ISLAMABAD, 15 October 2005 — High prices of imported oil, a weak global demand for export items, and Pakistan’s tragic earthquake, have, together, sparked fears of a slowdown of its $ 100 billion economy.
The destruction cost of Oct. 8 earthquake and how severely it impacts the economy, industrial and farm output, services, purchasing power in the affected areas, and the government finances, will take weeks to work out.
After initial weakening, Karachi Stock Exchange rose to 8,761.50 by Thursday, with minor fluctuations. The trend is bullish. Industrial sector, transport and other activities are adversely affected in Karachi, Pakistan’s business and financial hub, were manpower in thousands left the city. These workers belong to the Northern areas of Muzaffarabad, Rawalakot, Bagh, Balakot, Mansehra, Hazara, and Abbotabad. They left for their earthquake-stricken hometowns, to mourn their family dead and find survivors.
“As the epicenter of the losses is located in the northern areas, the impact on the wider economy will not be large. In fact, as reconstruction picks up, it will be positive for the economy,” said Sakib Sherani, ABN Amro’s chief economist. The bank’s GDP growth projection, earlier, was 6.0 to 6.5 percent for 2006, but it may come down. It, however, raised its 2006 budget deficit forecast to 4.1 to 4.3 of GDP. Tax collection target may shrink by 1.3 percent CPI inflation is expected in 9 to 10 pc range. It also said.
Dr. Ashfaq Hassan Khan, the government’s economic adviser, however, claims “the disaster will have no impact on the budgetary targets.” He said, “the effect will be limited if the world at large is generous in doling out financial aid to Pakistan for providing relief to victims, rehabilitating them and reconstructing the affected areas. But the impact can be tremendous if Pakistan does not get enough financial assistance from the international community, and the government is forced to finance this work out of its own resources.”
The earthquake hit the economy while the government, international financial institutions, independent economists, and Manila-based Asian Development Bank were already saying growth in 2006 will be less than 2005. There reasons: Cooling off of the economy after a peaking performance in 2005. A wearing off of the baseline effect, that is better performance in 2005 compared to a lower one in 2004, rising energy prices, and, a slowdown in the global economy which can cut exports.
But there is good news, too. It is the expected increase in foreign trade between SAARC nations as South Asia Free Trade Agreement (SAFTA) gets launched Jan. 1, 2006.
Pakistan’s improving bilateral relations with India and Afghanistan are also pointing to a likely larger business volume. Afghan construction-related imports and domestic consumer demand is picking up. It means larger Pakistani exports to that country.
However, there seems to be an overall consensus that Pakistani macro-economic indicators will be lower in 2006 compared to the recent best performing fiscal 2005.
Imported oil and its rising prices are a continuous drag on the economy. It also pushes the price of domestically produced energy, natural gas, and fuel-based electricity. That, in turn, is raising the cost of production and transportation. It also provides an excuse by all sectors of the economy to inflate consumer prices, costs, transport fares and freight rates.
The crude oil prices, currently are moving around $65 a barrel. Will these be contained? No one knows.
The government has been unable to restrain the Oil Companies Advisory Committee (OCAC), that sets oil prices domestically. OCAC has continuously been rising retail prices of petroleum, diesel and other products. Now, perhaps, the only way out for the government is to cut down petroleum prices by reducing its Rs.20 a liter tax it collects. It will help bring down the price level, as oil and transport costs spills over the entire economy.
In this perspective, now the macroeconomic numbers will have to be adjusted accordingly. What way the GDP growth goes? The government forecast, previously, was 7.0 percent. But among IFIs, including ADB and independent economists, the current talk in Islamabad is 6 to 6.5 percent, down from the actual of 8.4 percent in 2005. In fact, it may decline to 6.0 percent if adverse conditions continue, or external factors hit the economy.
Already, farm output is projected to decline from 7.5 percent to 3.0 percent in 2006 because of the high base effect of 2005.
Large industry will grow 11.0 percent compared to 15.4 percent in 2005. The services sector, especially banking, will continue to grow fast. The telecoms, that saw the highest growth in 2005, will expand further.
There are good prospects for foreign trade. Exports growth could slightly decline to 15 percent, from 16 percent in 2005, because the global economy is slowing down. Imports may rise 18 percent or more, compared to 38 percent in 2005. Trade deficit is likely to widen to $ 6.0 billion, or even more. The current account gap may widen to $3.5 billion or 2.8 percent of GDP.
Prime Minister Shaukat Aziz, early this week reported an inflow of $400 million foreign assistance for disaster relief. “ But, more money is coming in,” he said. The United Nations has made a flash appeal for $272 million assistance to Pakistan, against which only $11 million have been committed.