Positive signs?

Nov 05 - 11, 2001

Pakistan's economy which, was already struggling for survival, had been hit hard by the Sept 11 events in America followed by US-led air strikes in Afghanistan.

Consequently, the total loss to the national economy is now estimated at $2 to 3 billion by the Ministry of Finance. Earlier the government of Pakistan was maintaining the loss between $1 to $2 billion. The fall in revenue, decrease in exports and imports, shrinkage in foreign investment and a slowdown in the local manufacturing sector altogether causing serious harm to the social and economic life in Pakistan.

Moreover, increase in freight rates and the imposition of war-risk insurance will increase the cost of imports and make Pakistani exports more expensive.

Pakistan's major exports i.e. textile products, leather and leather products; rice and seafood and other sectors have suffered a major setback. Although it may be pre-matured to estimate the total loss, yet the prevailing conditions if continue to persists the loss of exports is feared much more at the end of the year.

Pakistan's textile sector, which, contributes over 65 per cent of the total exports, has expressed fears to lose over $700 million at the end of the year due to prevailing conditions. The persisting recession depressed cotton prices world over bringing it down considerably. The declining dollar at inter-bank rates is also compounding the problem of the textile sector. Since September 11, the dollar has depreciated by more than 5 per cent making it difficult for the exporters to remain competitive. The textile sector regretted what they called cancellation and withholding orders by the western buyers. Most of the buyers were cancelling orders or withholding them because they think that Pakistan cannot deliver the orders on time due to war zone conditions declared for Pakistan.

On the other hand rice exporters are also claiming for a decline of 13.79 per cent in rice exports during the first four months of the current fiscal.

The value of exported rice has been estimated at $119.73 million during July-October 2001. It may be recalled that last year rice exports were estimated 434,358 tons during the same period, which is estimated at 383,233 tons.


Leather garments exporters have lost 75 per cent of the total winter export orders from the US and Europe. Leather garment exporters to the commerce minister complained this. The exporters have urged the minister to obtain duty-free concession from EU for leather garments export on the pattern of textile exports. Due to loss of export orders production in leather factories had gone down to 25 per cent

Cancellation of air cargo flights by foreign airlines is also disrupting the trade flows from Pakistan. Manufacturing units will have to maintain higher inventories and the possible departure of expatriates from the country and the suspension of visits by foreign buyers in view of the media-hype about Pakistan being in the war zone, will not allow the country to maintain normal trade relationships. Revenue collection will also suffer due to lower imports while the continuous influx of Afghan refugees will add further pressure on Pakistan's limited resources and infrastructure, the report says.

Under the scenario, exports will decline significantly, foreign investment flows will dry up, capital flight will intensify, output losses will be severe and GDP growth will either be stagnant or negative depending on the intensity, duration and shape of the campaign in Afghanistan.

The World Bank estimates that growth in developing countries could be 0.5 or 0.75 per cent points lower than projected. Applying this to Pakistan's frontline status implies that GDP growth could be in the range of 2.5 to 3.75 per cent. The target set for GDP growth in the current fiscal year is 4 per cent.

On the other hand, the positive effects on Pakistan's fiscal and balance of payment situation will follow with the lifting of economic sanctions by the US and G-7 countries, resumption of economic assistance from bilateral governments, debt relief and better market access to Pakistani exports.


For the first time in its history, Pakistan was able to show a current account surplus in fiscal 2000-01. However, this did not create easier conditions in the foreign exchange markets, as the rupee experienced tremendous pressure during the year. But it clarifies that the surplus was generated by a statistical artifact-proceeds from the Saudi Oil Facility were categorized as official transfers and therefore a current account receipt.

The second contributing factor was purchases from the kerb market (the State Bank bought $2.16 billion from kerb in 2000-01, up from $1.56 billion in 1999-00).

Excluding the impact of changing status of Saudi Oil Facility (a Saudi commercial loan to finance oil purchases from the kingdom and the volume of kerb purchases, the current account deficit fell from $2.641 billion in 1999-00 to $2.509 billion in 2000-01.


In order to offset huge adverse balance of trade, Pakistan has sought greater market access from Japan. Besides inclusion in the list of those countries, which export, rice to Japan.

Besides seeking market access from Japan, Pakistan has urged the government of Japan to provide technology and technical know-how for Pakistan's medium and small-scale industries to improve the productivity and production base and resumption of export credit and insurance.

The Japanese Minister of Economy, Trade and Industry Takeo Hiranuma in his meeting with the Pakistani finance minister said that Japan was willing to extend this facility to Pakistan for viable projects. He said that Japan would plan to send experts to Pakistan for helping the small and medium enterprises.

Pakistan has asked Japan to include it in the list of rice exporting countries, in addition to special quota for Basmati rice, which is a unique product with aroma and flavour. The commerce minister also urged the Japan to take steps to increase import of Pakistani yarn and fabric that has been reduced from 70 per cent to 50 per cent after the relocation of Japanese industry to China.

The Japanese government however has assured to undertake all possible steps to further boost trade relations and facilitate Pakistani exporters in the areas of textile, leather, and fruits and sports goods. Areas like automobile, construction machinery, software parts; pesticides, cement, textile, chemicals and railways were identified for investment and trade collaboration between Pakistan and Japan.


The government is working on a 5-pronged strategy to overcome the difficulties arising out of the present situation.

The first is a sustainable permanent solution like substantial reduction in Pakistan's obligations. Pakistan owe $12.5 billion debts, the largest claimant being Japan $5.5 billion followed by USA $3 billion. If we can get reduction in this liability we can have space in our fiscal policy to manage the situation in a liberal manner.

