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Concerted efforts required to avert economic slow down threat

Dec 17 - 30 , 2001

Pakistan economy has shown sustained improvement in the first quarter of current financial year. The prospects for the remaining nine months largely depend on factors outside the GoP control. Nonetheless, it must be acknowledged that the GoP has been making serious efforts to neutralize the impact of post September 11 exogenous factors. The biggest achievement being successful negotiations with the IMF and other international financial institutions. However, some domestic issues, particularly revenue collection remains intractable problem.

The positive factors, hinting towards better performance are prospects for bumper cotton crop for third consecutive year, sugarcane output to exceed the target and wheat production to remain high. Therefore, real sector is expected to register 3 per cent growth. Large-scale manufacturing has shown strong growth in first quarter and the trend may continue if Pakistan is able to achieve higher exports of textiles and clothing. The European Union (EU) has already enhanced quota ceilings and reduced tariff and the same is expected from the US. As the US economy is expected to remain in recession, unless efforts are made to improve unit price realization, Pakistan may not be able to boost proceeds, in dollar terms, despite achieving higher volumes.

Collection of revenue not only fall short of target, but also not expected to improve in following months due to substantial reduction in imports. This clearly indicates weakness in tax policy of the GoP. Unless efforts are made to ensure lesser depenence on tax collection on imports and impose tax which is cosumption related, manufacturing sector is expected to remain under pressure. Collection of tax on plant and machinery is front loading which adversely affects the competitiveness of local manufacturers. It is necessary to reiterate this point because bulk of machinery being imported is for textile mills. There are reports that import of textile machinery is on the rise. During July-November 2001 period import of textile machinery amounted to US$ 197.44 million as compared to that of US$ 130.33 million for the corresponding period of previous year growth of nearly 52 per cent. The large scale import of textile machinery is part of massive expansion and BMR programme being undertaken by the textile industry to achieve higher value addition.

During the first quarter of last year trade deficit was US$ 505.7 million which came down to US$ 239.5 million in first quarter of current financial year. Export grew by 1.8 per cent and imports fell by 8.3 per cent. The sharp fall in import bill was driven by lower POL and food imports. The suspension of the Afghan Transit Trade also contributed to the reduced import bill. However, export receipts fell short of target. The impact of the global recession and falling unit prices of Pakistan's main exports were responsible for this poor performance.

Pakistan's current account deficit showed a significant improvement during the quarter under review, but was not able to post a surplus as was the case for the full year 2000-2001. In absolute terms, the external gap fell from US$ 481 million for the first quarter of last year to US$ 61 million for this quarter. The main drivers for this narrowing gap are lower trade deficit and lesser service payments on accounts of shipping and interest payments.

Although the war in Afghanistan seems to have entered a new phase, the implications for Pakistan are far from clear. There is also a fear that even if conditions return to 'normal', Pakistani exporters may not be able to recapture lost market in the west. The GoP is making efforts to secure greater access in the EU and the US markets, the global recession is making G-7 countries more introverted in their short-term outlook.

Although certain promises by the EU and the US for special assistance to Pakistan have been made, some actually formalized, it will take some time before this funding is actually realized. The approach being followed by the present economic managers regarding Pakistan's external debt is a significant departure from the conventional rescheduling and entails debt re-profiling. This will provide an opportunity to tailor, on a permanent basis, its debt servicing in accordance with its capacity to pay.

To conclude, a fact must be kept in mind. The September 11, 2001, is not the only exogenous shock to hit Pakistan in last four years; it followed the nuclear tests in May 1998 and the change in government in October 1999. However, sentiments following the terrorist attacks were different from previous shocks. Although uncertainty still remains, the reforms being implemented over the years have improved Pakistan's macroeconomic fundamentals, making the country more resilient to such shocks. Nevertheless, if proper strategy is followed to exploit the opportunities, Pakistan's economic growth can be assured.