KEY ISSUES IN MANAGING PAKISTAN'S ECONOMY
AROOJ ASGHAR (email@example.com)
Aug 18 - 24, 2008
Pakistan is currently facing various economic challenges including heavy external and domestic debt; high fiscal deficit & inflation and capital flight, weak balance of payments etc... There is no doubt that the present government has taken over the affairs of the country at a crucial time and they have to tackle with a lot of issues in short span of time. In past, a lot of emphasis was placed on investment in the stock exchanges, real estate, construction, trading of mainly in mobile phones and cars instead of supporting manufacturing concerns and initiation of mega projects which would have created millions of jobs. The interconnection between economic growth, poverty reduction, structural reforms and improved governance is fairly weak in the case of Pakistan . Ideally, macroeconomic stability and the consequent rapid economic growth help reduce poverty but this couldn't happen in Pakistan . It is important to strengthen the foundations of macroeconomic policies and to remove microeconomic distortions which are affecting key sectors of the economy.
Macroeconomic stability can't be achieved unless fiscal deficit is reduced, have surplus balance of payments with low rate of inflation, and a balanced profile of external debt. Under current situation, none of these measures are achievable. Government is trying to reduce fiscal deficit by pursuing a combination of policy measures i) mobilizing additional tax revenues ii) reducing subsidies iii) containing defense expenditures. SBP is continuously tightening the monetary policy though not getting the expected results. However, with the mounting of inflationary pressures in recent months, the State Bank is taking measures to tighten its monetary policy; the interest rates are expected to further go up in coming months.
GDP GROWTH RATE
Pakistan's average GDP growth rate for the last four years is above 6% whereas projected growth rate for the fiscal year 2008-09 is also 6%. Since last May, country is passing through a rough patch. While keeping in mind the current political and economic situation, it appears that Pakistan will not be able to achieve its targeted GDP growth rate of 6%. The consumer price index (CPI) and the wholesale price index (WPI) are increasing months after month which is in double digit now. Experts believe that the real GDP growth cannot be more than just 3% unless otherwise any miracle happens.
The State Bank miserably failed to contain the 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. Food inflation is expected to remain high in coming weeks because Ramazan is approaching.
Pakistani people have been listening a lot about the good governance by previous rulers though their style of governance was not different than most of the rulers of the county. It's now high time to promote good economic governance in the country. Transparency, consistency, logic, equality, fairness and national interest should be kept in mind while forming policies. Good governance requires transparency, elimination of nepotism, fiscal discipline, curtail unnecessary expenses, reduction in poverty and last but not the least promoting merit in decision making. While looking at this short list of prerequisites of good governance, it is not difficult to assess whether country would be able to achieve the target of good governance in next 12 months or not.
DEVELOPMENT OF INFRASTRUCTURE
One of the biggest challenges Pakistan is facing is the development of physical infrastructure i.e. power, oil and gas pipelines and terminals, ports, railways, roads and highways and airports. In last eight years or so, nothing much has been done in the exploration of gas in Balochistan. Now due to worst law and order situation in the province, it is more difficult to convince private sector especially foreign companies to explore the area. Presently, shortages are hiking up the cost of doing business and eroding the competitiveness of Pakistani exports. Gas reservoirs of Pakistan are depleting speedily and gas load shedding will also start by the end of December 2008.
Pakistan is presently facing shortage of electricity or nearly 20% of its installed capacity. What ever be the reason of this shortage, one thing which is difficult to ignore is that not a single megawatt was added in national grid in last eight years or so, now accumulated shortage is hampering the economic growth. Policy makers should seriously look into this matter, permit WAPDA to install power plants and stop looking at the private sector i.e. IPP. There is little chance of reliable supply of electricity in this fiscal year thus will badly affect the overall growth of the economy. Ministry of Water and Power is working on elimination of load shedding from the country most probably by August 2009. August 2009 falls in next fiscal year hence there is no chance to get positive results in current fiscal year.
