ISLAMABAD, 30 July — Investor confidence is the key to unlock Pakistan’s debt-ridden economy — and to make it move forward. Add to that lower interest rates, and you have the recipe of growth in the present Pakistani environment.
The World Bank in its just-unveiled report, Pakistan Country Assistance Strategy (CAS) stresses this point strongly. At the same time, it generally gives a nod to Islamabad’s reform agenda. The CAS also outlines a 3-year plan to improve basic social services, strengthen economic growth, generate employment and reduce poverty. “The agenda is on the right track.” The only requirement is restoration of the investment climate and reduction in the interest rate,” says Jonh Wall, the Bank’s chief of the resident mission in Pakistan, while unveiling the report. Investment and the investor confidence are still not forthcoming inspite of many measures announced over the past months from by President Pervez Musharraf and his Finance Minister Shakuat Aziz. However, the interest rates have not come down substantially for borrowers, although the depositors are getting a pittance in the form of profit on their savings.
The banks’ intermediation costs are undeservedly high. But, the question is: How, and how much, growth level is required in order to overcome the shortfalls that have blighted the horizon, while population keeps popping up? The growth must annually surpass 5 percent which is the only way to produce enough resources, needed to be invested in the human capital and the basic infrastructure. The growth has to be “faster than it actually was in the last four decades. That is going to be a major challenge,” the report notes. In the event of GDP growth rising to the hoped-for 6 percent, it will take the country a minimum of five years to bring the external debt burden to sustainable levels — and 10 years to bring the total public debt to sustainable levels.
But, the Bank expresses the fears that all hopes may not come true, because Pakistan’s “turbulent political and social history has contributed to limit its growth potential which, in turn, has constrained its ability to develop its human capital to reduce poverty.” Wall is of the view, “the current policies will ultimately prop up growth in the economy in due course of time.” But, as of now, Pakistan’s macroeconomic indicators are worse than the Highly Indebted Poor Countries (HIPCs), says the report. This “highly vulnerable situation” means that Pakistan should only be provided with soft-term assistance from the International Development Association (IDA), instead of the Bank’s high interest-rate loans. IDA assistance is virtually interest-free but for a small administrative disbursement fee that is charged on its lending.
“Given the high indebtedness level, the World Bank does not propose to provide any of its own lending this calendar year for Pakistan due to adverse ratios,” it says but it okays the Pakistani economic agenda. “The period of instability ended on Oct. 12, 1999 when the military took over in a coup. The progress in implementation has established its credibility.”
It projects a 3.2 percent growth of gross domestic product (GDP) during the current fiscal 2002, rather than 4.5 percent estimated by the government of Pakistan.
The Bank hopes that GDP will rise to 5.9 percent in fiscal 2003, and 6 percent in 2004. However, the worst hopes are still being expressed about Pakistan’s external sector. Despite implementation of very tight macroeconomic policies that have already led to compression of imports and falling current account deficits. Its “external capital requirements remain daunting,” the report notes.
