New threats looming amid recovery signs

The State Bank of Pakistan, in its latest report on the performance of the economy, sees the GDP moving up to 2.5 to 3.5 per cent in fiscal 2009-10, from 2 per cent in 2008-09. However, about a couple of months ago, the World Bank had expressed the view that the country’s GDP growth during 2009-10 remain unchanged at the previous year’s level of 2 per cent

By Aftab Ahmad

The national economy has shown signs of recovery recently. According to the Federal Bureau of Statistics (FBS), the large-scale manufacturing sector witnessed 0.17 per cent growth during the first two months of the current financial year, as against a decline of around 8 per cent last year. The items that recorded increase in production during July-August 2009 reportedly include motor-cycles, jeeps and cars, tractors, cement, cooking oil and vegetable ghee etc. The aforesaid increase in the production of certain industrial items may be attributed inter-alia to decline in the inflation rate to 10-11 per cent from around 25 per cent last year, rise in home remittances to approximately $800 million a month lately and improvement in business perception about the world economic scenario.

According to another report, exports of certain items including cotton, cotton yarn and hosiery etc. have also witnessed an improvement lately. Increase in the export of textiles has been attributed to the incentives provided to the local textile industry in the government’s new textile policy. The All Pakistan Textile Mills Association (APTMA), according to reports appearing in the national press, has demanded restrictions on unlimited exports of cotton yarn to ensure its availability in the domestic market at reasonable prices. The association has, also, requested the government to implement its textile policy in letter and spirit so that the higher export target of $25 billion fixed for textiles could be achieved.

Due to improvement in the growth of the manufacturing sector and exports lately, the estimates about next year’s GDP growth have been revised upward. The State Bank of Pakistan (SBP), in its latest report on the performance of the economy, sees the GDP moving up to 2.5 to 3.5 per cent in fiscal year 2009-10 from 2 per cent in 2008-09. It may be recalled that about a couple of months ago, the World Bank had expressed the view that the country’s GDP growth during 2009-10 may remain unchanged at the previous year’s level of 2 per cent.

Improvement in business perception about the world economic scenario has, also, played its part. If the global economy starts moving towards recovery, our exports to the US and European Union would no doubt pick up. With an increase in the demand for our products in the international market, the manufacturing sector would also be likely to show a positive growth as in previous years. Besides this, the higher GDP growth estimates are, also, based on expectations of another bumper wheat crop during the current fiscal year. The government believes that the wheat crop for 2009-10 may surpass the wheat crop produced last year.

The optimism and rosy picture painted in the preceding paragraphs is marred due to the fresh wave of terrorist attacks and political instability. Terrorism has already resulted in the closure of hundreds of manufacturing units in the country, cancellation of export orders and a plunge in local and foreign investments. In order to help the expectations regarding economic recovery to materialise, innovative measures may be needed to control the spread of terrorism and safeguard the economy from its evil effects.

In addition to terrorism, the long dry spell and climate change are staring the economy – particularly the agriculture sector – in the face. As the agriculture sector in Pakistan contributes to 20 per cent of the GDP and provides employment to over 40 per cent of the workforce, poor performance of this sector would hard-hit the country’s GDP growth and employment. According to a study undertaken by the Asian Development Bank (ADB), the impact of climate change on the agriculture sector in the Asian and Pacific region is likely to pose serious development challenges in the 21st century. Countries falling in this region, according to the study, may witness lower agricultural productivity and growth, declining growth in agricultural incomes and a threat to food security.

According to the afore-mentioned ADB study, lower agricultural production in the Asian and Pacific region, as a result of climate change, would result in higher food prices and lower food consumption – particularly among the poor – which can drive some people even to starvation. Reports have already started appearing in the national press about higher prices of vegetables and fruits in the local market, because of the long dry spell. Farm products are not only in short supply (due to which they are costlier), but they are also of poor quality due to dryness in atmosphere. If the dry spell lingers, it is feared that the next wheat crop may also be adversely affected and the country may be deprived of a bumper wheat crop.

Another reason why the next wheat crop may not be a bumper one is that the sugar crisis has not yet been resolved. The crushing season, which usually starts with effect from October, has not yet started due to which the sugar-cane fields are not presently available for wheat sowing. The ideal wheat sowing season is going conclude by the end of November. Therefore, if sugar-cane crushing does not start soon, wheat sowing may be delayed which would adversely affect the next wheat crop. Besides, if the sugar situation remains unresolved, the next year might also witness shortage and high prices of sugar as, at present. The government has announced its new sugar policy on November 4th and it is to be seen if it helps in resolving the present sugar crisis.

Yet another threat looming over the economy is the rising trend in the international oil prices. The oil prices touched $80 a barrel recently after hovering around $70 a barrel for the last few months. The rising trend in the oil prices is being attributed to the decline in the value of US dollar, signs of economic recovery in the industrialised economies and an increase in the demand for oil from China and India. The current oil price is no doubt about 80 per cent lower than the oil price prevailing in July 2008 at $147 a barrel. However, it is nearly 150 per cent higher than the price prevailing in December 2008 at $32 a barrel. Any further increase in the world oil prices could push up the country’s trade deficit and inflation rate and create serious difficulties for the economy.

Last but not the least, the government has not so far been able to end load-shedding and the objective does not seem likely to be achieved by the end of this year, as promised by the minister for power. As a result of load-shedding for extended periods, hundreds of smaller manufacturing units have reportedly been closed. Unless the gap between the supply and demand for electricity is removed, the shortage of electricity will continue to plague the economy. Due to frequent interruptions in power supply, the industry can not fully utilise its production capacity and it also has difficulties in meeting its export orders in time. It is, therefore, of paramount importance to solve this problem, as quickly as possible.

In order to resolve the aforesaid problems, the government should constitute a task force to recommend effective measures for the economy to properly utilise and conserve oil, gas and electricity. Another task force should be constituted to suggest measures for conservation of the country’s water resources and to make best use of these resources to maximise the country’s agricultural production. The government should monitor the implementation of its new sugar policy to ensure its success, in consultation with the sugar-cane growers, sugar mills and market players. The textile ministry should remain in constant touch with the textile manufacturers and exporters in order to remove their difficulties in promoting their exports. Last but not the least, the provincial governments need to make all possible efforts to ensure availability of daily use items to consumers at reasonable prices.

According to reports published in the national press, the government is going to launch an austerity campaign, which would cover the entire government sector. This is no doubt a step in the right direction. The campaign should be extended so as to cover the entire nation, in order to do away with waste and conserve the valuable national resources. If the austerity campaign is successful, many of our economic problems can be solved, to a great extent.