PERFORMANCE OF THE ECONOMY
GDP growth during the current fiscal year ending June 30, 2004 may touch nearly six percent instead of 5.3 as estimated in the budget
From SHAMIM AHMED RIZVI,
May 10 - 16, 2004
The Finance Minister, Shaukat Aziz is the lucky Finance Minister of Pakistan to have the honour to say good-by to International Monetary Fund (IMF) during his visit to Washington last week. He told IMF Chief that Pakistan was not interested in further extending the loan agreement under poverty alleviation and growth facility (PRGF) expiring by the end of this year.
Earlier he had told the National Assembly that the Government of Pakistan had decided that it would not enter into any financial agreement with the IMF in future as country's economy was on sound footing and strong enough to be self-reliant. He said that the sound economic policies initiated by the then Chief Executive Gen. Pervez Musharraf in the year 2000 and later followed strictly in letter and spirit by the elected government of Prime Minister Zafarullah Khan Jamali without any interruption has made the country economically strong enough to break the begging bowel which appeared to be only a dream a few years back. We are now free from the shackles of the likes and dislikes of IMF and the World Bank, he declared.
You may differ with many policy initiatives and feel dissatisfied with government performance in different sectors but you cannot deny President Musharraf and Prime Minister Jamali the credit of the marketed improvement in Pakistan economy during the last four years. As a matter of fact what has been done in the economic field is enough to cover the unsatisfactory or not up to the mark performance of the present government in some other sectors. Declaring that the fiscal year 2004-05 will be a year of common man, the Finance Minister gave the good news that the GDP growth during the current fiscal year ending June 30, 2004 may touch nearly six percent instead of 5.3 as estimated in the budget.
Going by what the minister declared, it would seem that the Musharraf's Government has not wasted its four-and-a-half-years in power twiddling its thumbs; in fact, it has made the most of this opportunity by enhancing and improving the overall conditions of the national economy and worked hard towards the development as well as the welfare of the people of Pakistan for the sake of our suffering majority, which has been subsisting below the poverty line. It is sincerely hoped that our dependence on foreign debts, which were running higher 40 billion dollars, consuming a large part of the national revenue for paying the interests on these loans, is will soon be over and we will have enough in the national coffers for us to live honourably and comfortably.
Because of increase in production of all the major agricultural crops except cotton, plus a robust growth of nearly 15 percent expected to be registered by the manufacturing sector. It is hoped that the per capita income would go up from the present level of $480 to $600 by the end of this year and by virtue, which Pakistan would no longer remain a low-income country (LIC).
In the international trade sector, it is expected on the basis of performance during the last eight months that exports would grow in 2003-04 by nearly 15 percent.
Since, exports were generally higher during the last 2-3 months of the fiscal year, the export target of $12.1 billion, fixed for the current fiscal year would be easily achieved. However, this remarkable performance in the export sector was likely to be marred by government's failure in containing the trade deficit to $0.7 billion, as per the target fixed for it at the start of the current financial year. During the last 8 months, imports galloped at the rate of nearly 17 percent and it was feared that the trade deficit might cross the $2 billion figure, at the end of the financial year. An unfavourable trade balance of the above magnitude may not pose any serious problem at present, due to a comfortable balance of payment (BoP) position. However, in the long run, government's failure to control the country's chronic trade deficits could create innumerable problems for Pakistan. It is, however, satisfying to note that rise in import in due to import of machinery and raw material and not on consumer's items. It in itself is a sign of growing industrial activity.
In addition to the growing trade deficit, income from workers remittances had, also registered decline of nearly 11 percent during the current year. Income from the source was expected to go down to $3.6 to $3.8 billion from $4.23 billion recorded last year.
Nevertheless, despite the persistent trade deficit and decline in income from workers remittances, the external sector was no-doubt still a source of strength for the economy. The country's foreign exchange reserves stood at above $12 billion in March 2004. Pakistan has recently made repayment of $1 billion of its expensive debt to the ADB and had collected $500 million by floating its Eurobond in the international market. The credit rating of Pakistan has considerably improved in the recent months and the same is, at present, comparable with that of Indonesia and Philippines. If the government's expectation regarding a 5.8 to 6 percent increase in the GDP growth during the current fiscal does materialize, public debt as a percentage of GDP would go down further, at the end of the current financial year.
The government has succeeded in maintaining price stability during the last 4 years and the inflation rate has been between 3.3 to 4.4 percent during this period. However, during the current financial year, prices of a number of essential commodities such as onion and tomato, vegetable ghee, meat and wheat/wheat flour have come under-pressure. In particular, wheat and wheat flour have been in short supply and selling at higher prices since January. According to press reports, wheat flour had been selling in certain parts of Karachi and Hyderabad at Rs. 15 to 17 per kg until the first week of March. Since the government was of the view that the situation was inter-alia attributable to lower quantities of wheat procured last year, it had decided to procure as much as 6 million tones of wheat during the current season.
