ADB REVIEW ON PAKISTAN'S ECONOMY
Describing Pakistan economy in 2003-2004 as a mixed bag of success and failures
From SHAMIM AHMED RIZVI,
Sep 15 - 21 , 2003
The Asian Development Bank (ADB) has reviewed the progress of Pakistan's economy during the 2003-04. The Pakistan economic update released by the ADB Islamabad office last week makes an interesting reading. By any standard it is an objective assessment of the situation describing Pakistan economy in 2003-2004 as a mixed bag of success and failures.
One of the prominent feature of the ADB report is that, unlike the documents and statements emanating from government quarters which highlights only the positive achievement. This report also records and bring to the public notice the negative aspects and areas of failures in various sectors. The report also reveals some of the deficiencies in the policies as well as in its implementation.
The economy's overall growth performance, according to the ADB, showed a sharp improvement in 2003-04 with the GDP growth rate increasing to 5.1 per cent from 3.5 per cent in the previous year. The improvement with broad-based, with agriculture, manufacturing and services, all recording higher growth and the trend is likely to be consolidated in 2003-04. The fiscal deficit and inflation declined and the current account surplus and foreign exchange reserves rose to all-time high levels.
Another significant development was the sharp fall in average lending rate from 13.1 per cent to 7.6 per cent per annum. As a result of this unprecedented decline in interest rates and upsurge in economic activity, borrowings by the private sector, including export finance, shot up from Rs.37.7 billion to Rs.153.6 billion. There was also a boom in the stock market and market capitalization almost doubled during 2002-03.
However, while the economic fundamentals looked promising, there was no dent in poverty or any acceleration in investment. According to the ADB, the poverty level deteriorated from 30.6 per cent in 1998-99 to 32.1 per cent in 2001-02 despite a revision of poverty definition to get the desired numbers. The government reduced the standard per capita Recommended Dietary Allowance (RDA) from 2550 to 2350, it still yielded a poverty estimate for below the international estimates. Although official unemployment rate was only 7.82 per cent, hundreds and thousands of people were being added to the ranks of unemployed every year due to the population growth rate of 2.1 per cent. Gross fixed investment remained stagnant at 13.1 per cent while gross national savings increased from 17.0 per cent to 19.2 per cent due entirely to higher workers remittances from abroad. Domestic savings, on the other hand declined from 16.1 per cent to 14.7 per cent. An important observation in this context was that most of the investment was not meant for new enterprises and private sector credit off-take went mostly for working capital requirements. New money flows were largely going to the stocks and real estate resulting in sky-high prices of these assets and this may be a matter of serious concern in year's time. There were also some signs of slackening of fiscal adjustment effort due mainly to a 15 per cent hike in public sector salaries and the continuing losses in public sector enterprises (PSEs), particularly in the power sector.
The ADB also revealed some of the deficiencies in development spending and its effectiveness. Spending under public sector development programme and poverty reduction strategy were very low during the first three quarters, but large scale releases in the fourth quarters to show higher utilization compromised the quality of delivery and resulted in leakage. Giving an example of the poor quality of spending and its outcome, the ADB country representative, Marshuk Ali Shah said that only 30 middle schools were operational out of 300 schools funded by his organization during the last three years. Another 6000 facilities funded by the ADB were also not working and similar was the fate of assistance from other donors.
Most of the observations of the update are based on a proper assessment of the prevailing situation and need to be carefully analyzed by the policy makers in order to rectify the faults in various areas of economic management. It is good to see that economists in the ADB have not been unduly influenced by the government's publicity of "all is well and take-off stage" but have applied themselves to determining the emerging weaknesses that retard of reverse the process made on various fronts so far. Some of the facts highlighted by the ADB need urgent attention. For instance, it has been made abundantly clear that it is not just the lack of resources that hit the economy but their poor management and frequent shortfalls in the utilization of available funds in the public sector that further aggravate the vulnerabilities of the economy.
For instance Pakistan could utilize only one per cent of the loan advanced by the ADB for flood protection projects since 1997. The loan sanctioned of an amount of $100 million and the projects identified were badly needed. Director of the Asian Development Bank, Marshuk Ali Shah, in a meeting with Minister for Water and power, Aftab Ahmad Khan Sherpao, here asked for expeditious loan utilization to obtain results in prescribed time. ADB is providing $100 million interest-free loan with only one per cent service charges for Floods Protection Projects approved on November 13, 1997. It was required under the conditions of the loan that it should be utilized by 2005, but after a lapse of 74 per cent time only about one per cent or $1.244 million, has been utilized so far.
According to another report, Pakistan has dropped 13 World Bank projects worth $2.3408 billion, including bank's contribution of $1.0317 billion during 1997-2001.
The reasons of dropping the projects were inter government disharmony and delay in implementation of agreed reforms. A few of these projects are again under consideration of the government and the bank might include these in the coming assistance.
However, the bank has shown reluctance to work with the government departments which are very slow in implementation. Bank officials are of the view that sometimes the response from a government office comes after two months, which should come in a week.