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SBP Annual Report on Pakistan's economy

Timely and corrective measures imperative for hitting the targets of 2001

By AMANULLAH BASHAR
Nov 13 - 19, 2000

Pakistan's total external debt outstanding on June 30, 2000 is estimated at $32.7 billion or 53.8 per cent of GDP. If other foreign exchange liabilities such as foreign currency accounts are added, the total external liabilities rise to $37.3 billion or 61.3 per cent GDP.

For the first time in the recent years, the annual report for 1999-2000 released by the State Bank of Pakistan (SBP) is not loaded with gimmicks to give a rosy picture about the financial health of the country. Instead the report has come out with a clarity of debt situation by brushing aside all kite flying estimates as to how much exactly is Pakistan's external debt. The credit goes to Governor Ishrat Husain of course.

Due to absence of exact figures of Pakistan's external liabilities has evoked a great deal of speculation, conjectures and wild guesstimates in the press and elsewhere. The conflicting numbers that have been cited by the resulting confusion arises due to differences in coverage and the categorization and measurement of external debt. Minor differences also arise from the use of varying rupee conversion rates.

According to figures released by the Central Bank, debt servicing on account of these liabilities amounted to $7.8 billion or 95.9 per cent of the country's realized export earnings in 2000. As it was not possible to pay this amount fully and still meet the economy's demand for imports, more than half the contractual debt servicing had to be rescheduled (Paris Club) restructured (Eurobonds).

Contrary to popular perception, the rescheduling agreed by Paris Club creditors for 2000 was only $1.3 billion; relief on the larger amount $2.6 billion was obtained outside the framework of the Paris Club.

Of the total amount falling due in financial year 2000, $3.7 billion was actually paid out of the country's foreign exchange earnings and by drawing down liquid reserves. The amount eligible for rescheduling/ rollover in financial 2001 is projected at $2.2 billion, which is 56.4 per cent lower than the $3.9 billion rescheduled in 2000.

Pakistan's External Liabilities at the end of financial 2000 (US$ million)

1.Public & publicly guaranteed debt

27,654

A. Medium and Long term (> 1 year)

Paris Club:

12,428

Multilateral

10,767

Other Bilateral

639

Eurobonds

610

NHA Bonds

241 (provisional)

Military Debt

958 (provisional)

Commercial Loans/Credits

1,100

Others

350

B. Short term (< 1 year)

561

IDB

130

Others

431

II. Private Non-guaranteed Debt

2,842

Medium and Long term (> 1 year)

2,842

Private Loans/Credits

2,842

III. Central Bank Deposits

700

IV IMF

1,550

Total External Debt

32,746

V. Foreign Exchange Liabilities

4,558

Foreign Currency Accounts

2,349

FE-45=

1,072

FE 25 Deposits

977

Outside SBP

616

With SBP (FE 13)

361

FE 31 (incremental)

300

Special US$ Bonds

1,297

National Debt Retirement Program

156

Other Liabilities

756

Total External Liabilities (1 to V)

37,304

External Liabilities Payable in Rupee

1,720

Frozen FCAs

1,572

FEBC

109

FCBC

36

DBC

3

Pakistan's economy during financial year 2000 showed some signs of improvement, stability, along with a modest growth rate. However a combination of domestic and external shocks coupled with structural shifts kept the economy under stress.

The residual vestiges of May 1998, the political uncertainty and the change of government in October 1999, were domestic shocks to the economy. On the external front, a breakdown in negotiations with the IMF in May-September 1999, the spike in world oil prices, the lingering dispute with Hubco and serious reservations in some international quarters on the emergence of a military government, exacerbated the situation. Since October 1999 the new government's economic agenda which is based on accountability, improved governance, widening the tax net and closure of official avenues of hiding wealth, created major structural shifts in the economy. Although the Pakistani economy has been inherently resilient and weathered many shocks in the past, its capacity to absorb domestic and external shocks along with fundamental structural changes at the same time has been tested to the limits during financial year 2000.

