Although the government has managed to increase financial resources through borrowing and privatization proceeds, it would not be able to sustain GDP rate during the next couple of years because of sluggish industrial and trade activity.
Jan 29 - Feb 04, 2007
The increasing inflation rate is feared to add to the problems of the people in general, particularly for the lower strata of society on one hand while it may lead to uncertainties and unpredictable conditions that may haunt the stock markets.
It seems imperative to take corrective measures against the inflationary pressures, which usually cause frustration and disappointment among investors and shareholders, who would rather prefer to secure their investments.
For quite sometime, there is an unusual upward trend in the inflation rate prevailing in the country. Last year the inflation rate stood at 7.7 percent, which has now shot up to 11.25 percent. There is no hope of the inflation coming down and it would be responsible for increasing the cost of production.
The prices and quality of industrial goods, especially of textile products, exported by Bangladesh, China and India were more competitive in the international market than those of Pakistan. These countries, therefore, captured the market that Pakistan was supposed to acquire. The increase in the cost of our production and quality deterioration would go on casting a negative impact on the country's exports. There seems to be no positive and favorable change in the government's economic policies. And as there is apparently no hope or scope for any downward trend of inflation, hence the prices of essential commodities might go on rising during the fiscal year 2007, having an adverse impact on the living standards of the masses.
Taking stock of the active players in the economy, the export sector, especially the textile, enjoys supreme importance, which has a lion's share of 63 percent in the total exports. Regrettably, exports of textile products, during the last six months of the current fiscal year, have suffered a shortfall of 13 percent. There is apprehension that exports will still suffer a downfall due to uncontrollable inflation. This year agriculture and livestock sector will have a growth rate of 3-4 percent as against last year's 8 percent.
There was a forecast of 12.8 million bales of cotton (phutti) during this year but as a result of pests and other disease attacks, cotton crop was badly affected and production came down to 12.5 billions. We would be harvesting wheat with a speculative increase of 3.7 percent, quantifying it at 22.5 million metric tons. Thus the overall position during the fiscal year 2007-08 would be favorable.
Although the government has succeeded in increasing its financial resources through borrowing and resorting to privatization, it would not be able to sustain its GDP rate during the next couple of years because of sluggish industrial and trade activity. During the initial five months of the current fiscal year trade deficit has touched the figure of $5.4 billion, which is 17.9 percent more than what it was in the corresponding period in the preceding year. It has been estimated that during the first six months of the current fiscal year, the trade deficit would remain approximately $5 billion, which means the government will have to seek foreign investment and continue privatization to get $7-8 billion, including foreign remittances from Pakistanis working abroad, which are estimated at $5 billion. It may be mentioned that during the last seven years, 40 different companies and organizations have been privatized at a total cost of $6.1 billion, of which 56% has been obtained from the privatization of two big concerns, namely PTCL and OGDC. The government is also interested to sell 51 percent shares of PSO, which would fetch an amount of $800 million. In order to privatize these strategic and profitable organizations of oil and gas, one or two years will be required to complete the process, hence to keep its resources at the present level, the government will be needing to take loans from foreign banks and agencies.
Accepting these challenges, the government would have to take necessary steps urgently. In order to avoid depending upon the foreign loans as far as possible the government would be required to minimize non-development and unproductive expenditures, banning all imports of luxury goods including luminous cars, unnecessary foreign tours, Hajj and Umra tours by MPAs and MNAs with their entourages, cronies and sycophants at the government expense, allowing the oil companies to sell petrol and diesel by fixing prices at their sweet-will and allowing sugar mills to extort money by hoarding their stocks and black-marketing (of course in connivance with the government). Monitoring of all imports will be required seriously and continuously to avoid uncalled for imports for ensuring a trade balance.
