6-8 percent growth looks within reach during next 3 years

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Sep 25 - Oct 01, 2006

The fiscal and monetary policies pursued by the government over the last six years have apparently provided economic stability. The macro economic indicators in particular have strengthened the confidence of the investors.

According to donor agencies, the overall future outlook for the economy is positive, and the growth target of 6-8 percent is achievable during the next three years. The economy may also register a further boost following fresh investment in the agriculture and expansion of the manufacturing sector. The fillip in services sector, particularly banking and telecom, is expected to continue.

At the same time, there are some areas of serious concern. The current account is facing a deficit of $ 5.5 billion. Fiscal deficit has jumped from 2.4 to 4.2 percent of GDP, while the overall tax to GDP ratio has gone down to 10 percent from 11.5 percent. The trade deficit stands at a staggering $ 12 billion. Speculative trading in cement, sugar and some food items has forced the government to import and offer them to the general public at subsidized rates. The 7.63 percent inflation attributable to high oil and food prices, and the growing imbalance in the external sector remain potential risks t o medium term economic growth.

The FDI for the last fiscal remained fairly encouraging showing an inflow of over $ 2 billion excluding the privatisation proceeds of $ 3.5 billion. The government has also firmed up a plan to attract $ 30 billion FDI in the next five years, which perhaps also includes the expected capital inflow from USA after the conclusion of the long awaited investment treaty. In its 'de-hyphenated' approach, USSA continues to pursue a discriminatory policy towards Pakistan not only in nuclear cooperation but in investment as well. Any treaty does not regulate US investment in India or China. While China pursues a political philosophy directly opposed to capitalism, India still has a mixed economy with an unenviable law and order situation.

The bulk of FDI in the form of equity investment or privatisation proceeds has come from Arab sources, which has no export bias. During the last one year, 51 percent shares each of HBL, UBL and Notional Refinery, and 26 percent shares of PTCL were sold to foreign buyers. In the next sequence, majority shares in PSM, Sui Northern, Sui Southern and PSO are on sale. In due course, the foreign investors are also expected to wrap up the remaining shares of these undertakings.

If on the one hand, the sale proceeds brings in foreign exchange, it also adds up to the country's liability when the buyers remit foreign exchange for repatriation of profits and dividends. One of the cellular companies is known to have remitted profits to their principals to the tune of four times the original investment so far. It is roughly estimated that the outflow in terms of dividends etc of HBL, UBL, National Refinery and PTCL in 2006 will add up to $ 102 million. As for some intangibles, the government has paid Rs. 5 billion (out of a total claim of Rs. 21 billion) to oil marketing companies on account of price differentials alone.

While the country is still left with some family silver, it is time to ponder about the privatisation priorities. Opinions are divided as to whether the restructuring and privatisation have reduced unemployment or checked economic disparities. Instead of wholesale privatization under diktat from donor agencies, each case should be considered on its own merit. Since the sale of strategic assets especially the energy sector to foreigners has its own demerits, each such unit must be subjected to proper scrutiny by a team of competent analysts.

It is also imprudent to speed up privatisation without proper costing, valuation and desirable transparency the case in point being the Supreme Court Judgment in PSM sale. Given a better management, most of the sold out units had the potential t o remain viable and profitable. In fact, the local entrepreneurship should have been preferred over foreign buyers by protecting them against protruding inquisitiveness of certain authorities.

The Ministry of Finance's economic outlook, issued last week seems a bit optimistic and relies much on validation from overseas multilateral agencies for claiming 'extraordinary successes' despite external shocks. The document, which liberally quotes the World Bank, the International Monetary Fund and the Asian Development Bank (ADB), does admit that the country still faces many problems, especially related to creating jobs, reducing poverty, deteriorating physical infrastructure and worrying socio- economic indicators. However, it quotes from a recent international ranking that places Pakistan at 74th position out of 175 countries.

The ministry for instance quotes from the ADB, which it quotes as praising the present government's macroeconomic management, which allowed the economy to emerge relatively unscathed after last year's devastating earthquake. However, this does not take away from the fact that the management of the post quake rehabilitation effort has been far from satisfactory. Many of those who lost their houses and property have still not been able to receive government compensation. Either because of red tape or because their due share has been diverted to other people by corrupt local officials. The relief efforts also saw scandal of sorts when tents of not the required quality and specification were provided to the survivors and construction of replacement dwellings when the next winter in the region is around the corner has not yet begun. Furthermore, one reason Pakistan was able to absorb the impact of the earthquake was because the economy of the region that was affected is not a major contributor to the country's GDP. Also, the reconstruction effort, purely from an economics point of view, also adds to GDP primarily because of construction of housing and the employment that is generated. Apart from issuing economic outlooks that to many may seem as overly optimistic and the result of selective quoting from sources, the ministry of finance would do well to examine its policies whose aim is to alleviate poverty and should analyze why poverty has not by the proportion that it should have were the fruits come down of economic growth more evenly distributed.

Consensus is emerging amongst the international donor agencies as well as the independent economists within the country that the rising inflation and the growing imbalance in the external sector are the two potential risks to the medium term economic growth of the country. The donors have also expressed their concern over what termed as 'rising in productive' being incurred by undertaking unviable development projects and schemes, which did not have any significant rate of return. Others one repeatedly pointing out the growing income inequality within the different set of population describe the present economic growth as development of elitist economy.

Some developments are very disturbing. For example trade deficit has surged from $ 3.2 billion to $ 12 billion. The current account with a surplus at $ 1.8 billion is now burdened with a deficit of over $ 5.5 billion. Fiscal deficit has jumped from 2.4 to 4.2 percent of GDP and more alarming, the overall tax to GDP ratio has gone down from 11.5 to 10 percent. All these developments could pose a serious threat to the economy specially when they continue to be on the higher sides. The economic planners of this country should focus attention as to how to overcome these negative factors of the economic development.