The success depends on addressing the outstanding
By SHABBIR H. KAZMI
Jan 03 - 16, 2000
Chief Executive, General Pervez Musharraf
announced the economic revival plan on December 15, 1999. The plan aims at accelerating
the economic recovery of the country by addressing the key issues. The plan has special
focus on: stabilizing external account, reviving investors' confidence, minimizing budget
deficit and boosting agricultural output. It also has special emphasis on information
technology. It is necessary to examine the factors which have a direct influence on the
outcome of the plan. PAGE with the help of Khadim Ali Shah Bukhari & Company
has tried to examine the plan.
There are some key points that must be examined in determining the
economic prospects of the country. These are getting the external debts rescheduled and
enhancing the debt servicing ability, achieving the desired GDP growth rate to meet the
IMF conditions, minimizing the budget deficit. The pre-eminence of the external account in
the plan came as no surprise. It is important to note that while most of the external
debts have been rescheduled, the debt servicing ability of the country remains a serious
concern. However, some analysts believe that the outlook is promising due to the IMF
The main theme of the plan was on reducing imports of wheat, oilseeds
and POL products. However, it may not be an easy target to achieve within current
financial year. However, in the long run agriculture sector may emerge to be the main
beneficiary. The key reforms are: following the market-based policies unless the
intervention is required to save the interest of small farmers, continuation of support
prices for important crops and the GoP will provide subsidy and low cost inputs and
developing water courses and infrastructure.
The highest priority for the manufacturing sector will be on ensuring
credit and advisory services to small and medium enterprises. Industrial financing will be
revived through restructuring of the financial sector which will help in rationalizing of
interest rates. It has been proposed to set up Corporate and Industrial Restructuring
Corporation. This will undertake the rehabilitation of sick units and, should a unit be
deemed unfeasible, will also dispose of the assets to pay-off accumulated debt.
The tax reforms are the most important element for the revival of the
economy to overcome persistent budget deficit. In this regard imposition of tax on
income from agriculture is key issue. The current economic enjoying the support of masses
can make them swallow this bitter pill. Since the GoP wishes to undertake ambitious
infrastructure development programme availability of the resources is a must.
Oil Marketing Companies
Oil Marketing Companies merited a quick mention. There was a reference
to a planned 'rationalization' of their margins to enable them to invest in petroleum
infrastructure in the country. Considering the slim margins these companies work on at
present (for regulated products), the rationalization of margins would mean an overall
increase in margins. Even a slight improvement in margins for marketing companies would
result in substantial earnings improvement. As PSO is one of the lesser efficient
operators, it has the potential to achieve the greatest efficiency gains as competition
intensifies. PSO is well poised to take advantage of expected margin revisions.
Privatization could be delayed further.
Any reduction in leased line charges is unlikely to hit earnings
Focus towards developing a software base should, in the long
run, feed into leased line revenues.
In the prevailing scenario foreign and domestic investor confidence
stands shaken. It is perhaps better to delay privatization until such a time that some
resurgence of confidence may attract serious global players with track experience.
Any reduction in leased line charges would hurt Pakistan Telecom's
earnings for two reasons. First, leased line revenues represent less than 2% of total
revenues. Second, positive elasticity (in the short term) and development of a software
industry (in the long term) should strengthen this revenue stream.
Independent Power Producers
The investigations against the IPPs be completed within 30 days. This
all sounds very encouraging. However, an interesting caveat is that there is no way to
know what will happen after report is submitted. There was an emphasis on finding an early
resolution to the IPPs problem, which coincide well with the government's stated objective
of working towards restoring investor confidence, both domestic and foreign.
Pakistan also look forward for debt relief from donors in order to make
the external account sustainable. Buying electricity from HUBCO cannot become affordable
for WAPDA without debt restructuring for the project. With Pakistan showing its intention
of seeking debt relief from various donors may also include asking the World Bank for
easier terms for the servicing of HUBCO debts. Such a move would go a long way towards
finding a sustainable solution to the problem.
