Oct 13 - 19, 2008

There are growing concerns about Pakistan's ability to meet its external commitment. Many of the critics are still of the opinion that the country does not face as precarious situation as it faced after impositions of economic sanctions in 1998 during the regime of Mian Nawaz Sharif. However, others are of the opinion that the country needs some breathing space to overcome its present crises to recoup its inherent strengths.

There are critics who are constantly saying that the country faces virtual default. They also express their opinion in view of persistently downgrading Pakistan's sovereign credit rating. However, they are fully cognizant of the internal and the external factors responsible for Pakistan's deteriorating economic condition. There are also supporters willing to extend a helping hand but also want the government to take certain measures, which are not approved by the local experts. Lately, a new group of donors has been established to come up with a bailout program. Earlier, the International Monetary Fund also made an offer to consider Pakistan's case, if a formal request for assistance was moved.

There cannot be two opinions that Pakistan faces a real precarious situation and it needs support today rather than tomorrow. There are some easy options like seeking assistance from the international donors but the options have to be thrashed out extensively. Borrowing for the sake of settling outstanding liabilities may be the easiest way but would plunge the country into deeper problems. However, most of the critics fear that the present regime suffers from two contentious problems: lack of expertise to make difficult decisions and the habit of sweeping the issues under the carpet.

Lately, the finance minister has announced the economic stabilization package of the government. It salient features include 1) further increase in POL prices and electricity and gas tariffs; 2) removal of subsidies, especially those on electricity by the end of FY09; 3) privatization of public enterprises in the Oil & Gas sector; 4) increase in import duties and increase in LC margin on 350 items and 5) curtailment of development expenditures.

As stated these measures are aimed at achieving macroeconomic stability by strengthening the balance of payment position and reducing external imbalances, by removing numerous price distortions in the economy. This in turn should help arrest the depletion in the country's foreign exchange reserves. However, most of the critics do not approve these measures because they believe that the measures just could not help in overcoming the prevailing problems. Some of the critics go to the extent of saying that these measures would further aggravate the prevailing crises and push the country towards default. And in order to avoid the default country would be forced to borrow huge amount.

The IMF has reportedly termed these measures insufficient to stabilize the economy or to contain inflationary pressures. The Fund has also advised that the stabilization package should not be overly dependent on external financing and has urged for further reduction in liquidity and devaluation of Rupee. Whatever the IMF has suggested is nothing new but the recipe which had plunged the country into vicious borrowing circle in the past. Pakistan must not accept IMF's advice.

Any person capable of understanding Pakistan's current economic woes would agree that the government needs to do more in order to increase tax collection, promote export growth and restrict imports of nonessential items. However, he fails to understand the rationale for draining liquidity from the financial system and further devaluation of Rupee. In fact any such attempt can only exacerbate an already volatile situation and has extreme negative implications for the economy.

Pakistan's foreign exchange reserves have reduced to half mainly because of two factors, hike in import bill (because of skyrocketing crude oil prices) and local exporters losing their competitiveness in the global markets (because of rising cost of production and cost of doing business. Unless these issues are addressed foreign exchange reserves would continue to deplete and borrowing could not help in bridging the gap.

Pakistan was lucky enough in the past to get a deferred payment facility for oil from Saudi Arabia during the regime of Pervez Musharraf. The country was still willing to extend such a facility but maligning by certain television channels involving Saudis with Al Qaeda seems to have frustrated the Saudi government. There seems to be no warmth in relationship. The government of Pakistan must try to resolve this issue because the country needs this facility.

It may not be wrong that even in countries like the United States people have changed their habits as regard to consuming POL products but the government as well as Pakistanis has not changed a bit. No effort has been made to conserve energy, optimize its use and remove inefficiencies and wastages. Therefore, rising oil import has affected Pakistan the most. Each hike in electricity tariff increases power theft necessitating further increase in tariff and the vicious circle continues. No organized program has been initiated in the industries to conserve energy and power theft is also rampant in certain areas/industries.

For decades experts have been saying that Pakistan is losing its competitive advantage and measures need to be taken to regain this. However, policy planners have been failing in even understanding the reasons of erosion in competitiveness. Two factors: hike in interest rates and persistent increase in electricity and gas tariff have rendered local manufacturers uncompetitive in the global markets.

While most of the central banks around the globe take immediate and appropriate measures to support the local entrepreneurs, State Bank of Pakistan has been raising interest rate to arrest inflation. The policy is being followed despite sever criticism by trade and industry. Governor Dr. Shamshad Akhtar has been saying that the policy has helped in containing inflation. But she hardly talks about the adverse impact of this policy on industry.