Although these structural changes may lay the foundations for a more sustainable and equitable growth in the future, the short-term transitional costs are significant. The withdrawal of investors who had built their fortunes on the basis of concessions, privileges, connections, tax evasion and loan defaults has created a vacuum for the time being. The potential beneficiaries of the new system are yet to emerge and will take time to establish themselves. The government could have filled in this gap but its own public finances are structurally weak.

The combination of a slowdown in the informal economy and the cumulative cut in productive public spending over the last few years has not only reduced opportunities for economic expansion and employment generation but may be able to sustain the productive use of additions to the labour force. The only exception to this is the agriculture sector, which has resulted in a large infusion of purchasing power in rural areas.

As a result of strong agriculture performance, the real sector witnessed a turnaround and GDP growth rose to 4.8 per cent from 3.1 per cent a year back. Bumper crops of cotton and wheat coupled with an increase in the production of rice led to agricultural growth of 7.2 per cent, which improved self sufficiency in food and the quantitative increase in exports.

The bumper cotton crop, low domestic cotton prices and falling interest rates created very favourable conditions for the textile sector. Value added in this sector grew by 13.0 per cent in the financial year 2000 compared to 2 per cent a year earlier. But the expansion was insufficient to offset the large decline in the sugar sector. Therefore, large-scale manufacturing did not show any growth this year. However, if sugar is excluded large scale manufacturing did perform well with sectoral growth at 6.8 per cent compared to 5.8 per cent in the preceding year.

3-pronged strategy

The Central Bank has identified adjustment in fiscal accounts as the most obvious element of strategy. Pakistan has never been known for austerity and fiscal prudence and the public savings rate has always been chronically negative. However the recent attempt to capture unrecorded commercial transactions and extend taxes to retail trade/services are steps in the right direction. Thus future fiscal adjustment will depend to a large extent on the success of current efforts to widen the tax base and bring in a larger segment of potential taxpayers within the net.

Export growth is the second key element of the government's strategy, although a concerted efforts has already been taken to keep Pakistani exports competitive by pursuing a market based exchange rate policy, serious efforts are needed to remove non-price impediments, improve efficiency in production of exportable items and enhance the outward orientation of Pakistani exporters.

The third element, which will impact Pakistan's medium term prospects, is the speed at which new investment both foreign and domestic can be attracted. The impending agreement with the IMF and the 3-year facility in particular will provide some comfort to potential investors.

The central bank has however recommended that an early settlement of the lingering dispute with Hubco will go a long way in restoring foreign investors confidence in Pakistan. The three investment areas that appear promising in this respect are Oil & Gas, Textile modernization and Information Technology.

Outlook

The preliminary projections for financial year 2001 indicate that GDP growth will be around 4.5 per cent. The impressive growth rate attained by the agriculture sector in 2000 is unlikely to repeat itself as the base has already risen significantly. There will be some resurgence in Large Scale manufacturing particularly in the textile sector but its overall weight i.e. 19.1 per cent is still insufficient to have much of an impact. Inflation is projected around 6-7 per cent, while the current account deficit is expected to slide further to 1 per cent of GDP. Public finances are expected to improve significantly as a result of the documentation drive and tax survey.

Consequently, tax revenues are projected to grow by 14.2 per cent in financial year 2001 to reduce the fiscal deficit to 4.6 per cent of GDP. The realization of these projected increases in exports and tax revenues will determine the medium term direction of the economy.

There are many areas of serious concerns, which need to be addressed during the current fiscal year. GDP growth may remain sluggish on the basis of the following factors: agriculture prospects may be dampened due to lower supply of irrigated water: The revival of sick industries has been much slower than expected.

Credit expansion to the private sector may remain supply constrained if the aggregate deposit base does not increase, while higher lending rates may deter private sector borrowing: The higher inflationary depreciation of the rupee may require an upward revision of utility prices. These factors may reduce private consumption, which can lower aggregate demand through the multiplier effect. There is also a resulting risk that the fiscal deficit may not be contained within the projected level due to higher debt servicing and the price increase of imported components of development and recurrent expenditures. The government will have to monitor this situation and take corrective and timely measures to mitigate the above risks, failing which, the goals set for financial year 2001 may be difficult to achieve, the Central Banks warned.