"ECONOMIC CHALLENGES FACING PAKISTAN"
The country had still to go long way to have a stable and satisfactory economy
From SHAMIM AHMED RIZVI, Islamabad
Jan 29 - Feb 04, 2001
There is lack of consensus and coordination amongst the economic managers of the country came to public notice last week when three economic stalwarts presented different assessment of the prevailing economic situation and its likely future trends. The public at large is just confused as to who they should believe and which assessment is correct.
After briefing the cabinet on the economic situation, the Minister for Economic Affairs, Mr. Shaukat Aziz told waiting newsmen that the overall economic situation was satisfactory and performance of the different wings of the Finance Ministry during the first six months of current financial year has been quite encouraging. According to him the country was on track towards meeting major economic targets including curtailing budget deficit, bank borrowing containing, inflation, ensuring steady economic growth, affecting structural reforms and increasing revenue collection as set in the budget for 2000-2001. Admitting that there has been some shortfall (about ten billion) in the revenue collection during the first six months, he hoped that the same would be off set during the remaining six months. He claimed that IMF was satisfied with the economic performance as "we have fulfilled all their conditionalities and I anticipate no difficulty in rescheduling of about 1.5 billion dollars debts by Paris Club or release of second tranche under standby arrangement from the IMF."
A senior member of the Central Board of Revenue (CBR) in a press interview disclosed that the cabinet was plainly told that it would not be possible to collect Rs.430 billion during the current financial year as set out in the budget because of go-slow orders on tax survey, undue interference in CBR campaign and allowing various concessions to the trade and business community, fall in imports and general slum in the economic activity in the country. According to latest CBR assessment the revenue collection will not exceed Rs.400 billion.
Annual report of the State Bank released recently said that the country may face low growth of 4.5% and high inflation of 6-7% in the current financial year. Surging international oil prices and the recent depreciation of the rupee have exacerbated consumer prices. A combination of cut in public sector development spending and low productive activity in the private sector has circumscribed employment generation. The report finds that agriculture prospects may be dampened due to low water availability. The revival of sick industries has been much slower than expected and credit expansion to the private sector may remain constrained if the deposit base does not expand. Such a prospect can hardly look cheerful to the consumers or to the entrepreneurs.
On the macro-economic side, the report said there is also the risk that the fiscal deficit may not remain within the 4.6% level due to higher debt-servicing and price increase of imported components of development and recurrent expenditure. The projected 15% increase in exports has been found ambitious. Still more disturbing is the low offtake of private sector credit. Its net disbursement fell sharply, from Rs.118.8 billion in FY 1999 to Rs.26.2 billion last year which is symptomatic of lack of investment interest. On the other hand, the government's bank borrowing ballooned to Rs.135 billion from about Rs.9 billion in the same period. This and the shifting base of deposits have tightened the liquidity of the banks.
Governor State Bank, Dr. Ishrat Hussain, speaking on "economic challenges facing Pakistan", at a meeting of the Centre for Development and Democracy, in Karachi, said that the country had still to go long way to have a stable and satisfactory economy. He agreed that the IMF agreement had not been widely welcomed because of low investment and unemployment.
"There are many time-bound conditions that have to be met during the next nine months, which are structural in nature such as privatisation, restructuring of public corporations, financial sector and civil reforms''.
The stagnant economy, he said, Pakistan would be facing a gap between external receipt and external payments of about $2.5-3 billion per annum. "To meet this gap, the country has to reschedule its debt services obligations and find ways to obtain new concessional loans after curtailing expenditures and maximizing revenues".
"The per capita economic growth rate slipped to 1.5 per cent, investment rate declined from 20 to 15 per cent, poverty doubled to 34 per cent, external debt soared to 36 billion, debt servicing rose to a level where it is claiming 56 per cent of our revenues. Fiscal deficits were averaging about 6 per cent of the GDP development expenditures particularly on education and health had been curtailed from 6 per cent to 3 per cent".
"The challenge of averting this slide and move economy out of such critical condition was a daunting task. And it was made even more difficult by initial reaction of international community to the change in the government and conflicting demands of various segments of population," he said.
Hussain said accountability was one of the major demands articulated by public and media. But that badly affected the economy as businessmen were threatened by such moves. He said after the May 1998 nuclear test, the country also lost an important source of external liquidity the foreign currency deposits.
Despite a 15-20 per cent increase in volume of textile exports, units value of our exports are down by 7-10 per cent on average. In this scenario, how can anyone keep the wheel of the economy moving in an orderly manner without recourse to relief or injection by international financial institutions," he said.
The recovery process is slow and cumbersome". The influence of unanticipated external and internal developments like international oil prices has also widened the gap. He said the narrow export structure of the country did not allow new and non-traditional exports to offset deterioration in unit value of textile exports. Exportable surplus is generated by farmers and businessmen but depressed world prices have not allowed this to be translated into high export earnings. The situation needs innovative measures and revolutionary steps to over come the crisis and salvage the National economy, Governor State Bank concluded.
According to sources in the Finance Ministry the present CBR team headed by its Chairman Riaz Hussain Naqvi faced some tough time after a shortfall of over ten billion in the revenue collection during July-Dec. 2000 and the target fixed. There were rumours that the entire team may be replaced. However, when the performance of the CBR was analysed in real perspective it was found that the tax collectors have fulfilled their part of the deal about tax collection. It was realized that whatever shortfall occurred was due to periodic interference in the ongoing documentation process from authorities sitting above the CBR. It is learnt that though tax collection until now is still short of the target but the finance managers have realised the handicaps under which the CBR has been working. It was found that the pressure on high-ranking CBR officials has eased as a result of this understanding. Rumours about a possible change at the highest level in the CBR have also died down.