MAJOR ECONOMY ACHIEVEMENTS - A REVIEW OF ONE YEAR OF DEMOCRATIC GOVERNMENT
PROF. DR. KHAWAJA AMJAD SAEED*
Feb 23 - Mar 01, 2009
By the grace of Allah, the present democratic government would be completing one year on February 17, 2009. The already passed One Year was very eventful on several fronts. One wishes the present set up to be strengthened with consensus and the future ought to augur well for the democratic set up. This piece examines some important aspects of economic achievements. The challenges are too big and a long way is needed to develop a positive and result oriented response. However, efforts are being made to face the challenges. An analytical review with important aspects on economic front is presented in this piece.
This paper presents an analysis of:
A) Legacies Inherited.
B) Changing Environment.
C) Major Economic Achievements.
- Eight areas including Budget Deficit to GDP Ratio, Inflation, Foreign Exchange Reserves, Rupee Dollar Parity Rate, Tax Revenue, Export Performance, Workers Remittances and Foreign Direct Investment.
D) Emerging Trends.
A: LEGACIES INHERITED
The present democratic Government inherited various legacies which include: Low GDP - Tax ratio, heavy internal and external debt burden, growing population, power shortages, deficits including gaps in balance of payment, savings and investments and budget deficit to GDP relationship. Besides, due to Geo political compulsions defence of the country cannot be compromised in the larger interest of maintaining territorial integrity and sovereignty of the country. A long way is needed to provide an integrated solution to the foregoing challenges. However, the democratic government has started addressing these so that solutions are found and problems are minimized to water down the legacies inherited and reduce the adverse impact on the economy.
B: CHANGING ENVIRONMENT
The democratic Government has been facing with difficult economic problems - both on International as well on domestic fronts. Globally the Government faced three problems namely:
1. First high escalation in Oil Price: In New York Market, the oil price touched US$ 147 per barrel - unheard and unseen in the history of world.
2. Secondly, globally there were food shortages and food prices sky rocketed. In 35 countries of the world, there were food riots.
3. Thirdly, global recession has taken place and thus this external factor also adversely affected the economy of Pakistan.
These factors did not exist before the take over by the democratic government. At home, due to unwise policies of the previous government by not maintaining a buffer stock of wheat and exporting the excess wheat, critical shortage of wheat took place and common man suffered the worst on account of non-availability of atta and the current democratic government was forced by circumstances to ensure availability of atta throughout the country by importing wheat from abroad. Moreover, the criminal neglect of not tapping the power sector broadly in Hydro Electric front resulted in shortage of energy.
For the last over one decade, no earlier government ever bothered to tap the hitherto potential of 58,000 MW through Hydro Electric sources. Due to this, the economy of Pakistan on all fronts has suffered a lot and the common man received a rude shock. Moreover, the recent unfortunate Bombay blast event brought a big setback for Pakistan due to lack luster attitude of India on economic front towards Pakistan. Consequently, the much expected vibrance which would have been seen on the front of healthy and productive economic ties between Pakistan and India received a big jolt. However, we are hoping that the dust will settle and normalcy will take place on account of initiating confidence building measures by the Government of Pakistan and India in the larger interest of ushering in an era of prosperity for the common man and both the countries will also respond positively.
C: MAJOR ECONOMIC ACHIEVEMENTS
Efforts have been initiated to first develop and later operationalize Economic Stabilization Program in Pakistan. Due to this initiative, balance of payment deficit has reduced with tightening the belt of imports and persuading Pakistani expatriates to send more remittances to Pakistan from abroad.
1: BUDGET DEFICIT TO GDP RATIO
Based on discussions held for developing home ground solutions, the ratio of budget deficit to GDP has been contained to manageable limits. This is likely to be in the range of 4.00% to 4.2%. The European Economic Union considers 4% ratio as a safe limit. Secondly, due to tightening of our belt, we are also likely to end up with the same ratio on account of having initiated various efforts on domestic sources mobilization and expenditure reduction with a disciplined approach as advocated by the honourable Prime Minister of Pakistan. He announced a 40% cut on the expenditure of his Secretariat (excluding salaries) and urged upon all other Federal Ministries to follow the lead provided by him in terms of expenditure reduction.
