State of economy
by
Javed Hafiz |
Pakistani economy is out of the ICU but has not yet been discharged from the hospital” said an economist recently, aptly describing its health. The officially claimed rate of growth is down to 3 per cent from 7 per cent in 2006-07. The rate of inflation in 2009 was above 20 per cent and this has hit the fixed income groups hard. Sluggish economic activity has brought down revenue collection. Imports fell by 16.3 per cent in July-December 2009 compared to the same period in 2008. This is a clear indication of an economic slowdown, new investments in particular.
The war on terror is not only very expensive but has also brought direct foreign investment to an abysmal low. Four years ago, Pakistan was an attractive investment destination but that is no more the case. The other day, the Pakistan government announced that development funds had been slashed by 30 per cent to finance war on terror. Law and order situation and uncertain power supplies have hit the industries hard. Bulk of Pakistani exports belongs to one sector, textiles. Erratic power supplies have dented the capacity of this sector to produce at an optimum level and export the surplus.
External borrowing is resorted to by many countries. However, in order to remain sustainable, external borrowing should result in proportionate growth in the gross domestic product and foreign exchange earnings directly or through import substitution. Only then can a nation repay its external debt efficiently. During the first three months of current financial year, Pakistan borrowed a staggering three billion dollars from abroad. This is the highest level of borrowing rate that could land Pakistan in the debt trap once again. Pakistan Institute of Development Economics (PIDE) has recently warned of that possibility. Pakistan faced the debt trap situation in the 1990s when bulk of its revenues was consumed by debt servicing.
International economic situation is not helpful either. Various national economies are inter-linked and inter-dependent these days. Due to week national and international growth, for example, demand for Pakistani cement has declined within the country and in GCC countries. This explains the fall in price of Pakistani cement in recent months.
Pakistani rupee value has been declining against all major currencies in recent past. Currency devaluation can have a positive impact on exports as it increases their competitiveness in the international markets. However, in the case of Pakistan, this possible gain has been nullified by ever-increasing production cost. At the same time, decline in currency value has made imported goods costlier, fuelling inflation further.
A close look at the borrowing levels since 1947 is revealing. For example, Pakistan government’s total borrowings in the first 51 years (till 1998) were Rs2,700 billion. Its borrowings over the next 10 years (1998-2008) were to the tune of Rs3,700 billion. And between July and December 2009, the country borrowed a staggering amount of Rs2,600 billion. The discrepancy between this amount and borrowing at the rate of $1 billion per month as indicated above is explained by the fact that the figure in dollars pertains to external borrowing only, while the ones in Pak rupees include internal borrowing by the government as well.
Certainly, this is an unhealthy trend. Various national saving schemes, which were actually meant to finance development projects, are now routinely used for administrative and non-development expenditure. When a nation borrows more than it can repay, it passes on the current liabilities to its future generations.
Since some of the aid commitments made by the Friends of Democratic Pakistan have not been fulfilled as yet, the government has had to resort to deficit financing. More money supply and slow growth in production invariably lead to inflation. Because of lower imports, government revenues from custom duty are lower this year. This could lead to additional deficit financing measures.
All said and done, I still maintain my optimism about Pakistani economy. Growth rate of 3 per cent this year is more than 2 per cent last year. The current inflation rate of 10.3 per cent is lower than the hyper inflation of last fiscal year. Foreign remittances have kept their momentum. Pakistan did not import wheat this year. This is a major achievement keeping in view the fact that a lot of Pakistani wheat is smuggled to food deficit Afghanistan.
When nations have to choose between bread, butter and guns, the choice is not an easy one. Pakistan is currently faced with that situation. But I must say that in such daunting circumstances, Pakistani economy is performing quite well. The manufacturing sector has shown good growth this year, power outages notwithstanding. And the total national debt is 60 per cent of the GDP, which is not a crisis situation. The economy is definitely out of the ICU. However, there is no room for complacency. It is still in the hospital ward.
(Javed Hafiz is Pakistan’s former ambassador to the Sultanate)
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