Agriculture is the back bone of our economy. It is very important to support this sector. The support price of wheat has increased from Rs510 to Rs625 per 40 kg. It is also vowed that there will be a revision of the support price for the next year's wheat crop in August-September i.e. before the next sowing season keeping in view the input cost and prevailing international prices. Government has also shown concerns over availability of credit to agriculture sector. Disbursement of loans to farmers has been limited compared to industry and other sectors. At present regretfully agriculture's share is hardly 4% of the banks' total debt portfolio. Though overall it sounds to be a good budget as far as agriculture is concerned but one has to see how it translates in reality. Government should focus on this sector to raise its yield and productivity.
INCREASED PUBLIC EXPENDITURES
Agriculture sector growth in Pakistan is highly correlated with availability of water for irrigation. The reservoirs built in the 1960s and 1970s have made a huge difference to food security of Pakistan . But these reservoirs are getting silted while the requirement for water is on rise. Thus public expenditure should be given priority to water resource development through new reservoirs, rehabilitation of existing canals and barrages, lining of water courses and conservation of water.
The excess of imports over export, or trade deficit, has received considerable attention from policy makers. Increasing trade deficit is a natural consequence of fiscal imbalances. It is estimated that trade deficit may increase during the current fiscal year while it would be difficult for the government to achieve the export target of $ 22.1 billion. Pakistan annual trade deficit for 2007-08 closed at $20.745 billion, which is 52.92% more over $13.563 billion for 2006-07 because of food import bill and steep increase in prices of crude oil in the global market. It is now important for the private sector to take the lead in for economic growth of the country. Under current circumstances, Pakistan needs high rate of profit through increase in exports. Likewise, increase in exports will enable the country to generate foreign exchange earnings and overcome the foreign resource constraints for greater imports. Therefore, higher economic growth can only be achieved through growth in exports.
The role of microfinance in poverty alleviation and employment generation has been widely accepted. The government has established a micro-credit bank (Khushali Bank), as a prototype institution for providing credit access to poor households. This bank has so far reached out to 500,000 poor households throughout the country. The work of this bank has been reinforced by the Pakistan Poverty Alleviation Fund, which through a network of partner organizations in non-governmental sector has reached out to another 300,000 poor families.
In short, Pakistan's current economic crisis is more of an administrative nature than of bookish theoretical nature. It is, therefore, imperative to address administrative issues like how to make sure the smooth supply of wheat and other food items, how to build confidence of investors, what steps to be taken for panic selling and to block the declining stock exchange index etc... It is also important to understand that those who intent to take their money out of country will do that irrespective of the dollar rate therefore it is required to address the dollar appreciation issue through practical means than through the bookish theories. Increase in dollar rate also doesn't mean that there is a capital flight, chances are also very high that people are converting their rupee account to dollar account thus it would not be entirely correct to associate dollar appreciation with capital flight. The crisis of flour, power, and unemployment has 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, 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 government take corrective steps. Being a nation, it is out duty to contribute in the betterment of the society in general and for economy in particular. The private sector must take the lead in materializing state polices. Private sector can provide better management, cost effectiveness; and healthy working environment. They must also undertake to look for new markets and new products. Today our exports are highly concentrated in few items and going into few markets. More than 75% of our exports originate from four items, namely cotton, rice, leather and sports goods. Similarly more than one-half of our exports go to 7 countries in the world. This state of affairs will not take us at higher export path. Diversification of exports, both in terms of commodity and regions will be needed. A more diversified export mix may enable the country to accomplish stability and growth oriented policy goals. In addition to this, the Government should play its supporting role in achieving the objectives of raising revenues. The government must provide a strong macroeconomic environment, an environment where exchange rate is stable; a comfortable foreign exchange reserves; low cost of capital; low inflation, low budget deficit and no debt crisis and consistent and transparent macroeconomic policies. The nation will soon hear great news but that mega relief is not sufficient to restore the pride of the nation unless and until everyone take the ownership and responsibility. Therefore, it is the need of the day that both private and public sector cooperate with each other and nation's unity can ONLY bring economic stability in the country.