Apr 06 - 12, 2009

Prime Minister Yousuf Raza Gilani-led coalition government has completed one year on March 24, but Pakistan's economic outlook still contains more downsides than upsides.

Officials claim that economy has entered "safe territory" as inflation is declining and the current account balance has recorded a surplus. On the other hand, critics say that the present government has failed to meet the economic challenges, as it had to go to the International Monetary Fund (IMF) for an emergency $7.6 billion loan to avert balance of payment crisis instead of tightening its belt, as earlier claimed by the president Asif Ali Zardari. The economy is still facing imbalances such as high saving and investment gap, high interest rates, persistent high inflation, falling exports, rising cost of doing business, severe energy crisis and depreciating rupee value.

Under IMF demands, the government raised interest rates that caused slump in the industrial sector leading to a decline in revenue collection and slowdown in exports proceeds. The officials have failed to tame inflation, which has hit the country's poor disproportionately. This year, the GDP growth is expected to be at 2 percent, lowest in 10 years, as irrationally high interest rates and tight monetary policy of the central bank is holding back the growth, according to the analysts.

Critics contend that the small improvements in some macroeconomic indicators have not been achieved due to efforts of the government but because of adjustments to the new realities. They argue that the improvement in forex reserves is due to donor inflows, inflation has declined because of low consumption by poor. The negative growth in the large-scale manufacturing indicates that the increase in imports was not in the industrial raw material rather its imports have gone down.

The government had been showing reluctance to swallow the bitter pill of an IMF loan, but the central bank's foreign-exchange reserves had shrunk 75 percent to $3.5 billion on November 8, the equivalent of one month's imports, and the country's failure to get cash support from friendly states including United States, China and Saudi Arabia forced the government to seek fund from the IMF, the most unpopular option. Critics say that Pakistan had to go to the IMF for an unpopular 'standby agreement' to avert an economic meltdown because the government suffered a 'trust deficit', which did not allow it to use other options with success.

The present coalition government is also criticized for unnecessarily delaying negotiations with the fund, as the government should have been approached the IMF four to six months ago when the economy was in a healthier position. The delay provided the Fund a chance to dictate its harsh conditions. It is worth mentioning that civilian governments in the country from 1988 to 1999 could not complete seven separate IMF loan programs because of tough IMF conditions.

The government has failed to reduce its borrowing from the central bank even after withdrawing subsidies on wheat, cooking oil, petrol, and diesel and kerosene oil. Slow foreign inflows and rising fiscal deficit has already increased the domestic debts by 10 percent to the record level of Rs 3.6071 trillion during seven months of the current fiscal year, from Rs 3.2661 trillion on June 30, 2008. The country's overall stocks of domestic debts, including permanent debt, floating debt, and un-funded debt, have registered a growth of 10.44 percent during seven months of the current fiscal year, according to the central bank.

The excessive borrowing from the central bank has also put further inflationary pressure on the economy due to excessive money circulation. Soaring inflation is not only affecting the macro economic indicators but also severely disturbing social life of the country's poor. The central bank in its monetary-policy statement on January 31 kept its benchmark interest rate unchanged at 15 percent. Despite high interest rate, the core-inflation remained at a higher side clearly indicating that this policy did not yield the required results.

The inflation has hit poor consumers harder than the more affluent ones, as for each one per cent increase in inflation, more and more people fall into poverty. The spiraling food prices and weakening Pakistani rupee pushed up consumer price index (CPI) inflation to an all-time high of 21.07 percent last month from a year earlier. The CPI in February was up 0.95 percent from January, according to the Federal Bureau of Statistics (FBS).

The country's industrial output plunged by 5.35 percent during July-January period of current fiscal year over the corresponding period of previous year, according to the FBS. The downfall in auto, textile, electronic, petroleum and other key sectors adversely affected the performance of large-scale manufacturing (LSM), which was slumped by 8.91 percent in January. Exporters fear that situation might aggravate in the summer when the power outages become a routine. The analysts believe that high interest rates, power outages, and high cost of utilities and raw materials are the main reasons behind the fall in the industrial output.

The country's tax system still needs to be reformed and more sectors need to be brought into the tax net to achieve a tax-to-GDP ratio at 16 to 17 percent, which is currently at around 10 to 12 percent. The experts consider low tax base a real challenge to the government and deem it imperative to bring non-taxpayers into the net. The revenue target seems harder to be achieved, as Federal Board of Revenue (FBR) could collect only Rs75.98 billion in February, against a target of Rs87 billion. There is a shortfall of Rs11 billion, hence the FBR needs to collect around Rs150 billion each month from March to June to meet the target. Another serious issue for Islamabad is to manage the fiscal deficit in the presence of massive revenue shortfall.

Officials blame the former government of Prime Minister Shaukat Aziz for not properly managing the economy from the beginning of 2007, particularly in terms of reducing unsustainable subsidies that chocked off the entire payment system of the country. Critics also blame the present government for ignoring the economy and giving more importance to narrow political considerations and political wrangling rather than sound economic management, which has landed the country in trouble.