Global Market Equity report under the theme of "Pakistan election 2008î the new government faces a more challenging economic environment now than during the entire term of the previous government. The failure of the interim government to take difficult but necessary steps has only added to their problems.
According to some experts the economy of the country has gone out of control and the new government would face the back lash of this mismanagement. Contrary to their claims and rhetoric the team of economic managers headed by former Prime Minister Shaukat Aziz has created enough mess for the incoming government. The trade deficits during the last six months cross $10.5 billion against a target of $12 billion for the entire year. Food inflation is running in double digit making the lives of poor and lower middle class miserable. Debt burden, both domestic and foreign, has mounted to an alarming point with over Rs 2800 billion and $42.8 respectively. It is perhaps the highest in the history of Pakistan sharply in contrast with public statements of Shaukat Aziz that "we have broken the begging bowel". The budget deficit is constantly rising with government resorting to heavy borrowing from all possible sources.
Will the new government be able to arrest erosion in the economic fundamentals of Pakistan? It is a vital question that is haunting each and every Pakistani within the country and abroad, having some concern for the economy and its future.
Another worrying issue is that the multinational companies, banks and other institutions have put on hold their expansion and investment plans for the time-being after they have observed deepening of the political crisis and increasing militancy in the country during the past four to six months. The political chaos that surface in March 2007 after the dismissal of Chief Justice of Pakistan Iftikhar Muhammad Chaudhry continued to deepen till now, a phenomena that has trampled the business and investment-friendly climate and irritated all and sundry in the country.
The foremost and thorny issue the newly elected government would have to embrace is the fuel oil subsidy, where the federal government is losing 14-15 billion rupees a month and that is one of the major reasons of widening of fiscal imbalance in the current financial and budgetary borrowing of the federal government. During the last couple of months the economic team of the government tried its best to pass on to the consumers some of the impact of hike in fuel oil prices, but the caretakers have rejected it with a view that it would irk the consumers. Shaukat Aziz government, in its last days, too ignored the hike in oil prices and left this crucial decision to his successors.
CONTAINING PRICE HIKE OF CONSUMER ITEMS
The caretaker government too has left this hot issue to the coming elected government. How the new government would tackle this issue, it would be premature to predict. But in case the new rulers jacked up the fuel oil prices, they would not only face the wrath of the people, but it would become difficult for them to contain hike in consumer items prices and all-time high monster of inflation.
Some analysts feel that the federal government should continue to absorb the impact of hike in the world oil prices to save the consumers and the people of the country from further hike in the value of consumable items and enlargement of inflation, especially food inflation. It is a routine that every year more than Rs 200 billion are spent on subsidies out of which a major chunk of money goes to the energy sector, an expert said, adding if the government loses Rs 168 billion in 2007-08 by subsidizing oil prices, the government would not become bankrupt by absorbing this amount. Because if the government can generate one trillion rupees worth tax revenue in FY08, it could develop courage to spend 16-17 percent of the total revenue on providing relief to consumers.
Analysts said that the economic team's foremost priority should be the wellbeing of the countrymen and not the dictations and aspirations the infamous donors and the international monetary found, whose top priority is to extract maximum revenue from the people of Pakistan, where more than one-forth of the population is either living below the poverty line or just strolling on this notorious line. It is true that the budgetary borrowings of the federal government have shot up to around Rs 260 billion in seven months of the current financial year, compared to just Rs 50 billion such borrowings in the corresponding period of last financial year. This big upsurge in budgetary borrowings is the result of government's inability to mop up foreign exchange from the international markets in the shape of privatization, sale of international bonds and the Global Depository Receipts of the mega public listed companies mainly because of deepening political uncertainty and militancy, etc.
The second major issue is how to control the inflation. In the month of January 2008 the general inflation has ballooned to 11.9 per cent while the food inflation has set a new record by hitting 18.2 per cent mark for the first time in the history of Pakistan. Artificial shortage of wheat, flour and hike in prices of different essential items and weak governance gave an unprecedented boost to the food inflation last month.
The current account and trade deficits are also posing a serious challenge to the economy and the strategy of the police-markers. From July-December FY08 the country had sustained $4.68 billion deficit in the corresponding period of last fiscal.
Meanwhile, the trade deficit had enlarged to $10.327 billion dollars from July-January FY08, showing 35.15 per cent growth when matched with $7.644 billion trade deficit in the same period in FY07. In FY07 the current account deficit had ended at slightly over $7 billion, but in six months of this fiscal, this deficit had increased very close to the size of entire financial year in 2006-07 because of widening of trade deficit and lesser than anticipated inflows of foreign exchange in 2007-08. In last financial year the federal government had raised over two billion dollars worth foreign exchange from the international markets through the sale of global bonds and the GDRs of the listed companies. But in this fiscal this exercise could not be taken up till today because of political uncertainty.
However, in the last quarter of the current financial year the government intends to offer the GDRs of a couple of listed public companies that, if materialized, would lead to earning of a reasonable amount of foreign exchange that would ultimately help to alleviate the quantum of current account deficit in FY08.
Another important task for the new government would be to restore the confidence of the foreign as well as local businessmen and investors that would pave way for expansion in business and investment in Pakistan. At present the investors and businessmen have adopted "wait-n-see" policy regarding expansion and investment and looking towards the outcome of the coming elections.
Talking to a 45 member delegation of business community PPP Co-chairperson Asif Ali Zardari in Islamabad last week said the newly elected government will have to take tough decisions to improve the ailing economy. However, some safety valves have to be provided to the common man who has suffered the most due to the faulty economic policies pursued during the last 8/9 years. He assured the businessmen that the elected government will consult all concerned while framing economic policies "but our main focus would be on poor and have-nots." It sounds well to start with.