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There is global recession but the government is constantly analysing the situation

Jan-21 - 27, 2002

Addressing the participants of the 17th annual general meeting of the Pakistan Society of Development Economics (PSDE) in Islamabad on Monday, the Finance Minister Shaukat Aziz assured the nation that the country had enough resources to face any eventuality because of the prudent economic policies of the present government and reform carried out during the last 2 years.

The Finance Minister who inaugurated the well attended international conference as chief guest said, the economy has shown clear improvement despite the fact that we faced many shocks over the last few months beginning from the events of 11th September to the increasing tension in the region.

"Although there is global recession which will have impact on Pakistan's economic performance but the government is constantly analysing the situation. The general direction is good, foreign exchange reserves are almost five billion dollars, the liquidity in the banking system is comfortable, the currency is stable and strong and availability of all supplies and their prices are satisfactory and inflation so far is about four per cent," the Finance Minister added.

Mr. Shaukat Aziz said despite difficulties of the past few months the tax collection during December last stood at 38.5 billion rupees exceeding the monthly target. The government has also paid lot of refunds. They are giving highest attention to attracting investments and increasing exports. Government's macroeconomic policy mix will be geared to consolidate macroeconomic stabilisation revival of economic activity, reduce the public debt burden, while directing expenditure efforts at poverty reduction and social development.

Shaukat said the monetary policy of the government will be geared towards containing inflation and supporting a steadfast accumulation of reserves to reduce external vulnerability. He was confident that if the policies stayed the course, Pakistan will regain its lost growth momentum and macroeconomic stability on a sustained basis by the end of the medium term plan.

"Government's two pronged strategy has paid dividends. While stabilisation policy succeeded in restoring macroeconomic stability and avoiding default, structural reform measures have laid the foundation for sustained growth in future. The fiscal deficit has been reduced to 5.2 per cent of the GDP during the last two years," Mr. Shaukat Aziz said.

The external debt which was growing at an average rate of six per cent per annum remained flat over the last two years. Tax collection increased at an average rate of more than 13 per cent, he said adding that the country's major weakness so far have been growth and investment. The crippling drought damaged growth prospects last year despite impressive recovery in industrial growth. He hoped that with debt burden gradually reduced the public and private sector investment would pick up.

The event of September 11 affected Pakistan on two counts. Firstly, to the extent it is integrated with the world economy, the sharp downturn is bound to affect Pakistan's economy. The slower pace of economic activity in Pakistan's major trading partner countries (US and ECU and Japan in particular) would reduce their demand for Pakistani products. As such, Pakistan's exports would be lower than the targeted level. Secondly, the event has not only disrupted the trading activities but has also increased the cost of international trade. This disruption is likely to cause a decline in export and imports. Decline in imports is likely to affect tax revenues as roughly 40 per cent of these are dependent on imports. Foreign investment, particularly in oil and gas sector and in information technology as well as privatization programme are likely to be affected, the Finance Minister said.

He however, added: We hope that these difficulties are temporary in nature and should not affect our medium-term goals of reviving economic activity and restoring macroeconomic stability. This crisis has also opened up new opportunities for Pakistan. We have received grants assistance to offset our budgetary loss as well as support to our balance of payments. We have received substantial debt relief as well. Our debt situation will be stabilised as a result of the package we received from the Paris Club. Our burden of annual debt servicing has been reduced which will provide enough resources to be spent on improving social sector, reducing poverty and reviving economic activity, we have also been provided enhanced market access and reduction in duty which will increase our exports on a sustainable basis. The US EXIM Bank as well as OPIC will facilitate the role of the US private sector in Pakistan. There are many countries negotiating with Pakistan for debt-for-education swap as well as debt-for-social sector swap. This will provide us enough resources to improve our education, health, and social sector in a relatively shorter period of time. Our gross foreign exchange reserves are nearing $ 5 billion and are likely to increase further in the short-to-medium-term. Most importantly, Pakistan will benefit from the reconstruction and rebuilding of Afghanistan."

"These gains can be translated into strengthening our economy, reducing debt burden, reducing poverty, and improving social indicators provided we remain firm to our commitment and continue to perform well. We have enormous responsibilities on our shoulders. We have embarked on a journey of reconstruction and reform that will bring returns. If we stay the course. We are committed to the structural reform programme launched some two years ago. There is no looking back, no role-back of reform programme and our economic policies".

In his welcome address the president of PSDE Dr. A.R. Mamal said that the rescheduling recently negotiated by the government is expected to have positive impact on the country's economy, ensuring fiscal space to pursue development work and programmes for the welfare of the poor.

This has not been just rescheduling, there has been reprofiling of the debt in such a way that it takes into consideration the capacity to pay of the country. This rescheduling arrangement, he continued, would allow the State Bank of Pakistan to pursue a monetary policy that stabilises the economy without squeezing the investment levels.

He further observed that it would definitely help in the growth prospects and resultantly employment and real wages may start rising and poverty is reduced.

"We must ensure that the debt crisis does not recure again. Not only this is to be ensured that the fiscal space is used for public investment but also that the total savings and investments rises, he maintained. Stagnant investment and savings levels would imply that the future generations will face an even more acute problem of debt than has been experienced recently. The government has recently increased the development expenditures which is a good omen, he stated adding, a better investment climate because of the strong economic fundamentals is "expected to result in higher levels of investment. It would hopefully be instrumental in not only stopping the capital flight, but may also mean that the capital that has already left the country comes back. The stimulation of growth along with pro-poor policies would ensure that poverty levels start falling, he viewed.

Dr. Sabur Ghayur, Director International Confederation of free trade unions, Singapore criticised the floating exchange rate policy followed by the government of Pakistan which had been instrumental in raising the debt burden of the country. He said that the floating exchange rate policy in 2000-01 has been responsible for adding roughly Rs.250 billion (or $ 4 billion) to the public debt of Pakistan while it helped only to the tune of $ 500 million in enhancing export earnings.

In his paper, titled as 'IFI's Conditionalities, Poverty Reduction and Employment' Mr.Sabur presented a number of experiences of the countries facing predicaments from the IFI's prescriptions. He said, "The terms and conditions of participation especially in the developing countries and the imposed speed and sequencing of the structural adjustment, transforming and market liberalisation carry serious implications for workers, their employability and living conditions are incompatible with the goals of reducing poverty and unemployment. The areas needing attention would be (i) striking a balance between result-based and program-based funding/assistance (ii) focusing on core areas only but addressing the issue of governance comprehensively (iii) obligatory standstill arrangements in case of financial crisis, whereby a temporary moratorium is placed on debt payment to all creditors (iv) financial market liberalisation syncronised with building prudential supervisory framework and institutions, (v) drastically reduced emphasis on privatization and sale of State owned enterprises (vi) greater focus on technical assistance and capacity building (vii) recognizing the right governments to control foreign capital in and -outflows in the existing macroeconomic and social stability and (viii) pursuing an active labour market policy besides education training information, counseling and guidance also focuses on building and strengthening social safety nets.