ISLAMABAD, 7 April 2008 — The central bank has warned of stiff economic challenges to Pakistan, as the new government gets launched. So, how will the new people in charge tackle gray economic areas? Business, industry and financial bigwigs are watching.
The Ministry of Finance’s brief recommends “no relief” to the Pakistani public before the next national budget for fiscal 2008 starts on July 1. The ministry, citing the country’s present “precarious financial situation,” recommends adhering to financial discipline to sustain growth.
The plans that the government wishes to implement range from lowering food prices to reducing power outages, and more jobs to housing for the poor.
Prime Minister Syed Yousaf Raza Gilani recently unveiled a 100-Day Plan to boost the economy. This was followed, two days later, with a grim report by the State Bank of Pakistan (SBP).
“The plan includes improvement in energy, wheat, and unemployment situation. Initiatives have to be taken in this regard... load-shedding not only causes inconvenience to the people but also hampers growth of industry in addition to discouraging investors,” said Gilani.
Ishaq Dar, the new minister for finance, has to carry the burden treading between SBP’s grim projections and Gilani’s 100-Day Plan.
However, the SBP report reveals that most of the major economic indicators are headed against growth. The outgoing government’s record high spending and fudging figures have “compounded the situation.” Hoping against hope, SBP still feels GDP growth this year will be 6.0 to 6.5 percent, but not the targeted 7.2 percent.
“The fiscal deficit has turned into a threat” but SBP insists even this description is understated. It says the fiscal deficit is already 3.6 percent, trade deficit 7.9 percent, and current account deficit 4.8 percent of GDP. The budgetary balance is minus 5.2 percent.
Government borrowing from SBP in eight-months rose sharply to a record 359.3 billion rupees, against just 25.6 billion rupees in a like period of fiscal 2007. Subsidies on imported oil, wheat and food are a key cause of this deficit scenario.
The outgoing government also provided oil-marketing companies, many of them foreign, guarantees on the basis of which the companies borrowed heavily from commercial banks. This borrowing will further compound the picture of the deficit next year, the SBP says.
The SBP describes the rising inflation as the “real woe of the economy.” It says, “Inflationary pressures in the domestic economy have continued to mount throughout July-Feb 2008.”
The headline Consumer Price Index (CPI) inflation rose to 11.3 percent in February from 7.0 percent in June on the back of the government’s budget deficit, heavy borrowing from the central bank, and high prices of imported oil, wheat, edible oil and other commodities. Worst of all, CPI food inflation started rising in September, reaching a peak of 18.2 percent in January — the highest since 1995. SBP claims it eased to 16.0 percent in February. But the latest government data says the Sensitive Price Index (SPI), covering key food items, rose 17.35 percent during the week that ended on March 28.
“The rising fiscal deficit and its financing pose severe complications for the monetary policy framework for fiscal 2008. It has eroded the impact of monetary tightening measures undertaken (by SBP) in August, 2008,” and “increased the risks of a further surge in inflationary pressures.”
The farming sector will achieve “reasonable growth” but may not attain its 4.8 target because of smaller raw cotton and rice crops.
On the other hand, industrial output of large-scale manufacturing in the first half declined to 4.5 percent, as against an increase of 8.3 percent in the same period last year. The downtrend in industry was widespread.
“LSM has been encountering headwinds since the start of February 08, because of domestic and external factors. The slowdown was broad based, and was seen in 11 out of 15 industrial groups,” it said. The central bank says increased banking profits, and improvement in value addition by other financial institutions, is expected to support the high growth momentum in the finance and insurance sub-sectors.
Commercial bank credits to the private sector rose 11.7 percent in eight months, compared to the same period of fiscal 2007, as the demand for working capital rose.
A decline in industrial output, reduced textile exports, a big rise in commodity prices abroad, a grave electricity and natural gas crises, and a slowdown in demand adversely hit GDP. The assassination of Benazir Bhutto and the riots it ignited also hit growth.
The forex reserves declined from $15.6 billion in July to $14.1 billion in February. In eight months to February, the rupee depreciated 3.5 percent against the dollar. SBP estimates full year exports at $19.7 billion, against the target of $18.9 billion.
Imports for the full year will rise to $32.1 billion, against a target of $29.6 billion. Half of the total increase in import bill in eight months was due to rising international prices of oil, fertilizers and palm oil.