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Economic fundamentals are not as worse as perceived by many Pakistanis

By SHABBIR H. KAZMI
Jan-07- 13, 2002

People have conflicting views about the capability of Pakistan and its economic managers to meet the economic challenges faced by the country. However, it is also a fact that economic fundamentals are not as worse as perceived by many Pakistanis. This observation was endorsed by Dr. Ishrat Hussain, Governor, State Bank of Pakistan. He was the key note speaker at a seminar organized by Management Association of Pakistan on 'Imperatives, prospects and challenges for economic growth'. The other speaker was Dr. Kaiser Bengali, an economist.

In his opening remarks Dr. Ishrat explained the linkage between economic growth and poverty reduction. He referred to China and India which have been able to improve living conditions by mainly concentrating on economic development. The GoP is following a policy framework for strengthening institutions and moving away from area and industry specific incentives which have not yielded the desired results in the past. Since 'rent seekers' have no role to play the old set of entrepreneurs is fading out and a new group is emerging, which is willing to assume risk on the basis of return.

Another important fact to be kept in mind is that bulk of the investment which has been made recently is in projects which are capital intensive. Two of these sectors are textile and oil and gas. The investment in textile is aimed at achieving higher value addition but creates fewer jobs. Similarly, investment in oil and gas sector is capital intensive. Therefore, people do not see visible signs of an overall increase in economic activities.

Dilating on a point that Pakistan has not been able to achieve desired results, Dr. Ishrat suggested that one should not ignore factors which affect growth. He referred to five factors which have been responsible for the current economic scenario. These are: external environment, GoP's policy framework, institutional capacity, response of private sector and exogenous shocks.

As regards external factors, one must not ignore 'synchronized recession'. In the past this was not the case. All the developed countries are in deep recession and intensity has further aggravated after September 11, 2001. The other factors which had a direct effect on Pakistan's economy were economic sanctions imposed after May 1998 and drought.

Due to a shift in the GoP policies fresh investment has gone down. The opportunities are there but investors are hesitant as well as cautious. It is mainly because concessional funding of projects is not being dished out by the government. There are ample evidences that a large number of sponsors did not invest their own money and projects were viable only because of incentives offered by the government which created uneven playing field for others.

Dr. Kaiser Bengali was of the view that Pakistan's economic priorities are not properly lined up. Opportunities had existed in the past but the then economic managers were not able to create enabling environment. Pakistan has a long list of missed opportunities.

Over the years Pakistan has been the victim of debt servicing burden which was beyond its repayment capacity. However, in the post September era, its external debts are being re-profiled and restructured. Reduction in debt servicing burden will enable the government to spend more on development projects which has snow-ball effect. However, the GoP has to set right priorities and invest in those projects where the return commensurate with the rate of interest being paid.

As regards interest rates, which was said to be too high, it must be kept in mind that higher rate was not the issue, access to financial institutions was the problem. This has specific reference to small and medium enterprises which are the backbone of economy. The situation was due to the rules followed by commercial banks. To overcome this the GoP has established Kushhali Bank and SME Bank.

Therefore, it will be right to say that opportunities are there and the GoP is trying to create conducive environment. Now it is up to the private sector to exploit the opportunities or continue to complain about missed opportunities.