The government seems to be relying on a lower interest rate environment
to spur domestic industrial activity. The government's intention is to cut mark up rates,
to make working capital more affordable. Banks have been straining under the burden of
non-performing loans and low capitalization, and unable to step up lending activities in
the recent past. Banks have concentrated on building up provisions. However, the weakness
in interest rates is expected to continue. With interest rates set to weaken further the
spreads is likely to improve. Large banks with widespread networks would be ideally suited
to leverage-off their traditional cost advantage to capture cheap deposits. Profitability
is expected to improve dramatically for the banking sector.
Though a depreciating currency may not be a strong threat, the
possibility of greater domestic production of edible oil may squeeze operating margins for
the companies. Higher agricultural support prices and further reduction in banking
sector's implied downward pressure on interest rates should raise consumption and provide
a disincentive to save. A depreciating currency may not be a severe threat due to ability
to pass through such cost increments. The volatility in the prices of tea and edible oils
may erode margins. The margins on these products are likely to be lower due to increase in
international prices and regulatory duty. Being an agrarian economy, higher farm incomes
would have a dominion effect and consumption levels would not be left untouched.
The government is focusing almost exclusively on the agricultural
sector to spur short-term growth, and to curtail costly imports. Pakistan's trade balance
has been hit by the vagaries of the commodity cycle, with costlier oil and cheap cotton
playing havoc with imports and exports respectively. The government is expected to enhance
farm credit. The establishment of a Micro Credit Bank to disburse loans to individuals,
more so in the rural areas, should help ease liquidity for the farming community. With the
increase in support prices for wheat and finally some buying activity in cotton, farmers
should have ample liquidity to invest in fertilizers for the next season.
The automobile sector was largely ignored in the economic revival plan.
After the start of the austerity drive and the loan defaulters recovery programme, the
demand for luxury cars looks set to weaken considerably. Due to the strict government
drive to recover the defaulted loans, defaulters are keen to liquidate holdings and hold
on to liquid cashpreferably outside the country. This would result in a decline in
vehicle demand, at least in the short term.
The government's encouraging stance on the agrarian sector did not come
as a surprise, bearing in mind that 65 per cent of employment is related to agriculture.
In a bid to boost agriculture activity, the government announced the removal of taxes and
subsidized local produced tractors. This invigorated the local tractor demand. Local
tractor producers are likely to remain net beneficiaries of the government's resolve to
provide micro credit and subsidized machinery and tools to the small- and medium-size
farmers. Revitalizing agriculture is one of the priorities, which should ultimately result
in easier credit terms for the farmers, thus further stimulating demand for credit and
There was nothing to suggest that the government may introduce a
specific package for the textile industry. During the last several years, the textile
sector has earned the dubious distinction of being the largest defaulter of the total
defaulted amount. With the tough stance taken by the government to recover the defaulted
amount, the textile sector is going to find itself in the initial line of fire.
The government has increased its export target for the year 1999-2000
to US$ 9 billion an increase of US$ 1 billion over last year. With the textile
sector accounting for 58 per cent of total exports, some indirect efforts may be made to
make textile exports more competitive. This may include offering cheaper input prices to
the textile sector primarily to the export-oriented units. The increase in farm
credit and revitalizing the Agricultural Development Bank are steps in that particular
direction. The announcement that the government would not directly intervene in the cotton
market is also likely to result in raw material prices, particularly cotton, remaining at
Some of the factors indicate that despite 1998-99 being a bad year,
performance was not all that disappointing. The performance is expected to further improve
in the following years. With the restructuring of external debt, at least some breathing
time is available to restructure the economy.
If the GoP is able to address external debt issue, balance of payments
crisis and contain budget deficit, most of the other related issues are manageable. The
present economic managers were able to resolve bank-defaulters issue to some extent and if
the efforts continue the outcome can help in strengthening the financial system of the
An analysis of capital market indicate that with the exit of some
groups enjoying ample credit from financial institutions the market has stabilized to a
large extent. Further consolidation is expected. Announcement of dividend by about 320
listed companies for the year 1998-99 has once again made investment in shares an
However, it should also be kept in mind that Pakistan despite
formulating good policies has not been able to attain the desired results mainly due to
poor implementation of the policies. The new economic managers must ensure implementation
of announced policies in letter and spirit.