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Payback time for
Musharraf
By Nadeem Malik
ISLAMABAD - Pakistan has gained substantially in
terms of its economy since it joined the US-led "war
against terrorism", with rapid growth in foreign
exchange earnings, the manufacturing sector and tax
revenues.
The Gross Domestic Product (GDP) is
expected to rise by more than 4.5 percent during the
current fiscal year ending June 2003, and latest
forecasts project a 5-5.5 percent growth rate during the
next two fiscals. The rate of inflation is stable at
below 4 percent, with little threat of any dramatic
rise. The budget deficit is also likely to be contained
within the announced benchmark of 4.6 percent of GDP.
The turnaround started soon after September 11,
2001. Large external flows of new concessional
multilateral loans, re-profiling of the entire official
bilateral external stock of debt and one-off budgetary
grants helped build coffers to the tune of $10.5
billion. The current account, which was in a historical
deficit, posted a surplus of $2.22 billion last year
(July-June 2001-02), and $4.38 billion until April 2003.
Even if official transfers, including the Saudi Oil
Facility (SOF), are excluded, the current account
balance was in surplus by $2.56 billion this year, as
compared to $1.014 billion in the corresponding period
of the last fiscal.
The State Bank of Pakistan
made large outright purchases of dollars of almost $10
billion in recent years to accumulate these reserves.
Growing inflows sent by overseas workers through
official banking channels provided this window of
opportunity. Remittances during the July-April period
were about $3.2 billion, which the government hoped
would cross $4 billion mark during the year.
Foreign Direct Investment has also trickled in,
with a $658 million total in 10 months. At least one
major private sector bank, United Bank Limited, has been
sold during this difficult period. Portfolio investment
is also in the positive column after a long time,
showing an over bullish trend in the market that has
taken the KSE-100 Share Index to all-time highs.
There were genuine reasons to be skeptical about
this positive trend in the external sector. Many believe
that it was due to one-off factors and would not be
sustainable. However, recent signs of growth in the real
economy are more promising. "There are indications
suggesting that the growth was broad based," said Nawid
Hamid, senior economist of the Asian Development Bank.
He maintained that industrial sector activity,
agriculture growth and trends of international trade all
support this assessment.
The large-scale
manufacturing sector (LSM), according to official data
of the Ministry of Industries, registered an average
growth of 11.71 percent during July-March period of the
current fiscal. The growth rate registered in the third
quarter (January-March) was the highest, at 15.38
percent, as against 10.39 percent during second quarter
(October-December) and 5.11 percent during the first
quarter of 2002-03.
A new wave of car leasing
and auto-cash facilities offered by commercial banks,
awash with liquidity, along with new consumer finance
schemes, has provided new impetus. However, the textile,
cement and sugar industries have also shown buoyancy.
The production of cement during this period was up by 20
percent, sugar grew by 12 percent and cotton cloth by 13
percent. With textiles having 19.1 percent weightage in
the LSM basket, followed by 8.6 percent of sugar and 1.9
percent of cement, the overall growth rate has been
dramatic.
The consumer goods industry, like deep
freezers, refrigerators and TVs, and the auto industry,
including cars (52 percent), motorcycles (33 percent),
light commercial vehicles (58 percent), buses (42
percent), trucks (118 percent) and tractors (17 percent)
have all shown robust performances in this period.
As a result of the higher economic activity, the
Central Board of Revenue collected about Rs 310 billion
(US$5.3 billion) in taxes during July-March 2002-03,
registering an increase of 15 percent over the
corresponding period of the previous fiscal. The board
needs to collect another Rs 149 billion in the last
quarter of the current financial year to meet its annual
target of Rs 460 billion, which it is sure to do. The
revenue generation will also mean that the budget
deficit will remain within limits.
Exports
during the period under review totaled $7.86 billion, as
compared to $6.53 billion in the corresponding period of
the last fiscal year, registering a record increase of
20.4 percent. Mainly textile manufactures, ready-made
garments, knitwear and bed wear were exported during
this period. Imports during the first three quarters
increased at an even higher pace of 22.8 percent, from
$7.3 billion of the last year to about $9 billion during
the current fiscal year. This includes 37 percent higher
machinery imports, which the government claimed was a
reflection of increased industrial, manufacturing and
investment activity in the country.
On the trade
account, the facility granted by the European Union in
response to Pakistan's support against the Taliban and
al-Qaeda helped a lot, as the textile sector results
show. However, the United States has not offered much in
terms of trade concessions. Only a $142 million
additional quota was granted over a three-year period.
Pakistan's exports to the US increased from $2.25
billion in the year 2001 to $2.3 billion in 2002. At the
same time, imports from the US increased from $542
million to $693.8 million.
However, US support
for Pakistan within the multilateral institutions, as
well as bilateral debt relief, helped Pakistan reduce
its debt-servicing burden from 66 percent of budgetary
revenues in 1999-2000 to 46 percent in 2002-03. The US
recently provided Pakistan $188 million under the
Economic Support Fund (ESF) to help buy down the $1
billion bilateral loan that Islamabad owed to
Washington. US budget proposals for 2004 also indicated
$395 million in new commitments, including $200 million
under the ESF to help reduce the debt burden further.
However, Islamabad had made an official request
to the US to waive the remaining stock of $1.8 billion
debt in recognition of Islamabad's support against
terrorism. Pakistan has helped catch and extradite
almost 450 terrorists during the past 18 months,
including Khalid Sheikh Mohammad and Abu Zubaida.
A senior official at the Ministry of Finance
said that Pakistan was also seeking continued support in
the issue of market access, and sales of defense
articles from the US during 2004. This issue, he said,
would be discussed in detail with Richard Armitage, US
Deputy Secretary of State, who arrived in Pakistan on
Wednesday "to promote peace and stability in the South
Asia region".
One of the primary agenda items of
Armitage's visit is to help facilitate dialogue between
India and Pakistan ahead of President General Pervez
Musharraf's visit to Washington in June 2003. Musharraf
is due to meet President George W Bush to seek further
economic assistance, investment and trade guarantees,
and military cooperation in the fight against terrorism.
The timing of his visit is also crucial for
Musharraf's personal political standing. Opposition
parties have refused to accept a president in uniform,
and the wide powers he still retains, including the
discretion to dismiss the elected assemblies and the
prime minister.
However, many diplomatic
observes believe that it is time for Musharraf to
concede more to the US to pave the way for better
Pakistan-India relations, a process that has been
revitalized in the past few weeks with the planned
resumption of air, rail road and diplomatic links.
Islamabad has also added 78 more items to the tradable
list under the South Asian Association for Regional
Cooperation.
For fully-successful ties, though,
much will depend on concessions granted on the issue of
Kashmir, and the Line of Control (LoC) that divides the
disputed Himalayan region between the two countries. In
this regard, Musharraf's summit meeting with Bush could
hold the key.
(©2003 Asia Times Online Co, Ltd.
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