GDP UNDER PRESSURE

SHABBIR H. KAZMI
Nov 23 - 29, 2009

Pakistan GDP has three major components while nearly half is contributed by the services sector. The remaining is equally shared by industries and agriculture sectors. Lately, it has been realized that if GDP growth rate has to be accelerated special attention has to be paid to agriculture. It would automatically provide impetus to industries because two of the large scale industries are based on agriculture.

One of the positive points also highlighted by the central bank in its recently released annual report is that a gradual recovery is underway. Country's GDP is expected to post growth between 2.5 and 3.5 per cent for the current fiscal year as against 2 per cent registered for the last fiscal. However, International Monetary Fund (IMF) has projected GDP growth at 2 per cent for 2009-10. The reasons for disparity in projection need to be explored.

Pakistan's economists don't have consensus on the growth rate. While the pessimistic analysts project a growth of 2.5 per cent people having optimistic view pin their hopes at 3.5 per cent. The projection depicts only the mindset.

The first group is a little cautious one and does not wish to face any disappointment in case the economy remains subdued. The other group sets a higher target and also wants the supporting policies. They say if GDP growth rate is below the population growth it is not only disappointing but also will not help in poverty alleviation. The IMF also follows a conservative approach because it believes often the borrowing countries fix ambitious targets but most of the times fail in achieving the set benchmarks.

There are groups which strongly believe that the country is capable of achieving above 5 per cents GDP growth rate. This requires faith in the country, appropriate policies and above all the will to achieve the targets. The disappointing fact is that the country is often termed as failed state. This is only because the decision makers failed in coming up with appropriate policies. One such example is obstinacy of the group which still believes that following a tight monetary policy alone can help in bringing down rate of inflation in the country. Their basic premise is incorrect because inflation in Pakistan is cost pushed. Efforts are made to regain Pakistan's comparative advantage and improve competitiveness of the local manufacturers.

Another interesting example is hike in cotton yarn price despite forecast of production of around 17 million cotton bales during this season. Theoretically, production of nearly 4 million additional bales should have brought down cotton and yarn prices in the country but an opposite movement is evident. While the spinners are desperate in boosting export of yarn made-ups manufacturers and exporters are demanding imposition of ban on export of lower counts yarn. Ideally textiles and clothing industry should try to export more of value products but its desperation to export yarn should have some reasons.

It is known to all and sundry that the spell of load shedding of gas and electricity would be extensive and intensive this year. Therefore, if the operations of textile processing units and made-ups manufacturers are expected to suffer from production losses, spinning mills should not look at them. This is a myopic view which may help spinners make some short term gains but higher yarn prices would certainly add to the woes of manufacturers and exporters of value added products

Keeping in view the recent sugar crisis and expectation of lower production during the ongoing crushing season the policy makers are repeating the past mistakes. They have once again decided to import refined sugar contrary to the advice of millers. An expected import of about one million tons refined sugar would not only erode country's foreign exchange but also force the government to pay huge subsidy.

Import of one million tons sugar will erode forex reserves by nearly US$700 million and quantum of subsidy would be dependent of the retail price at which the government chooses to sell sugar. The landed cost of imported sugar will be around Rs65/kg as against a price of Rs40/kg fixed by the Supreme Court of Pakistan. This translates into a subsidy of Rs25,000/ton and a total outlay of Rs25 billion. Aren't the figures mind-boggling?

Within the services sector financial sector has substantial share. With the rising delinquencies some of the financial institutions will be forced to make higher provisions and consequently post losses or marginal profit, at the best.

Three of the major industries, textiles, sugar and cement continue to face bleak outlook under the prevailing conditions. Despite providing moratorium to textile units their financial health has not shown any improvement. Curtailing of number of crushing days by sugar mills and closure of about half a dozen cement plants would only add to the burden of non-performing loans.

The only point of consolation is that most the problems faced by Pakistan economy could be overcome by showing the resolve not only by the government but also by other stakeholders. Reduction in interest rate can help in attracting fresh investment in the manufacturing sector and also improving financial condition of many industries which suffer from excessive borrowing. Duration of electricity and gas can be curtailed by containing rampant pilferage and blatant wastages.

Governor State Bank of Pakistan is right in saying that the borrowing made lately has provided the much needed breathing space. Instead of following the IMF dictation blindly the planners must come up with a home grown plan, formulate supporting policies and show resolve that they are serious. Hike in electricity and gas tariff will fuel inflation and erode competitiveness of the local manufacturers.