State of the Pakistan economy: an overview


By Shazia M. H. Khan

Macro-economy is not in a good shape. According to many latest reports of World Bank, IMF, ADB and the SBP, Pakistan’s economy is once again (since 1999) at a critical juncture. Economy is shrinking as well as the confidence of local and foreign investors. The country is now facing very serious economic strains and social challenges across a broad front.

High levels of inflation are a serious threat to macro-economy. The burden of high prices, especially of basic food items, has become intolerable for poor households. The latest report of the federal bureau of statistics (FBS), the sensitive prices index (SPI) showed 24.94 per cent inflation in the month of April 08. However, the consumer price index (CPI) reflected 17.21 per cent inflation during last month. The main commodities, which showed an increase in prices during April 2008, are as under:

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Commodities  Increase (%)

Eggs   27.36

Fresh fruits    26.09

Wheat flour    22.37

Chicken farm 16.32

Wheat 8.60

Rice    8.07

Cooking oil     3.38

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According to the data issued by the FBS, CPI, SPI and WPI in ten months from July to April 2007-08 have increased by 10.27 per cent, 14.09 per cent and 13.70 per cent respectively over the corresponding period of 2006-07. The CPI, SPI and WPI data in the month of April 2007-08 shows increases by 17.21 per cent, 24.94 per cent and 23.50 per cent respectively. Compared to the corresponding period of 2006-07, it increased by 6.92 per cent, 8.31 per cent and 6.03 per cent respectively, in 2006-07 over the corresponding period of 2005-06 and in 2005-06, increased by 6.16 per cent, 6.82 per cent and 8.10 per cent respectively over the same period of 2004-05. Purchasing power has been decreased due to high inflation and persistent price hike.

Looming trade and widening current account deficits (the current account deficit has skyrocketed to 7.5 per cent of the GDP) are creating problems. Fiscal (the fiscal deficit is projected at 9.5 per cent of GDP) are serious threat to macro-economy stability and sustainability. According to the SBP report (2008), the trade deficit for the ten months of the current fiscal has crossed $16 billion. It is feared that it may hit $20 billion by the end of June 2008. Trade deficit recorded a sharp 32.3 per cent expansion during July-November 2007 and reached $7.2 billion. Trade deficit for the same year during July-February 2008 recorded a sharp $3.5 billion increase. The deficit during the six months of current fiscal year indicates that it will be further enhanced in the current fiscal year. Soaring import is the main reason for imbalance in the Pakistan economy and rapidly increasing trade deficit as well. The higher trade deficit leads to outflow of capital resources from the country on one hand and indicates the economic dependency on the other hand. The lowering of competitiveness of the country’s main exports, textile and clothing, and an increase in imports, especially due to high oil prices have led to a large increase in the trade imbalance. It has led to a continuing decline in the level of foreign exchange reserves and in the value of rupee. The current ongoing surge in dollar-rupee parity verifies it.

Industrial production is declining too. According to the federal finance ministry (April 2008) the country’s industrial production slowed down further as they grew by a paltry 4.84 per cent in first nine months (July-March) of current financial year. It was even bleaker in March 2008, when it fell by 3.23 per cent over the corresponding month of previous year. It is feared now, that LSM 10.5 per cent growth target set for the current financial year would not be achievable.

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LMS    (%)

2006-07        8.8

2004-05        19.9

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It is estimated that the falling growth in the manufacturing sector will also adversely affect the country’s GDP and if the trend persisted, it would be hard to achieve the targeted GDP, which in the recent years stayed over seven per cent on the back of strong performance of manufacturing sector.

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(July-March 2007-08)

Sectors         (%)

Jet fue l        12.11

Diesel oil        2.80

Lubricating oil 0.33

LPG     2.02

Vegetable ghee production   2.83

Electric transformers 36.15

Paper and board       5.59

Steel products          39

Source: Finance Ministry

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Continued energy crisis (the government estimated power shortage to remain in the range of 1000-2000MW during the current year has already touched 3600 MW which has increased the worries of the government. The economy is being run at almost 30 per cent energy shortage. Now, it has reached to 4500 MW). High rates of utility bills (latest reports say that increase of Rs.2-3 in the POL is in the offing which has already made our exports unattractive in the international markets. Declining levels of water are adding miseries to the government and has already reduced our per yield agricultural production. The ADB issued its latest report “the Asian Water and Development Outlook (AWDO) once again highlighted Pakistan’s water and sanitation woes. The country has reached the water scarcity threshold of 1,000 cubic meters per person a year and has been ranked among the worst performers in Asia in terms of water use. Pakistan is ranked at the 17th position among 23 developing countries of the region in the index of drinking water adequacy (IDWA). The continued declining water shortage may be a serious threat for even human survival in the country in the days to come.

Furthermore, looming political chaos has discouraged the local businessmen, and disappointed the common people too. The PML-N’s decision to pull out from the coalition government over the judges’ issue has shaken the businessmen’s confidence. They anticipate a worst economic meltdown if the judges’ issue is not resolved on a permanent basis. It is seemed that no body in the government talks about serious issues like building new dams, new power plants, controlling inflation and boosting exports.

The mantra of gross root devolution, people’s participation in decision making, trickle down effects, and the last but not the least self-reliance magnetism is loosing its importance, scope and utility. According to the Global Competitiveness Report (2007-08), Pakistan occupies 92nd position among 131 countries in the global competitiveness index (GCI) while India ranked 48th. In the 2006-07 index with 122 countries, Pakistan was on the 83rd position, and this year it has shown a decline of ten positions. It also shows weakness in our structural systems.

 

Integrated policies

(a) It is strongly recommended that growth, equity, and financial soundness must be pursued simultaneously, (b) Concrete efforts should be initiated to enhance food security mechanism in the country. The food scarcity in Pakistan is so high that the Asian Development Bank, in its recent report, assessed that the country would need to import 1.117 million tons of food in 2008 against 1.9 million tons’ food import requirements of five times larger India, (c) Development of SME, and the cottage industries especially in the rural areas, (d) Overhauling in the system and operations of the micro-finance institutions, (e) Radical macroeconomic adjustment/balances must be made through a sharp cutback and restructuring of public spending that has grown sharply during the last five years, (f) Increase the tax-GDP ratios. A determined effort should be made to mobilise tax revenue from segments of society whose contribution to tax revenues has come down sharply, (g) Immediate relief to the poor people by allocating at least Rs.50 billion to minimise the impact of rise in food prices, (h) Diversification and competitiveness of exports is must, (i) Special focus on agriculture and promising labour-intensive manufactured exports, based on geographical comparative advantage. More facilities of agricultural credit, (j) New comprehensive workable energy policy is urgently required. Import of electricity from Iran and Tajikistan is on the cards. Conservatory measures should be adopted as whole nation and (k) Sincere efforts for alternative energy resources i.e. wind, coal, solar or bio-fuel should also be explored.

Diversified but integrated efforts are urgently required because economic prosperity can not be achieved merely by having “good wishes” alone.

Source: The News, 8/9/2008

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