Some of the analysts say that the policy has virtually capped new investment.

In order to curb imports and boost exports additional productive facilities have to be created to produce exportable surplus. Two of Pakistan's large scale industries textiles and clothing and sugar and allied have the potential to pull the country out of prevailing economic chaos. Pakistan can obtain over 20 million bales of cotton from existing area under its cultivation. Producing this much cotton can help in avoiding its import. Availability of sufficient cotton within the country would stabilize its price and let the local mills to get optimal capacity. However, the government policy should discourage export of low value-added products.

This year the country is expected to face shortage of cotton. Therefore, an integrated strategy is needed to achieve the highest realization from each kilogram of cotton produced locally. The first step is to impose temporary ban on export of cotton and yarn up to 30 counts. This will improve the supply of yarn and stabilize its price in the domestic market. Local industry has the first right on the indigenous cotton and the announcement of temporary ban must come immediately. The central bank should also stop providing export refinance on cotton yarn up to 30 counts.

Sugar industry is capable of earning huge foreign exchange through export of sugar and ethanol. It also has the potential to supply nearly 3,000MW electricity from the power houses presently installed at various units. Power generation at sugar mills would not only meet electricity requirement of the adjoining areas but also save millions of dollars because of burning of baggase. Pakistan should also benefit from locally produced ethanol and contain its POL import bill.

Therefore, the government should take all the necessary steps to enhance production and yield sugarcane. Reportedly, local mills have an aggregate sugarcane crushing capacity of about 6 million tons. Over the years, at an average capacity utilization has remained around 50% mainly because of shortage of sugarcane. It is often said that production is constrained by inadequate supply of water. It is partly true but lower yield of sugarcane is mainly because of harvesting of low yielding varieties and cultivation of sugarcane in the cotton growing belt.

Pakistan should also go for cultivation of corn in a big way. The crop cycle is spread on less than 150 days and the same land can be utilized for harvesting the second crop. Cultivation of corn on the massive scale can help in containing edible oil import bill as well as earn extra foreign exchange through its export.

In order to boost production of major crops, achieve higher yield, ensuring adequate supply of various types of fertilizers is a must. Currently the country faces shortage of nearly half a million tons of urea. With the availability of enhanced credit to farmers, Rs 250 billion during the current financial year, and increase in support price of wheat and sugarcane demand for fertilizer is expected to take a quantum leap. Import of urea has become a big burden and two grass-root urea plants must be established as soon as possible. The government must facilitate establishment of these plants by offering soft term credit and guaranteeing feedstock price.

For the opponents of guaranteeing feedstock price it is suffice to say that if the country is capable of producing urea at less than $200 per ton, its import at $850 a ton is a criminal waste of country's foreign exchange reserves and big disfavor to the local entrepreneurs. It may also be noted that fertilizers plants getting gas from Mari gas field do not get feedstock at subsidized rate. IT IS SALE OF LOW QUALITY GAS AT A DISCOUNTED PRICE. To ensure ample supply of gas from Mari field to fertilizer units, the government must stop supply of gas to power plant. It is blatant violation of 2001 Fertilizer Policy because the government had dedicated this field to fertilizer industry.

Lately, auto industry was a big contributor to Pakistan's GDP growth. Not only that it contributed billions of rupees as duty and taxes, it was also driving growth of financial institutions and insurance companies. However, during August its sales declined to a little more than 50%. The situation is real alarming because the industry provided employment to about half a million people. It is on record that manufacturers of parts and accessories as well as the assemblers have invested millions of dollars to enhance the capacity; they were gearing up to produce 500,000 vehicles annually in the country. If the domestic sales are going down, efforts should be made to export locally made vehicles and earn extra foreign exchange.


Negotiations with the Saudi government must be completed on fast track for the facility of deferred payment of crude oil and POL products. At the same time Pakistan should also take the best advantage of 'Friends of Pakistan' forum. Members of this Forum should form joint venture with Pakistani entrepreneurs for the creation of new productive facilities rather than extending credit.

It is true that Pakistan needs the support of international financial institutions to overcome its current problems. However, policy makers should come up with their very own program and should also avoid following their advice blindly. Pakistan has enormous potential to achieve above 7% GDP growth rate but has to come up with prudent policies.

Financial services sector is relatively strong and problems of agriculture and industrial sectors must be resolved at the earliest. Risk of allocation of Rs 250 billion credit to agriculture must be mitigated prudently to enhance production and productivity.

New manufacturing capacities must be created without further delay to achieve higher exportable surplus. At the same time efforts should also be made to improve competitiveness of the local manufacturers.