Missing macroeconomic targets
Despite all the achievements,
some macro-economic targets in the folowing
areas could not be achieved: food inflation,
large scale manufacturing, current account deficit,
trade deficit, exports, and private sector credit

By Mehmood-Ul-Hassan Khan

Our national economy has been performing very well for the last 4-5 years. The GDP has been in range of 6.5-7.5 per cent which is supposed to be fastest in the emerging economies. All the major indicators of macro-economic development and sustainability are good and sound. The foreign reserves have reached to new heights i.e. $15.6 billion at the end of June 2007 and may cross to $17 billion.  The country has received highest-ever workers’ remittances, amounting to over 5.493 billion dollars during FY07. The country attracted $6.945 billion as foreign private investment (FPI) during the fiscal year. The revenue collection increased to Rs841.4 billion during the outgoing fiscal year 2006-07. Our country is rated as business friendly by many international monetary agencies with business freedom 70.9 per cent, trade freedom 53.6 per cent, fiscal freedom 82.0 per cent and freedom from government 89.3 per cent, monetary freedom 72.0 per cent and investment freedom 50.0 per cent.

Missing targets

Despite all the achievements, some macro-economic targets could not be achieved. It seems that the government once again failed to achieve its targets of food inflation, large scale manufacturing, current account deficit, trade deficit, exports, and private sector credit (The flow of credit to private sector fell by 24 per cent during more than nine months of the current fiscal and is far behind the target set by the government). The private sector borrowed Rs262.8 billion between July and April 7 against the whole year target of Rs390 billion. The fixed investment growth in the textile sector was negative 10.5 per cent against a positive growth of 3.3 per cent last year. Overall credit flow to the textile sector remained less than half than what it was during the same period. The credit flow was just 8.1 per cent during the said period, compared to 17.2 per cent of the last year). It is a great set back to government which also shows the failure of advisors and economic managers of the government. The different quarterly reports of the State Bank of Pakistan (SBP) and the Federal Bureau of Statistics (FBS) show that major macro-economic targets were not achieved during 2007.

Declining exports

Despite many new schemes, incentives, policies and packages, the exports volumes are going downwards. The country fell short of its export target of $18.6 billion by $1.6 billion, as overall exports stood at $17.01 billion during the last fiscal year. On the other hand the country also missed its import targets. The trade deficit grew by 11.53 per cent to highest ever level of $13.528 billion in the last fiscal year as against the $12.12 billion in FY06. In the last fiscal year, the imports of luxury items raised imports bill to $30.54 billion as compared to an increase of 6.85 per cent or $1.96 billion. Overall, exports increased by a mere 3.5 per cent to reach $17.3bn and imports have surged by 8.1 per cent to an all-time high of $30.86bn. It is now feared that if the trend continues, imports will soon be twice as high as exports. According to many economists and marketing experts the country’s high cost of production is supposed to be one of the main factors in our poor performance of exports. Our cost of doing business remained much higher than the other regional countries, including India and Bangladesh, which have put a negative impact on the export.

Suggestions/strategies

We urgently need to have export diversification, removal of supply side constraints, enhancement of labour productivity & easy availability of skilled human resources, sharp upward increase in quality of products, immediate institutionalisation of adoption of international standards, more market access, and removal of inefficiencies caused by bottlenecks. Adoption of value-addition would increase our share of exports in the region and world alike in the days to come. Paradigm shift is required from consumption-oriented growth to export-oriented development as did by many countries like Singapore, Thailand, Malaysia, Indonesia, and Taiwan. Moreover, there is an urgent need to rectify the bad effects of tighter monetary policy especially on textile industry which has already increased the interest rates which has rendered business uncompetitive  

Widening current account deficit

The country has missed its current account deficit target too, which is the main parameter of judging the overall position of the country’s inflows and outflows payments. In the last fiscal year, the current account deficit increased by 40 per cent to 4.8 per cent of the gross domestic production (GDP) and all-time high level of seven billion dollars. The government had set the current account deficit target at 4.3 per cent of the GDP; however, for the first time in our national history of the country, the current account deficit reached 4.8 per cent of the GDP against the target of 4.3 per cent in FY07. According to many reports of the SBP and data that during the last fiscal year, the country’s current account deficit increased by $2.026bn, as a result it reached new peak of $7.016bn at the end of the last fiscal year while it stood at $4.99 billion in FY06.

Main reasons

According to many economists the widening current account deficit would be dangerous for the economy in the future. They term that failure in achieving export target is supposed to be one of the main causes of the widening current account deficit. Furthermore, the widening trade deficit, services deficit(country faced a deficit of 4.125 billion dollars in service trade, mainly due to high payments of transportation, construction, financial, computer services and royalties during the 2007 fiscal year) and high raise in income deficit during the last fiscal year are also responsible for the high levels of current account deficits.

Many countries of Far-east region has surplus current accounts which are being used in the development of infrastructure, massive socio-economic uplift programs like elimination of poverty and creation of jobs.

