ISLAMABAD, 4 November — The central bank forecasts good prospects for the Pakistani business if the global economy does not dip this year. State Bank of Pakistan (SBP), the central bank, in its annual report for fiscal 2002, that ended June 30, appears cautiously upbeat on the economy, but has warned the business, industry and the government, over pitfalls they’ll have to avoid.
“While the growth rate recorded some improvement in FY02, the quality of growth remained lackluster and shallow, as the spread and spillovers to the rest of the economy remained highly limited. Thus, the buoyancy and briskness in economic activity was not observed,” says the bank. But several year-old squeeze of the economy that was hardened during the present military government over the last three years, continues.
Pakistani business and the economy went through several pluses and minuses during FY02. The SBP now confirms it. But, what the central bank recommends, could be hotly contested by the newly elected government, emerging out of Oct. 10 national elections.
Three parties are vying to install their candidate for the top job. They include: a nominee each of the military-backed Pakistan Muslim League (Quaid-e-Azam), Pakistan People’s Party Parliamentarians that is operating under the shadow of former Prime Minister Benazir Bhutto currently in self-exile in Dubai-London, or the six-party Muslim-religious alliance called Muttaheda Majlis-e-Amal (United Action Council).
The surprising thing about all the three political groups is that they have contested — and won — the national elections without spelling out their major economic plans, or outlining the issues they wish to tackle. There may be some tinkering, to begin with, with the existing economic policies, formulated and managed by Finance Minister Sahukat Aziz. But there will be stronger noises later on to make the policies more people-friendly, more welfare-oriented. There is a widespread outcry against the present IMF-dictated policies, that critics blame, have swelled the number of people living below the poverty line to more than 40 percent of the population over the last 10 years.
Politicians apart, Aziz and SBP Governor Dr. Ishrat Hussain, backed by President Pervez Musharraf, strongly are in favor of continuing the IMF-dictated policies and “reforms.” Musharraf has assured Washington, World Bank, IMF, international financial institutions and Western governments, that these economic policies will continue even when the politicians take over.
Musharraf, who stays as president, will continue to call the shots over economic, and also, on other key policies. However, there still is considerable opinion that the politicians may well have to continue with policies that seem to have worked, including the exchange rate regime, the monetary policy, financial sector reforms and privatization. But, the new government will have to provide some relief to the common man in areas like skyrocketing utility prices, rising cost of living, and costly education and medicare.
SBP says, “Pakistan must continue implementing the IMF-World Bank-backed reforms to improve upon the 3.6 percent growth of GDP, achieved in FY02.”
“With prospects of a broad economic recovery looking bright, it becomes even more important that the FY02 improvements in the macroeconomic fundamentals not be frittered way,” SBP adds. Whether the politicians like it or not, SBP is already urging them to toe the line, saying: “The key policy challenge for the government in FY03 is to stay the course by remaining fully committed to implementing the ongoing reform process. It is irrespective of gains such as higher availability of external assistance and debt reprofiling” that was aimed at providing Pakistan temporary relief in repaying its $32 billion foreign debt.
The SBP points out: “It is important to note the possibility — however modest — that the external account improvements can taper off in future. If this development emerges, it can have significant negative repercussions, not least the re-emergence of devaluation expectations and a jump in domestic interest rates.”
The country cannot afford either the return of devaluation of its currency that was sinking for years, but has gained more than 8.0 percent against the US dollar over the last one year, nor a return to a high interest rate, that, like a reluctant groom, has come down from a hurtful 23 percent to around 14 percent over the last four years.
Current inflation rate is officially estimated at 3.5 percent, down from 4.4 percent in FY01, from an atrociously high level of upto 11 percent in 1990s. Although SBP and the present government take credit for lowering inflation through a tight monetary policy, the fact remains that an overall squeeze applied over the last three years has hurt the economy that has failed to bounce back, in spite of official claims to the contrary.
The growing jobless rate has been an all-time worry to all governments for years. “No significant decline” took place in FY01 or FY02, but the actual number of the jobless for FY03 will await findings of the new labor force survey. So far, 17.3 females and 6.1 percent males are officially recorded as unemployed, although the independent experts consider it to be much higher.
The jobless rate, in fact, rose from 5.9 percent in FY98 to 7.8 percent in FY00. Based on the FY00 labor force survey, the Federal Bureau of Statistics had concluded that formal industrial and services sectors are “unable to create enough jobs, consistent with labor supply in Pakistan.” The number of the unemployed will “remain unchanged unless the economic growth and investment scenario changes significantly.”
The ground reality is that investment ratio, as a percentage of GDP is declining. In 1990s when investment was 18.9 percent of GDP, unemployment was 3.8 percent. Industry, at that time, had a strong absorptive capacity. Investment declined to 13.9 percent of GDP in FY02, spreading unemployment, as the private sector stayed dormant because of political uncertainty and global and domestic recession. The government, too, curtailed its development spending as revenues declined. Federal and provincial governments’ development spending was only Rs. 123.6 billion that had slightly improved to 3.4 percent of GDP in FY02 from 3.0 percent in FY99. It increased unemployment, and also “effectively led to a deterioration of the infrastructure, reducing the economy’s growth capacity.” FY02 trade deficit, SBP says, narrowed to $1.2 billion while the “realized’ outcome was even better with a deficit of $360 million. The role of “exceptional financing,” including foreign assistance that flowed-in after 9/11, is declining.
In FY02 a notional flow of $1.7 billion on account of the Paris Club foreign debt rescheduling was largely offset by maturities of the earlier rescheduled payments. Rescheduled loans and higher foreign currency flows enabled SBP to pay off more expensive commercial credits.
The good news is that home remittances, the second biggest source of forex after exports, sent by overseas Pakistanis doubled in FY02 to $2.39 billion. The post 9/11 rise has been attributed partly to a reversal of capital flight as Pakistani balances held abroad came under greater international scrutiny by host countries, waning attraction of forex holdings due to rupee’s appreciation, and remitters’ preference to send money home through official banking channels, rather than the traditional ‘hawala’ or ‘hundi’, because the kerb market in Pakistan collapsed. At times, as private and aid forex inflows into banks and kerb rose, dollar rate was lower in open market than the interbank market. Dollar is now down to less than Rs. 59 compared to Rs. 63.40 two years ago while it had even touched Rs. 67 at one point.
An analysis of GDP indicates, the services sector grew 5.1 percent, against the target of 4.4 percent, large-scale manufacturing industry grew only 4.0 percent compared to a target of 6.5 percent due to weak demand, while the farming sector growth was 1.4 percent, compared to a target of 2.0 percent, mainly due to shortage of irrigation water.
However textiles grew 5.1 percent as a result of improved access to Western markets and a decline in interest rates. These are ups and downs of the economy. Pluses and minuses.
In view of this, SBP forecasts: “If the global economy does not see a major dip, Pakistan appears well placed to meet its economic targets in FY03. In fact, FY02 developments — including post 9/11 events — provide a rare opportunity for Pakistan to accelerate the improvement in the country’s economic fundamentals.”