ECONOMIC SLOWDOWN IN PAKISTAN

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Oct 22 - 28, 20
12

Pakistan's trade deficit shrank by almost 10% to $4.7 billion in the first quarter of current fiscal year 2012-13 (July-September) against $5.2 billion in the same period of the last fiscal year, according to the Pakistan Bureau of Statistics (PBS). The contraction of trade deficit during the first quarter is attributed to the country's declining imports and a meager growth in exports. The country exported $2.21 billion worth of goods, $1.7 billion higher than the exports made in the same month last year. The decline in imports indicates an economic slowdown in a developing economy like Pakistan. International Monetary Fund (IMF) in its latest staff mission report has revised the country's growth projection downwards to 3%-3.5% against the official target of 4.5%. The country's economy grew by 3.7%, against the growth target of 4.2% set for the last fiscal year 2011-12.

Growing energy crisis has adversely affected the country's industrial production and exports. Investors are losing interest in the textile sector, which is the largest foreign exchange earner and directly provides jobs to 3.5 million people. IMF in its mission report urged Islamabad to address deep problems in its energy sector, including costly subsidies and poor distribution, while boosting growth to meet a rapidly growing population. Another reason for meager 4% growth in country's exports in first quarter is travel advisories by the western countries including the United States that negatively impacted the visits of international buyers to Pakistan. The foreign buyers were unable to directly visit the exporting houses and place orders to manufacturing units owing to the poor law and order situation in the country. IMF in its mission report urged Islamabad to address deep problems in its energy sector, including costly subsidies and poor distribution, while boosting growth to meet a rapidly growing population.

In a move to spur growth, the central bank on October 5 slashed its benchmark interest rate by 50 basis points to 10% after slashing it by 150 basis points in August. Announcing the monetary policy for the next two months, the central bank governor Yaseen Anwar said the move was aimed at encouraging private-sector investment, as the overall outlook for inflation had improved. The business community is however not happy with the reduction of 50 basis points in the key policy rate, as it demands further cut to a single-digit for promoting economic activities in the country. Critics say that the rate cut will lead to further government borrowing from the banks, instead of benefiting the private sector, particularly at a time when elections are nearing and the government wants more money in hand to take populist measures.

The government borrowing from banking system reached a record high of Rs532 billion during the first quarter of the current fiscal year, according to the central bank. The inflation-fueling government borrowing increased by 86% from July 1 to September 28, against the same period last year. The government borrowed Rs1280 billion from banks in the last fiscal year ended on June 30 as compared to Rs645 billion during the previous year, while it printed Rs1.5 billion daily in new currency notes during the June 1, 2011 and July 25, 2012.

Like his predecessor Yousaf Raza Gilani, Prime Minister Raja Parvez Ashraf-led coalition government continues to print currency notes and borrow from banking system to meet its expenses raising concerns about the country's macroeconomic stability. The uninterrupted borrowing from central bank and scheduled banks caused an expansionist monetary growth and increased currency in circulation.

The analysts predict that the government is likely to continue printing currency equivalent or more than 2.4% of Gross Domestic Product (GDP) in the absence of revenue generation resources from taxes, privatization and foreign aid to meet its expenses in the current financial year. The excessive borrowing by the government from banking sources and the central bank to finance budget deficit is the main reason for the persistence of high inflation. The negative impact of exchange rate parity, and increase in petroleum prices, coupled with high power and gas rates, also made an adverse impact on prices. The country's poor are hardest hit by soaring prices. Surging poverty level is a daunting challenge for the hugely indebted country with poor economic performance. Though the government has not produced poverty estimates for the past five years, yet a study recently conducted by Islamabad-based Sustainable Development Policy Institute (SDPI) reveals that the incidence of poverty hovers around 33% in the South Asian country where 58.7 million people are living below the poverty line out of the total population of estimated 180 million.

Though the country's the Consumer Price Index (CPI) inflation fell to 8.8% year-on-year in September compared to 9.05% in August, yet the IMF has warned that the country's inflation, may return in double digits, as the government prints money to finance its budget deficit. The international lenders and donors have linked financial assistance to the country on tight scrutiny by the IMF. They have asked the government to seek another IMF assistance that wants the next government to take ownership of its next loan program. The country however assured the IMF team that it would be in a position to service its debt obligations and there would be no balance of payment difficulty in the current fiscal year 2012-13 ending in June 2013. Earlier this month, Islamabad repaid $109.4 million to IMF as a fifth installment against the total $8 billion loan disbursed to the country under the Stand-by Arrangement (SBA) signed with the IMF in 2008. The country in August repaid fourth loan installment worth $397.2 million to the IMF.

Pakistan has to repay$2.8 billion to the IMF during the current fiscal year. The total debt has crossed Rs12 trillion with Rs5.02 trillion of foreign loans and Rs7.6 trillion as domestic loans. In 2008, total debt of the country was Rs5.5 trillion and now it has swelled to more than Rs12 trillion. The country's total public debt reached 60% of the gross domestic product (GDP) by June 30, 2012 under Fiscal Responsibility and Debt Limitation (FR&DL) Act. The government is restricted to increase the public debt beyond 60% of the GDP under FR&DL Act.