ECONOMIC GROWTH

CHALLENGES AHEAD

FROM: SHAMIM RIZVI
Islamabad
Jan 28 - Feb 03, 2008

National economy is passing through critical times these days. The year 2007, specially the second half was also not good for the economy of Pakistan. The end of the year was bad from political social and economic point of views as during the last four days alone the national economy suffered massive losses during lamentation of Benazir Bhutto tragic assassination on December 27th.

Pakistan economy despite its resilience and strong fundamentals is facing daunting challenges to stay on course. The usual cynicism notwithstanding, for the last four years, the country enjoyed economic stability leading to remarkable progress in different walks of life. The strong fundamentals are still in place - a market of 160 million people with an emerging middle class, a strategic geographical location and an enviable record of economic reforms and policies. But what is missing is an illusive political stability in the run up to and after the general elections rescheduled for 18th February. The political and judicial unrest since March last and the horrific murder of Benazir Bhutto at year-end are not the end in itself but merely an indication of likely events to follow in a country where election results are looked with suspicion and the legitimacy of every new regime challenged.

POLITICAL INSTABILITY: For three quarters of the year, the political stability in the country with its consequential impact on the economic situation was subjected to violent pulls and pressures necessitating a paradigm shift in priorities and policies. Inflationary impact of rising oil prices, power outages and an upsurge in international food prices has had a direct impact on the purchasing power of the common man. A deteriorating law and order situation fuelled by a rapid rise in acts of terrorism further compounded the situation. As it was not enough, the 27th December Liaquat Bagh incident brought the entire civic and economic activity in the country to a grinding halt for the next 72 hours. The country fell into a deep sense of despair and outrage at the killing of a popular leader while the miscreants availed of the opportunity to perpetrate loot and arson at a horrendous scale not witnessed in the country so far.

According to official sources, the losses during rioting, strikes and arson are estimated at Rs. 100 billion mainly in Sindh and Punjab. Railway property worth Rs. 12.38 billion was destroyed including burning of 22 locomotives, 140 coaches, 24 railway stations and extensive damage to railway track, telecommunication and signaling systems. The insurance industry is facing huge claims running into Rs 6-7 billion on account of burning of 22 factories, 2000 cars and buses, and 1500 trailers along with cargo worth Rs. 500 million. The banking industry sustained a total loss of Rs. 1.2 billion as 699 branches were looted and damaged (of which 290 branches were totally destroyed) and some 50 ATM's removed by miscreants. 56 persons lost their lives, which cannot be measured in monetary terms.

CONFRONTING CHALLENGES: At the moment, the economy is facing multiple challenges. These challenges, inter alia, include wheat crisis, food inflation, stagnating exports, trade deficit, budget deficit, power shortage, lower literacy rate, poor health-care facilities, unemployment, poverty and a widening gap between the rich and the poor. The shortage of wheat is widespread and is mainly attributable to flawed policies and faulty supply line. Initially, the last wheat crop was over-estimated, deliberately or otherwise, at 23.3 million tons against a domestic demand of 22 million tons, and the government prompt permission for export to support domestic prices. When the shoe started pinching, the decision to import wheat (at a much higher price) was taken too late while the government also failed to control smuggling to neighboring countries. Earlier on, the same mistake was committed in the case of sugar sector also. As for power outages, the government over the last four years failed to match rising demand with the power generating capacity of the existing infrastructure.

Over the last few years, Pakistan's exports have stagnated while the imports are constantly rising. Last year, the trade deficit stood at $ 13.5 billion, whereas the deficit for the current year is threatening to be much higher. At the same time, the budget deficit at present 4 percent of GDP is expected to rise to 5 percent on account of international oil prices since the government is obliged to pay a subsidy of Rs. 13 billion per month to keep the local oil prices unchanged. In order to keep its balance sheet in tact, the government either shall have to expand its basket of revenue through new taxes collection or slash down on development expenditure or both. Already, FBR is finding it difficult to maintain its target of revenue collection as it could collect only Rs. 4 billion in December 2007 (as compared to Rs. 24 billion in the corresponding period last year) due to country wide riots in the wake of Benazir Bhutto's assassination. The target of revenue collection projected at Rs. 1025 billion in the budget may also not be achieved.

UNFAVORABLE SCENARIO: The SBP quarterly report, compiled before the 27th December incident while reiterating strong fundamentals of the economy, highlighted a number of grey areas requiring immediate attention by economic managers. It admits that the risks are increasing because of an unfavorable global and domestic economic environment. The nation will miss the GDP growth target of 7.2 percent while the current account deficit will expand beyond 5.2 percent of GDP posing a major threat to economic stability. The rupee is weakening against the dollar and FE reserves are under pressure and depleting. Core inflation would be to the order of 7.5 percent against the target of 6.5 percent and more difficulties will be created on account of poor performance of rise and cotton crops and deceleration of large-scale manufacturing. The textile sector is also on the decline for various reasons. That the threat of "renewed macroeconomic complications, after five years of good performance, would be heightened if prompt actions are not taken to correct the recent drift in the fiscal indicator:

While there should be no denying the fact as stated by SBP Governor that the next six months would be crucial for the macroeconomic management of the economy particularly the policy of subsidizing oil, power and food items, yet much more will depend on our capacity to manage our affairs in the right direction in the run up to and after the general elections. Election disputes are common in all electoral democracies. Whereas in mature democracies, such disputes are settled through understanding and judicial verdicts, but in emerging societies, the aggrieved parties resort to violence and rioting leading to chaos and mayhem. This has to be avoided in the larger national interest.