MOBILIZING INTERNAL RESOURCES TO FINANCE INVESTMENT NEEDS
TARIQ AHMED SAEEDI (firstname.lastname@example.org)
Sep 22 - 28, 2008
While government is yet to come up with a consolidated economic package that is probably under discussion of planning commission's panel of economists to ponder at ways of attaining targets it set for economic development, the measures it has already taken for ongoing fiscal year 2008-09 are to stave off economic imbalance or disturbance in economic indicators.
Reduction in subsidy was the foremost aim of present economic managers to offload fiscal burden. Therefore, government started to reduce subsidies from petroleum products primarily. Though gradual the removal of subsidies from petroleum products will more likely to worsen inflation, which is already hovering around double digit figure.
Ever since government decided to pass down increase in international oil prices back in March 2008 to consumers, domestic oil prices continued to rise regularly. Notably, ending subsidy exerted higher impact over prices of kerosene, light diesel oil, hi-octane gasoline otherwise consumers of gasoline had been receiving international price hike spillover from July 2007 to end of August 2008. Recent decrease in ex-depot gasoline per liter price has still sharp difference in comparison to total import cost.
According to an estimate calculated by Asian Development Bank, when total import price of gasoline was Rs. 34.22, domestic price in the country was Rs. 53.70, likewise as against import price of Rs. 50.27, Rs. 86.66 was charged per liter till end of August 2008. Despite that during this period rupee was depreciated by 11% against dollar, government continued to bag significant profit margins.
It is believed that price rise in Pakistan is spurred by soaring international commodity prices, in a way it is true; the question is that if external drivers of inflation clam down does government become able to remove domestic constraints in passing down benefits of international lowered price to final consumers? Probably not for government did not decrease price of gasoline in proportion to nose-diving crude oil price recently.
Similarly, monetary tightening stance adopted by the State Bank has not been effective enough to control the inflation. Asian Development Outlook 2008 report says since inflation in Pakistan is high commodity price driven, monetary tightening would unlikely to have impact on inflation control, rather this exercise in repetition would worsen further structural problems and "cause deflationary pressures on economy through unemployment and underused production capacity".
In almost one year, State Bank revised upward discount rates from 9% to 13%. Rise in interest rate is aimed at to make treasury bills attractive for investors so that government can minimize its borrowing from the central bank and fulfill its debt requirements through commercial bank operation. However, previous result exhibits that commercial banks are reluctant to invest in government securities. The report recommends moderate increase in interest rate to limit credit expansion. It says government borrowing from SBP was the single largest contributor to the 15.4% growth in broad money supply in last fiscal. It also advices authorities make policies to link nominal wage increase to up in productivity to hold back wage inflation. During last fiscal year, fiscal deficit was widened to 7.4 % of GDP than targeted 4%. In current fiscal year too, public debt kept on moving up.
With substantial flight of portfolio investment of 38% from the country in last fiscal year and slowdown in capital inflows government needs urgently to cork up fast depleting foreign reserves. This can only be possible through either formulation of policies to magnetize foreign investment or expansion in export. Later one also matches with the government's challenging objective of reducing trade deficit, which jumped to $15.3 billion by 57.4% in last fiscal and to $4 billion alone in July and August 2008. During two months, total revenue from exports was $3.6 billion and payment to import $6.2 billion according to SBP statistics. The report says government is able to exceed annual export target, but due to its increasing import bill and uptrend in international commodity prices it may fail fill gap in the import-export account. Further it notes slower industrial growth and weak global demand conditions even if make target of $22 billion achieved, trade deficit remains in place.
In course of diminishing fiscal deficit through subsidy cut not only industrial process gets hurt but also economic growth may become slower. Combined with power shortages hampering production, sluggish growth would result into enlargement of trade and current account deficit.
Bankruptcy of two investment banks: Lehman Brothers and Bear Stearns and tumultuous fall in shares of Morgan Stanley, and Goldman Sachs are also seen as warning for developing economies, closely integrated to US financial market. Bygone credit crisis in US mortgage market has already unrolled worldwide costly consequences of $500 billion in charges and loses branching out from the crisis. Pakistan is among such developing economies which are vulnerable to developments in US. An economist foresees affects of the recent development on Pakistan's financial sector. That would this affect be broadened on overall economy is questioned however.
ADO-2008 projects 20% inflation in Pakistan in FY09; the rate is higher than the government target of 12%, whereas in August consumer price inflation touched around 26%. It also projects current account deficit as 8% of GDP in this fiscal. Credibility of this projection reflects in the two starting month results of current fiscal year in which current account deficit widened agape to around $2.5 billion, which is 1.6% of GDP. The annual target is 6% of GDP.
The report puts forward advices for economic managers to maintain economic balance and to finance national investment needs through internal resources. As Pakistan's exporting products and destinations are too few only diversification in exports along with textiles, rice, leather and expansion of exporting destinations may help reducing trade deficit.
Competitiveness of exports should be improvised through investing in power sector and labor force training. Tax to GDP ratio in Pakistan is still at 10%. This ratio must be increased in order to generate revenue for the government, so must the saving to GDP ratio. In this regard, tax net should be elongated to cover under-taxed sectors, report suggests. But, the outreach expansion requires strategic design as, according to report, in following period services sector would albeit witness robust growth, tax measures might affect its progress. Mobilization of domestic resources to finance investment needs can lead to sustainable economy and meet budget shortfall. Improvement in saving would mitigate the need of cutting development expenditures.