Sustaining high economic growth in
a rapidly changing domestic, regional and global economic environment
By M. Sharif

At the back of this anticipated change, resulting after the election results were announced, reflecting the intense desire of the electorate to see a radical change in the government’s approach to economic policies. The policies pursued by the earlier government resulted in people facing economic hardships. This scenario existed prior to the general elections and thus the massive reaction against the sitting government. To the economic woes of the people in the face of deteriorating cost of living especially rising inflation and that too mostly food items and commodities of daily use made matters worse.

The main culprits in the deteriorating economic situation was the slide down in US dollar and increase in the price of crude oil to $104 per barrel which resulted in increase of the price of raw materials used in various industries.

Sustaining high economic growth of more than 7 per cent of the GDP is imperative to resolve issues in the long term related to debt servicing, unemployment, poverty alleviation and economic inequality. Equally important are the short term issues of ensuring food supply at affordable prices and over all inflation that has so far affected the very poor and the low income group.

Focus on the real issues

Issues such as persistent high inflation, slow down in exports, the deterioration of macro-economic indicators, mounting domestic and foreign debt and an increase in fiscal deficit, trade and current account deficits are resulting in a slowdown of the economic growth.

During the past few years the focus was on generating economic growth through consumerism and pumping capital into the economy from external and domestic sources attained through foreign and domestic debt and higher fiscal deficit. It could, at best, supplement consumerism and create more fiscal space for the government to increase public sector development projects (PSDP) expenditure. It was evident in the current fiscal year PSDP which was Rs520 billion. It could have contributed towards sustainable growth provided it was prioritised correctly. Huge PSDP expenditure during the past three years did not focus on power generation and social sector development. The neglect of these vital areas has resulted in severe shortages of power and created multiple distortions in the economy and society.

Inflows of remittances increased steeply from around $1 billion in 2001 to a five-year average of around $5 billion. During the past six years no less than $25 billion has been received in the economy through remittances for which the economy was not ready for productive utilisation.

Uneven distribution of the economy has fuelled inequality on one hand and on the other the account of increase in rents has made life difficult for many. But, the fact can’t be overlooked that investors are in the stocks business to earn as much profit as they can in shortest possible time. It would therefore be quite illusive to equate the factors in stock markets and its behaviour pattern to the real situation of the economy.

Public debt has become yet another area of concern for any serious student of Pakistan’s economy. It goes to the credit of the de-empowered government that it steered the country through extremely difficult times when in 2000, it was faced with public debt of around 100 per cent of GDP and with a situation of sovereign default in 1999. It brought down public debt to less than 60 per cent of GDP within 4-5 years but all this was done because of debt re-scheduling of $12.5 billion. There was a debt write-off of around $3.5 billion by the US and other Western countries that gave an immediate relief of the debt payment of $1 billion a year.

Afterwards, a sense of complacency took over the government. Public debt was led to have its way towards exponential growth. It was primarily because real economic issues remained un-addressed. According to latest figures released by the SBP, the quantum of total foreign debt has increased by $2.61 billion, to $43 billion during the first seven months of the current fiscal year against total foreign debt of $40.48 billion on 30 June 2007. $ 3 billion is required annually for debt payment and servicing.

Domestic debt has soared to Rs2.9 trillion and its servicing at 10 per cent to 12 per cent is a huge burden on the meager revenue of Rs1 trillion that the FBR might be in a position to collect for the first time in history.

Industrial growth has dipped to an average of 6 per cent during the past three years. Value addition has not taken place up to the desired level in the textile sector which is the backbone of the industry. Diversification in the industrial sector is also lagging behind the targets that were generally fixed by the government in the trade policy despite some progress in this direction. The industrial sector has not seen an upward growth of more than 12 per cent on a year-to-year basis that is considered the minimum essential for a high sustainable economic growth rate of more than 7 per cent. In fact, 7 per cent average growth attained by the economy over the past four years was mainly because of a high growth in the financial and services sector. That was possible because of the inflow of foreign capital through privatisation of banks and telecommunication assets.

Banking and telecommunication sectors that have attracted maximum foreign capital lacks the potential and created opportunities that are the bare minimum. They also increased the outflow of capital as is happening at present. Their profit earning rate is quite high. Out-flow of the profits earned by foreign investors has increased to around $1 billion, double of the amount of a year earlier.

The agricultural sector has not been given the attention it deserved during the past few years. It is one of the major reasons of the food insecurity that is being faced presently by the people at large. According to an analysis, production of major crops such as cotton, wheat, rice and sugar cane, during the past seven years grew on the average 1.23 per cent a year. It is lower than the population growth of 2.2 per cent.

Low production is because of four factors:

(1) High profit earned by the middle man between the market and farmers that leaves the small farmers high and dry.

(2) High cost of inputs like water, seeds, fertilisers.

(3) Poor marketing strategies adopted by the government and the farmers because of lack of resources.

(4) Low support price fixed by the government in case of wheat and sugar cane procurement by the mill owners who do not even pay the farmers their outstanding money.

The government has fixed the wheat procurement price at Rs510/ 40 kg but the farmers are insisting to raise it to Rs800/40kg. The share of the agricultural sector in GDP has reduced from 24 per cent to 20.9 per cent within a few years.

Strategy to sustain high economic growth

The strategy of economic growth pursued thus far has led to more distortions in the economy and society than addressing the issues that it was supposed to address. In order to address the economic woes of the public and to put the economy on sound footing for a sustainable economic growth of 7 per cent or more in medium and long run, the new government will have to take radical measures to reduce fiscal and current account deficit. Some of the areas that would need attention are as follows:

(a) Non-developmental expenditure of the government should be reduced along with the size of the government at the central and provincial levels.

(b) Industrial and agricultural sectors may be revived with focus on value addition, diversification, competitiveness and increase in productivity. Foreign investment may be encouraged to invest in those sub-sectors of the economy that have so far been neglected.

(c) Consumer-led growth strategy may be replaced by export-led growth strategy.

(d) Cost of inputs and doing business in the country may be decreased by reducing tariffs and cost of utilities.

(e) Taxes may be increased on import of non-productive items and taxes on food items like edible oil may be reduced to the bare minimum to give relief to the common people.

(f) Infrastructure development, hydro-power generation, good governance and human resource development may be given top priority.

(g) Radical steps may be taken to document the economy to increase the tax base. Income through services, stocks, agriculture and real estate may be taxed according to the capacity of the stakeholders.

(h) Fiscal decentralisation may be done to enable the provinces to play a greater role in the economic development at the grassroots level.

(i) Fiscal discipline may be observed to make budgetary proposals successful by the end of the fiscal year.

(j) Pro-public fiscal and monetary policies maybe pursued at the federal and provincial level.

Conclusion

Sustaining high economic growth in the midst of a radically changing global economic scenario and high expectations of the people, who have voted for a change, is a really big challenge for the government that is yet to step into the corridors of power.