ISLAMABAD, 25 March — While the financial sector is improving, the economy recorded a slow growth during the first half of the current fiscal 2002.
This is indicated in the government’s “Mid-Year Review of Economic Performance, Reform Agenda and Medium Term Macroeconomic Policies.” The review, just unveiled, was prepared by the Ministry of Finance (MoF). It reflects the state of the economy, impacted by Sept. 11 events, as well as the continuing recession in major economic regions of the world. This is besides the domestic factors that are not helping the economy to come out of its own, prolonged, slowdown. Among the external factors, to the extent that the economy is integrated with the world economy, the sharp downturn is bound to affect Pakistan. The slower pace of economic activity in Pakistan’s major trading partners, including US, European Union and Japan, will reduce their demand for Pakistani products.
As such, Pakistani exports will be lower than the targeted level. Reduced foreign demand for Pakistani products, coupled with recessionary situation at home, have cut down imports. Imports, including raw material inputs for reprocessing for export, are down by 10 percent. It means reduced revenues from import duties.
Export of commodities declined 13.5 percent. Exports in the first half of the current fiscal totaled $4.450 billion, down from $4.474 billion in the like period of fiscal 2001. As a result of this situation and the continued lower demand in Pakistan’s trading partners abroad, the government has trimmed the export target for fiscal 2002 from the original $9.1 billion to $8.5 billion. In fact this is the second time, target has been scaled down. Originally it was $10.0 billion. A decline in unit prices of Pakistani export goods have already cost $219 million. If the unit prices did not decline, the exports would have been 4.3 percent higher, rather than 0.5 percent lower as compared to the same period of last year. Imports are down 9.6 percent. Significant declines took place in the case of wheat and petroleum, as the country produced more wheat than it had expected, while the international prices of crude oil and petroleum products declined.
The balance of trade improved, as the trade gap narrowed to $425.4 million, down from $921.7 million in the same six months of fiscal 2001. Coupled with the official transfers, the current account surplus rose to $994 million, up from $437 million in the like period of last year.
The home remittances of Pakistanis working in the Gulf, Saudi Arabia, Middle East and elsewhere rose to $982.3 million from $609.2 million in the same period last year. Strengthening of forex reserves, helped the rupee appreciate 6.5 percent in the interbank and 10 percent in the kerb market, during July 1, 2001 to January 28, 2002.
Foreign investment, in several sectors, particularly in oil and gas, and Information Technology (IT), and for buying state- owned enterprises now being sold, is likely to go down, the report says, referring to international investment environment.
The government, with the help of foreign aid donors, takes credit for a reduction in current account and fiscal deficit during the first half of fiscal 2002 — July 1 to Dec. 31, 2001.
The farm sector is performing reasonably, while industrial production is increasing only slowly. Inflation rate is lower than projected, because the economy is not bouncing back significantly.
The report says: “the events of Sept. 11 have created uncertainties about the short-term economic outlook of the country which will adversely affect Pakistani exports, imports, tax collection, foreign investment, privatization of state-owned enterprises and industrial production.” These factors will mean more unemployment and increase in poverty, as expenditure on poverty alleviation and social sector programs, already critically low, are further cut. The financially starved social sector has already seen a growing number of people falling below the poverty line.
Shahid Amjad Chaudhry, deputy chairman of the Planning Commission says, “Poverty has increased substantially from below 20 percent in late 1980s to more than 30 percent in the late 1990s. At present, more than 40 million people, out of a total population of 140 million, are poor.” Officials of the MoF say, “the economy has performed well during the first six months of fiscal 2002, despite many problems experienced in the wake of Sept. 11 events.”
The picture is not rosy all the way. The report admits: Having achieved a major success on the stabilization front, the challenges for the medium term are revival of growth through greater private sector participation and efficient public sector investment, in order to increase employment opportunities and reducing poverty. The country has to strive for a greater financial discipline so that its debt burden does not increase. In order to achieve these objectives, the government is implementing a 3-year medium term macroeconomics framework, covering fiscals 2002 to 2004. It aims at stepping up the annual growth rate to a level of 5.2 to 5.5 percent, reducing the fiscal deficit to 3.2 percent and current account deficit to 1.3 percent of GDP, while restraining inflation to under 5 percent. Social sector spending will receive a high priority. By the end of this period, Pakistan also hopes to regain its growth momentum and macroeconomic stability on a sustained basis. MoF review says GDP in fiscal 2002 was targeted to grow four percent, against 2.6 percent in fiscal 2001. The farm sector was to contribute 2.7 percent and 5 percent by large-scale industry to this growth. The continued shortage of irrigation water and the events of Sept. 11 are “likely to affect the growth performance of the current fiscal year.” Not sure how things will move during the second half, MoF has indicated no growth estimate for the whole fiscal. Production of three major crops — cotton, wheat and, sugarcane — in the farm sector are expected to achieve somewhat higher production target, set higher than last year, although the overall growth of the sector has not been forecast.
Industry, this fiscal, is not doing as well as it had achieved an 8.6 percent growth in fiscal 2001. The first six months of the current fiscal have recorded a growth of only 1.9 percent, compared to 6.9 percent in the like period of last year. One of the reason for the decline was a major reduction in sugar production, but as processing of the new sugarcane crop is now underway, the output will be much higher for the whole year.