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Pakistan economy is still fragile

All business performance indicators point out "fiscal 2003 is a watershed for Pakistan's economy," says the State Bank of Pakistan (SBP), the central bank's report for the first half of this fiscal. SBP's report, just transmitted to the Parliament, as mandated by the Constitution, counsels the new government of Prime Minister Zafarullah Jamali to stay the course, the economy was put on, in December, 1999 and to further strengthen its weak areas.

"Structural adjustments of recent years appear to be slowly taking hold, laying the foundations for an acceleration of economic growth in the medium term. However, it should be noted that such transitions are, by definition, fragile and must be nurtured through continued adherence to the reform path," SBP said in the report, sent to the Senate of Pakistan and the National Assembly.

The advise, though presumably sound in pure business terms, poses a number of problems for Jamali who would wish to ease, a bit, the life of the common man, the middle class, and for several business sector that have gone through a period of belt-tightening and financial squeeze. In fact a little bit of relief like halting the astronomical energy prices has drawn disapproval of the economic technocrats and godfathers I.M.F. and the World Bank.

Near-term threats like Iraq, regional and geopolitical tensions are highlighted in the context of the likely export losses, high oil prices, high transport costs and war risk insurance surcharges, besides anti-dumping threats from its trading partners. The Iraq-centered threat alone may cost Pakistan $1.0 billion (b) or more.

"There is no doubt, Pakistani economy is still fragile to absorb serious shocks like attack on Iraq. But, had President Pervez Mushraff's government not implemented macro and structural level reforms in the last three years, the country would have been declared financially bankrupt," Mieko Nishimizu, World Bank vice-president told Jamali this week.

Jamali assured Nishimizu, "Pakistan will remain fiscally responsible, and there will be continuity of the reforms process started three years ago. We believe in the consistency and continuity of reforms."

Commenting on Jamali government, now its fifth month, SBP says, it has remained "committed, so far, to good governance and continuity of reforms." "If this tendency persists, domestic investor uncertainties will be reduced to a large extent and help reinforce the economic revival process," it argues. On the other hand, any "perceived political instability or, relaxation in the fiscal and monetary discipline," or a slowdown in either tax collection or regulatory reforms, or restructuring of state-owned electricity monopolies, or privatisation of state owned enterprises, will "exacerbate uncertainties and render the achievement of the reform path unviable."

What does all this mean? The foreign and domestic investors and business now have further guarantees of the government sticking to the present pro-business, and pro-investment policies. But, for the "common man" who has not been factored into these policies, relief, even if intended, stays on hold.

What business and development horizon SBP forecasts? Its view is that the main stimulus to the economy in the next two years should take place via larger public sector development spending and higher farm output. The monetary and credit policy will also play its role in boosting domestic and export demand while keeping inflation under control-projected at 4 per cent as of now. The increase in the government's development spending, increasingly neglected and curtailed in the past several years of high budgetary deficit, has now become feasible. It is so because of the fiscal space available in the wake of a reduced debt servicing, following reprofiling of Islamabad's bilateral foreign debt for 38 years. The ratio of debt servicing to forex earnings that was 75 per cent in fiscal 2001, is expected to decline to 25- 30 per cent by fiscal 2005. Increased tax collection has also helped expand fiscal space. The drought-hit farm sector, is now forecast to resume its historical growth, as a result of increased availability of irrigation water.

Current fiscal 2003 that ends June 30, is forecast to record a 4.5 per cent GDP growth. The outcome for this year will, by and large, determine whether, or not, Pakistan is indeed moving towards a 6 per cent GDP growth trajectory, targeted for fiscal 2005.

If 4.5 per cent growth level is attained this year, and the Iraq war or any other shock-domestic, regional or international - does not cause a major disruption, it is quite likely that Pakistan will be able to strike a GDP growth of 5 to 5.5 per cent in 2004 and 6 per cent in 2005.

But, SPB cautions, "Pakistan has been prone to a variety of shocks. Therefore, downside risks of a worsening geopolitical situation, domestic violence, and stresses in the working of Parliament should always be kept in mind. In such events, these growth targets will be hard to achieve."

