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Economic
Scenario 2009
A perspective on the economy
By Sabeen Mushtaq
Year 2009, another year has passed by with a
slight improvement in certain key macroeconomic indicators as compared to
2008. It is for sure that our economy will have to face quite a lot of
challenges in the year 2010.
Economic highlights and analysis of 2009:
The IMF (International Monetary Fund) approved a 23-month loan of
$7.6 billion in 2008 to help Pakistan to cope with the global financial
crisis and balance of payment crisis. Up till now, Pakistan has received
$6.5 billion from the IMF. IMF support has had a positive effect on
certain areas, for e.g. macroeconomic imbalances have been shrinking,
inflation has declined and the exchange rate has become more flexible as
foreign currency reserves have increased, but there have been some
negative consequences as well.
The government was required to adopt tight fiscal and
monetary policies. Interest rates were kept high contrary to global
trends, taxes were increased and subsidies were reduced that resulted in a
very low GDP growth and rise in poverty. Moreover, foreign debt
liabilities also increased and those were also short term, implying
continued pressure on BOP (Balance of Payment) and fiscal deficit.
On 17th April 2009, the Friends of Pakistan (FoP)
pledged more than $5 billion to stabilize PakistanŐs economy and fight
terrorism The US and Japan pledged $1 billion each. Saudi Arabia added
$700 million and the EU $640 million. Only a fraction of this amount was
disbursed. In August of 2009, a FoDP forum was carried out in Turkey;
however Pakistan failed to secure swift aid from donors.
Another development on the economic front was the
approval of Kerry Lugar bill that got signed by US President Barrack Obama
on 15th October, 2009 and on 21 Oct 2009 the federal cabinet formally
accepted the Kerry Lugar law. One of the major objectives of this bill is
to triple non-military aid to Pakistan to Rs.7.5 billion. Some of the
economists were against this bill due to the fact that Pakistan is losing
its self sufficiency and getting more dependent on foreign aid. But, the
problem lies in our weak security situation which is demanding more
budgetary expenditure that can only be made possible through the
materialization of foreign funding. (see table-1)
Inflation was brought down with the help of tight
monetary and fiscal policies but the challenge is to keep the downward
trend going while stimulating growth.
Looking at the downward CPI inflation trend, the SBP
(State Bank of Pakistan) cut the rate by one percentage point in April
from 15 to 14 per cent. On August 16th, SBP cut the interest rate by 1 per
cent to 13 per cent effective from August 17th. In November 2009, the SBP
again cut the interest rates by 50 bps. It is evident that SBP is giving
top priority to reducing inflation at the cost of growth. In this respect,
the performance has been impressive with inflation reduced by one half in
a span of few months. It seems that growth stimulation has been left to
fiscal relaxation and foreign aid, although there has been a little easing
of monetary policy as well. (see table-2)
Because of tight monetary and fiscal policy as
directed by the IMF, demand was kept in control that resulted in reduced
imports and better balance of trade. Higher remittances and reduced oil
prices also helped.
Foreign investors had been cautious in bringing
additional capital throughout the year. The reasons behind the decrease in
foreign direct investment include, deteriorating law and order situation,
power shortages and lack of policy implementation.
SBP expects a gradual recovery during FY10, and
expects real GDP growth to be close to the target of 3.3 per cent in 2010.
Signs of economic recovery include, (a) a rise in imports during July
2009, which points towards a possible pick up in domestic demand, (b)
easing of LSM contraction and (c) resolution of circular debt problem
would also support production activities in oil and energy sectors. The
anticipated recovery may also be supported by the re-stocking of
inventories and a small recovery in exports as the incipient recovery in
major economies gather pace. However, the risks related to higher
commodity prices and delays in anticipated external flows remain intact.
SBP anticipates fiscal slippages led by a surge in expenditures due to
security related operations and below par tax revenue collection. The
central bank expects a current account deficit and a fiscal deficit at
around 5.2 per cent, a level we have seen in FY09. However, its inflation
outlook for FY10 stands at 10-12 per cent relative to 20.8 per cent
reported in FY09.
Besides all these economic facts and figures, the real
questions which arise are whether we, as a nation have moved ahead or not?
Was 2009 really a useful year for our economy and what can we expect from
2010? Finally, the most essential query to ponder upon is if the poor,
that is perhaps the most dominant segment of our society can expect
something concrete and beneficial for themselves in the new year or not?
These questions will only be answered in the days to come.
TABLE-1: MONTHLY CPI
INFLATION COMPARISON
Months
2009
2008
January
-0.4
1.91
February
1.0
0.49
March 1.4
3.08
April 1.4
3.04
May 0.2
2.69
June 1.0
2.10
July
1.5
3.34
August 1.7
2.14
September
0.5
0.97
October
1.0
2.12
November
1.4
-0.12
TABLE-2: BALANCE OF PAYMENT FOR 2009
(Million $)
1Q-09
1Q-08
2Q-09
2Q-08
3Q-09
3Q-08
Oct/Nov,
Oct/ Nov,
2009
2008
Trade Account
-2045
-4602
-2365
-4184
-2809
-4484
-1889
-252
Current Account
-550
-3636
-875
-4181
-532
-4258
827
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Exports
4231
5163
4800
5961
4620
5713
3057
2941
Imports
6276
9765
7165
10145
7429
10197
4945
5476
Remittances
2018
1662
2153
1723
2331
1879
1501.08
1086.65
FDI
497
1499.4
678.2
2104
471.7
1116.4
302.4
504.4
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