In addition to food items, the price of mild steel bars and cement, which are used in the construction activities, have also increased recently. The price of petroleum and petroleum products, also, stand at a higher level reportedly because of increase in the international crude prices in the recent months.
In view of the position explained above, the food and the fuel groups of the consumer price Index (CPI) might come under pressure. Similarly, in the wholesale price index (WPI), the food, fuel and lubricants and building materials groups were expected to show an upward trend. It is feared that the inflation rate (as measured by the (CPI) may exceed 5 percent during the current financial year, while the WPI may register an increase between 5 to 10 percent. In addition to inflation, poverty and unemployment may remain a problem area in the current fiscal, also. According to independent economists, the unemployment rate has gone up from 7.82 percent in 2002-03 to 8-9 percent during the current financial year. In the same way, the poverty situation also appeared to have worsened instead of showing improvement. Is it not ironical that while Pakistan's per capita income is expected to rise from $480 to $600 during the current financial year, no marked improvement is discernible in the condition of the poor, throughout the length and breadth of the country.
Likewise, improvement in the education and health sectors is also likely to remain marginal, at best, during the current financial year. As long as the government was content by taking perfunctory measures in the social sector, no major change in the social sector could be brought about. For real change, a determined effort and targeted measures together with a monitoring mechanism were required.
One of the most remarkable achievements of the government is that it has succeeded in boosting its revenue collection from nearly Rs. 300 billion to Rs. 500 billion during the last 4 years. On the other hand, the government expenditure on debt servicing has gone down considerably inter-alia due to the rescheduling of a part of the country's external debt. As a result, the government has been able to increase budget allocation for its public sector development programme (PSDP) to Rs. 160 billion for the current financial year. It was expected that with the higher size of the PSDP and a massive amount available for poverty alleviation, we would able to bring about marked improvement in the poverty and unemployment situation.
The situation with regard to local and foreign investment is not a happy one. Despite the optimism shown by the government in this regard, foreign investment has reportedly registered a decline of 43 percent during the first 6-7 months of the current financial year, as compared to the corresponding period of last year. As regard local investment, the economic team of the government was of the view that the 23 percent increase in the import of machinery together with increase in credit to the private sector from less than Rs. 100 billion last year to Rs. 225 billion during the current financial year so far clearly shows that local investment during the year has picked up. In case the above-mentioned assumption is correct, that would certainly be a welcome development. However, the government would be well advised to collect details about the ultimate use of imported machinery, raw material and utilization of credit by the private sector, in order to be able to present the factual position before the public.
It was perhaps a moment, (while reviewing the economic program) of truth for the Finance Minister, when he maintained that Pakistan could not overcome the challenges of poverty reduction, increase investment level and creation of employment opportunities despite macroeconomic stability. This is the first time that such an important government official has publicly accepted the government failure in its well pronounced goals at the conclusion of one year of the Jamali-led government are extension of the earlier policies, it can be inferred safely that while the last four years saw considerable improvement in the macroeconomic stability of the government, they fell short of seeing any tangible improvement at the popular level. It is in fact a failure in the achievement of the ultimate goal as the rational for all economic changes in the final analysis is the well being of the people at large.
In spite of strong rationale for tacking poverty through direct programmes, a closer look would reveal that the lack of investment, as all other programmes of tackling poverty through direct programmes will remain limited in domain and can hardly encompass all the impoverished people of the country. It is, therefore, prudent that facilitation of domestic and foreign investment in the country should remain pivotal to economic decision making in the country. As the private domestic and foreign investors feel shy, it is high time that the government should take the lead and bring about significant increase in its development expenditure. The housing sector has rightly been classified as an area of investment and the policies should continue in future as well. Once the effects of government policies started yielding results, the level of investment by private sector will rise as well and hence the unemployment and poverty could be tackled.
It is, however, heartening to note that the government is fully cognizant of these probes and in proposing to take some bold steps in this direction in the coming budget. It is focusing on housing and construction industry which can create highest number of jobs then compared to any other industry. Public Sector Development Programme is likely to be raised to Rs. 200 billion in the coming financial year from present Rs. 160 billion.
To demonstrate to all concerned that the government was determined to boost the Construction and Housing Industry, President General Pervez Musharraf himself presided over a meeting comprising representatives of construction industry, contractors, property developers and other stakeholders, to find out the irritants and hurdles impeding the desired level of expansion and boost of this industry. Addressing the meeting in Rawalpindi last month, the President urged all concerned to work together to achieve the common goal of boosting construction industry which would help improve the economy, provide jobs and reduce poverty. In fact it is one of the highest source of job creation, he remarked adding that a boost to construction and housing industry will benefit about fifty downstream industries. Because of this importance, this industry was on the priority list of the government. Inviting the participants to come out with their problems he assured them that the government will provide all the required facilitates and incentives.