July 21 - 27, 2008

Domestic factors like political instability, an unstable law and order situation, capital flight, collapse of stock exchanges, coupled with external factors like a worsening of international financial crisis, and an unprecedented rise in global food and energy prices is testing the strength of economic fundamentals of Pakistan. Pakistan's economy grew at 5.8 percent in 2007-08, as against 6.8 percent last year whereas next year's target is set at 7.2 percent. Country's economic growth has been steady over the last few years but still remained below the potential. Average GDP growth rate was at 5.6 percent from 2002-08 and 3.8 percent from 1990-99. Quantitative analysis can be done for reasoning of high and low growth rates but the real issue is what would be the growth rate of future years' and how that can be achieved. Foundation of Pakistan's economy is shivering these days and apparently nothing concrete is happening to support that. In recent past, macroeconomic fundamentals improved, the real GDP growth rate increased to above 6 percent from 3.6 percent, annual inflation rate increased, and current account of the balance of payments posted an unprecedented large deficit. So far, Ministry of Finance has failed in mobilizing adequate domestic resources to finance development which is restraining the growth rate. This is one of the reasons why the actual rate of development is below the potential rate of development. It is also responsible for our dependence on external resources in the shape of loans, investments, subsidies; defer payments and grants to an extent that it has now impinged on our economic sovereignty. President General (Retired) Pervez Musharraf said in one of his TV program, "Awan-e-Sadar say", "Pakistan gets millions of Dollars of financial support from Middle East countries thus it has to compromise on certain domestic issues and accept the advise of the rulers of those countries", he was referring to Nawaz Sharif's return from Saudi Arab last year. This economic mismanagement has badly affected Pakistan's national interest; here national interest means national interest and not what most of the rulers define and believe.

From May 2007, Pakistan's economy started showing signs of stress. Last government did take number of good steps in their early years of governance but dent their performance with their own hands in the last year of power. Since then things have not been going in right direction. Real GDP growth in fiscal year 2008 has dropped below the 6 percent level for the first time in five years, annual inflation is poised to return to double digits (it's highest in 30 years), the fiscal deficit is forecasted to rise substantially, and the annual current account deficit, as a percentage of GDP, is projected to be at an all-time high. Foreign currency reserves are also depleting speedily, mainly due to higher oil import bill, depreciation of Rupee against almost all the currencies, and capital flight in Dubai's real estate. Reserves are now in the range of 10 billion dollars and will come down from this psychological barrier in next few days. In comparison to this, India and China has 313 billion dollar and 1200 billion dollar foreign currency reserves respectively. Dollar goes up by 3 Rupees in a single day transaction and no one tries to investigate the reasons for this speculation. KSE Index has dropped from 15,500 to 10,000 in just 3 months.

According to the state bank's report, the most recent data indicates that the slowdown in the economy during last fiscal year is principally in the commodity producing sectors. For example, the disappointing performance of important major crops contributed significantly to slowdown in agricultural growth during last year and so as it will happen in current year. On one side, it is vulnerable to weather conditions but on other country's polices also contribute in the performance of this sector e.g. government's policy on fixing the price of agri-produce, insufficient regulation on quality of inputs (pesticides, seeds, etc) and poor infrastructure (for water management, storage and processing facilities as well as lack of farm-to-market roads, etc). State Bank has allowed the insurance of agricultural products which is a good sign for this sector. This will defiantly enhance the yield, contribution in the national economy and in the growth of GDP. Share of agriculture in GDP is declining yet it is still the largest sector, contributing 21 percent to GDP and employing 44 percent of the workforce. More than two-third's of Pakistan's population lives in rural areas and their livelihood continues to revolve around agriculture and allied activities.

Bearing in mind the political unrest which started in March 2007 and other mega events in the country occurred since, the final GDP growth rate of 5.6 percent is relatively satisfactory though it should be higher. Over all the economy grew at an average rate of 6.6 percent per annum for the last six years which provides a source of relief and optimism that the country can regain its past macroeconomic stability provided correct actions are taken at the earliest. With every passing day, it is becoming difficult to handle the situation; the sooner corrective measures are taken the better it will be.

Last year, agriculture and manufacturing sector has under performed and were not able to achieve their targets. In current fiscal year, it is not expected that agriculture sector will perform well; Caretaker government didn't give reasonable support price to farmers in November last year, which has created troubles in the shape of wheat shortages this year. It is expected that the situation will further aggravate in coming days. In order to over come this problem, government will have to import wheat thus will consume millions of dollars from development budget.

In order to curb domestic inflation, SBP started monetary tightening policies in April 2005. In recent days it has further tightened the policy but the positive outcome has not yet come rather on one side it has created the bearish trend in stock exchange and on other inflation is on the rise instead of decreasing or even maintaining the same old level. It is also being said that in next quarter, SBP will further take tough steps in controlling inflation. God knows how that will affect the economy. SBP has little success in controlling the inflation, which has now become more an administrative issue then a policy matter. High rate of inflation can only push the GDP growth rate down.

