The State of Pakistan Economy: Perennial Problems Persist

FP Special Report

The second quarterly report on the economy of Pakistan for 2004-05, issued by the State Bank of Pakistan (SBP), has received eulogistic reviews in much of the popular press and laudatory headlines in the electronic media. The expected growth rate has been termed as historic. This growth has been supported by forecasts of sharp improvement in agriculture and strong growth in industry. There is, however, a lot more in the SBP report, not just the contrived reduction in unemployment, which goes to show that the fundamental problems of the economy remain in spite of the favourable impact of the fortuitous developments of the last five years. The report can be used as an early warning for the policy makers.
Is Growth Sustainable without Investment?
The biggest factor contributing to the likely growth rate of the economy is the improved prospects of availability of water that has raised the hopes of agricultural growth beyond the 4.0 per cent annual target. We have to thank nature for this and pray that more rains cause no damage to the wheat crop.
In spite of the recent weakening of its growth momentum, the industrial production is expected to grow at 16.1 per cent over last year. The heavy BMR in textile and high cotton output had its uses.
However, even the generally supportive SBP has doubts about the sustainability of the real sector growth. Considering that, for various reasons, investment has been sluggish during all these years, the SBP has emphasised the need for substantial rise in public, foreign and private investment. It is, however, our misfortune that prospects in this area remain bleak in spite of many tall claims. Not only the problems of political stability and law and order remain, the political dissentions within the country have deepened and no significant breakthrough in the regional issues has taken place. In other words, non-economic factors affecting the economy of Pakistan remain intractable. The prospective investors have choice of locations. The sale of existing assets to foreigners falls in a different category as the returns to investors can be quick and the equation of risk and reward is different.
Quick Rise in Inflation
The other areas of concern are economic in nature. These include inflationary pressures, reemerging fiscal deficit and a massive current account imbalance. Against earlier projections, the inflation rate is approaching the range of 9 to 10 per cent. This can endanger the much talked about macro-economic stability of the last few years. In other words, the availability of goods and services is not in keeping with the dictates of monetary policy. The independent economists have already started predicting grave consequences of inflationary trends on export, public expenditures and wage structures.
Reversals in Budget Implementation
Combined with inflationary pressures, the fiscal picture depicted in the latest report indicates another adverse development. The decline in revenue growth and acceleration in non-development expenditure have caused a rise of about Rs80 billion in the overall budgetary deficit. If the trend is not reversed we may end up the year with a rise in domestic debt. The shortfalls in federal revenues have adverse impact on the provincial and local finances as well. The provinces depend on the NFC transfers for 80 to 90 per cent of their expenditure needs. The bulk of the transferred resources are shared by the provinces with the district governments, which meet about 90 per cent of the local government needs. The issue of sharing of resources is already a bone of contention between the provinces and the federation. Any major dent in federal revenues will increase the strain further.
Alarming Bells in External Sector
As against the surplus of the last year, the current account deficit has jumped to $2.3 billion. The SBP has dismissed this development as a matter of lesser concern. This could have been so if the much wanted foreign exchange reserves had been earned through the normal functioning of the economy, like growth in exports. In fact, any growth in exports would have come from the expansion in productive capacity and provided additional employment opportunities. Our reserves were collected not by successful pursuit of economic policy but through luck and pluck. To some extent, we were rewarded by the Americans for our prompt submission to their dictate. We also benefited from the remittances of the scared Pakistanis living in countries which were not the traditional sources of unrequited transfers. They wanted to buy security in their old country by transferring part of their savings here. The questionable purchase of dollars by SBP from the local market might have served its purpose at that time. If all these developments are not likely to be repeated then the rise in external deficit can wipe out the reserves as quickly as they were built up.
Trap of External Borrowing
The SBP's dismissal of the rising current account deficit because it considers it manageable as long as the low cost external disbursement, foreign direct investment and non-resident deposits continue to flow in. The current international political and economic scenario does not provide an assurance of continuance of these flows over a longer period. Foreign direct investment is still a trickle and the non-resident deposits is floating source in a country marred by uncertainties. There are already signs that interest rates are likely to rise at home and abroad. This approach of SBP needs to be curbed at a time when the stock of external debt of Pakistan has started increasing again.
Contrived Decline in Unemployment
It is surprising that the reported decline in unemployment rate could find a place in the SBP report. It has been stated that unemployment rate has improved from 8 .8 per cent in FY 02 to 7.7 per cent in FY 04. However, this improvement has been attributed largely to increase in female employment in the rural informal sector, bulk of which was employed as unpaid family helpers, especially in the rural areas of Punjab. For all intents and purposes, such a calculation of increase in employment appears to be highly contrived. It seems the old notion of disguised unemployment has been replaced with unpaid family workers. If this is accepted as the normal approach to promote employment, then Pakistan will soon become a model country with no unemployment.
Need of Vigorous Public Sector Management
It appears that the favourable effects of the fortuitous factors have run their course. The perennial problems affecting our economy are back. The public perception of the performance of government is diametrically opposed to that of the regime itself. The present government is seen as steeped in ostentatious consumption surpassing previous records. The ever increasing fleets of luxury cars, the sumptuous feasts in the capital's five star hotels, the rising perks and privileges of the ministers, legislators and generals, foreign trips and Umra visits at state expense, are seen as presenting a story in contrast to the rising unemployment and widening poverty in the country. The public sector activities that directly help the poor, like primary and secondary education, urban and rural health facilities, public transport, sanitation and water supply, have neither expanded nor their services improved. Rising budgetary deficit and rising inflation in such a situation are not easily explainable to the people. The promised trickle down continues to delude them. The long waiting period and rising premium on purchase of new cars is no indicator of prosperity for the people.
In the past, the SBP has excelled over many other actors in vigorously articulating government policies and programmes. Now the time has come for SBP higher officials to use their ingenuity in suggesting a policy package that in the final analysis actually promotes employment, reduces poverty and reduces the rising trend of income inequality. However, such advice should be free of sophistry and contrivance.