DEVALUED PKR HURTING GNP
Mar 28 - Apr 3, 2011
Diplomacy is not just restricted to politics but its use in economics has also been increased. Once falling under the category of 'underdeveloped', third world economies are now referred to as 'developing' economies. But, CIA is not as diplomatic as IMF or World Bank. And of course, it is not expected to be so. The CIA World Factbook 2010 has described Pakistan's economic history in the following words: "Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes, low levels of foreign investment and declining exports of manufactures. Faced with untenable budgetary deficits, high inflation, and hemorrhaging foreign exchange reserves, the government agreed to an International Monetary Fund Standby Arrangement in November 2008. Between 2004-07 GDP growth in the 6-8 per cent range was spurred by gains in the industrial and service sectors despite severe electricity shortfalls. Poverty level decreased by 10per cent since 2001, and Islamabad steadily raised development spending in recent years."
The CIA report has brought to light the following facts:
1. Pakistan's economy inherently suffers from internal political disputes
2. GDP growth during the period 2004-07 was on a high
3. Poverty level during the previous rule decreased by 10 percent (which now stands at around 40 percent)
Since these observations are likely to hurt the 'democracy hawks', we should have left it at that. But, since our topic warrants tracking down of rupee depreciation, we must admit that this too was the outcome of the infamous political feud that took place between the democrats and autocrats in 2007-08.
PAKISTAN'S GDP/GNP (MP) 10-YEAR
(Million Rs except where stated)
YEAR GDP (1) NET FACTOR INCOME FROM ABROAD (2) GNP (1+2) GNP GROWTH PER CENT PER CAPITA GNP (RS) $ EXCHANGE RATE PER CAPITA GNP ($) 2000-01 4209877 (54482) 4155391 - 29605 58.44 507 2001-02 4452654 23665 4476319 7.7 31266 61.43 509 2002-03 4875646 151812 5027460 12.3 34260 58.50 586 2003-04 5640580 124478 5765058 14.7 38524 57.57 669 2004-05 6499782 134461 6634243 15.1 43495 59.34 733 2005-06 7623205 149901 7773106 17.2 50030 59.86 836 2006-07 8673007 157631 8830638 13.6 55830 60.63 921 2007-08 10284380 209801 10494181 18.8 65193 62.55 1042 2008-09 13095039 407867 13502906 28.7 82455 78.24 1054 2009-10 14668428 570615 15239043 12.9 91515 83.58 1095
Pakistan's stable economy saw the dollar range-bound for eight years. The result was a steadily growing per capita GNP in an inflation-controlled economy - inflation ranged from 4.4 percent in 2000-01 to 7.8 percent in 2007-08. The GDP and GNP (mp) in rupee terms will appear to rise much faster during 2007-09 which was essentially the result of higher inflation during those years. The changed global environment and our economic policy deficit, particularly during the last three years, have rendered our economy bereft of sense and direction. Till 2007, we were working on the unmistakable theme of consumption-led growth. If it was madness, then at least there was a method in it. After condemning that theme, we dumped it but never came up with any alternate workable idea. If it has to be production-led growth, then what measures have been taken to achieve it? Has it to be an exorbitantly high benchmark interest rate? We have neither been able to control inflation nor have we brought down the interest rate to the regional level. The result is that the mainstay of our economy, services sector is also threatened by a sharp downturn.
GDP and GNP as measures of economic growth have long been criticized by world economists. These measures, they contend, give an overall view of increase in national output and income without bringing into focus the actual distribution of this income among various segments of the society. Unemployment rate, below-the-poverty-line existence, government spending on education and social sectors should therefore be kept in mind while deciding on the progress a particular economy seems to have made on the basis of its GDP and GNP. The distinction between GDP and GNP is made on the basis of net factor income from abroad. In the case of certain economies, for example US, this income is very nominal and therefore does not draw a dividing line between the two. In Pakistan's case, however, where sizeable amounts are received as workers' remittance, a distinction between GDP and GNP must be made. Pakistan's GNP suffers on three accounts. First, it gets hurt by the depreciation of domestic currency; a forty percent rupee depreciation, during the last three years or so, has diminished its size in dollar terms. Second, in a high-inflation economy, it gives a false sense of growth. And third, it does not represent our potential real output; if measured, we will end up with a huge GNP gap.
A regressive monetary policy and lax fiscal management have withheld the economy from growing to full potential. Inflation and unemployment control should be the ultimate targets of monetary policy. Interest rate and the rate of growth of money and credit are the intermediate targets which the central bank can hit. Inflation targeting is widely popular with the central banks to achieve long term objective of price stability. The disadvantage of this approach is however, quite considerable as it restrains central bank's ability to control fluctuating output and employment levels. In the event of an adverse supply shock which raises prices and reduces output, inflation targeting may force the central bank to check money supply at a time when the economy is in recession. At this time when the world economy is struggling to come out of the trauma of recent global economic recession, our high inflation and interest rates are going to do more harm than any good to our already depressed economy. Our swiftly depreciated rupee has further stifled the growth as high costs of import rule out the possibility of any worthwhile capital formation which is so badly needed to boost our underperforming LSM sector.
The per-capita-GNP measure is worldwide recognized as an indicator of financial health of the people in an economy. This measure suffers from reliability-deficit in the same way as the measure of GNP does, for it does not expose the disparity of incomes among various sections of population. Our per capita GNP in real terms has not increased in line with the year-on-year inflation with the result that the purchasing power of masses, particularly those living on or below the poverty line, has plummeted. Our government has developed a tendency to hide its administrative failure to control inflation behind the excuse of international price parity. When wheat support price was increased from Rs.625 to Rs.950 per 40 kg to augment the wealth of feudal elites, international wheat prices were brought into argument to deflect criticism. An impoverished country with a meager per capita GNP should not vie to catch up with the international prices of commodities that are locally produced.