Dec 6 - 12, 20

WikiLeaks and SBP could not have joined hands at a worse time to deal coup de grace to Pakistan's ailing economy. During the first quarter of FY-11, the economy has recorded 6.3 percent decline in revenues, 50 percent reduction in PSDP expenditure, 48 percent hike in defense expenditure (over and above the authorized limit), and 208 percent increase in government's bank borrowing. To use the term 'ailing' for such an economy is sure an understatement. WikiLeaks have pitted Pakistan against brotherly Muslin countries on one hand, and other Muslim countries against one another, on the other. The alleged pejorative remarks against county's president and leader of the opposition may be taken lightly by the nation who is not very happy with the democratic change that has made their lives almost impossible, but the confidence of investors, both local and foreign, who were looking for the right moment to stage a sort of comeback, would definitely be badly bruised.

SBP has once again confirmed that it is as shortsighted and incompetent as the ruling elite. The 50 basis points increase in the policy rate has infuriated even the cool and sedate elements of the business and industry circles.

The FPCCI president is reported to have said that the business community was expecting a significant reduction in interest rate as it was a consensus recommendation by economists that monetary policy should be eased to control adverse effects of recession. He further said the tight monetary policy was already hampering the industrial production, hurting exports, increasing joblessness besides pushing up the cost of doing business. One of the FPCCI vice presidents is reported to have said that in the name of reducing inflation, the State Bank policy measures had been generating more inflation. As a consequence of these steps inflation will not decrease but it will increase further, he added. Another FPCCI vice president said that the SBP was preparing monetary policy without studying the nature of inflation, which is not "demand-pull" type. KCCI president said the upward revision in lending rate would translate in multiplying the already sky-high inflation and increasing the cost of production that would further paralyze the already numb industries.

In the given scenario, it is not difficult to visualize the shape the economy is likely to take in the coming months. During the first quarter ended September 2010, it has already recorded a fiscal deficit of 1.6 percent of GDP which on an annualized basis translates into 6.4 percent. Domestic private investment is essentially bolstered by a low interest rate and free flow of credit. Both new and expansion projects heavily rely on a leveraged financial position. The government, through excessive bank borrowing, has managed to keep the private sector at bay leaving almost nothing or too little for it. SBP has done its part of villainous act by increasing the policy rate thrice in succession by bringing it up from 12.5 percent to the present 14 percent. Unfortunately, in pursuit of its inapt policies the SBP is hoisted with its own petard - its profits in the first quarter of FY-11 have plunged by 43 percent. High interest rate has not only stifled the economy but has also added significantly to the cost of doing business (CoDB). Its role in containing inflation can be debatable but not the impetus it has given to the overall rise in the cost of output. Incredibly high in the entire region, the SBP policy rate has not only added to the CoDB, but has also triggered high-scale defaults thereby raising the size of non performing loans on one hand and forcing closure of a number of industrial units, on the other - the resultant job losses notwithstanding. How far the high rate policy has stabilized the economy may not be easy to assess but the quantum of economic loss in the shape of closures and job losses has already been measured. While the State Bank never fails to highlight in its reports the need to contain inflation and therefore to raise interest rate, it never attempts to make a regional comparison and offer some logic for the policy rate being so out of this world. It also fails to tell why the tight monetary instance has remained ineffective in controlling inflation.

The situation on foreign investment front is the mirror image of what is happening on the domestic scene. The table presenting an overview of foreign investment inflow/outflow during the last five years is testimony to the fact that foreign investment is heavily dependent on political stability, irrespective of the form of government. The paradox is that the foreign investor feels more safe and comfortable during autocratic rules when corruption is comparatively low and frequent policy changes do not lurk around.

Total foreign investment during the first four months of current financial, on a quarter-on-quarter basis, has registered a decline of 35.7 percent, which shows that the investor confidence is still far from being restored. Any signs of political maturity and total elimination of terrorist threat not being in sight, returning of foreign investor to our uncertain and economically illogical market appears to be a distant possibility. The current developments on international and domestic fronts have also added to the pessimism on return of economic normalcy and improvement of investment climate

(Amounts in Million US$)

Foreign Direct Investment-1 3,521.0 5,139.6 5,410.2 3,719.9 2,150.8 596.4 467.7
% of Total Foreign Private Invst 90.9% 73.8% 99.6% 115.9% 78.5% 66.7% 77.0%
Private Portfolio Invst-2 351.5 1,820.4 19.3 (510.4) 587.9 298.4 140.0
% of Total Foreign Private Invst 9.1% 26.2% 0.4% (15.9)% (21.4) 33.3% 23%
Foreign Private Invst-3=1+2 3,872.5 6,960.0 5,429.4 3,209.5 2,738.7 894.8 607.7
Public Portfolio Invst-4 613.0 1,468.3 20.8 (544.1) (652.4) (9.9) (38.7)
% of Total Foreign Public Invst 100% 100% 100% 100% 100% 100% 100%
Other Public Invst-5 - - - -      
Foreign Public Invst-6=4+5 613.0 1,468.3 20.8 (544.1) (652.4) (9.9) (38.7)
Total Foreign Invst-7=3+6 4,485.5 8,428.3 5,450.2 2,665.4 2,086.3 884.9 569.0
Y-o-Y % Increase/(Decrease) - 87.9 (35.3) (51.1) (21.7) NA (35.7)

The steep decline in foreign investment since 2008 has eaten away all economic benefits gotten during 2002-07. Despite huge potential in our agriculture and energy sectors, the reluctance of foreign as well as domestic investors can only be attributed to the failure of our economic polices and poor governance. Coal-based and hydro energy are the most attractive segments of our potent economy. Our rivers loose 40 million acre feet (MAF) of water to the sea as against the standard loss of 10 MAF. By improving our water resource management and putting Thar coal to active utilization, we can change the fortune of this country. While we need better fiscal and monetary policies to achieve this breakthrough, we need to strongly deal with the unholy cartels operating in almost every sector of the economy, more so in the energy sector.