ECONOMIC CHALLENGES FACING PAKISTAN
AROOJ ASGHAR (email@example.com)
May 12 - 18, 2008
Pakistan's new government is facing four main challenges: heavy external and domestic indebtedness; high fiscal deficit and low revenue generation capacity; rising poverty and unemployment; weak balance of payments. Finance Minister Ishaq Dar presented the "balance sheet" inherited from the previous government and pointed out that the budget deficit has hit unsustainable and highly inflationary level and cut the real GDP growth estimate for the current fiscal year to 6% from 7.2% and revised the inflation estimate from 6.5% to 10%. New government has taken over the affairs of the country at crucial time. There are a lot of issues which it has to tackle with in short span of time. Quite visibly, the issue is much greater than just the budgetary overruns and current account deficit. Pakistan is facing the threat of economic down turn due to high inflation, global financial, oil and food crises, energy shortages, stagnant exports, continuously falling foreign exchange reserves, a depreciating currency, and slowdown in investment activity.
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 are given repeatedly one now people like to drink Pepsi /Coke instead of lasi and the other is that now over 80 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 even Governor Punjab Lt General (R) Khalid Muqbool said in Multan University in front of Prime Minister that economy has turned around in last eight years. It needs courage and guts to say such things publicly while knowing the existing economic issues and reasons for those problems.
THE CHALLENGES AHEAD
GDP GROWTH RATE
Pakistan's average GDP growth rate for the last three years is above 7.5% whereas projected growth rate for the fiscal year 2007-08 was initially fixed as 7% later decreased to 6.5% and last month it is readjusted at 6%. While keeping in mind the current political and economic environment, it looks difficult to achieve this revised target. While analyzing the numbers, it appears that GDP growth rate of 7.2% was estimated on the basis of inflation rate of 6.5% but in real inflation rate has gone up to 13% then how come 6% GDP growth rate can be achieved. From July 2007 to March 2008, the cumulative rise in the consumer price index (CPI) was 13.30% and 15.75% in the wholesale price index (WPI). Obviously, these numbers will be higher for the entire 12 month period and nothing going to happen in last quarter of current fiscal year to bring down the average to 6.5%. On the basis of this information, the annualized inflation rate works out to be above 19% for the CPI and above 22% for the WPI. Here, it is important to note that much of the real GDP data is calculated using the wholesale price index (WPI). According to the independent experts, the real GDP growth cannot be more than just 3% unless otherwise any miracle happens.
Privatization in Pakistan has remained a controversial issue in recent months in particular. Last government lost its credibility on the privatization of Pakistan Steel Mill. After the verdict from the Supreme Court on Pakistan Steel Mill, Q-League government was unable to privatize any other state owned institution and nothing could be realized. Resultantly budget deficit increased. New government will have to try to establish its credibility and will have to pursue an aggressive and transparent privatization plan.
Taxation reforms should take a prominent place in the new government's agenda. This is an area where the business community has grievances and dissatisfaction with the nature of the tax administration. Tax reforms should be aimed at broadening the tax base, bringing in tax evaders under the tax net, minimizing personal interaction between tax payer and the tax collector, eliminating the multiplicity of taxes and ultimately reducing the tax rate over time. Unluckily, salaried person is the one who suffers the most and government should also focus on rationalizing salary tax regime.
New government must promote good economic governance. Transparency, consistency, predictability and rule-based decision-making should be taken. Concrete steps should be taken for freedom of press and access to information which onward provides feedback for making decisions. Good governance requires that fiscal discipline is maintained, expenditures beyond a certain level are not undertaken, revenues are mobilized by extending tax cover to those outside the net, subsidies are targeted at the poor and the vulnerable only, and employment is generated for productive purposes and given on merit to those who are qualified.
Pakistan has been a recipient of official bilateral assistance from the United States since the early 1950s, which was later interrupted in the 1990s. However, this assistance has been resumed since September 2001. The time has come for a re-appraisal of overall strategy. In the globalize economy, we need market access for our exports, lowering of barriers against trade, flows of foreign direct investment, transfer of technology, easy movement of labor and active collaboration in scientific education, research and development. Pakistan will benefit a lot if, for example, the United States allows our textiles and clothing to enter the U.S. markets on the same terms and conditions as given to Mexico, Central America, Caribbean and Sub Saharan Africa. This single gesture alone will generate hundreds of thousand new jobs in the economy, boost our foreign exchange earnings substantially and escalate our economic growth to new horizons. Pakistan would prefer to have greater access to the U.S. market compared to increased aid allocation. The machinery in the U.S. can be shipped to Pakistan in lieu of equity in the joint ventures. In this process, the American consumer will buy clothing at lower prices, some of the American workers will be able to save their jobs and Pakistan will expand output, exports, employment and reduce poverty. This is a win-win situation for both the countries and does not involve U.S. tax payers' money that goes into aid.
Another challenge Pakistan is currently facing is to invest in human development as Pakistan's indicators in this field are not very encouraging. The neglect in education, training, skills and professional development for a very long period has seriously impaired Pakistan's capacity to develop quality people. The United States and the Middle East attract several million doctors, engineers, accountants, IT professionals, bankers and teachers from Pakistan, but the rates of accumulation remain low and the overall quality worrisome. Female education and female labor force participation rates are areas where Pakistan has to focus more on. The agenda for poverty reduction and better income distribution can hardly make any headway unless investment in and management of education, health, nutrition, drinking water and sanitation take a discrete jump from their present levels.
DEVELOPMENT OF INFRASTRUCTURE
One of the biggest challenges new government is to face is the development of physical infrastructure i.e. power, oil and gas pipelines and terminals, ports, railways, roads and highways and airports. Pakistan has huge investment requirements in each of these areas otherwise high growth will be stifled. Congestions and shortages are hiking up the cost of doing business and eroding the competitiveness of Pakistani exports.
Despite all claims and results, previous government miserably failed in installing a single megawatt in the national grid. No solid reason is being given for this negligence. It may have been happened due to strong economic growth, improvement in the living standards of the people, more procurement of TV, AC and other electric appliances etc but the issue is this all didn't happen over night. It took eight years to reach this "prosperity". Now the people have AC, TV, hi-fi electric equipments but don't have electricity to enjoy these facilities. It was sheer lack of interest and mismanagement that Pakistan is facing shortage of electricity. New government has to work on this area but it will take at least 24 months to install a power plant. The issue is not how much time will it take to install a power plant but the issue is don't waste any further time.
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.
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. The crisis of flour, power, and unemployment has also aggravated the sufferings of common man. The worsening law and order situation (though suicide bombing has surprisingly stopped these days, one can only say for this is Thank God), 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. Since February 18th, these political parties are even today negotiating for government formation which is not encouraging situation and these politicians should now focus on issues. 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 without disturbing or creating hurdles.