MACROECONOMIC STABILITY TAKES PRECEDENCE OVER GROWTH
Nov 23 - 29, 2009
The government has set a Gross Domestic Product (GDP) growth rate of 3.3 per cent for the current fiscal year 2009-10, while the International Monetary Fund (IMF) has predicted a 2 per cent growth. The analysts fear that per capita income would be put on reverse path if the GDP growth declined to below 2 per cent of the GDP for the current fiscal year in the country with a population growth of 1.9 per cent per annum. The high inflation marred the investment potential and expansion of the economy during the last fiscal year. The average inflation was over 20 per cent, which eroded any possibility of investment and growth in the economy.
The analysts believe that irrationally high interest rates and tight monetary policy of the central bank is holding back the growth. Under IMF demands, the government raised interest rates that caused slump in the industrial sector leading to a decline in revenue collection and slowdown in exports proceeds. Under the IMF programme, the country witnessed a significant economic slowdown, as macroeconomic stability took precedence over growth.
Officials say that Pakistan's economy is going through tentative recovery phase. Transfers of funds rose by $292.2 million, or 63 percent in October, according to the central bank. Overseas Pakistanis in the UAE transferred $175.2 million, up from $75.9 million a year earlier. Pakistanis in Saudi Arabia sent home $142.9 million, up from $96.8 million, and Pakistanis in the USA transferred $154.3 million, compared with $127.3 million. Officials in Islamabad expect to receive around $1.2 billion in the ongoing quarter (Oct-Dec) as disbursements from the Friends of Democratic Pakistan, $530 as Coalition Support Fund from the United States and around $1.2 billion from the IMF in December. The IMF, which increased the loan to $11.3 billion in July, has so far disbursed over $5 billion.
Though Pakistan's external accounts position has been continuously improving, yet prospect for the balance of payments hinges significantly on the magnitude and timing of external inflows as well as the outlook for international oil and commodity prices during the current financial year 2009-10. The decline in growth rate and decreasing currency value has led people to expect more inflation and massive increase in the joblessness. The middle-class income group is slipping fast into the poor class while vulnerability of the lower classes has further aggravated.
Pakistan was forced to turn to the IMF for a $7.6 billion emergency loan package last November to avert a balance of payments crisis. The Washington-based Fund released $3.1 billion as first tranche of the 23-month standby arrangement last November, and the second tranche of $847 million on April 2. The country's external debt and liabilities, which have now reached to $55 billion, has further burdened the economy.
The GDP has declined due to economic slow down following the tight monetary policy. Critics say that the government's ill-conceived policies have stifled the growth and consequently closure of industries is drying up government revenue. Poverty level would increase in the coming days, as dependence on IMF would hurt economy, ultimately pushing more and more people below the poverty line.
The gap between rich and poor is widening; rich is becoming richer and poor getting poorer. Majority of country's 170 million population is at the mercy of a few people who have and control the resources of the state. The deepening economic crisis may convert into a political crisis leading to social chaos and political anarchy in the nuclear-armed country- a nightmare haunting the international community. Desperation among people is growing in the country due to rise in poverty. Everyday the newspapers carry the stories about the poor parents, who have put their children on sale for they cannot meet their basic needs of life. The frustrated and impoverished people try to grab the maximum whenever they get opportunity like flour giveaway. At least 18 women and girls died on September 14 when a crowd waiting for handouts of flour swelled and a stampede occurred in southern port city of Karachi.
The per capita income, which is an important benchmark to determine the health of an economy, rose from $410 to $1085 from 1999 to 2007-08 in the country. The per capita income in Pakistan is likely to witness negative growth during the current fiscal year owing to the slowest GDP growth in 10 years and 30 per cent depreciation of the rupee against the dollar. The inflation has hit poor consumers harder than the more affluent ones, as for each one per cent increase in inflation, more and more people fall into poverty.
The State Bank kept its benchmark interest rate at 13 percent. The higher interest rates caused slump in the industrial sector leading to a decline in revenue collection and slowdown in exports proceeds. Despite hiking interest rate and withdrawing subsidies on petroleum products, the government has so far failed to tame inflation, which is still at a higher side. The current monetary policy has virtually failed to achieve its objective of combating inflation, which has pushed up the cost of living and made it the most important problem in Pakistan, reveals Inflation Expectation Survey recently conducted by Pakistan Institute of Development Economics (PIDE).
Struggling with economic meltdown and Taliban-led insurgency in its border, Islamabad diverted huge resources from other sectors of economy to fight war on terror, which is why main social sectors of education, health, and projects to erase poverty remained neglected. The State bank had cut its GDP growth forecast for the 2008/09 fiscal year to 2.5-3.5 percent from an earlier target of 3.5-4.5 percent after a slowdown in industrial and services sectors. In the last fiscal year budget, the GDP growth target was set at 5.6 percent, which was lowered to 2.5 percent under IMF demands.
The economic growth revival largely hinges on the performance of the manufacturing sector. The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry. The local manufacturers forecast more industrial closures and job losses over the next one year.