By Erum Zaidi
KARACHI – Pakistan’s economy will expand by less than 6 percent for the first time in five years amid double-digit inflation and ballooning budget and trade deficits.
According to the 3rd quarterly report for the year 2007-08 released by the SBP on Saturday, the GDP growth in FY08 is expected to be in the range between 5.5 per cent and 6 per cent well below the targeted 7.2 per cent. The inflation will remain in the double-digit touching 11 to 12 percent. On the fiscal side, the current account balance is most likely to witness negative growth of -7.3 per cent to -7.8 per cent against the original -4 per cent target of total GDP. While on the external front, SBP forecasts $19.9 billion amount of capital to raise in the form of foreign exchange from export trade and to spend $39 billion on import of various goods and services respectively.
As far as foreign inflow is concerned, country is expected 6.7 billion US dollars remittances from the Pakistanis working abroad in FY08.
The report said weakness in the external account is also reflected in the weakening foreign exchange reserves (and a 7.3 per cent YTD depreciation of the rupee by the first week of May 2008).
Productivity improvements can also be important in containing domestic inflation which is already a serious policy concern for Pakistan, with CPI inflation at 17.2 per cent YoY for April 2008, the highest level in a month since April 1995.
The restoring price stability in the short-run may prove challenging. Even the fiscal measures (tariff cuts and subsidies), aiming to at least partially protect the broad populace from rising food and energy commodity prices, are likely to prove unsustainable, given the already large fiscal deficit.
Report said the government has to urgently address the growth of the fiscal deficit as well as to diversify its financing away from the central bank. While information on fiscal developments is only available for first half of FY08. SBP assessment indicates that the July-Mar FY08 fiscal deficit (as a ratio of GDP) is likely to be greater than the FY07 annual figure. The new government has indicated an intention to broaden the tax base and rein in expenditure growth in support of macroeconomic stability. It has also indicated an intention to diversify the financing of the deficit and reduce dependence on the central bank borrowings. For the economy to retain its high growth momentum, it is important that these goals are achieved.
Report said Pakistan’s economy is showing increasing signs of stress by April 2008. A combination of adverse domestic and international developments is driving a broad deterioration in key macroeconomic indicators.
At least a part of this is driven by domestic supply-shocks that have compounded the impact of strong aggregate demand and high international commodity prices. The latter, in particular have continued to rise, and the pass-through to the domestic consumers is increasing; administered prices are increasing, wages are facing upward pressure, and imported inflation is on an upward trend.
Report suggests a policy focus on regaining macroeconomic stability through further reforms and corrective measures could quickly reinvigorate the growth momentum of the economy.
The removal of the excessive fiscal stimulus, the increase in administered energy prices, the recent exchange rate adjustments and continued tight monetary stance are also expected to help correct the substantial increase in the country’s trade deficit.
This correction is overdue. With food and petroleum imports constituting more than half of the rise in imports, there is a limited scope for import compression in the short-run. Moreover, it is likely that the country will need to raise imports to strengthen its infrastructure, particularly of power generation. Thus, policy focus needs to remain on addressing structural impediments to export growth in medium- to long-term. Typically subsidies do not incentivise efficiency, raise fiscal costs, and often lead to “gaming” to maximise rent seeking rather than increased productivity. Therefore, policies must instead focus on structural reforms to reduce cost of doing business, ensure efficient provision of key inputs (water, power, etc), improvement of logistics chains, etc.
The slowdown in the economy during FY08 is principally in the commodity producing sectors. For example, the disappointing performance of important major crops contributed significantly to slowdown in agricultural growth during FY08. This sector is globally vulnerable to weather conditions, but in Pakistan farmers also suffer from policy risk in the pricing of agri-produce, insufficient regulation on quality of inputs (pesticides, seeds, etc) and poor infrastructure (for water management, storage and processing facilities as well as lack of farm-to-market roads, etc). Similarly, facilitation of institutional credit, as well as risk mitigation for farmers through active future markets and crop insurance, can allow a substantial increase in value-addition. Policy focus on the above areas can thus yield relatively quick returns in the form of higher productivity and lower post-production losses.
Over the last 6 months, expansionary fiscal policy has overshadowed and substantially weakened the impact of sustained monetary tightening by SBP. This impact of the heavy government borrowings has been particularly evident in FY08, with the borrowings rising to a record Rs 551.0 billion by May 10, 2008 (as compared to only Rs 45.7 billion in the corresponding period of FY07), almost doubling the total outstanding stock of borrowings to Rs 940.6 billion. This trend cannot be sustained without risking a substantial further acceleration in inflation.
In addition, significant gains in foreign exchange earnings may be achieved by boosting services exports such as IT services, tourism, etc and focusing on increasing remittances by benefiting from labour market opportunities in East Asian and Middle East economies. Productivity gains likely to be accrued from skilled labour will have spillover effects in attracting FDI, enhancing workers’ remittances as well as increasing exports of goods and services
Source: The Nation, 1/6/2008