THE STATE OF PAKISTAN'S ECONOMY
Country has successfully emerged from crises
From SHAMIM AHMED RIZVI,
Jan 03 - 09, 2005
Both the major donor agencies, the International Monetary Fund (IMF) and the Asian Development Bank (ADB) in their latest report on Pakistan's economy released last week, while generally appreciating the growth rate, have pointed out some weakness and negatives in some sectors cautioning the economic managers of the country to take immediate remedial measures.
The board of directors of the IMF, who examined and approved the report before release appreciated Pakistan's overall performance and observed that the country "has successfully emerged from crises." According to the Executive Board's assessment, the Executive Directors noted that Pakistan has successfully recovered from the 1998/99 crisis. "Growth has rebounded in 2003/04, and fiscal adjustment, supported by official inflows and debt relief, has led to a substantial improvement in public and external debt indicators."
Reflecting strong export growth and remittances, the balance of payments has strengthened and international reserves now cover over five months of imports. Directors attributed Pakistan's recovery to the steadfast implementation of sound economic policies and broad-based structural reforms, while noting that external support has also played a part. The IMF board observed that, notwithstanding these significant achievements, poverty remains widespread and social indicators are weak in Pakistan. "Thus, they considered that the key policy challenges for the medium term are to maintain strong economic growth and to ensure that this is translated into a significant reduction in poverty."
Directors commended the authorities on the progress made with fiscal consolidation. They noted, however, that Pakistan's debt burden is still relatively high. In this context, Directors viewed the fiscal policy stance in 2004-05 as appropriate, as it ensures both a further reduction in the public debt burden and an increase in social and development spending. The high oil prices represent an important risk to the budget, however, and directors stressed that the rise in international oil prices should be passed on to domestic consumers to safeguard fiscal targets.
The IMF board supported Pakistan's ambitious growth targets, but cautioned that these would be realized only in the reform agenda laid out in the poverty reduction strategy paper is fully implemented and external factors are favourable. In particular, directors emphasized the need for deepening structural reforms to improve the investment climate and governance, including through continued privatization and trade liberalization. At the same time, they noted the importance of enhancing human capital and labor productivity through grater and more efficient spending on health and education. Directors also underscored that accelerating growth will require the continuation of sound macroeconomic policies. They encouraged the authorities to take advantage of the current favorable conditions in pursuing these challenges."
The IMF report maintains that poverty and unemployment remains high in Pakistan with real wages declining despite success in macro economic stabilization during the last three years. There is no clear evidence yet on poverty trend, reflecting lack of comparable data.
A government sample survey conducted in early 2004 suggests that poverty has fallen over the last three years. The survey showed a decline by 4 percentage points in the poverty rate, to 23 percent. The last official household survey in 1998-99 showed 32.1 percent poor in the country. "The results of this survey are not fully comparable with those from earlier household surveys, as its sample size was much smaller and the poverty line may have been underestimated."
The IMF data provided some sectoral indicators showing no major change so far in the social sectors. Many intermediate outcome indicators for the health and education sectors have yet to show significant improvements. Both as a ratio to GDP and per capita, education and health spending in Pakistan is among the lowest levels in the world. A cross country analysis exploring differences in growth rates among low and middle income countries finds that weak human capital indicators are an important constraint to growth in Pakistan.
Real wages in the manufacturing sector have declined by 7.5 percent in real terms since 2000-01. Pakistan is still ranked low in the 2004 UNDP human development index. "Overall, poverty remains widespread and Pakistan faces a major challenge in trying to meet its Millennium Development Goals (MDGs)."
"While the immediate outlook is good, Pakistan faces major economic and social challenges in the medium term. Poverty is relatively high and social indicators are weak, with little evidence of a strong improving trend recently. Per capita social spending is low and the public debt burden, though reduced, is high. The infrastructure is weak in many areas. There is still some way to go toward creating a modern institutional structure and improving governance," IMF maintained.
The IMF has also expressed reservations on issuing tax exemptions skewed tax net delay in power sector reforms, low human capital and social sector indicators and complacency of the authorities on fiscal position.
Asian Development Bank (ADB), in its review has appreciated overall improvement in Pakistan economy. The latest update of ADB on Pakistan's economy will, however, be regarded as important because it has highlighted two important negative developments. Pakistan, according to the update, would fail to achieve its inflation and current account balance targets after four years of impressive performance in these areas. Shortage of essential food items and rising house rents have already pushed CPI based inflation upward to 9.1 percent in the first four months of FY05 compared with only 2.2 percent in the same period of last year. The State Bank, as a consequence, has changed its monetary stance to a 'measured tightening up' of monetary policy. Interest rate on 6-month treasury bills has increased from 2.1 percent in May, 2004 to 3.7 percent in November and the growth in money supply has slowed to 3.1 percent from 4.3 percent last year, though the flow of credit to the private sector remains strong. During July-November 2004, imports have increased by 37.4 percent to $5,894 million while exports have risen by 12.3 percent to $4,462 million, resulting in widening the trade gap to a staggering $1,432 million. The current account went into a deficit of $80 million in sharp contrast to a surplus of $1,492 million in the same period last year. The reversal in current account was mainly due to the burgeoning trade deficit more than nine fold increase in services account deficit and termination of Saudi Oil Facility, which had amounted to $189 million in the first four months of FY 2005. Foreign exchange reserves of SBP declined by $1.3 billion to $9.3 billion and the rupee depreciated by 2.7 percent in the first five months of FY 2005.
On the positive side, economic growth forecast of 6.5 percent in FY 2005 is likely to be achieved. Despite water shortages, agricultural sector is expected to grow at 3.5 percent as cotton output is estimated to touch a record level. The growth in manufacturing is likely to be a robust 12 percent. CBR tax revenues should exceed the target of Rs. 580 billion. Defence expenditures are also expected to remain on target due to improvement in relations with India. Despite the adverse effect of a sharp increase in oil prices, the fiscal situation improved significantly in the first quarter of FY 2005, with the overall budget deficit declining to 0.4 percent of GDP compared with 0.7 percent in the corresponding period of last year.
The two reports by world major donors have exploded the myth of the official claims of economic recovery. The barometer of economic progress is obviously the level of poverty, which has unfortunately risen in Pakistan in recent years. The fact that about 35 percent of Pakistani people are forced to live below the poverty line amply speaks of the hollowness of the government propaganda of economic progress. The reports have exposed the ground realities of Pakistan's scenario about poverty, unemployment, public deprivation, lack of attention towards social welfare sectors of health and education, poor communication infrastructure and absence of will on government's part to respond to masses' bare minimum macroeconomic concept. They want mitigation of their socioeconomic problems. The fact that poverty is on the rise despite increased allocations for execution of the relevant projects. It's an undeniable truth that people have not benefited from what is said to be the economic turnaround that Pakistan has achieved in recent years. Masses life is miserable due to unemployment, price hike, mounting cost of living and other problems pertaining to shelter, education and health. The government's utter disregard for the pervading high cost of education and health in the country is disgusting. It has become virtually impossible for the people with average resources to provide good education to their children and to ensure proper health care for their families. Government's blind eye towards these basic sectors of public welfare letting the private sector to loot and plunder has turned the nation virtual hostage to the mafia's whimsical pursuits. The situation calls for reorientation of the government's policy on poverty alleviation and social welfare. It's hoped that Prime Minister Shaukat Aziz will not only work for stuffing the national kitty but will also be mindful of the state obligation towards public welfare. Poverty and deprivation is a curse and needs to be addressed urgently to avoid its negative fall out on the national life.