What does the central bank expect from the key ingredient of the economy-the financial sector? It says: considerably low rates of lending, large liquidity with the banking system, fierce competition among the banks and lower yields on government securities, are pushing the financial institutions towards new avenues such as consumer, mortgage, personal loans, small and medium enterprise and agricultural financing, and targeting new customers, particularly in middle class." This, SBP projects is likely to boost domestic demand while the continued decline in export finance rate - concessionally provided by the central bank - low cost dollar loans to exporters and a stable exchange rate will help the export sector of the economy." Here is an opportunity. This is the field that should attract a substantial domestic and FDI investment, which in turn, can enlarge exportable surpluses of a range of consumer durables and other products.

Industrial output and large scale manufacturing (LSM) are helping the economy look up, SBP and the government claim. Output analysis of 91 types of major industries show a 5.2 per cent growth in the fist half of fiscal 2003, up from 1.8 per cent in the like period of 2002. The LSM growth, it is claimed, is generally broad-based. Textile exports and domestic demand for consumer durables led the growth. Textiles exports are attributed to larger sales to EU and USA. Rising home remittance send by overseas Pakistanis, particularly, those working in the Gulf, Saudi Arabia, and North America, declining interest rates and increased access to consumer credit - specially for purchase of autos and home appliances-were the key factors that boosted the domestic consumer demand. But again, with such credit costing anywhere from 10 to 13 per cent, how many are in the market, and how much credit can they absorb?

The home remittances and forex inflows that led to external account improvements continued to heavily influence the central bank's monetary policy, as it tried to reconcile the conflicting imperatives of preventing a too-abrupt rise of the rupee while, at the same time, preventing a destabilising growth in the reserve money-dollar. SBP, as a result, allowed a gradual adjustment in the rupee-dollar parity by mopping up the growing liquidity from the interbank forex market.

In this connection the central bank points out, as exporters gradually adjust to the structural shifts in Pakistan's external account, "it is probable that SBP will slowly accelerate the exchange rate adjustments, in order to benefit the economy through cheaper imports and savings in external debt servicing. However, this may not be immediately possible."

The dollar has, by now, declined to a little less than Rs.58 in the interbank market. But, the market expectations are that dollar will decline further as forex inflows, mainly in the form of home remittances, continue. The forex reserves with SBP have now risen to $10.1 billion.

The first half of fiscal 2003 saw a 124 per cent growth in home remittances to $2.129 billion up from $ 951 million in the like six months of 2002. Official hopes are that if the present trends continue, and there is no adverse fallout of the US attack on Iraq, home remittances for the whole of 2003 are likely to reach a record $ 4.3 billion.

Comparable inflows for the first half of 2002 and 2003 include: remittances from the Gulf region rose from $481.9 million to $ 981.4 million. This total for the first half of 2003 comprised: UAE $471.9 million, Saudi Arabia $283.4 million, Kuwait $ 107.1 million, Oman $44.4 million, Qatar $40.8 million, and Bahrain $33.8 million. Remittances from countries other than Gulf rose from $469.5 million to $1,148.2 million. The remittances for the first half from this group included: USA $ 657.1 million, UK $129.9 million, and others $332.7 million.

There was an overall improvement in the volume and value of foreign trade in the first half of the year. Exports rose 16.6 per cent to $5.2 billion, of which textiles alone were 64.7 per cent. The 2003 official export target is $1.4 billion. Exports in the first half of 2002 were $4.521 billion. Imports rose 18.7 per cent to $5.585 billion, from $4.630 billion in the first half of 2002. The increase in 2003 was on account of non-food and non-oil imports which means larger inflow of machinery and capital goods, industrial raw materials, consumer goods and consumer durables.

Even before the Iraq war and its fallout impact Pakistan, SBP is advising a caution, inspite of the positive performance of the economy in the first half of 2003. "There is no room for complacency," it says. "Pakistan has still a long way to go before the incidence of poverty is significantly reduced, employment generation takes place on a wide scale and standard of living of the common man takes a turn for the better. But, the route to achieve these objectives is not through adhoc, short- term temporary palliatives, but by sticking to the course of reforms, good governance, political stability and hard work by Pakistanis." It means, perhaps, a little bit more of belt- tightening, as Jamali government finds its feet and may hand down some relief-the much needed relief.