Suggestions/strategies

It is urgently needed that government should change its policies and initiate proper steps to mange the increasing current account deficit. Better financial and corporate management, complete transparency, accountability, cut on luxury way of life and the last not the least substantial increase in exports volumes would be instrumental to reduce the widening gaps of current account deficits. 

Poor performance of LSM

The high and sustainable performance of the large scale manufacturing (LSM) is supposed to be cornerstone in the macro-economic development.  High and speedy but constant onward march of the LSM played very important role in the economic growths of Germany, Japan, USA, UK, France and China which produced unlimited opportunities of employments, instrumental of elimination of poverty, and above all one of the main actors of earning billions of dollars foreign exchange. In our country too, the LSM play a very important role. It is the second largest sector of the economy accounting for over 20 per cent of GDP. It showed poor performance in the last fiscal year. The government fixed its growth target 13 per cent missed by 4 per cent during the last fiscal year.

Main reasons

According to many economists, the high interest rates, increasing cost of doing business in the country, persistent energy crisis, lack of qualitative infrastructure, absence of skilled labour are supposed to be the main reasons for declining ratios of the LSM. The reports of the SBP and FBS show that LSM growth has been declining for last three years.

Suggestions/strategies

It is strongly suggested to reduce the cost of production and improve the technical skills. It is also recommended that disparities between the demand-supply of energy resource and the easy availability of credit funds to private sector on lesser rates should also be initiated. Joint venture should also be taken as an immediate option for the quick revival of poor performance of the LSM in the country.  

Rising foreign & domestic debts

The country’s foreign debt has also increased by two billion dollars to 39.265 billion dollars against 37.265 billion dollars in FY06. In comparison with the quantum of the real GDP of the country, the total size of the foreign and domestic debts has reached very close to the real GDP.        

The domestic debt has also marked a huge increase of 3.74 billion dollars over FY06 as the domestic debt heaved to Rs3226 billion mark by April 2007, from Rs2999 billion in June 2006. In foreign exchange the domestic debt was estimated at $37.93bn in FY06, which increased to 42.14 billion dollars by April 2007.

Public debt in Pakistan

Pakistan entered the 21st century with serious financial problems. Public debt exceeded 90 per cent of its GDP, over 600 per cent of its annual revenues, and debt servicing accounted for over half of current revenues. In 2001, Pakistan was the only country in South Asia to be classified as a severely indebted country by the WB. In FY07 the federal government’s borrowings shot up to around Rs218 billion, which were reduced to 170 billion when the government used Euro bonds proceeds to curtail the borrowings. The federal government had projected Rs130 billion budgetary borrowings for FY07, but the actual borrowings enlarged to above Rs200bn at one time. The multiplier effects of increase in debts also disturbed the budgetary deficit which widened to 4.5 per cent of GDP from 4.20 per cent, depicting an upsurge of 30 basic points in the last fiscal year.

High inflation ratios

The government could not control the constant price hike and high levels of inflation during the current fiscal year. It remained a major threat for the economy, therefore. The tight monetary policy could not control the inflation besides, liquidity in the market. It is obvious that despite all the high claims, the inflation prevails. According to latest report of the Federal Bureau of Statistics (FBS), the Consumer Price Index (CPI) has increased to 7.77 per cent for the fiscal year ending 2006-07 over the same period of last year, showing the food inflation jump to 9.68 per cent. The CPI based food inflation increased to 9.68 per cent in June 2007 over the same period of last year. Furthermore, the inflation, based on consumer price index (CPI), Sensitive Price Index (SPI) and Whole Sale Price Index (WPI) increased by 7.77 per cent, 10.82 per cent and 6.94 per cent respectively, in fiscal year 2006-07 over the same period of 2005-06. It is seemed that both the CPI and WPI have recorded 9.68 per cent and 11.16 per cent food inflation in June 2007 over the same period last year.

Mixed performance in agricultural sector/sub-sectors

Agriculture sector’s contribution to our GDP has undergone almost a precipitous decline, i.e. from 53.2 per cent in 1950 to approximately 23 per cent at present, largely due to inadequate focus on developing new seed varieties with higher crop yield and pest resistance potential. The national economy agricultural sector showed a modest recovery from the dismal performance of last year, as overall agriculture grew by 5 per cent in FY07. The impressive growth in major crops owes partly to the bumper wheat and sugarcane crops, and partly to the base effect, as it is measured from a low base of last year.

Wheat production was up by 10.5 per cent to 23.5 million tonnes, the highest ever wheat production recorded in the country’s history. Sugarcane production improved by 22.6 per cent last year to 54.8 million tonnes the second highest size of the crop in the country’s history.

The third largest crop, cotton has missed its production which stood at 12.5 million bales against the target of 13 million bales in last fiscal year. Two other major crops, rice and maize did not perform well, registering negative growth rates of 2 per cent and 4.5 per cent, respectively.

Concluding remarks

Economics has multiplier effects and always works in integration. Missing macro-economic targets are a wake-up call to the government. Despite the short term policies, long term policies should be initiated and implemented and the fruit of the macro-economic achievements must be equally distributed among the general masses.