Economic recovery and prevailing policies

By Mehmood-Ul-Hassan Khan

Economic recovery although is slow, but seems to be moving in the right direction. Substantial decrease in current account, surge in workers’ remittances, lowering of inflation and decreasing fiscal deficit are supposed to be healthy signs, which would contribute towards achieving tremendous level of output, if utilized in a proper way.

Current account deficit

According to the latest official statistics of the ministry of finance, the current account deficit had declined by $3.796 billion or (89 per cent) during July-September of fiscal year 2009-10. A sharp decline in trade deficit and drastic decrease in imports were the main reasons of declining current account deficit. Moreover, it is predicted that the current account deficit would be around $2-2.5 billion by the end of June 2010. Now, the overall current account deficit has narrowed down to $462 million as compared to $4.258 billion in 2008. Monthly analysis of the current account deficit registered a surplus of $174 million in September 2009, relative to $19 million in August 2009.

Economic performance

According to the latest official statistics, trade and service sectors achieved a sustainable improvement and contributed greatly in decreasing the current account deficit. Trade deficit stood at $2.75 billion in the first quarter of fiscal year 2009-10, as against $4.51 billion in the same period of last fiscal year. Service sector deficit stood at $749 million, with $1.551 billion exports and $802 million imports, as compared to $1.130 billion with $2.39 billion exports and $1.092 billion imports in the corresponding period of last fiscal year.

The data indicated that the overall deficit (goods, services and income) stood at $4.135 billion against the current account transfers of $3.712 billion during the July-September period of fiscal year 2009-10. Overall, commodity imports stood at $4.635 billion and exports at $5.711 billion with a trade deficit of $2.7 billion in first three months of the current fiscal year.

Workers’ remittances

According to the latest figures of the SBP, Pakistan received $7.811 billion as workers’ remittances during 2008-09. The impressive inflows of remittances have helped to build foreign exchange reserves to the tune of $14.75 billion, the highest level recorded since 2006-07.

Workers’ remittances have been increasing at a remarkable rate in the current fiscal year. Pakistan received an amount of $2.332 billion in the first quarter of FY 2009-10, showing an impressive 24 per cent rise, when compared with $1.880 billion received in the same period last year.

________________________________________________________

Month           Workers’ Remittances

July-2009          $744.85 million

August-2009          $780.5 million

September-2009   $807 million

Total of first quarter           $2.332 billion

Source: SBP (2009)

________________________________________________________

Projection

It is hoped that the country would have an inflow of $9 billion remittances by the end of the current year and up to $12 billion by the end of the 2010-11 fiscal years. In terms of percentage, it amounts to 15 per cent rise this year and more than 50 per cent increase in the next fiscal year, over a period of just two years. It is estimated that it would also help the economic managers of the government to take appropriate managerial decisions in stabilizing the local currency which had lost 23 per cent value against the greenback in 2008.

________________________________________________________

Country-wise

________________________________________________________

Countries/Region          Workers’ Remittances %

Gulf and the Middle East          70

North America; US and Canada          21.6

Europe 32.2

Source: SBP (2009)

________________________________________________________

Short-term scenario

It seems that the economic policies of the government are conflicting.

(a) It is predicted that the decline in imports, especially in machinery and food items may have a negative impact on the economic stabilization drive. This may also badly affect our already stagnated exports further in the long term period.

(b) For the time being, contraction in demand has eased inflationary pressures but the removal of power subsidies by the government and resurgence in oil and food items at international markets would negate all the efforts of managing inflationary pressures.

(c) It is feared that expected high prices of oil and food items would be instrumental in an increase in fiscal balances.

(d) Stagnant revenue collection, falling gross capital formation and deteriorating law and order situation in the country has already badly affected the inflows of FDI.

(e) The ongoing severe energy crisis would also be one of the main hurdles in the economic stabilization process. According to a WAPA official, the overall generation of the country’s power system has reduced to 11,308MW. Hydel, thermal and independent power producers (IPPs) are generating less than their dependable capacity (DC) 16,316MW. Moreover, the total demand is 14,341MW and the shortfall between the demand and supply is still 3,033MW, even in this fairly mild weather.

(f) The industrial sector was going down and needed fiscal stimulus. Continuous tightening of monetary policy kept the industrial production negative till the end of the fiscal year in June 2009.

Long-term scenario

It is feared that the long-term macro-economic targets would be difficult to achieve. Equitable resource allocation, balanced sector growth and poverty eradication efforts would be affected by poor planning and bad governance. Furthermore, generation of employment opportunities, optimal source mobilization, increase in domestic savings and last but not the least, infrastructural development will not be easily achieved due to deteriorating law and order situation and rising heat in the political system.

 There is no short cut approach for this, but it is hoped that effective structural changes, institutional reforms and institutionalization of good governance may provide dividends in the near future. Moreover, controlling of black or parallel economy, financial discipline, simplicity, equal distribution of wealth and economic justice would be main actors for achieving all the long term macro-economic targets.

Key challenges

According to the IMF (2009) implementing a second generation of reforms, addressing the infrastructure deficit, prolonging the fight against terrorism and improving implementation of development projects are the key challenges to the government in the near future. Rigorous pursuit of the poverty reduction strategy and the medium-term development framework for 2005-2010 would be two important challenges for the government.