ECONOMIC CHALLENGES FOR THE NEW GOVERNMENT

AROOJ ASGHAR (arooj.ashar@hotmail.com)
Mar 24 - 30, 2008

The economic issues which new government is going to inherit range from all time high current account deficit to high non-developmental government spending, from high food inflation to shortage of various food items. Prime Minister and his cabinet are going to take oath on March 25th and will take charge of the affairs of the country on the same day. Since last few months Pakistan is going through a rough political patch consequently affecting economy. There is a collective frame of mind and general outlook that numerous economic issues have been piled up for new government to tackle with, arisen out of visibly failed "trickle down affect" economic policies of previous regime. It is said that the new leadership might not have the luxury of any honey moon period and is likely to face not only a rough ride but also the risk that former economic brains and their sponsors would create hurdles. According to independent economic analysts, the next government will have to swallow the twin deficits, fiscal deficit and current account deficit, as well as low GDP growth than the actual target, low revenue collection, pressure on rupee, shrinking investments and almost a halted privatization process, which will be a quite similar situation to the decade of the 90s. The revised forecast for the external current account is likely to be around US$9.5 billion for full FY08 (6% of GDP), up from an earlier estimate of US$6.5-7.0 billion (approx: 4.3% of GDP). The revision mainly reflects a higher oil price assumption, touching more than 111 dollars per barrel, as well as a moderately lower GDP base.

In a recent State Bank of Pakistan's (SBP) quarterly report, Governor SBP acknowledged that due to government's excessive borrowing from the SBP, they are encountering monetary imbalances and are constrained to further tightening monetary policy to contain inflation due to excess money supply (M2) in the market. Resultantly tight monetary policy and higher lending rates have slowed down growth of industrial and manufacturing sector. No new industry or expansions are taking place because of higher financial cost, instead a large number of spinning units have been closed as per latest CIB data of SBP.

The textile crisis has led to increase in unemployment and decline in exports. Textile sector has missed export target in the first seven months (July 07-January 08) of current fiscal year and it is expected that the gap will not be recovered by the end of the fiscal year. According to a report, textile products fell short of US$794 million or 12% of $6.853 billion target set by the government. This is second consecutive year where Pakistan will not achieve its export target in comparison to other regional competitors who have increased their exports manifold.

Pakistan's irony has been remained that most of the times it imports its Finance and Prime Ministers. This phenomenon continued in the regime which came into power on the name of good governance. The worst thing happened in Pakistan in recent past is that country's economy was managed by a Banker. He (Shaukat Aziz) might be a good banker but one must not forget the functions of a banker, who simply gets projections from the prospective investors, negotiate and issue and monitor debt against guarantees and warrantees obtained from the borrower. Arrangement and management of debt is one function out of several functions of Finance Minster. In comparison a World Bank official can be a better Finance Minister because of World Bank's role i.e. poverty reduction, environmental concerns and improving the living standards of people etc through debt and non-debt means whereas the ideal Minister would be someone who comes from within the system, has stakes in the country and remains available for accountability during and after his term. Recently a senior business community leader said in a TV talk show that once Shaukat Aziz said in a meeting with business community that if any business is unable to generate minimum 20% profit, it should be closed down including the textile sector. According to the business community leader, it was very negative approach of a leader of the country, as a true political leader cannot think of closing down a sector providing 40% of the jobs in manufacturing sector and contributing more than 60% to country's total exports. One wonders how time changes, a few months back it was same business community which was dying in praising Shaukat Aziz and now they are hyper in criticizing his polices.

Unluckily, a lot of emphasis had been placed on the investment in stock exchange, real estate, construction, trading mainly in mobile phones and cars instead of making policies for investors to invest in manufacturing concerns and mega projects which would have created millions of jobs. In order to portray the economic turnaround, two examples have been given repeatedly one of which is that now people like to drink Pepsi /Coke instead of lasi and another is that now over 70 million people out of 160 million people have cell phones. President General (R) Musharaf recently said that the economy is on the upsurge and all macro-economic indicators are strong. He further cited a recent report issued by Merrill Lynch that attributed these to healthy economic policies over the past several years. Though I don't agree with number of polices of General (R) Musharaf but here I would like to give him benefit of doubt. He has blind trust on his economic team which is with him since October 12, 1999. It's quite natural that one always believes on what his confidant says instead of what others mainly critics say. It is unfair on part of the economic team that they have misguided President and exhibited wrong economic picture. But once the new government takes oath, President would be surprised to know the ground realities and then I am sure he would be the first person to take the responsibility of economic melt down.

Since last eight years not a single megawatt has been injected in the national grid. It clearly shows negligence of economic managers but irony of fate is that they claim that it is the fallout of the rapid industrialization in the country. One must not give such arguments in defending their blunders.

It is also said that government forming parties have agreed to continue the privatization process and also to take short-term and long-term steps to ensure a quantum leap for boosting the dwindling exports and to avoid fiscal and external vulnerabilities. Gone are the days when various past governments privatized national assets on a price much below the market price. On one place Pakistan earned a lot from privatization proceeds but on the other it has suffered more due to selling of assets at lower prices than it could have fetched.

Successors would also have to include ratification of macro-economic situation and steps to control the prices in their top agenda. Another challenge for the next government would be the consistent cash-bleeding of major public sector institutions such as Wapda, Pakistan International Airlines etc as these two institutions were going to cause losses to the national kitty of over Rs 100 billion in the current financial year.

Last seven years" record indicates more fundamental and structural problems with the growth trend of the agricultural crops. The production of cotton, wheat, rice and sugarcane grew by a yearly average of 1.63%, 1.23%, 0.59% and 1.87% respectively during the seven years from 1999-00 to 2006-07 and was below the estimated average population growth of 2.2% or so during this period. An examination of a sample of the production of other agricultural produce reveals similarly low and volatile rates of growth. The new government will have to undertake massive infrastructure projects particularly in water and transportation sector. In addition to this they will have to take steps to solve issues like high quality seeds, fertilizer and related matters to attack poverty and increase incomes in rural areas.

The State Bank miserably failed to contain the core food inflation through tight monetary policy. The only way to control food inflation is to maintain demand and supply mechanism of the essential food items effectively. Food inflation can be addressed by allowing duty free import of all food items as a short-term measure and make increase in crop yields a top priority.

Energy crisis alone is a huge issue and there are no quick fixes whereas inflation and current account deficit are symptoms not the causes. Low agricultural productivity, wrong estimates of crop and top of that deliberately distorted growth numbers just for the sake of publicity, narrow tax base, continuously decreasing exports and increasing value added imports, and huge governmental non-development expenditure are among the major reasons of poor economic condition of the country.

Summing up, agriculture, energy, and exports-led growth should be the top priorities of the economic policy if serious economic disruptions are to be avoided in the coming months and years. In order to implement this, Pakistan desperately needs to change the policy structure so as to attract both local and foreign investors but also to give relief to general people. Our industrial policy lacked motivation to enhance investment in SMEs, a sector capable of providing 80% jobs in the country. The crisis of flour, power, and unemployment has also aggravated the sufferings of common man. The worsening law and order situation, terrorism, extremism which has in due course spread to almost every part of the country and is badly damaging Pakistan's image, is resultantly deteriorating investment horizon and export market. It might be difficult to overcome various economic problems in short term but off course not in long term provided new government is allowed to complete its full term with powers.