The global financial crisis has had serious affects not only on the developed world but the developing markets as well. Almost all East Asian Tigers — Malaysia, Thailand, South Korea, Philippines and Singapore are experiencing negative growth as the world economy is likely to slide downward by 1.3 percent in 2009 with almost all developed countries registering negative growth.
In contrast, Pakistan, India, Indonesia, Bangladesh and Sri Lanka are likely to show positive growth.
The efforts of the government to manage the economic and financial affairs of the country need to be viewed in the context of the prevailing state of security in the country. Pakistan today is not simply a frontline state against the war on terror; in fact Pakistan is fighting insurgency and terrorism on its own soil. Pakistan not only lost precious lives and infrastructure due to the war on terror, it has already incurred over $35 billion since 2001-02 in economic costs.
Pakistan now faces the prospect of incurring huge costs on account of counter-insurgency expenditures. It is trying to meet the maintenance and rehabilitation costs of almost 2.5m internally displaced persons (IDPs) as result of the insurgency. The international community has pledged its support for this human cause. However, the government is fully conscious of its responsibility and has allocated Rs.50 billion in the budget for fiscal year 2009-10 for the relief, rehabilitation, reconstruction and security of the IDPs.
Besides the war on terror, Pakistan’s macroeconomic environment is affected by aggravation of global financial crisis. There was considerable decline in exports and a visible slowdown in foreign direct inflows. Although large-scale reduction in imports as a consequence of the global crash of crude oil and commodity prices compensated for the decrease in exports, external sector vulnerabilities remain a threat. Despite support from the IMF and other bilateral and multilateral donors, Pakistan’s external account remains exposed to a host of uncertainties. The dependence on external inflows needs some rationalization and to this end additional domestic resource mobilization is instrumental.
The last fiscal year witnessed the peak of the increased cost of Pakistan’s involvement in the war on terror. This has created many uncertainties for public finances. In addition, exogenous oil and commodity price shocks led to a significant deterioration of the macroeconomic indicators of Pakistan in 2007-08. At the same time, the external account, however, does depict certain positives. Even in the face of the world economic downturn, workers’ remittances have remained strong and grew by 19.5 percent. In addition, fall in international commodity and food prices had a positive effect on country’s import bill and in turn on the large current account deficit. At the beginning of the fiscal year 2008-09, Pakistan’s economy was confronted with four major challenges which threatened Pakistan’s recovery and socioeconomic growth including regaining macroeconomic stability, poverty reduction, fiscal retrenchment and weaknesses in the external account. The overall vision is to regain macroeconomic stability and to attain GDP growth rate of 6 percent by 2012-13 from 2.0 percent in 2008-09.
In order to ensure that macroeconomic difficulties do not further slow down the pace of job creation and adversely affect poverty reduction, the government has recently reached an agreement with IMF for a $7.6 billion package with interest rate varying from 3.51 to 4.51 percent spread over a period of 23 months. For the first time, IMF has accepted Pakistan’s homegrown proposals/programs which have two main objectives:
(i) To restore the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies until visible signs of demand curtailment; and
(ii) To protect the poor and preserve social stability through well-targeted and adequately funded social safety nets. The government’s new broad-based program for economic stabilization was mainly focused on rationalization of expenditures, removal of unproductive subsidies to reduce the burden on the budget; significant cuts in expenditures to reduce budgetary deficit and a tight monetary policy to fight inflation.
The government adopted the following measures to address the above challenges:
Strong adjustments in the petroleum prices were undertaken to reduce the budget deficit; significant cuts were made in the expenditures to curtail aggregate demand; tight monetary policy was followed by the State Bank of Pakistan to contain inflationary spiral; electricity tariffs were periodically adjusted to rationalize energy prices.
The government also adopted a nine-point program for economic and social recovery encompassing the following elements: (i) Macroeconomic Stability and Real Sector Growth; (ii) Protecting the Poor and the Vulnerable; (iii) Increasing Productivity and Value Addition in Agriculture; (iv) Integrated Energy Development Program; (v) Making Industry Internationally Competitive; (vi) Human Capital Development; (vii) Removing Infrastructure Bottlenecks through Public Private Partnerships (PPPs); (viii) Capital and Finance for Development; (ix) Governance for a Just and Fair System.
It has also prioritized the scarce government expenditures available for development-related programs; directed immediate support to the most vulnerable groups through the Benazir Income Support Program (BISP). These are small (Rs.l,000 per month per family) cash grants channeled through women to help satisfy the most fundamental needs of vulnerable households, currently reaching 3.5 million poor households. The scope of the program is expected to expand to 7.0 million households in 2009-10.
It has also intensified public-private partnerships with the objective of making private investments, including foreign investors, the most important funding source for economic development; and, reinforced the importance of sound governance, managerial and systemic mechanisms to ensure that investments in the social sector are cost-effective and aimed at output-oriented service delivery.
Pakistan’s stabilization program is supported by the Stand-By Arrangement (SBA) with the IMF approved on Nov. 24, 2008. Under this arrangement, a significant tightening of fiscal and monetary policies is envisaged to bring down inflation and strengthen the external position adopting several structural measures in the fiscal and financial sectors including strengthening of the social safety net.
In addition, to stabilize the macroeconomic situation, the program aims to address some of Pakistan’s long-standing economic problems. In particular, it called for a comprehensive tax reform to raise budgetary revenue and phase out the electricity subsides to create greater fiscal space for public investment and social spending.
The present government is conscious of the cost being imposed on poor families from the sharp escalation in food prices.
