Pakistan has to implement wide-ranging structural, institutional and governance reforms
to strengthen the economy of the country and thus boost the long-term economic prospects
By Zafar-ul-Hassan Almas
Pakistan’s economic landscape has undergone a complete change in the last two years. Now, the economy seemed more vulnerable against extraordinary shocks of high intensity both from domestic and external factors. Exchange rates is falling freely has already depreciated by 18 per cent in the last six months. Foreign exchange reserves are drying at a faster pace than never before. The inflation is extraordinarily higher and attaining new heights in the economic history of Pakistan. The interest rates are moving beyond reasonable levels. Fiscal and current accounts deficits has already crossed highest ever mark during the last one decade or so in the last year. Large-scale manufacturing growth actually declined by 4.5 per cent in June 2008. External debt, which has declined appreciably as a proportion of GDP during the last eight years, has actually started rising. The debt service burden thanks to lower interest rates, debt re-profiling and prepayment of some expensive debt was declining but now reversal has already started by allowing debt service burden to grow.
The previous economic scenario
The situation is altogether different from seemingly heavens of comfort build upon higher growth trajectory of around 7 per cent or higher, fiscal deficit below 4 per cent, current account deficit at just above 4 per cent but financed primarily through non-debt creating inflows and debt was though rising slightly in absolute terms but decreasing drastically in relation to GDP, debt burden in relation to revenues or foreign exchange earnings was on declining path, exchange rate stability for long time, rising foreign exchange reserves, favourable response to Pakistani paper in the international capital market and buoyancy in the domestic capital markets. The economic growth rate was targeted in the vicinity of 8 per cent in the medium term only just two year ago. So, it was all honey and sweets all around.
Present day economic scenario
But now the economic managers and experts are eying hardly six per cent growth in the medium-term. Domestic capital markets are no more buoyant and responsive while access to the international capital markets has become improbable task. Pakistan’s credit rating is only second to Argentina and now we are sliding down at brisk pace. Pakistan is badly in need of support from the multilateral institutions like IMF and the World Bank.
The volatility of oil prices, despite strenuous efforts of the major oil exporters to stabilise the market, is a matter of great concern for oil importing countries like Pakistan. The possible supply disruptions are associated with geopolitical developments in a major oil producing region and shocks affected US economy. The oil prices may respond quickly to the recent adverse developments in the US economy. The great Wall Street crash has implications for capital flows to the developing countries. Pakistan is the desperate seeker of capital flows in the current year to finance its huge current account deficit of around $12.0 billion. Pakistan is definitely neither a priority of investors to invest nor of multilateral institutions to lend. The Wall Street crash may not hurt directly but the second round effect would definitely hit Pakistan. The contagion of sub-prime crisis was hardly subsided when fresh addiction of Wall Street crash has added fuel to the dwindling fire.
The movement towards a higher interest rate environment in international capital markets has implications for private capital flows for developing countries like Pakistan which has already scraped the idea of going to the international capital market in near future. The large and persistent macroeconomic imbalances among the major industrial countries like US and some European countries create risks of disorderly exchange rate, and interest rate movements; which has created a high degree of uncertainty that is inimical to the prospects for investment revival in developing countries like Pakistan.
The fragility of Pakistan’s economic fundamentals is well exposed and now it is well established that we can not feed in more foreign savings into the orgy of domestic consumption that may artificially boost growth prospects of the economy. Pakistan has to implement wide ranging structural, institutional and governance reforms to strengthen the economic structure of the country and thus boost long-term prospects of the economy. The model of boosting economic growth through foreign capital inflows without improving productive capacity of the economy has miserably failed. This model has played havoc with the confidence of the business sentiments.
The economic model of the previous regime where the stock market gurus, property barons, hoarders and middle man were the drivers of economic growth of the last eight years made the difference. The signs of deterioration were one manifestation of poor structure of governance during the last eight years. The present regime has no intention to reform the economic fabric of the country.
Pakistan is facing difficulties in financing its current and fiscal account deficit in the current year. The State Bank of Pakistan has made its intentions very clear through monetary policy statement that it is not going to be the financer of the deficit anymore. The privatisation is not the right proposition in the given circumstances. The National Savings is not the right choice because of its poor organisational structure and product development. The government could tap this source only through inflating interest rates and that would be disastrous to the financial sector. National Saving schemes are mobilising their deposits from the pool of investors willing to spare resources for the longer term and any preferential treatment may be detrimental for other competing counterparts like commercial banks.
The government has ignored Bond market development in the past and it seemed that it is unwilling to do so now as well. The bond market gives an important boost to the diversification of debt instruments but unfortunately the government has ignored this very important source. The corporate sector is also not very comfortable with the failure of the bond market development objective of the previous government. It was reported in the newspapers that the National Savings would bring innovative short-term paper as well and it will be seen whether there is any appetite in the market for such item. The government has rightly decided to launch Sukuk bond to meet its financing need. The Islamic instruments have great potential and it should be developed on regular basis.
The financing of the fiscal deficit through external resources has become a dream. The economic growth of 4 per cent seemed too optimistic because the financing for savings-investment gap was hard to find. The government policy is once again faltered by reducing development expenditure like we did in the 1990s and results are obvious. We have to review the structure of the current expenditure like defence, running of civil administration and structure of governance. The number of the futile departments should be slashed and multiplicity of the work in various ministries should be minimised. We need an integrated approach to economic management instead of working in the piecemeal. The economic policy should be at the heart of the government policy and the President and Prime Minister should be on board with economic managers to look into the true picture of the economy. There is no denial of the fact that economic conditions are challenging but the economy has a potential of moving to higher growth trajectory of around seven per cent in the long-run. Pakistan economy needs to shave-off leakages and harness its true potential. We are able to sustain domestic and external challenges with great success.