Signs of the economy’s gradual revival

With a significant drop in current-account deficit, a substantial increase in overseas workers’ remittances, lowering of inflation, decline in fiscal deficit and agriculture better than
last year, a gradual economic recovery seems to have been set in motion

By Mohammed Arifeen

The State Bank of Pakistan has projected GDP growth at the rate of 2.5 to 3.5 per cent for the current fiscal year 2009-10. It envisions the rate of inflation to be at the rate of 10 to 12 per cent, half of previous year. The government has established the GDP growth rate for the current financial year at the rate of 3.3 per cent while the IMF has anticipated a 2 per cent growth.

In the financial year 2008-09, the fiscal deficit dropped to 5.2 per cent of GDP. The fiscal deficit dropped from Rs777.2 billion in the year 2007-08 to Rs680.4 billion in the year 2008-09. The tough macro- economic stabilisation with the support of IMF was partially responsible for the reduction in the fiscal deficit.

Agriculture, the main stay of the economy performed well in the fiscal year 2008-09 and attained a growth of 4.7 per cent against the target of 3.5 per cent principally due to the higher supply price. During this period both the major agricultural crops and the livestock sub sector displayed above target growth. Significant feature of the growth this year was the record harvest of crops like wheat, rice and maize that collectively accounts for 59 per cent of value addition by major crops and in this fiscal year, this share achieved 63 per cent. The government believes that this year the bumper crop of wheat would surpass the wheat crop produced in the past year.

During 2008-09 Pakistan received $7.811 billion as workers’ remittances. This facilitated the government to build a foreign exchange reserve of $14.75 billion, the highest level registered since 2006-07. It is expected by the end of the year 2009 and 2010 the workers’ remittances would be up to $9 to $12 billion respectively. Trade deficit stood at $2.75 billion in the first quarter of the fiscal year 2009-10 as compared with $4.51 billion in the same period of the past year. The current account deficit dropped by 3.796 billion during the months of July- September of 2009-10. It is projected that current account deficit would be around $2.25 billion in the current financial year.

With the significant drop in current account deficit, substantial increase in workers’ remittances, lowering of inflation, decline in fiscal deficit and agriculture repeating the same performance as that of last year, there is optimism of a gradual economic recovery. Further, the increase in import in the first quarter of the current financial year reflects an increasing domestic demand. Also, the positive growth in the large scale manufacturing sector in the same period shows signs of economic stability in the current fiscal year. Full economic activity will take a longer time to recuperate due to negative business sentiments prevailing in the private sector.

Both Pakistanis and foreigners are shying from investing in Pakistan. Total investment was down to 19.7 per cent of GDP from 21.5 per cent a year earlier. The investment declined by 6.5 per cent-largest fall in 40 years. During the last few months of the current year it has shown no signs of any improvement. Growth in private sector was 13.2 per cent of GDP – lowest since 1998-99. Security fears and persistent power crisis are driving away both the foreign and private investors.

Exports as per cent of GDP have degenerated from 13.2 per cent in the financial year 2004-05 to 11.5 per cent in the financial year 2008-09. National savings as percentage of GDP despite ameliorating to 14.3 per cent in the fiscal year 2008-09, from 13.4 per cent in the financial 2007-08 is still the second lowest in eight years.

In the financial year 2008-09, the large scale manufacturing (LSM) output declined by 8.7 per cent- the first in 62 years. Mining and quarrying recorded the lowest growth in eleven years.

The construction industry recorded a substantial decline of 10.8 per cent in 2008-09- the largest fall in 37 years. The surge in prices of building materials and a major reduction in disbursement of development projects and scarcity of financing facilities caused the construction industry to contract significantly. The service sector which had been showing significant growth in the past years grew by only 3.6 per cent in 2007-08; the lowest growth in the past eight years. 

Debt servicing – to- total revenue ratio rose to 49.1 per cent in 2008-09 from 45.3 per cent in 2007-08. Total debt and liabilities (TDL) stocks registered a phenomenal growth of 27 per cent in the fiscal year 2008-09. According to State Bank of Pakistan, persistent growth in the stock of TDL depicts that imbalances in the overall fiscal account as well as the country’s current account are still large. For the second consecutive year, the target of 2.5 percentage point reduction in foreign debt and liabilities as per cent of GDP has not been met.

Around 62 million out of the total population of 170 million have fallen below the poverty line. According to World Bank report poverty has reached 36.4 per cent. The rapid rise in poverty is due to surge in inflation and reduction in subsidies. In Pakistan, the share of “severely food insecure population” was also expected to have increased from 23 per cent in the financial year 2005-06 to 28 per cent in 2007-08.

The economic recovery is gradual, but still there are some serious economic issues that have to be settled once for all. The government should come up with programmes to root out terrorism, raise the tax to GDP ratio by gradual documentation of especially the agriculture sector, which could immensely contribute substantial tax revenue to the government treasury. The FBR must develop the data to curb tax evasion from the powerful political elites. In order to eliminate the rising poverty, the government should come up with vital economic projects for providing jobs to millions of unemployed educated, skilled and unskilled labour.

Too much dependence on the so called aid from the so called friends of Pakistan for political interest and strengthening of mock democracy will not bring any sort of economic prosperity either in the short run or the long run. No friendly countries will come to rescue the economy of Pakistan unless it shows its own awareness and efforts to improve the lives of the bulk of poverty stricken population. The country requires uninterrupted supply of power like gas and electricity to the industrial and agricultural units, for accelerating domestic production and boosting exports. In this context, the vital textile industry not to be sidelined and all its problems be sorted amicably by the government.

Pakistan’s high level of economic strength lies in the vast development of agriculture. The country’s emphasis should be on greater investment on agriculture. Priority should be given to produce surplus food commodities to the hungry stricken people at reasonable rates. With better water management, introduction of mechanised methods of cultivation, storage and marketing facilities, there is no reason why Pakistan cannot develop this major sector which contributes 20 per cent to GDP and provides jobs to about 40 per cent of the population.

Last but not the least, the austerity drive should cover the entire Pakistan. This must include not only the government sector but also the private sector. Mere half hearted measures will not bring any good results to the economy of Pakistan. Several countries in the hour of crisis have taken austerity measures and were economically benefited.