The government has set a number of targets for the
current financial year. Even at that time of announcement these targets
were termed 'over ambitious'. There is a growing feeling that some of
these have to be revised in the light of changing economic fundamentals.
The targets needing re-evaluation are: GDP growth rate, inflation rate,
fiscal deficit and trade deficit. One may say that the very idea or
revising targets sounds completely outrageous because the first quarter
is still not over.
Against a GDP growth target of 6.6% and an inflation
rate of 5% for the current financial year, Pakistan is expected to
achieve growth of 6.4-6.5% on the back of a 5.5-6% inflation rate. It is
the result of underperformance by the agricultural sector and rising
core inflation. The fiscal deficit may touch 4.5% against a target of
4%. Due to increase in administration expenses one is likely see an
offset of the expected increase in the CBR collections. At the same
time, Pakistan's trade deficit is likely to exceed the target by US$ one
billion due to faster than projected growth in imports. This will put
further pressure on rupee experiencing erosion in value against dollar.
After reporting real economic growth of 6.4% in FY04,
the government, in line with its medium-term target of 8% growth by
2007, set a 6.6% GDP growth target for the current financial year. While
the services and industrial sector are expected to attain and possibly
even beat the growth targets during the year, the agricultural sector is
likely to fall short of the 4% growth target that was set for it as a
result of the lower than expected availability of water. At this stage
analysts expect GDP growth not to meet the target.
The government set a 5% target for 2004-05 and
onwards. Last year the factors responsible for inflation were rising
petroleum and food prices and house rent. This year the government has
taken steps to control these drivers. These steps include (I) the hit
the government has chosen to take on its revenues in order to avoid
passing on the impact of high international oil prices to local
consumers and (II) the import of wheat to meet any potential shortfall.
However, inflation still seems to be accelerating. The problem this year
is that even though fuel and wheat prices have been controlled to some
extent, prices of other items have increased, thus causing inflation to
shoot up over 9% YoY and core inflation to shoot up by over 6% YoY.
At the beginning of new financial year, the
government set a target of Rs 580 billion for tax revenues, which
represents a rise of 14% over last year's target of Rs 510 billion. The
raise came as a result of expectations of greater than 6.4% real growth
in the Pakistani economy coupled with 5% inflation and a broadening of
the tax base. However, the higher than targeted collections in July on
the back of increased indirect tax collections, and the increased
likelihood of greater than 5% inflation led the IMF's visiting mission
to encourage the CBR to raise its collections target for the current
financial year. The CBR has suggested a revised collection target of Rs
590 billion. Some analysts believe that CBR is likely to achieve the
revised target and possibly surpass it.
However, they also fear that Pakistan's fiscal
deficit is likely to touch 4.5%, above the targeted 4%. The reasons for
higher fiscal deficit are said to be reduced collection of Petroleum
Development Surcharge and higher administration cost. The government
decided not to pass on the impact of high international oil prices to
local consumers. Higher administration cost is likely to be there
because of a huge new Federal Cabinet. It is feared that the government
will indulge in higher bank borrowing, beyond the Rs 45 billion that was
targeted for the year. This will also lead to crowding out private
As per Pakistan's Trade Policy, exports are expected
to grow at 11% and imports are projected to grow at 8% during financial
year 2004-05 resulting in a trade deficit of US$ 3 billion. Given
current export and import growth pattern it is expect that while exports
will meet their 11% growth target, imports are likely to grow by a much
more rapid 15% rate during the current financial year. This is because
of the continued rise in import of machinery and raw materials. This
trend is likely to boost the trade deficit close to US$4 billion. This
will further worsen the exchange parity.
It may be true that Pakistan has succeeded in
achieving even the most difficult targets in the past. However, it is
also necessary to fix realistic targets and then make concerted efforts
to achieve them. While the present government has the potential to
overcome the internal factors, some of the external factors, affecting
the economy, are certainly beyond control.