ISLAMABAD, 11 June — The State Bank has warned that Pakistani economy is not returning to the path of revival, despite implementation of a stiff IMF prescription — and perhaps because of it.
Besides the lack of recovery, the bad news is that the State Bank (SB), central bank, in its report for first three quarters (July 2000-March 2001) of the current fiscal 2001, says the growth this year will be less than 3 percent. In reality it will be 2.6 percent — that is less than the real population growth. This fact was known for the past several months, but the government’s economic managers alone pretend otherwise.
“The Gross Domestic Product (GDP) during fiscal 2001 will be below 3 percent against the targeted 4.5 percent, therefore the per capita income is likely to remain stagnant,” the SB said in its mandatory quarterly report on the state of the Pakistani economy.
The SB, put its seal of authenticity, on what was already being stated by independent analysts, that the tight noose of “the IMF program has, so for, not helped Pakistan in reviving investment nor has it helped boosting the economy.” But, wait! Does it mean that Pakistan’s economic managers will have to capitulate further before the IMF, and whether the Fund will tighten its noose more to get “good” results out. The SB also says, “the good standing with International Financial Institutions (IFIs) has not yet helped revive widespread investment nor has the economy picked up to meet the public’s expectations.” Is this so, in spite of the government claims that “the program is entirely home-grown,” and the Fund does not dictate?
Talking of Washington and the program, Shahid Javed Burki, economist and the former Vice President of the World Bank for Latin America, says the Fund imposed on Pakistan a program that was crafted for Latin America of 1980s. But when the same strategy was adopted to overcome the 1997 East Asian financial crisis, the result was “a near disaster,” Burki says.
Burki, who also briefly served as Pakistan’s finance minister, says, a different recipe was needed to cure the Pakistan problems which is particularly due to “poor governance, excessive dependence on external capital flows, and poor development of human resources. Combined, these problems have resulted in a sharp slowdown in the economy’s expansion.”
“Given that, should we have adopted an economic model that puts further pressure on growth? The answer, I believe, is that we should have adopted growth-oriented policies rather than an approach that further constrained growth and investment,” Burki says. To that I will add one more corroding factor: the massive amount of political uncertainty that hits investment decisions, economy, and pockets of harried consumers.
This is the ground reality. But, ironically the government’s economic managers, followed by SB, persist with these anti-growth policies. And, at the end of the day, they, themselves, keep wondering and lamenting why growth is not taking place, despite, the government’s so-called incentives? Even officially admitted, inflation rate is high and rising to nearly 7 percent — double the last year’s figure. But, a more severe bout is visible on the horizon, despite the IMF-prescribed multi-pronged squeeze on the economy. Isn’t a major part of it due to the fast depreciation of the rupee. The rupee has gown down 40 percent since the nuclear explosions on May 28, 1998, including more than 20 percent since the currency was uncapped on July 20, 2000.
Pakistani currency went down to Rs. 67.00 to a dollar the past week, before recovering to Rs. 65.70. The interbank rate that had touched Rs. 64.0 recovered to Rs. 62.30/62.40 by the weekend. All this, in turn has made investment and modernization of the country’s woefully outdated industry, including imported machinery and inputs, more costly. It also stunts the economy, that continues to stagnate.
While the anti-growth policies and the deepening political uncertainty were hitting the economy, drought too has added to the woes this year. The estimated drought- related losses at $927 million — including a loss of exportable agricultural surplus of $747 million, and $180 million higher oil imports to thermally generate the otherwise lost electric capacity. But, the bureaucracy is hiking the drought-losses to $2 billion, in order to put the blame on nature rather than owning their own wrongdoing. The forex situation is already critical. The SB admits, it had to make “heavy buying of foreign exchange from the open market to meet the IMF-set target of net foreign assets.”
“The SB purchased $1.56 billion from the open market, in the first nine months of this fiscal year, against $1.37 billion in the year-ago period,” the report says. It purchased $3.7 billion from the kerb over the last 30 months. That’s the principal pressure, driving the rupee down, besides the flight of the capital — that in turn is due to depreciation of the Pakistani currency and the political uncertainty.
The exports have “not done well” in the first three quarters. If the trend persists, export earnings in the full fiscal will be $9.2 to $9.3 billion, as against the $10.0 billion target. Oil imports exceeded $2.5 billion, but since the growth in total import bill remained below the growth in exports, the trade deficit narrowed down to $1.32 billion, marginally above he deficit in the like period of last year. It led to a rare current account surplus in the third quarter, and narrowed the balance of payments gap to $575 million between July, 2000 and March 2001 — down from $1.3 billion last year. “But, it did not ease the pressure on the rupee as it depreciated in the third quarter when SB reduced its support to the interbank market,” says the report.
The drought and shortage of irrigation water may lead to a minus 5.4 percent growth of production of major crops that include cotton, wheat, rice and sugarcane.
Perhaps the only real good news is that large-scale manufacturing grew 8.8 percent — up from 3.3 percent in the same period last year. It was driven by “a sharp recovery” in the production of refined sugar, value addition in petroleum refining, and larger production of autos, light commercial vehicles, motorcycles, airconditioners and refrigerators. As cotton crop increased only 4.5 percent compared to the last year, the textile sector production grew merely by 4.6 percent — down from 13.5 percent last year.
Home remittances sent by expatriate Pakistanis, mainly from the Gulf, Saudi Arabia, Middle East and North America rose to $803.9 million — up from $678.1 million in the like period of last year. Tax collection targeted at Rs. 430.2 billion was revised down to Rs. 417.3 billion and further to Rs. 403 billion.
CBR claims that it has collected Rs. 308 billion in the first 10 months, while the SB report says its merely Rs. 276.6 billion for the first nine months. But, who is telling the truth? That’s the state of the economy as the government is going to unveil, June 16, its budget for fiscal 2002 — that starts July 1.
Reports say, the budget will impose Rs. 50 to Rs. 55 billion in new taxes. However, Finance Minister Shaukat Aziz has been saying “it will be a people-friendly, and business-friendly budget.” But, one still wonders what is coming? Are more new taxes coming?