May 21 - 27, 20

During the last few years, Pakistan's economy experienced scores of ups and downs with regard to major macroeconomic indicators. While the growth of gross domestic product (GDP), gross investment, foreign aid, public borrowing and broad money growth showed some fluctuation over the years, domestic resource mobilization, foreign currency reserve, inflow of remittance, export earning and export of textile products demonstrated robust growth.

Inflation, in particular, food inflation, which is perhaps the biggest enemy to the poor, appeared to be galloping. Exchange rate depreciation has also been increasing, thereby keeping upward pressure on imported food items.

GDP GROWTH: The overall GDP growth rate has remained low in last three years, particularly during FY 2010-11 and FY 2011-12. The economy has lost growth momentum considerably during last three years as the economic growth averaged just 2.6 percent as against 5.3 percent in the preceding eight years. There are many reasons for deceleration of growth momentum like massive terms of trade shock of 2008, global financial crisis, intensification of war on terror, security hazards and high profile killings. However, this trend needs to be reversed in the following year. Real GDP growth in the outgoing year is now estimated at less than three per cent compared to 3.8 percent in the previous fiscal year.

Initially, government set 4.2 per cent GDP growth target for the ongoing fiscal year on the eve of budget, which was later revised to 3.6 per cent after the unprecedented floods and rains in the country. Now it is estimated that government would once again miss the revised target of economic growth of 3.6 per cent and it is projected that Pakistan's economy would grow by only 3.2 per cent in the year 2011-2012.

SAVINGS AND INVESTMENT: There was a gain in national savings while domestic savings grew at a slower rate (nearly stagnant). However, the share of gross-investment in GDP experienced a fall in FY 2011-12. This has a far-reaching negative implications for economic growth in the current fiscal year. Gross investment during the last 10 months has dropped significantly. The declining rate of public investment has serious negative implications for the development of physical and social infrastructure, which are crucial for attaining high economic growth.

TAX REVENUE COLLECTION: Pakistan has failed to achieve the major policy objectives to reduce fiscal deficit at or below 3.5 per cent of the GDP and improving tax-to-GDP ratio to 12.7 per cent by 2011-12 could not be achieved, as per World Bank mid-term progress report.

A low and declining tax-to-GDP ratio and increasing public debt stock has imposed a constraint on fiscal stimulus to support revival of growth momentum needed for the economy. The gross and net collection of direct taxes during first half of fiscal year 2011-12 has been Rs371.4 billion and Rs312.6 billion, indicating a growth of 42.4 percent and 29.8 percent, respectively. The net collection is Rs72 billion higher as compared to H1FY11. Though there is an increase in tax collection, yet it is not adequate and a large number of people are not yet included in tax net. FBR collected some Rs158 billion in April against stated target of Rs187 billion. It is encouraging that federal board of revenue (FBR) is determined to meet its annual tax collection target of Rs1.952 trillion at all costs.

GOVERNMENT BORROWING: Total government borrowing saw its biggest increase in FY 2012. The government borrowed Rs527 billion in long-term against a target of Rs408 billion. Higher demand for Islamic instruments, favorable liquidity conditions and low private sector credit demand owing to lower economic growth helped the government to raise long-term debt. The government borrowed Rs569 billion in the shorter tenors against the target of Rs91 billion. Higher fiscal deficit contributed by increased security spending, higher energy and food subsidies, non-materialization of defense and privatization receipts, lower revenue collections, floods in Sindh and payment of Rs120 billion to clear the energy subsidy claims of past years were the main reasons for this high short-term borrowing.

Borrowing from banking sources certainly has negative implications for private sector investment. It will be a challenge for the government to restrain this trend. The Debt Policy Statement 2011-12 has hinted that the government will be forced to continue borrowing from the State Bank of Pakistan, which will not only be inflationary but also complicate management of monetary policy and keep the domestic interest rates on the higher side.

REMITTANCE: Finance Minister Dr Abdul Hafeez Shaikh recently claimed that Pakistan would receive a record $13.5 billion in foreign remittances, reflecting a 21 per cent increase from the last year's $ 11.2 billion. The large inflows of remittance have been facilitated by the sharp depreciation of rupee and the government's crackdown on informal money transfers (hundi).

FOREIGN CURRENCY RESERVES: International currency reserves in FY 2012 have increased to $16.43 billion. The increase in reserves is due to smaller capital inflows. Overall government will pay back total amount of $1.2 billion to International Monetary Fund during current fiscal year 2011-12 out of which first installment of $417 million has been paid back whereas the second installment of $783 million will be repaid till June 30th this year from foreign currency reserves held by the SBP.

There are however, debates on whether the state bank should continue with the policy of rising foreign reserves, or it should release some US dollars in the domestic foreign exchange market in order to restrict further depreciation of the rupee.

Inflation: Inflation in Pakistan is a way above the acceptable standards and there is no chance of downward adjustment in near future. The state bank had kept the interest rate unchanged at 12 per cent since November 30, 2011. The analysts believe that inflationary pressure mounted as a consequence of the massive increase in POL, LPG, CNG and electricity cost. The prices of petrol and electricity will increase in coming days thus the inflation will remain high.

EXPORTS: The value of raw cotton has declined to reach almost half in the international market, besides export volume of textile made-ups also recorded decline on account of lower production. It is believed that exportable products of Pakistan particularly textile made-ups and cotton see lack luster trading trend in the global commodities market, which results in low value of national earnings. The cumulative trade figure shows that Pakistan's exports during July-February 2011-12 stood at $15.189 billion, while in the corresponding period of the last year 2010-11 exports were $15.263 billion, which shows a negligible decline 0.5 per cent.

As per a rough estimate, if the trend continues in the remaining months of the current financial year, the export receipts are projected to show a decline of 3 to 5 per cent. However, the export receipt can recover if Pakistan starts exports to European Union and improve cotton prices. Reducing lead time, improving infrastructure, and raising worker productivity are the main challenges that need to be addressed in order for Pakistan to remain competitive as a textile products exporter.

IMPORTS: Pakistan imports mainly petroleum, petroleum products, machinery, plastics, transportation equipment, edible oils, paper and paperboard, iron and steel and tea. Pakistan's import bill has increased substantially due to increase in the price of petroleum products in the international market with the result of US-Iran tension. In addition, rupee devaluation is also putting pressure on import bill. Imports during July-February 2011-12 were $29.789 billion as compared to $25.599 billion during the same period of the year 2010-11, registering a 16.37 per cent growth.

FUTURE MAJOR CHALLENGES: At the end of 2012, Pakistan's economy is at a crossroad. The economy is now facing a number of challenges, and the future development of the economy will depend on how effectively these challenges will be encountered. The major challenges are:

* Economic stagnation
* High inflationary pressure
* Post-flood management
* Regaining business confidence

There is a serious concern that economic growth is likely to further slow down in the coming days. This concern could be justified by looking at a number of indicators. There has been a decline in the investment-GDP ratio in FY 2012. Furthermore, L/Cs opening for the imports of capital machineries, machineries for miscellanies industries and for industrial raw materials experienced reduction in their share in total L/Cs opening. On the other hand, exports will further reduce due to energy crisis.

It is important to bring structural changes in the economy and policymakers should take long term measures instead of taking short term measures. Government should also take measures to increase industrial production and exports, which will increase the foreign exchange earnings and assist in the balance of payments. Revival of economy will create jobs and alleviate poverty.