Large-scale manufacturing has failed in meeting its growth target for the fiscal year 2007-08. Though we are in the first month of current fiscal year, yet it is becoming obvious that growth target of manufacturing sector will not be met. Textile industry in Faisalabad has gone for strike for 4/5 days. It is not possible to recover the loss of strike of a day then how will they be able to cover 5 days loss. It will have a compounded affect in rest of the year while keeping in mind the international price trend and domestic factors mainly political unrest.

The only performer seems to be the construction sector but the way cement and steel prices are going up it will be difficult for it to maintain the growth. There is little chance of reliable supply of electricity in this fiscal year thus will badly affect the overall growth of the economy in at least this fiscal year. Minister for Water and Power claims that load shedding will be eliminated from the country by August 2009. August 2009 means next fiscal year so forget the GDP growth of current fiscal year. No serious effort and no concrete steps have been taken in last 6 years in gas exploration in Balochistan due to bad law and order situation in the province. Instead of improvement in law and order situation, things are getting worst with every passing day. Gas reservoirs of Pakistan are depleting speedily and by December 2008, gas load shedding will also start. In this situation, how can Pakistan achieve its GDP growth targets?

The services sector has emerged as the main driver of economic growth and has remained the economic powerhouse of Pakistan for some time. The services sector has surpassed the growth target of 7.1 percent and grew by 8.2 percent in 2007-08 as against actual achievement of 7.6 percent last year. The services sector has made a contribution of 74 percent to the GDP growth in fiscal year 2007-08. It must be understood that this sector will not be able to keep itself away from the unrest in economic and political front and will be influenced in short to medium term. The sector consists of the following sub-sectors: Transport, storage and communication; Wholesale & Retail Trade; Finance and Insurance; Ownership of Dwellings; Public Administration and Defense; and Social Services. These sectors collectively absorb approximately one-third of workforce in Pakistan. Growth in the services sector is mainly attributed to the robust performance of the finance & insurance, wholesale and retail trade, public administration and defense, and social services sector. The service sector has proved to be the only sector which pushed the growth rate up and surpassed its target. The contribution to economic growth is dominated by the services sector with almost three-fourth stake. The services sector has out performed in last few years and provided much needed support for sustaining a relatively higher growth rate for the economy. Financial sector has grown tremendously but now it is also not in very good shape. In old good days, corporate/project finance was considered to be the most profitable department of the bank but in last few years', consumer finance department took that position. Banks issued credit cards, short term loans, car finances blindly and now they are facing the consequences. State Bank's former Governor, Dr. Ishrat Husain was in great favor of consumer finance. He complained that Pakistan has only 5 percent share of consumer finance whereas Malaysia has over 60 percent and suggested banks to follow middle class consumers more aggressively. It is difficult to understand why things are evaluated in isolation, Pakistan has its own problems, without having a reasonable growth in the manufacturing sector, consumer finance has a negative impact on the economy. There are no two opinions that manufacturing and agriculture sector is significantly ignored in last five years and whole economy has been shifted towards trading and relied on consumer's spending. Pakistan being a poor country, has to import over 90 percent of its energy needs can't afford to have a consumer base economy. For the current fiscal year, financial sector will not be able to recover their losses, there are number of banks which are booking huge defaults both from small consumers and textile industry.

Since long we have been observing that textile industry of Pakistan is facing difficulties. As a matter of fact the real issue is that numbers of textile owners have taken money out of their businesses, but are demanding more relief from the government to support their companies instead of changing their way of governance. The existing situation of the textile industry will remain intact in at least current fiscal year thus there is no likelihood of exceeding growth targets rather there are more chances of not achieving the targets. Once the international market is slipped from the hands of a local manufacture then it will take substantial time to catch that again. It is a competitive environment where India, China, Bangladesh and others are ready to fill the gap and absorb the potential.

In short, Pakistan's current economic situation is not favorable to support its GDP growth targets unless and until everyone takes the responsibility and contribute. Pakistan might not get foreign direct investment as it got in past therefore it has to mobilize its big investors but at the same time these investors have to change their attitude as well. There are number of big players who don't want to invest their money yet they want the projects and high returns. The matter gets worst when they take money out of businesses and request for subsidies and relief from government in the shape of discounted prices of input, lower electricity and gas tariffs and lower interest rates. Under current situation, there are chances that inflation will increase, oil prices will further shoot up, law and order situation will remain out of control, no privatization or if it happens it will not get the best price (Supreme Court will not intervene this time, for sure). In this situation, there is a need for greater transparency and accountability in regulating the economy. One of the major problems of economic development has been the expenditure in unproductive areas. Revenue shortfalls produced by slowing economic activity and expenditure overruns may limit fiscal space and reduce public investment, which in turn may affect private investment and growth. Economic environment is not in good shape world wide. Oil prices are increasing continuously without realizing how much it is damaging the world's economy in general and developing economies in particular. Unprecedented global price hike in energy, ongoing power and gas shortages caused by an aging energy infrastructure, chronic under investment in expansion and maintenance,, slow production and constrain domestic and foreign investment and continuous political unrest are the major player in hampering the growth performance. Wit this background, it wouldn't be wrong to forecast that the forecasted GDP growth rate will be difficult to achieve. Therefore, it is advisable that economic team of government of Pakistan must take corrective measure at the earliest to address all the core issues and provide relief to poor people.