Reversing slowdown of the economy
By M. Sharif

The national economy has slowed down because of multiple domestic and global factors over more than first half of current fiscal year. The new government will have a great challenge to reverse any further slowing down of economy. It will have to face challenges not only on account of correcting fiscal imbalances but in the realm of new development strategies that will have to be pro-public, achieve and sustain higher economic growth, contain inflation, create employment opportunities and strengthen the supply side of economy.

Contributory factors

The SBP in its latest report has projected that the economy may grow from 6.0 to 6.7 per cent intead of the earlier estimate of 7 per cent during the current fiscal year.

The three important things that have happened include increase in inflation, increase in the prices of oil, edible oil and other food items which are imported from the international market and decrease in the supply side of the economy and political slide down. Each of these factors has played its role in slowing down the economy to some extent and creating fiscal imbalances.

The government’s trategy worked well and it gave desired impetus to economic growth and the financial sector grew with a high rate of profits. But at the same time it brought the supply side of the economy under pressure. It was initially addressed by utilizing unutilized industrial capacity that took the graph of the industrial growth upward. It was registered that19.9 percent in 2004-05 and gradually declined. The latest figure about it for the first five months (July to Nov 2007) has registered a low growth of 6.9 per cent against a target of 10.5 per cent for the current fiscal year. During the past three years imports and inflation have surged in the wake of a decrease in the industrial output, increase in M2 and persistence of high demand of consumable items.

The SBP had to wait before reacting to twin developments. It started pursuing a tight monetary policy from 2005 to contain inflation that had increased to more than 8.0 per cent. Since then it has proved to be a hard nut to crack despite further tightening of the monetary policy. Tight monetary policy according to the SBP has curtailed import of non-essential items to a reasonable extent notwithstanding the fact that trade deficit has been increasing over past 2-3 years. During first seven months of current fiscal year, it has increased to $10.327 billion instead of $7.641 billion of the last fiscal year. It has seriously affected the current account deficit that has been sustained because of the strong external sector supported by high remittances by the expatriates, privatization proceeds, FDI, foreign loans and assistance. According to the WB report, current account deficit has its share in slowing down the economic growth.

During past one year prices of edible oil and wheat, which has increased by 90 per cent since mid-2007, have shown upward trend.

According to the WB and OECD (Organisation of Economic Co-operation and Development) report, all the leading global economies and some of the emerging economies are likely to show a downward trend in growth during 2008.

The projection shows that the South Asian economy would slowdown to 7.9 per cent growth from the previous year’s growth of 8.4 per cent. Obviously Pakistan’s economy can hardly remain isolated from the slow down in the global economy. In the process of expected political change the economy has taken quite a bit of a burden. Rupee has hit its lowest level since September 2001 and is traded at Rs62.85 for $1, despite the strength it gets from forex reserves that are at $15 billion. Because of violent reaction to the event of 27th December 2007, there have been tremendous losses in Sindh in particular that stand at around Rs100 billion according to an estimate. Exports have suffered because of disruption for exports.

During January 08, the trade deficit increased by 77.84 per cent. It swelled to $2.053 billion instead of $1.154 billion during January 07. Exports increased by 25.60 per cent and imports surged to 51.48 per cent during January 2008. Pakistan has been facing tough competition from India and China in selling its textile products in the international market.

Strength and state of the economy

The economy has slowed down only during past 5-6 months and as such its strengths are in tact. The expected growth rate of around 6.0 per cent during the current fiscal year is likely to be compared with the growth rate of the regional economies and some of the emerging economies. Despite this fact, current state of economy particularly with increase in fiscal deficit, high trade deficit, current account deficit and weak supply side of the economy would certainly ask a review of the strategy of development and management. Strength of the economy lies in the diversity of the economy and gross output estimated to be at $160 billion.

The economy grew at an annual growth rate of 7 per cent during past five years. Per capita income is estimated at around $1000 and forex reserves stand close to $15.0 billion despite political instability and pressure on the reserves because of the increase in oil and food items prices. External sector is vibrant and the government is confident to make any deficiency in it by financing the account deficit by global listings of NBP, HBL and Kot Addu Power Co. According to the caretaker finance minister, “we are planning to have some GDRs in the last quarter of the fiscal year and if they are successful, I think we will be able to finance the current account deficit without any problem.”

The minister also stated that fiscal deficit would be around the figure of 4.0 per cent of GDP. According to him, increase in it is because of increase in oil price in the global market whose effect has not been transferred to the consumers to keep inflation and the cost of doing business in the country on lower side. According to him, “we have the oil price pressure on subsidy side that we foresee in the next six months, we will pass on oil prices to the consumers and this should ease some of the burden and we are hoping that our fiscal deficit will be very close to our target which was 4 per cent.”

Limited options

The new government will have limited options to start with to tackle the problems faced by the economy in short - term perspective. Post election economy is an extension of the economy faced with energy deficit of around 2500 MW without any immediate remedy. The agricultural sector which did not get the attention it deserved, high debt servicing because of high domestic debt of Rs2.7 trillion, foreign debt of $40.2 billion, high inflation that might end at 8.0 per cent and huge borrowing by the government for budgetary support from the Central Bank that is Rs317 billion from July-2007 to 02 February 2008 instead of Rs34.5 billion during the same period in the last fiscal year.

Conclusion

Political change and economic development are fundamentally linked in any developing and developed society. The change should be acceptable to all the stakeholders. The fault-lines that have emerged in the economy during the transitory period of political change should be considered a blessing in disguise to take short and long term measures to remove them.