THE STATE OF ECONOMY
From SHAMIM AHMED RIZVI,
Sep 09 - 15, 2002
Appreciating the strong willed implementation of Economic reforms by the present Government, the Asian Development Bank has estimated that Pakistan Economy could grow by 4.5 per cent during fiscal year 2002-2003 and by 5 per cent next year if it continued to pursue the present sound macroeconomic policies.
The ADB is, however, not so optimistic about achieving of the budgetary deficit target of 4.4 per cent and the containment of inflation rate as estimated in the budget.
In its "Pakistan Update 2001-2002" released on Friday last the ADB has also identified certain areas which need close attention on a long-term basis. One, it is not clear, it says, whether additional government expenditures can provide sufficient boost to the economy given well known impediments to investments. Two, Pakistan's current economic slowdown is not simply cyclical in nature but is also manifestation of structural problems which include a huge overhang of external and domestic debt. Three, higher fiscal and current account deficits, resulting from additional spending, will not be viewed favourably by the donor community and may also affect investor confidence. Four, governments' failures in the past to efficiently identify, prioritiese, plan and execute development projects cast doubts on the efficacy of government expenditure in generating growth. The only way to increase expenditure, without worsening fiscal and current account balance, is through additional resource generation.
The ADB report noted that the Pakistan economy demonstrated great resilience during financial year 2002 in the face of external shocks generated by the post-11 September 2001 developments, tensions with India, global recession, and continuing drought. Macroeconomic fundamentals improved further, and the real GDP growth rate increased to 3.6 per cent from 2.5 per cent in financial year 2001, the annual inflation rate declined to 2.8 per cent from 4.4 per cent, and the current account of the balance of payments posted an unprecedented large surplus.
The increase in GDP growth in financial year 2002 was mainly due to the agriculture sector, which despite continued drought, performed better than the previous year. Growth of value-added in the sector is estimated at 1.4 per cent in contrast with a contraction of 2.6 in the previous year. Growth of the industry sector was slightly lower (2.8 per cent) than in the previous year (3.1 per cent), mainly because of a sharp deceleration in the large-scale manufacturing sector. The large-scale manufacturing sector was hurt the most by the post-September 2001 developments and the global recession. Its growth declined to 4.0 per cent from 8.6 percent in financial year 2001. However, production in the latest three-month period (March-May 2002), shows a significant turnaround in the large-scale manufacturing sector, which is likely to continue in financial year 2003. The growth of the services sector, which contributes 50 per cent to GDP, also improved somewhat during financial year 2002.
The improvement in the current of the balance of payments was broad-based, as all the three components of the current account showed significant improvements. The trade balance, through still negative, improved sharply in financial year 2002 due to a larger decline in imports than in exports and faster realization of export bills prompted by the sustained appreciation of the Rupee. There was a substantial reduction of $515 million (or 18 per cent) in the services account largely due to receipts from the USA against logistic support provided for war in the Afghanistan and smaller interest payments resulting from falling stock of foreign private loans and FE45 deposits. The largest improvement was seen in current transfers, the third component of the current account, as net transfers increased to $5.3 billion in the first 11 months of the year compared with $4.2 billion in the corresponding period of FY 2001. Sharp increases of 112 per cent and 76 per cent in remittances and official grants, respectively, contributed to improvement in current transfers.
Given their assessment for the future the Bank experts said that the growth performance of the economy is expected to improve further in FY 2003 for the following reasons. One, the greater availability of water after the recent rains has improved prospects of the agriculture sector, as well as for electricity generation. Two, the upturn in the large-scale manufacturing sector observed in the March-May 2002 period, is likely to continue during the current year. Three, the sharp increase in remittances is likely to boost construction activity. The sound macroeconomic fundamentals achieved over the last 2-3 years, will also help, and the economy should be able to achieve the growth target of 4.5 per cent in FY 2003. However, inflation, which pocked up towards the end of FY 2002, is expected to rise in FY 2003.
The upturn in exports and imports in the fourth quarter of FY 2002 is likely to be sustained in FY 2003. Exports should benefit from the revival of the global economy and greater access to the European Union markets, and with the anticipated revival of the domestic economy and higher oil prices, imports will also increase. Remittances will be sustained at the high level attained in FY 2002.
The medium-term prospects for the Pakistan economy have improved due to reprofiling of foreign bilateral debt, improvement of relations with the G-7 countries, greater access to the European Union markets, and modernization of textile industry underway for the last couple of years. If the government continues to pursue sound macroeconomic policies and implement the planned governance reforms, it should be possible to achieve the growth target of 5 per cent, set for FY 2004 in the medium-term macroeconomic framework under the Poverty Reduction and Growth Facility.