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Mid year review of economic performance

  1. New cotton policy in March
  2. The sugar industry scenario
  3. Mid-year economic performance
  4. Wheat import requirement
  5. Boosting the fruit exports

Non-implemention of structural reforms and policies

From YOUSAF RAFIQ
Special Correspondent, Islamabad
Feb 28 - Mar 05, 2000

Pakistan's economic performance over the last several years has been disappointing. Serious lapses in implementation of structural reforms and stabilization policies have been mainly responsible for current economic problems.

Major economic problems facing the country are: (I) deceleration in economic activity; (ii) stagnating/declining tax-to-GDP ratio causing difficulties on fiscal side; (iii) stagnating/declining exports causing balance of payment difficulties; (iv) growing unemployment; (v) loss of investors' confidence causing decline in investment; (vi) poor state of social sector; and (vii) institutional collapse as a result of poor governance. Major challenges are to restore investors confidence; revive economic activity, increase tax-to-GDP ratio, increase exports, alleviate poverty, protect the most vulnerable from adjustment cost; improve social indicators, create employment opportunities.

Real GDP growth slowed to an average of 3.1 percent during the last three years (1996-97-1998-99) slightly above the country's population growth rate. It is targeted to increase by 5 percent in 1999-2000. Slow down in economic activity is mainly caused by weaker performance of large-scale manufacturing, sharp decline in real investment, and erratic behaviour of agriculture sector. The growth of large-0scale manufacturing slowed to an average of 2.7 percent per annum during the last three years (1996-97-98-89) lower than the country's population growth rate. Large-scale manufacturing is targeted to grow by 4.3 percent in 199-2000.

Major factors responsible for slowing down of industrial activity are: adverse law and order situation in major growth poles of the country, badly affecting investor's confidence; decline in real fixed investment at an average rate of 3.8 percent per annum; decline in private sector investment in large-scale manufacturing at an average rate of 10.3 percent per annum; frequent upward adjustment in utility charges and frequent downward adjustment in exchange rate causing uncertainty for the cost of production; senseless taxation causing serious tax anomalies; poor performance of cotton crop affecting textile industry; rapid growth in smuggling through Afghan Transit Trade, adversely affecting domestic production of the smuggling prone items; and, financial crisis in WAPDA and KESC, adversely affected the electrical engineering industries.

Mid-Year Review

The first half of the current fiscal year (July-December 1999) has been a challenging period for Pakistan's economic policy making. During the first six months (July-December 19990 large-scale manufacturing has registered a growth of 7.5 percent as against 2.3 percent of the corresponding months of last year. The major items which have registered an impressive growth during July-November 1999 are: soda ash (18.2%) toilet soap (33.9%), nitrogenous fertilizer (12.3%), phosphatic fertilizers (33,3%), cotton cloth (2.7%), cotton yarn (9.8%), motor tyres (10.8%), beverages (41.4%), etc. Agriculture grew at an average rate of 1.4 percent per annum over the last three years (1996-97-1998-99) and is target to brow by 4.3 percent in 1999-2000.

Fiscal Side

Tax-to-GDP ratio has remained stagnant around 13 percent during the last three years (1996-97-1998-99). The total expenditure -to-GDP ratio exhibited a declining trend primarily due to a decline in development expenditure-to-GDP declining from 22 percent to 20.4 percent. Fiscal Deficit as percentage of GDP averaged 5.5 percent over the last three years. The Government has succeeded in reducing fiscal deficit from 6.3 percent to 4.5 percent of GDP mainly by cutting development expenditure. During the first 6 months (July-December, 1999), tax collection amounted to Rs 159.6 billion as against Rs 132.7 billion during the comparable months of last year---thereby registering an increase of 20.2 percent. Direct tax collection in the first 6 months stood at Rs 50.1 billion, which is 10.4 percent higher than the corresponding months of last year (Rs45.5 billion).

Indirect tax collection in the first 6 months stood at Rs 109.5 billion which is 25.3 percent higher than the corresponding months of the last year (Rs 87.3 percent billion). Within the indirect taxes, the performance of sales tax has been impressive. The collection of sales tax amounted to Rs 51.4 billion, which is 78.4 percent higher than the corresponding period of last year (Rs 28.8 billion). Pick up in industrial activity, as stated earlier, increase in sales tax from 12.5 percent to 15 percent. Central excise duty has registered a decline of 6.3 percent mainly because of the shifting of high revenue yielding items from this tax net to sales. Customs duty has increased by 4.5 percent despite the fact that the maximum duty has been reduced from 45 percent to 35 percent and almost zero growth in dutiable imports during the first half of the current fiscal year.

Money And Inflation

Money supply during the last three years grew at an average rate of 11 percent per annum. It is projected to grow by 9.4 percent in 1999-2000. Money supply during July-December 1999 has grown by 3 percent as against 4.7 percent of the corresponding period of last year. Credit to private sector has picked up in December 1999 and during July-December 1999, it stood at Rs 34.2 billion as against Rs 39.3 billion of comparable period of last year. It may be noted that during July-November 1999, the private sector in fact retired more than they borrowed and net credit to private sector stood at negative Rs 1577 million. There are two reasons for not picking up the credit to private sector during September-November 1999 after the peak retirement of Rs 22 billion in end August 1999. First the breakdown of law and order situation into a large-scale sectarian violence throughout the country; worsening of law and order situation in Karachi on political grounds, row between traders and government on GST resulting into a general strike and growing polarisation between the government and the opposition are responsible for preventing private sector to take initiative during September-October 12, 1999. Consequently, credit to private sector did not accelerate after the peak retirement. Secondly, after the change in Government on October 12, 1999 the private sector was waiting for the government policy. Economic Reform package was announced on December 15, 1999. The credit to private sector has picked up in December 1999. There is yet another reason for slower growth in credit during the first half of the current fiscal year, that is, the low inflation leading to low requirement of credit by private sector. Bank borrowing for budgetary support stood at RS. 19.0 billion during July December 1999 as against RS. 5.7 billion of the corresponding months of last year. Bank borrowing for budgetary support remained much belo the end December target. Inflation has decelerated considerably during the last 3 years. It has declined from 11.8 percent in 1996-97 to 5.7 percent in 1998-99 During the first 6 months of the current fiscal year inflation stood at 3.4 percent low inflation is the result of improved supply situation of goods prudent monetary management leading to lower growth of money supply and lower growth in the unit value of imports.

Foreign Trade

Exports remained stagnant around $ 8 billion over the last 3 years. During the first 6 months of the current fiscal year exports amounted $ 4103 million, which are 7.4 percent higher than last year ($ 3819 million). Imports have decelerated during the last three years mainly because of the slowing down of economic activity and have declined at an average rate of 6.9 percent per annum. During the first 6 months of the current fiscal year imports amounted to $ 4886 million which are 11.5 percent higher than the corresponding months of last year ($ 4383 million). Trade deficit has been significantly over the last two years mainly because of substantial decline in imports. During the first 6 months (July-December) the trade deficit stood at $ 783 million a deterioration of 39 percent. Worker's Remittances during the first half of the fiscal year amounted to $ 517.6 million as against $ 580.9 million last year of compatible period thereby registering a decline of 10.9 percent Foreign Exchange Reserves position remained stable and the reserves stood at $ 1465.6 million at the end of December 1999.