Target seems within reach


Nov 08 - 14, 2004





The abnormal rise in international oil prices is feared to pile up the oil import bill to the tune of $4.5 billion during the current financial year. According to an estimate, the oil imports on month to month basis are estimated at $350-400 million which may consequently cross the mark of $4.5 billion dollar at the end of the year. Pakistan was not alone to suffer due to increase in oil prices but it's a worldwide phenomenon yet costing more painfully to the developing economies like Pakistan. One of the major reasons behind the persisting oil crisis is what it is called the war against terror launched by the United States especially in Iraq. The situation may further aggravated, and the entire oil consuming economies may suffer an unbearable cost if the normalcy was disturbed in Iran, yet another major contributor in the world oil scenario.

Oil experts are, however, of the view that the after re-election of President George W. Bush the situation may take a positive turn in general and towards Pakistan in particular.

Despite the fact that there were strong indicators that the target of 6 percent GDP growth set by the government in the budget for the current financial year seems within reach, yet it is feared to accompany a higher rate of inflation as well. The major factor behind inflationary pressures is going to be the multiplier effects on general prices, if the government concedes to the advice of the International Monetary Fund for an upward revise in electricity tariffs.

At this critical moment when out economy had reached the take off point, the increase in electricity prices which has become the basic raw material both in social and economic life of the nations, may disturb the economic cycle but also prove counter productive to the efforts for poverty alleviation in Pakistan.

The exceptionally high escalation in oil prices, which can adversely affect the current account and fiscal balance, would put pressure on exchange and interest rates.

This exogenous shock may be amplified if the water shortage reduces the wheat output and other major crops and raise demand for imported fuel oil to generate electricity.

The State Bank of Pakistan in its annual report for 2003-04 in its assessment, however, suggests that these risks can be mitigated if exports and remittances continue to show better than assumed results. Moreover, the government revenues should exceed target, wheat supplies also need augmentation through timely imports, development expenditure is not curtailed, and gas and coal are increasingly used for power generation.



The oil prices, together with the decline in the non-structural flows such as the Saudi oil facility and the logistics support payments have already led to a weakening of the current account, but July-August 2004 data shows that the current account for the period is nonetheless in surplus, aided by a continuation of the strong export growth, as well as an acceleration in remittances. If this favorable constellation of events extends throughout the financial year 2004-05, or even if only a small deficit materializes, it would obviously help the central bank in ensuring that the economy is not significantly disturbed by abrupt changes in the exchange rate.

The pressure on external account would help the State Bank in managing the growth of reserve money in the economy, thereby holding down the rise in monetary assets within the limits set in the Credit Plan for financial year 2005. It is important to note that monetary expansion in the preceding three years has been substantially higher than nominal GDP, and this overhang needs to be adjusted if rising inflationary pressures are to be contained to support long-term growth.

Indeed, it is in this perspective that the planned 11.4 in the necessary assets during current financial has been kept slightly below the project 11.9 percent rise in nominal GDP for the year. Supply side shocks, if they persist, will force inflation to exceed the postulated target of 5 percent. Although monetary policy stance will remain geared to subdue inflationary expectations, the initial momentum built up in the first quarter of the current financial year will resist the reversal to the target.

The annual report, however, pointed out that a key determinant of the State Bank's ability to meet its monetary targets would be the government's fiscal posture during the year. In particularly, while tax revenue has seen robust growth so far during the current financial year, non-tax revenues have probably been hit by the government decision to squeeze the oil development surcharge. Since only part of the resulting revenue shortfall is likely to be met from other sources like higher dividend receipts etc, the government's fiscal discipline is likely to be tested in the year. It important to stress the necessity of holding to fiscal discipline not only to the direct negative long-term consequences of fiscal laxity but also due to the risk of losing the had-won credibility of Pakistan's economic managers in the eyes of the international investment community.