The Governor State Bank of Pakistan in a recent report has cautioned the government to be more vigilant. According to the report, if upward trend of prices of edibles, fruits, vegetables and essential commodities of daily use is not checked and controlled, the inflation would go on rising. It has been identified in the report that control over inflation is also necessary for cost control in trade and business and cost of production to compete in the international market. It has been observed with great concern that in spite of giving Rs. 42 billion for refinancing and Rs.10 billion for research and development to textile sector, besides $4 billion foreign exchange already provided 4-5 years ago for purchase of modern machinery in textile sector, the growth rate of exports has shown an extremely low productivity.
Besides other indicators, the State Bank of Pakistan fears that if the prices of essential commodities are not controlled administratively, the inflation rate can exceed 8 percent. The bank observes that these prices are not being charged on the principle of supply and demand ñ rather these are determined and applied by the middlemen and businessmen devoid of business ethics. It is still agonizing that no benefits of these high prices are being passed on to farmers and cultivators.
Briefly, the prices of petrol, diesel and furnace oil must be tailored in the light of the prices in vogue in the international market. Moreover, giving a free hand to the oil companies to sell petroleum, diesel and furnace oil at the rates fixed to extort money unfairly would be equally harmful to the country's economy and people at large.
It has been observed that the objectives of privatization for controlling the foreign debt liabilities and poverty cannot be achieved. In spite of the fact that more and more profit-making strategic companies and organizations are being subjected to privatization, the objectives remain unfulfilled. Financial experts and economists are of the considered opinion that if the sugar and cement industries were not nationalized in the past, industrialists and traders would not have found any scope for monopolization and exploitation, rather they would have been involved in healthy competition.
Recently the Public Accounts Committee of the National Assembly has rightly opposed the privatization of PSO and urged the government to desist from privatizing strategic and profit-making companies and enterprises. Evidently, this practice cannot be termed as investment — rather it is out-rightly selling out our national assets to the MNCs. Moreover, to meet the government's expenses from the proceeds of privatized companies tantamount to destructing the country's economy. The government must give a serious thought to it as it is like selling our kitchen utensils to run the business of our home and hearth.
The overall performance of agriculture sector remained unsatisfactory. The target for major crops was 6.6 percent but the achievement, being 3.6 percent, was too low. The target for agriculture sector was fixed at 4.8 percent. The performance showed an increase of 2.5 percent. The production target was fixed at 11 percent and for major industries it was fixed at 13 percent. The performance has respectively been 8.6 and 9 percent. The increase in the country's imports, which was visualized at 13 percent, shot up to 25.8 percent. Services were targeted at 6.8 percent but with an increase of 2 percent, the performance stood at 8.8 percent.
Similarly, there were significant shortfalls in the achievement of other sectors as compared to the targets and the budget deficit reached at the highest level. Trade deficit has been constantly on the increase, which has arrived at the figure of $2.654 billion during the first quarter of the current financial year. This is higher by 67 percent as compared to the trade deficit recorded in the corresponding period of last year. Besides trade deficit, the budget deficit has also increased significantly. This has reached the figure of $87 billion during the first quarter of the current year as compared to $38 billion as recorded during the corresponding quarter of the last fiscal year.
Consequent to these deficits, especially the trade deficit, thousands of workers in the industrial sector, especially the textile industry, have been laid off.
Some of the textile units have been closed while others are not fully operative. It is being speculated that still more workers will lose their jobs. These facts and figures bespeak loudly and unambiguously that the government's economic policies are not going in the right direction.
The fiscal year 2007 may prove more difficult to deal with. There is a strong possibility that GDP growth rate may remain either unchanged or may further slide in the face of energy crisis. Pakistan may be seeking urgent international co-operation to address the issue. Expectedly the trade deficit may rise to 12-13 billion dollars, which will be the highest and the worst of its kind in the history of Pakistan.
CITY WISE INFLATION IN CPI (YOY), DECEMBER 2006
HIGH INFLATION CITIES
LOW INFLATION CITIES
Note: High inflation refers to above average inflation, and low inflation refers to below average inflation
SOURCES: STATE BANK OF PAKISTAN