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Pakistan's economic scenario in PML's 31-month rule

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Only achievement the government could make is rescheduling of foreign loans

Form Shamim Ahmed Rizvi, Islamabad
Sep 27 - Oct 03, 1999

The present government has completed thirty one months in power but nothing seems to have worked out specially on the economic front during this sufficiently long period. Basic economic issues remain unattended , rather things have gone from bad to worse.

During 31 months of PML government in power, apart from rhetoric and cliches, nothing tangible has been achieved and no consistence economic strategy has been evolved for increasing revenues, boosting exports, improving balance of payment position, privatization of state enterprises and attracting foreign investment. The only achievement the government could make is the rescheduling of foreign loans to the tune of about $3 billion till 2001 and thereby saving the country from default. This happened more because of considerations other than economic and not for any promising performance shown by the policies of the government. Default by Pakistan did not suit the donors either. Even otherwise this amounts only to postponing the liabilities. It could be helpful to us only if during this intervening of 2 years we are to revive our stagnant economy. Unfortunately no such sign is visible so far.

Rising trade gap and declining foreign reserves are cause of grave concern. Pakistan's official foreign exchange reserves have declined to $ 1.4 billion. This signals trouble ahead if the trade deficit continues to rise at the current alarming rate. In the past two months, this deficit has reached $ 369 million.

According to senior official sources in the Ministry of Finance, the existing low forex level also includes $ 200 million of FE 25 deposits placed by commercial banks with the State bank of Pakistan (SBP). This confirms that the widening gap between imports and exports has resulted in a significant drawdown of the official reserves.

After facing a severe balance of payments crisis in 1998, when the official reserve level fell to around $ 400 million Pakistan is currently implementing a structural reform programme sponsored by the IMF. This programme also allowed the country to negotiate a special financial arrangement with the official creditors of the Paris Club. The formalization of debt rescheduling agreements with individual countries is still being done as part of the Paris Club process. Likewise, about $ 877 million commercial debts were also rescheduled by private creditors. The negotiations for rescheduling eurobonds and the sovereign floating rate notes are also still underway.

All these efforts resulted in an improved reserve position of around $1.6 to $ 1.8 billion in the past eight months. However, the pressure is rising again on reserves due to the fall in remittances of overseas Pakistanis, delay in the IMF tranche and the rising trade gap. In these circumstances, the government was required to significantly enhance exports during the debt relief period of two years, to avoid a similar situation in January 2001, when repayment of this debt becomes due.

However, the external trade performance in July and August is alarming, experts say. Imports were $1.597 billion against exports of $ 1.228 billion. Although exports showed a marginal increase of 0.99 per cent as compared to the corresponding period of July-August 1998, in real terms it was insignificant. The corresponding period of 1998 was in any case a poor basis for comparison as this was the period of sanctions imposed after the nuclear tests of May 1998.

Increase in imports may be a sign of pick up but, given the current fragile balance of payments position, Pakistan can ill afford a huge trade deficit. Government officials claims that the import bill has increased due to a sharp rise in crude oil prices in the international market. Secondly, they stated that the import of wheat and fertilizer has also gone up.

If these three items are considered the factor behind the rising import bill, it would mean that increase in imports would not help increase exports from Pakistan. Neither it should have any positive impact on the industrial productivity. For that to happen imports of machinery and other export inputs should be gong up. But that is not happening.

Last year the Prime Minister gave a target to his economic manager to double the exports by year 2000. The Finance and Commerce Minister promised a zero trade deficit for the year 1998-99 which ultimately ended with a deficit of $1.5 billion. If the target for 1998-99 now appears wholly unrealistic, what can one say about the target set for 1999-2000. The exports target has been set at $ 9 billion, and the imports target at $ 9.8 billion, leaving a trade deficit target of $ 0.8 billion. And this target, if is revealed, has set after the suggestion of a zero trade deficit target was finally turned down. The point is whether the economic trends and indicators justify the expectation that the trade deficit will decline by $ 0.849 billion this year. Realism is required for economic management, particularly in a difficult period that the Pakistani economy is passing through.

Although, the trade deficit may have improved since the historical high of $ 3.574 billion or 5.7 per cent of GDP since 1996-97, the trends betray a tendency on the part of the economic managers to set unrealistic targets not related to the real state of the economy, and to be so narrowly wedded to defending the balance of payments that they have lost sight of the need to simultaneously adopt measures to revive the economy.

The export target fixed for fiscal year 1999-2000 may appear optimistic in the context of our previous year performance but it is certainly achievable with extra efforts. Nobody agrees with the Prime Minister's wishful thinking that exports can be doubled in 2 years time but there is a consensus in she relevant circles that there can be a quantum jump and a target of $ 10 billion could be achieved if the recommendations, made by the committee appointed by the Prime Minister to suggest measures to boost exports, are implemented. Last year the Prime Minister addressed all the chambers of commerce and industry and held series of meetings with businessmen throughout the country and made impassioned appeals to them to help in achieving his cherished goal.

Addressing the member of business community in Lahore the Prime Minister had said, "To some people doubling of export in two years looked like very ambitious target, but I want to assure them that with determination and total commitment everything can be achieved. To some people, even the prospects of exploding a nuclear bomb appeared too ambitious but we have achieved it with a big bang."

The competitiveness, diversification and knowledge of the markets demands are considered as the main factor for achieving higher market share in the world. However, such research-based efforts were not followed in Pakistan, which at one time, was exporting more than the combine exports of East Asian tigers. Now it can hardly compare itself with any of them.

Direction of the exports had also remained more or less the same over the years, with 30 per cent to European community, 18 per cent to the United States and seven per cent to the United Kingdom. Exports to Japan had, however, declined as a result of recession in the Japanese market to 4.2 per cent in 1997-98 from 8 per cent in 1993-94.

The fall in Pakistan's exports is attributed to the high cost of inputs, like imported raw materials, fuel, electricity, credit and transportation and devaluation of local currency. To provide additional relief apart from higher rupee earnings the government has allowed finance facility for the export of all counts of yarn.

The special committee, appointed by the Prime Minister to formulate proposals and recommendations to boost the exports, submitted its report to the Prime Minister about six months back which are still under consideration. These recommendations have given due importance of making the exports from the country competitive in the world market thereby encouraging export industries to maximize production and increase exportable surplus. The committee has also rightly emphasized the need to make export refinance less expensive which is an important suggestion to improve the competitiveness of our exportables in the world market. The suggestion that the mark up on value added goods for exports should not exceed 4 per cent and that the general rate of export finance should not be more than 6 per cent as compared to the present rate of 8 per cent, appears to be fairly reasonable. Additionally, the special committee has demanded a 30 per cent cut in the electricity tariff for export industries and that the lending rate in general by banks to business and industry should not exceed 14 per cent.

The most important suggestion called upon the government to establish a high-level Export Development Authority under the chairmanship of Prime Minister and appoint an executive Vice Chairman from the private sector. This suggestion appears to be quite reasonable if seen in the context of the need to give top priority to tempo of exports and that is why it is desired by the committee that the Prime Minister should be kept fully abreast of day to day situation on the export front.

There can be no two opinions that export efforts need to be revamped with maximum possible incentives to the export related industries especially the textile sector, the manufacturing sector catering for exports, it may be emphasized, would do well to optimize the results of these incentives by giving constant attention to cost management and improvement in the quality of the products besides showing dynamism in exploring export markets globally without depending too much on quota countries.