Feb 20 - 26, 20

The economic data for the first half of the current fiscal year (July-Dec 2011/12) show that the economy is stabilizing slowly. According to a Moody's report, the rating outlook is 'stable', although pressures on the balance of payments have reemerged.

Consumer price index (CPI) inflation was registered below 11 per cent for the first half of the current financial year from above 14 per cent a year earlier.

The current account balance showed a surplus of $160 million in December on rapid growth in remittances, which went up by 19.5 per cent in the first six months of the year to $6.3 billion. Overall, the current account deficit dropped to $2.154 billion or 1.8 per cent of the size of the economy in the six months.

The major factor for this deterioration in the current account is the rising trade gap, which surged to $7.619 billion from $5.770 billion last year on over 19 per cent increase in imports to $19.743 billion.

Exports performed well in the six months and surged by 9.1 per cent to $12.1 billion in terms of their dollar value.

The improvement in the economic indicators for the December seems to have encouraged the government to revise upwards its forecast for gross domestic product (GDP) growth to four per cent, up from an earlier downward revision to 3.6 per cent. The hope for a better growth rate is based on the estimate of better performance by the crop sector and the large-scale manufacturing (LSM). The other major positive development for the macroeconomic stability was the declining trend noticed in the government's budget deficit, which declined to 2.6 percent of GDP in the first half from 2.9 per cent a year earlier.

The energy shortages continue to rise throughout the country causing limited industrial outputs particularly in Punjab, where three quarters of the largest exporting industry - textile - is located. The energy shortages, the government concedes, are wiping out at least two to three per cent of growth every year.

The State bank of Pakistan (SBP) has, at first, forecast growth to decline below four percent in its annual report for the last financial year.

This year's budget estimated debt servicing payments in excess of Rs800 billion. In these circumstances, it appears doubtful for the government to control the budget deficit.

In spite of a reduction in the interest rates by 200bps this fiscal, the private credit off-take did not show any sign of improvement. The cost of borrowing is still high.

The increase in private credit, as noted, is more because of its meeting the day to day capital requirements of the borrowers rather than being used for setting up new industries or replacement of their outdated machines and technologies.

The government seems to be entirely dependent on the release of coalition support fund (CSF) by the U.S., receipt of the remaining PTCL privatization proceeds, and funds to be generated from the sale of five 3G telecom licenses to cover shorten its budget deficit.

The Moody's report indicated the low economic, institutional and government's financial strengths, and Pakistan's high susceptibility to event risk.

The International Monetary Fund (IMF) in its recent report has warned Pakistan that its economy is "highly vulnerable", and urged it to brace itself for further increase in consumer prices and widespread unemployment. It stated that unless there are measures taken to rein in the fiscal deficit and tighten monetary policy that is probably needed right now, pressures on the rupee could continue.

In its annual assessment of the Pakistan's economy, IMF noted that the country has faced difficult challenges in the past few years. However, policymakers have taken actions and implemented several reforms. The IMF said Pakistan's economy would hasten up to a 3.4 percent growth pace in fiscal 2011-12, compared to 2.4 per cent last year.

It also noted with concern that political resistance has prevented a needed effort by the government to increase revenues to cover its budget deficit, which will expand to about seven percent of GDP this year from 6.6 per cent last year.

The report also highlighted key challenges faced by Pakistan on account of two major floods, unresolved structural problems (especially in energy sector), difficulties in implementing key policy reforms due to lack of political support and riskier global environment as bottlenecks to growth.

The Fund's as well as Moody's reports on Pakistan's economy seem to depict not the correct side of the picture. The reports did not consider the implications of increasing electricity tariffs, increase in POL prices or hike in interest rate and urged further stiffening of the monetary policy, which are bound to aggravate economic sufferings of the poor man already hit by the economic recession.

IMF and Moody's both stress the need of reforms to resolve structural problems. There is, no doubt, a need for the government to concentrate on the economy.

External events such as massive global slowdown have substantially contributed to our economic sufferings. The government's failure to comply with some of the critical IMFs conditions that were essentially designed to support macroeconomic stabilization efforts as well as its lack of ability to lessen its expenditures and raise revenue, have put negative impacts on the fiscal deficit.

However, a great lack of political will towards implementation remains an insurmountable barrier. Unless this barrier is dealt with expeditiously, little to nothing will change anytime soon.