The positive factors expected to have a bigger say
in Pakistan's medium-term prospects
By SHABBIR H. KAZMI
Nov 26 - Dec 02, 2001
Pakistan's decision to support the US-led coalition
and its frontline status has significantly enhanced the country's
vulnerabilities to additional risks and costs. A number of factors are
expected to put pressure. These include: increase in cost of imports
and made in Pakistan products, manufacturing units to maintain higher
inventories and disruption in exports. revenue collection to also
suffer due to lower imports and influx of Afghan refugees to add
further pressure on Pakistan's limited resources.
However, it is difficult to conjecture how long
negative trends will continue. The more protracted crisis is expected
to exacerbate the situation. Under this scenario, exports may decline
significantly, foreign investment flows be low and output losses to
adversely impact GDP growth rate. The World Bank has already hinted
that growth in developing countries could be 1/2 or 3/4 percentage
points lower than projected. Applying this to Pakistan's frontline
status implies that GDP growth in current financial year could be in
the range of 2.5 to 3.75 per cent. A number of factors, particularly
debt related and better market access to Pakistani exports, are
expected to have positive impact. However, these issues have yet to be
discussed, negotiated and settled. Larger flows of hard currency are
expected to allow the central bank to shift away from purchase of
dollar from kerb market and help in bridging the external gap by using
more conventional measures.
Pakistan's economic performance in last financial
year was characterized by government's efforts to bring macroeconomic
fundamentals back on-track. The fiscal deficit was contained within
its targeted level, inflation was low, current account was in surplus,
foreign exchange reserve accumulation was satisfactory and government
borrowing from the banking system was within manageable limits.
Pakistan completed its Standby Arrangement with the IMF and
established credibility with the international financial institutions.
However, restrained expenditures and efforts to increase revenues
lowered purchasing power, the corresponding need to reduce the element
of subsidy in utility bills also added to this issue.
The policy steps required to address underlying
structural problems altered the incentives structure for the private
sector. Although this was expected given the nature of the
stabilization programme, poor agriculture growth compounded the
problem since the country was unable to meet its aggregate growth
target for the year. The aggregate growth rate was only 2.6 per cent
for the last financial year as against a target of 5 per cent. Private
sector investment was stagnant despite declining interest rates.
Privatization drive also did not yield desired results.
Persisting drought conditions did not allow the
agriculture sector to even show positive growth. The impact on
water-intensive crops like sugarcane and rice compounded the problem.
Risk diversification in the rural sector encouraged strong growth in
livestock. However, this was insufficient to shore up the agriculture
sector. Value added by agriculture declined by 2.5 per cent against a
target of positive 2.6 per cent. The saving grace was large-scale
manufacturing (LSM). With full growth of 8.4 per cent, the growth was
broad based, but still spearheaded by sugar, vegetable ghee and
cigarette production. Petroleum refining, leather and automobile
sectors also witnessed strong performance. However, textiles which has
the largest share in LSM did not performed well as compared to
In the external sector, the two noteworthy outcomes
were: 1) for the first time in history, Pakistan was able to post a
current account surplus of US$ 331 million and 2) the rupee/dollar
parity depreciated by 18.6 per cent — the largest adjustment since
1981-82 when the rupee was moved to a managed float. In terms of the
surplus, although the narrowing of the trade deficit helped, the swing
factors were SBP's dollar purchase from kerb market and the
recognition of the Saudi oil facility as an official transfer (grant).
Pakistan's BOP experienced a windfall improvement for the past three
years, with a surplus in 2000-2001. However, this improvement in the
external gap did not ease pressure on rupee.
The adverse impact of drought conditions were also
reflected in Pakistan's external sector. Additional oil imports were
needed to compensate for reduced hydel power generation. Nevertheless,
despite an unprecedented oil import bill of US$ 3.4 billion, the
realized trade deficit was brought down from US$ 1.4 billion in
1999-2000 to US$ 1.2 billion in 2000-2001. Except for oil and textile
machinery, all other imports declined in 2000-2001.
Pakistan's monetary policy faced some conflicting
goals. On the one hand, there was need to shift government borrowing
from SBP to banks. On the other hand, efforts to increase private
sector investment pushed in the opposite direction. Even with the
increase in liquidity, total M2 growth was below the target.