SAAD ANWAR HASHMI
Jan 9 - 15, 2012
Pakistan's economy moves to 2012 with various challenges in the monetary, external, and real sectors. The year 2011 has not been viewed a supportive year for businesses with GDP growth recorded at 2.4 per cent, the lowest in the region.
Those living at or below poverty line further suffered with high food prices with average CPI recorded at 14.10 per cent.
Income groups earning minimum wage only sufficient to meet monthly food expenses were largely affected with increase in price of vegetables by 32 per cent, ghee 28 per cent, sugar 26.8 per cent, and cooking oil 21 per cent.
In addition to stagnant GDP growth and high inflation, Pakistan experienced poor law and order situation, political uncertainly, corruption, consistent upward trend in prices of oil and gas, poor tax base, and high lending rates.
Each political party is attempting, whether on media or through public speeches, to answer the burning questions of ways to reduce inflation and increase economic growth.
In order to further ascertain what measures are to be taken to increase GDP and lessons learned in CY11, we must understand Pakistan's current demand and consumption pattern, domestic and foreign investments, foreign trade, and development expenditure.
Based on a recent report by the World Bank titled 'Country Partnership Strategy Progress Report FY2010-14', the way forward for Pakistan to increase GDP is to enhance its reliance on industrial growth to ensure long-term sustainable development.
The industrial growth should be shoved through ease in availability of credit and confidence building of both foreign and domestic investors to invest in development projects that create employment. Unfortunately, this cannot be seen in isolation in view of worsening law and order situation and political instability, which shakes investor's confidence. Manufacturing concerns are on a status quo and continuing with current capacity rather than seeking capacity expansion.
The consumer demand due to high inflation is highly skewed towards meeting monthly food requirements than expenditures on luxuries.
Growth of five to seven per cent is expected in yarn manufacturing, oil production, ginning and milling industry. Large scale manufacturing sector is expected to remain sluggish throughout FY12.
Investment in an economy is a direct product of economic progress and investor friendly environment.
The political environment, law and order situation, energy crisis, and fiscal imbalances were major hindrances for investments during last year.
According to the state bank of Pakistan, foreign direct investment (FDI) fell to $239 million during July to Oct 2011 from $610 million in the same period last year. FDI was directed towards consumer goods, telecommunication, and oil and gas development and exploration.
The rupee is depreciating against the dollar trading between 89.82 and 90.4 as banks are moping up dollars from the market in light of import payment pressures. Rupee is also depreciating with pressure on reserves due to repayments of $500 million budgetary support loan in January 2012 and IMF loan from February 2012. The country was only able to avail a total of $8.940 billion standby arrangement of IMF's sanctioned loan of $11.3 billion. It seems that the countries future rests with the government to decide whether to negotiate a fresh loan or repay borrowed money from next month. Exchange companies and commercial banks expect state bank of Pakistan to stabilize local currency value through injection in the open market, which seems difficult with current SBP reserves valued at $16.6 billion. Through the injection, maybe viewed as a short-term measure, there continues to be an uncertainty on rupee dollar parity in the long-run.
Pakistan is a net importer, which further puts strain on dollar deposits with SBP. As per official data released by federal bureau of statistics, trade deficit on month to month basis widened to $2.17 billion in November 2011 from $1.71 billion in October 2011. The overall trade deficit as on November 2011 was $9.06 billion compared to $6.5 billion the previous month.
Consistent deficit results in pressure on dollar reserves. Though the economic situation remains grim, a positive sign emanates from worker remittances, 60 per cent of which are received from Middle East whereas 30 per cent is received from USA and UK.
The country receives an average one billion dollar a month in worker remittances. Total $5.2 billion was received from overseas Pakistanis in fiscal to November.
Lack of employment opportunities due to poor GDP resulted in large scale migration from the country in search of employment, though it is a blessing in disguise reflected through influx of remittances. Though this continuing trend is beneficial for the economy, flows cannot be predictable.
Based on current macroeconomic indicators and economic situation of the country, it is complex to predict economic progress and GDP growth through 2012.
The main challenge currently faced by the consumers is the cost of energy. Trade deficit is expected to remain between $14 billion to $15 billion in FY12 and remittances are expected to maintain an average of a billion dollar a month.
GDP is expected to grow and remain between 2.6 and three per cent. Budget deficit is expected to remain below five per cent of GDP.
The government must focus on increase in growth through development expenditure with marginal yet stable and expected rise in inflation, which is a product of economic growth.
Development expenditure will create jobs and assist those unemployed and living at or below poverty line to improve their living standards. The government must make collective efforts to define and implement economic goals with mutual consent of all stakeholders.
A price control mechanism must be put in place to keep price for basic commodities in check. The government takes ownership in decision-making and actions to combat corruption.
The monetary policy may only be functional if the monetary policy decisions are aligned with the fiscal policy to keep a check on inflation arising from the supply side. The current challenges to the economic growth are not inscrutable and can be overcome with wisdom and will.