Inflation is a big monster and has been fueled in Pakistan due to external and internal factors. On the internal front, supply shortages, lack of demand management, hoarding etc. have been instrumental in putting tremendous pressure resulting in high inflation. However, due to various efforts which were initiated by the Government, declining trend has been manifested in the following indicators:
a) Consumer Price Index (CPI).
b) Wholesale Price Index (WPI).
c) Sensitive Price Index (SPI).
However, there is a need to control core inflation so that it has least impact on the wage basket of the common man. This challenge will need to be met on time staggered basis.
3: FOREIGN EXCHANGE RESERVES
The present democratic government inherited foreign exchange reserves to the extent of US$ 16 billion. Unfortunately, due to import of oil and food items, exorbitant price was paid. The Foreign Exchange Reserves depleted by US$ 1.4 billion per month. These factors were beyond the control of the Government. However, fortunately declining oil and food prices have favourably helped the country to be a beneficiary. Firstly, the price of the oil abroad has declined considerably US$ 40 as against US$ 147 per barrel. Moreover, Pakistani expatriates abroad have been helping the country by sending remittances at a higher amount as compared to last year.
Further through the Emergency Fund of IMF a sum of US$ four billion was received and our total foreign exchange reserves aggregated to US$ Ten billion. Recently, the Government of Pakistan has developed an understanding with Iran to buy oil at deferred credit plan. Similar initiatives are on the way with other Middle East countries and accordingly this will help stabilize the level of our foreign exchange reserves to US$ ten billion.
4: RUPEE - DOLLAR PARITY RATE
Rupee has been falling against US$ since the take over by the democratic government due to BOP crisis. However, in the recent months, the dollar parity rate to Pak Rupee has stabilized at Rs. 79 to US$ 1. Efforts are being made to clamp down on foreign exchange dealers so that outflow of dollar from Pakistan through informal channels is brought to a grinding halt and accordingly the US$ parity rate will be strengthened in future. One can possibly project declining trend.
5: TAX REVENUE
Tax revenue collected by the Federal Board of Revenue stood at Rs. 553 billion (Net) during the first six months (July-December, 2008-09). The comparative figure for the corresponding period (July - December, 2007) was Rs. 435 billion. Accordingly a healthy increase of 27% was registered. Direct taxes registered a growth of 28% (Rs. 46 billion) which is more than the amount during the same period in the last year. Moreover, indirect taxes have also showed an increase of 27% (Rs. 72 billion). This is more than the amount during the comparative period of the last year.
6: EXPORT PERFORMANCE
Exports grew 10.6% during July-December 2008 and totaled US$ 9.6 billion. The comparative figure for the corresponding period of the last year was US$ 8.7 billion. The significant increase, despite domestic problems of power shortages, was mainly due to food group especially rice, non-textile items and other items.
7: WORKERS REMITTANCES
Workers remittances totaled US$ 3.6 billion in July - December 2008 as against US$ 3.1 billion in the comparable period of the last year. This has depicted an increase of 18.7%. Efforts are being made to motivate Pakistan expatriates abroad to use official channels for sending remittances. Accordingly, it is expected that by the end of June 30, 2009, there will be a rising trend in inflow of remittances in foreign exchange.
8: FOREIGN DIRECT INVESTMENT (FDI)
FDI is affected by several factors at home and abroad. However, during July ñ December 2008, FDI amount was US$ 2,327 million as compared to US$ 2,066 million in the comparative period of the last year. This manifested an increase of 12.6%. If privatization goes smooth, there is a possibility of increase in FDI. Various groups which contributed to an increase in FDI included communication group, financial business and oil and gas exploration.
D: EMERGING TRENDS
Economy of Pakistan is showing clear signs of improvement. A sum of US$ 0.70 billion was received in FDI in December 2008. A similar amount was received through remittances from abroad. The current account deficit declined to US$ 0.50 billion in December 2008. Government fiscal deficit remained on target during July-December 2008 at around 2% of GDP. If this trend continues, the expected fiscal deficit to GDP is likely to be 4% during 2008-09. This ratio is considered as safe limit even by European Economic Union. Consumer Price Index (CPI) has declined 25% by end of December 2008 and is expected to further decline by June 2009.