Dr Ashfaque H Khan
The government has released the State of the Economy Report for the year 2008-09. The report, commonly known as Pakistan Economic Survey, painted a not so encouraging picture of the economy. It stated that many key macroeconomic targets were missed in 2008-09 and that the economy remained more or less in depressed conditions. For example, economic growth decelerated sharply to a mere 2.0 percent, almost equal to the country’s population growth, thus expressing no improvement in the level of prosperity of the people of Pakistan. This year’s growth was mainly supported by a reasonably good performance of the agricultural sector which posted an increase of 4.7 percent. The performance of agriculture was neutralised by the contraction of the industrial sector, large-scale manufacturing, in particular. The services sector also exhibited a less-than-satisfactory performance as it grew by only 3.6 percent against last year’s achievement of 6.6 percent. The contribution of agriculture to this year’s growth has been overwhelming: it contributed a 1.0 percentage point or 50 percent to the year’s real GDP growth. A deeper analysis of the contribution of agriculture reveals that wheat and rice crops alone contributed 64 and 14 percent, respectively, to the year’s agricultural and real GDP growth.
Large-scale manufacture, accounting for 12 percent of the GDP, instead of growing, has in fact, contracted by 7.7 percent this year. Deterioration in the security environment, political instability, weak external demand, shortages of electricity and higher cost of borrowing have been the major factors responsible for the worst-ever performance of large-scale manufacturing. The services sector also witnessed a sharp decline in growth to a mere 3.6 percent–the slowest growth in the last eight years. The services sector generally follows the overall trend in the economy. If the level of economic activity is brisk the services sector will exhibit strong growth, and vice-versa. The real per-capita income remained almost at last year’s level, showing no improvement in the level of well being of the nation.
Critics of the previous regime’s economic policies have always argued that Pakistan’s economic growth over the last seven or eight years has been primarily a “private consumption-led” growth. They have also argued that no or little effort was made to curtail the consumption demand of the private sector. In other words, the monetary policy was not tight enough to discourage “private consumption-led” growth. Interestingly, this year’s growth has entirely been “private-sector-consumption-led” despite a tight monetary policy of an aggressive nature that was pursued throughout the year. How the critics of the previous regime would respond to this year’s growth performance is yet to be seen.
Another important development of this year has been the sharp decline in investment rate. Total investment in terms of GDP percentage was at its peak in 2006-07 and stood at 22.5 percent. It continued to decelerate to 22 percent last year and witnessed a sharp decline to 19.7 percent this year. The deteriorating security environment, poor economic governance, higher cost of borrowing, weak external demand, shortages of power and resource constraints have been the major factors responsible for the sharp decline in investment rate this year. It will take a much longer time to restore investors’ confidence, for which improvements in these factors will be essential.
Persistence of higher inflation throughout the year has remained one of the disturbing features of the economy. The inflation rate, as measured by changes in the consumer price index (CPI), averaged 22.4 percent in the first ten months (July-April) of the current fiscal year, as against 10.2 percent in the same period last year. Factors that have mainly been responsible for the persistence of higher inflation in Pakistan are reckless increase in the support price of wheat and sugarcane, sharp depreciation of the exchange rate and market forces not being allowed to play their roles in adjustment of price level. Inflation in Pakistan in 2008-09 has been “government-induced.” Empirical evidence shows that support price of wheat is highly inflationary in Pakistan. The wheat support price was raised by 124 percent in only in two years, that is, from Rs425/40kg in 2006-07 to Rs950/40kg in 2008-09. Wheat production, however, did not increase during these two years–wheat production was 23.3 million tones in 2006-07 and was 23.4 million tones in 2008-09. Despite wheat prices being more than doubled in two years the output did not increase appreciably. But in the process, the government created enormous difficulties for the economy as average inflation remained over 22 percent in 2008-09, which forced the State Bank to keep the discount rate at a very high level, thus affecting investment and growth. This is a lesson that the government should learn, and never repeat the mistake. The government should concentrate more on enhancing yield, rather on prices.
Another disturbing development of this year has been the sharp increase in public debt. Public debt increased by Rs1,367 billion in just nine months of this fiscal year (July-March). Over the last two years, public debt has registered an increase of Rs2,454 billion as against the cumulative increase of Rs1,800 billion in the previous eight years. The unprecedented surge in public debt in the current fiscal year owes mainly to the $3.1 billion accumulation of the external debt and the over 20 percent depreciation of the rupee. Avoiding reckless borrowing and maintaining stability in the exchange rate will go a long way in achieving debt sustainability.
Notwithstanding the negative developments, some major improvements in key macroeconomic indicators have also been witnessed in the current fiscal year. The government succeeded in maintaining financial discipline as budget deficit reduced sharply to 4.3 percent of GDP from 7.4 percent last year. In external accounts, the current account deficit narrowed to 5.3 percent of GDP from as high as 8.5 percent last year. Such a sharp improvement in “twin deficits” in just one year is not a mean achievement, and the government should be commended for maintaining financial discipline. The inflows of workers’ remittances remained strong during the year, standing at $6.35 billion in the first ten months (July-April), against $5.3 billion last year, thus posting an increase of 19.5 percent. The sharp increase in workers’ remittances has contributed significantly to the reduction of the current account deficit. The general perception about the surge in workers’ remittances is that Pakistani workers who have lost their jobs in oil-rich countries are coming back with their savings. Workers’ remittances are, therefore, expected to decline next year. Another positive development of the year has been the modest inflow of foreign direct investment in the face of global economic meltdown. Pakistan succeeded in attracting $3.2 billion in FDI as against $3.7 billion last year–a loss of just $0.5 billion in a global economic meltdown environment is still a great success.
This years’ economic performance must be evaluated in the backdrop of many external and domestic shocks of extraordinary proportion. The crisis in global economy that began to be felt in 2007 and early 2008, aggravated, and started impacting developing countries like Pakistan adversely around October/November 2008. On the domestic scene, the deterioration in the security environment as a result of the intensification of the war on terror, political uncertainty, particularly in the wake of the exit of one of the major coalition partner of the government, the issue of the restoration of the judges of the superior court, including the chief justice, the high cost of borrowing, the massive shortfall in power supplies in the wake of growing circular debt issue and the frequent changes in the ministry of finance surely played important roles in shaping the developments on the economic scene in Pakistan during the current fiscal year. In the midst of these developments the performance of the economy can be described as mixed. While the performance of some key macro variables improved, many others witnessed deterioration as well.
Going forward, Pakistan still faces the challenges of higher budget and current-account deficits and a stubbornly high inflation. There is no room for complacency. The government should not lose its patience so soon. The patient has just come out of the intensive-care unit and shifted to the general ward. Don’t force the patient to run now. The government should continue to pursue tight fiscal and monetary policies for one more year. The idea is to consolidate the gains made in the current fiscal year. There will be plenty of resources available to the government for spending in the remaining three budgets. If the government loses patience and undertakes an expansionary fiscal policy the chances of having resources available in the remaining three budgets will be slim. This is the choice the government will have to make in the forthcoming budget.
The writer is dean and professor at the NUST Business School, Islamabad. Email: firstname.lastname@example.org
Courtesy: The News