challenges facing Pakistan
The country had still to go long
way to have a stable and satisfactory economy
From SHAMIM AHMED RIZVI, Islamabad
Jan 29 - Feb 04, 2001
There is lack of consensus and coordination amongst the economic
managers of the country came to public notice last week when three economic stalwarts
presented different assessment of the prevailing economic situation and its likely future
trends. The public at large is just confused as to who they should believe and which
assessment is correct.
After briefing the cabinet on the economic situation, the Minister for
Economic Affairs, Mr. Shaukat Aziz told waiting newsmen that the overall economic
situation was satisfactory and performance of the different wings of the Finance Ministry
during the first six months of current financial year has been quite encouraging.
According to him the country was on track towards meeting major economic targets including
curtailing budget deficit, bank borrowing containing, inflation, ensuring steady economic
growth, affecting structural reforms and increasing revenue collection as set in the
budget for 2000-2001. Admitting that there has been some shortfall (about ten billion) in
the revenue collection during the first six months, he hoped that the same would be off
set during the remaining six months. He claimed that IMF was satisfied with the economic
performance as "we have fulfilled all their conditionalities and I anticipate no
difficulty in rescheduling of about 1.5 billion dollars debts by Paris Club or release of
second tranche under standby arrangement from the IMF."
A senior member of the Central Board of Revenue (CBR) in a press
interview disclosed that the cabinet was plainly told that it would not be possible to
collect Rs.430 billion during the current financial year as set out in the budget because
of go-slow orders on tax survey, undue interference in CBR campaign and allowing various
concessions to the trade and business community, fall in imports and general slum in the
economic activity in the country. According to latest CBR assessment the revenue
collection will not exceed Rs.400 billion.
Annual report of the State Bank released recently said that the country
may face low growth of 4.5% and high inflation of 6-7% in the current financial year.
Surging international oil prices and the recent depreciation of the rupee have exacerbated
consumer prices. A combination of cut in public sector development spending and low
productive activity in the private sector has circumscribed employment generation. The
report finds that agriculture prospects may be dampened due to low water availability. The
revival of sick industries has been much slower than expected and credit expansion to the
private sector may remain constrained if the deposit base does not expand. Such a prospect
can hardly look cheerful to the consumers or to the entrepreneurs.
On the macro-economic side, the report said there is also the risk that
the fiscal deficit may not remain within the 4.6% level due to higher debt-servicing and
price increase of imported components of development and recurrent expenditure. The
projected 15% increase in exports has been found ambitious. Still more disturbing is the
low offtake of private sector credit. Its net disbursement fell sharply, from Rs.118.8
billion in FY 1999 to Rs.26.2 billion last year which is symptomatic of lack of investment
interest. On the other hand, the government's bank borrowing ballooned to Rs.135 billion
from about Rs.9 billion in the same period. This and the shifting base of deposits have
tightened the liquidity of the banks.
Governor State Bank, Dr. Ishrat Hussain, speaking on "economic
challenges facing Pakistan", at a meeting of the Centre for Development and
Democracy, in Karachi, said that the country had still to go long way to have a stable and
satisfactory economy. He agreed that the IMF agreement had not been widely welcomed
because of low investment and unemployment.
"There are many time-bound conditions that have to be met during
the next nine months, which are structural in nature such as privatisation, restructuring
of public corporations, financial sector and civil reforms''.
The stagnant economy, he said, Pakistan would be facing a gap between
external receipt and external payments of about $2.5-3 billion per annum. "To meet
this gap, the country has to reschedule its debt services obligations and find ways to
obtain new concessional loans after curtailing expenditures and maximizing revenues".
"The per capita economic growth rate slipped to 1.5 per cent,
investment rate declined from 20 to 15 per cent, poverty doubled to 34 per cent, external
debt soared to 36 billion, debt servicing rose to a level where it is claiming 56 per cent
of our revenues. Fiscal deficits were averaging about 6 per cent of the GDP development
expenditures particularly on education and health had been curtailed from 6 per cent to 3
"The challenge of averting this slide and move economy out of such
critical condition was a daunting task. And it was made even more difficult by initial
reaction of international community to the change in the government and conflicting
demands of various segments of population," he said.
Hussain said accountability was one of the major demands articulated by
public and media. But that badly affected the economy as businessmen were threatened by
such moves. He said after the May 1998 nuclear test, the country also lost an important
source of external liquidity the foreign currency deposits.
Despite a 15-20 per cent increase in volume of textile exports, units
value of our exports are down by 7-10 per cent on average. In this scenario, how can
anyone keep the wheel of the economy moving in an orderly manner without recourse to
relief or injection by international financial institutions," he said.
The recovery process is slow and cumbersome". The influence of
unanticipated external and internal developments like international oil prices has also
widened the gap. He said the narrow export structure of the country did not allow new and
non-traditional exports to offset deterioration in unit value of textile exports.
Exportable surplus is generated by farmers and businessmen but depressed world prices have
not allowed this to be translated into high export earnings. The situation needs
innovative measures and revolutionary steps to over come the crisis and salvage the
National economy, Governor State Bank concluded.
According to sources in the Finance Ministry the present CBR team
headed by its Chairman Riaz Hussain Naqvi faced some tough time after a shortfall of over
ten billion in the revenue collection during July-Dec. 2000 and the target fixed. There
were rumours that the entire team may be replaced. However, when the performance of the
CBR was analysed in real perspective it was found that the tax collectors have fulfilled
their part of the deal about tax collection. It was realized that whatever shortfall
occurred was due to periodic interference in the ongoing documentation process from
authorities sitting above the CBR. It is learnt that though tax collection until now is
still short of the target but the finance managers have realised the handicaps under which
the CBR has been working. It was found that the pressure on high-ranking CBR officials has
eased as a result of this understanding. Rumours about a possible change at the highest
level in the CBR have also died down.