Second, increased market access to Pakistan's products. By January 2002 Pakistan's exports to EU will increase by 30 per cent as compared to the preceding year. Similarly with USA also Pakistan is chasing the same strategy through the movement of Commerce Minister and the Finance Minister is following this strategy in Japan. In order to get positive results, Pakistan is seeking compensation from EU, USA and Japan.

Thirdly, Pakistan is seeking concessionary softer loans from international agencies at the rate of zero per cent for 35 years for Poverty Reduction Growth Facility (PRGF). Pakistan will move a formal request in November.

Meanwhile, the International Monetary Fund (IMF) has indicated to wrap up negotiations on a new poverty reduction loan for Pakistan soon. Tom Dawson, IMF spokesman has expressed the hope that a financing package supporting the authorities program is agreed soon and that discussion on poverty reduction loan can be wrapped up in the near future. Good progress is being made on this subject. However it is premature to speculate on the size of the loan. Earlier this week the US State Department had said it would support a $2 billion IMF loan for Pakistan. Dawson has suggested that Pakistan was unlikely to secure that amount of funding from the IMF alone but that World Bank and other contributions were likely to be added, possibly taking the broader financing package to an amount of roughly that size.


White House has recently told lawmakers that it may seek to cut tariffs on Pakistani products for up to three years as part of a package to reward Islamabad for helping in the war on terrorism.

But US textile manufacturers were making last-ditch efforts to prevent the cuts, saying that they went too far. The trade benefits, subject to approval, would be part of a broader US aid package. It is expected to include an additional $500 million in direct financial assistance, debt rescheduling and Washington's support for international loans that could be worth billions.

The US administration also told lawmakers it would submit its package of trade concessions to Congress in the next few days. The White House is urging lawmakers to act quickly.

Under the draft White House proposal, Congress would grant Bush the authority to reduce or eliminate tariffs on certain Pakistani goods through 2004. The administration would also allow Pakistan to increase this year's shipments of textiles to the US by using a portion of next year's quota.

US aid

Pakistan was set to receive well over $1 billion in assistance from US and several billion from international organizations. This was indicated by the US State Department last week. This will be an additional package besides the State Department officials had been talking earlier on the subject during their visit to Islamabad recently.

The fourth part of this strategy is to claim all expenditures being incurred on extra security measures taken for ensuring internal security and security at borders. This is necessary because Pakistan did not have provision in the present budget to incur and allow this expenditure.

Fifthly, Pakistan is also seeking coalition alliance to get considerable share in the rehabilitation of post war Afghanistan. Pakistan would not like repeating of the situation of 1989 as the countries involved left without re-construction of the country required out of the then Soviet war. Pakistan is expected to gain by increased employment, selling products and providing services for the reconstruction of post-war Afghanistan.

Dr. Ishrat, Governor State Bank of Pakistan has said that as a result of government efforts to motivate importers of USA and EU to order from Pakistan, the outcome will be visible soon. The common man, was going to get relief in the present situation as benefit of cheaper imports of petroleum products will pass on to him. Transport and electricity will become cheaper. The important benefit of appreciated rupee will be reduced debt servicing liabilities.


Pakistan expects $1 to $1.2 billion saving in its $3.5 billion annual oil import bill if the prevailing situation continues, but this will result in massive industrial and economic downturn and revenue loss.

Secretary Petroleum M. Abdullah Yousaf said at a news briefing that the government was expecting $500-600 million saving due to decline in international oil price and another $500-600 million through reduction in consumption.

In another way the healthy decline in import bill would be around 15 to 20 per cent due to fall in international oil prices, another about 10 per cent due to reduction in consumption besides strengthening of the rupee against the US dollar.

If the situation continues as today we expect oil import bill going down by around $1 billion, the Secretary Petroleum said. The decline in consumption was because of a combination of decline in industry and Afghan transit trade.

He said that WAPDA's furnace oil bill had also been reduced during the last quarter due to availability of more hydel power but this will increase during the current quarters, although it was lower than normal in October as well.

Abdullah said that war risk premium imposed on ships to Pakistan had an additional cost because it was 0.5 per cent of the total oil import bill and then additional inventories for strategic reserves carried some additional burden.

The government had deferred the gas price revision due in September this year to provide relief to the consumers against post-September11 situation till next bi-annual review becomes due in March next year.

Currently, the petroleum stocks were satisfactory as required under the "war book" and were reviewed weekly. He said that stocks have been build up over the last few days from existing 10-12 days requirement to about 30 days. The petroleum secretary said the petroleum ministry was in final stages of discussion with tribal leaders to lift force majeure imposed on oil and gas exploration in Balochistan. However, he expressed his inability to say when the government would be in a position to strike a deal with tribal leaders.

The government expected a substantial investment in the country particularly in the oil and gas sector in view of the changing environment.


There was a mix reaction of the business community over the prevailing economic conditions in Pakistan. There was a feeling that currently Pakistan is walking on a tight rope, which calls for extra care to bail out the country and its economy. Some senior members of the business community feel that Pakistan's economy is passing through a make or mar situation. So far Pakistan's leadership has played its cards well. Pakistan could emerge as a strong economy on the world map if the present management handled the situation carefully. They said that as a result of current situation, which has apparently eased the situation for Pakistan due to flow of foreign aid to the government, however the private sector has suffered a lot as well as the common man due to stagnant economic conditions. They said that situation demands that steps should immediately be taken for the relief of the common man. The international oil prices have gown down steeply but its benefits to the common man has not been passed on so far. Contrary to that the electricity charges have been increased.

Although the State Bank of Pakistan has indicated that general public would soon get relief in electricity and transportation, the government has announced however practically speaking nothing tangible so far. The business community feels that due to decline in exports, the local industry has suffered a lot and consequently it is adversely affecting the working class. Since the government is seeking relief package from the world community, it is imperative to give some relief package to the people to provide them a sigh of relief to their sufferings, which continue to increase every day.