Mid-year review of the economy

Most local economists and financial experts of the
country do not agree with the rosy picture of the mid-term prospects of economy. They have some serious and valid reservations. Despite all claims, the trickle-down
effect is nothing to write home about
By Mehmood-Ul-Hassan Khan

The government has discovered five critical areas and ratios for macroeconomic stability. In order to maintain growth in the range of seven to eight per cent per year on a sustainable basis, the government will have to achieve the following goals in the days to come.

Five critical areas and ratios

* Substantial improvements in tax collection: The tax to GDP ratio, presently in the range of 11-12 per cent, needs to rise to 16-17 per cent. The government should try to broaden the tax base by identifying under taxed sectors. The overhauling of CBR and under consideration tax on agriculture income may bring desirable fruit in the days to come.

* High volumes of trade/exports: Pakistan needs to capture a larger share of world trade, both in exports and imports. The existing trade-to-GDP ratio which is hardly 35 to 40 per cent of GDP is in sharp contrast with the 70 and 80 per cent maintained by the developed countries.

* Increase in investments both domestic and foreign: The investment to GDP ratio at 20-22 per cent needs to be enhanced and kept above 25 per cent of GDP.

* Increase in savings ratios: The savings ratio must improve from 17-18 per cent to over 25 per cent of GDP. The spread between the average lending rate and deposit rate is too high and shows the inefficiency of the banking sector. It should be in range of 2.5-3 per cent but has become almost double.

* Efficiency in incremental capital output ratio: The capital to output ratio needs to be improved through better governance. It is estimated that at present, an investment of Rs3 adds a rupee to the GDP which is low in the region. Ideally it should be a rupee rise in GDP with Rs2.50 in investment.

Present and Mid-term projection of GDP

The economy is in good shape and all macro indicators portray prosperity in the days to come. The economy is standing at 7 per cent. According to official claims, the growth of the economy would be at the level of 6-8 per cent. But if the agriculture sector fails to perform, we would achieve 6 per cent growth and if it succeeds we get 8 per cent growth. The gap between 6.8 and 8 per cent does not seem to be rational.

Debt-GDP ratio

Pakistan has had been in the trap of external debts. But with constant institutionalisation financial reforms and corporate governance last year this burden came down to 56 per cent and this year we hope it to come down to 52-53 per cent and by 2009-10 it would be at 40 per cent. According to the Fiscal Responsibility and Debt Limitation Law by 2012-13, the debt burden should not be more than 60 per cent.

Development resources

The public sector development programme has already been increased to Rs435 billion as against allocation of less than Rs100 billion in the budget a few years ago According to government claims 50-60 per cent is going to infrastructure development and about 23-24 per cent for human infrastructure. Roughly over 80 per cent of the federal government development expenditure is being spent on development. Results would be seen in the coming years.

Other integrated policy options

*        To control the widening current account deficit (the country will have a Balance of Payment (BOP) surplus adding to forex reserves.

*        The budget deficit should be controlled and it would come down to 3.5 per cent of GDP in the next five years

*           Poverty reduction

*           Enhance the opportunities of employment

*        Control and equilibrium in internal and external borrowing

*        Control the looming ratios of inflation

*        Control and regularise the widening gap of current account
deficit

*        Reduce the cost of production

*           Promotion of SME

*           Development of water reservoirs

*           Availability of sufficient energy resources/power supply

*        More focus on alternative and affordable energy resources

*        Further reduction in debt-GDP ratios. In 1990s, the debt burden remained to 100 per cent of our GDP. In the last 6 to 7 years it has come down to an average 3.5. Last year the burden came down to 56 per cent.

Independent analysis

Most local economists and financial experts of the country do not agree with the rosy picture of the mid-term prospects of economy. They have some serious and valid reservations. Despite all claims, the trickle-down effect is nothing to write home about.

Frequent power break down and losses that WAPDA (It fears a shortfall of Rs84 billion to meet the challenge. Production costs per unit is Rs4.75 and its sale price is Rs4.10 - a loss of 65 paisa per unit) and PIA (requested for assistance of Rs20 billion from the federal government) are experiencing negate the figures and projections of the government.

Poor or almost non-existent infrastructure (Rs400 billion is needed), broken roads (Rs250 billion) and traffic jams (wastage of economic activity, time, money and resources) speak loudly and clearly than all claims made.

The constant menace of inflation and unstoppable price hikes have already verified that a lot needs to be streamline before announcing complete sovereignty/sustainability.

The nominal and negative return on savings, the increasing population growth, poverty (one third of the population is living below the poverty line and rural poverty is on the rise), sectoral disparities and unemployment (14-15 per cent) are also areas of concern. High ratios of income inequalities and expanding gaps in the external sector add to the situation.

It is predicted that the rising ratios of current and trade deficits would be the main threats and obstacles in the days to come. The meaningless bulk of FTAs and RTAs are increasing the trade deficits and our country’s comparative advantage is being lost by the day. The limited value-addition, line of exports products would be dangerous for the economy.

The gap is being sponsored by selling of national assets along with FDI, FPI, issuance of GDR, bonds and worker’s remittance and not by export-oriented growth which may disturb the mid-term prospects of the economy.

Mid-term geo-political factors

The “Blame Game” and politics of strikes and processions are seriously damaging the mid-term economic prospects in the country.

The prime example is the city of Karachi which tends to loss Rs3.5 billion in a single day closure in recent waves of strikes.

The burning issue of Balochistan, Waziristan, and the rapidly changing ties with Afghanistan would be obstacles in achieving mid-terms goals and may bring deficiencies in the highly projected mid-term economic prospects in the country. The rising tensions between the US, and Iran would put Pakistan in a difficult situation.