QUETTA, Pakistan - The two-month-old coalition government in Islamabad, faced
with soaring inflation, a swelling trade deficit and a slowing economy, gave
more cash to the military and further burdened the poor when it presented its
first national budget last week.
Gross domestic product growth is forecast to slow to 5.5% from the average of
7% over the past five years. The 2.01 trillion rupees (US$30 billion) budget
covers the fiscal year to June 30, 2009.
The new government inherited a political crisis and an economic slowdown after
the February 18 polls. The Pakistani masses are already hardest hit by surging
inflation and food shortages. The budget, according to analysts, will make
their lives more difficult.
For example, it seeks to make inroads on the 582 billion-rupee
deficit by increasing indirect general sales tax to 16% from 15%, which will
further increase inflation. A drastic cut on food, fuel and electricity
subsidies will further drive up prices. Critics say the government slashed
subsidies on the advice of the International Monetary Fund and other
international donors, which have long demanded the abolition of all subsidies.
Officials argue it is an attempt to cut the fiscal deficit to 4.7% from 7%.
At the same time, the defense budget jumps 7% to 296.07 billion rupees from
last year's 277 billion rupees, allocated by the previous government of prime
minister Shaukat Aziz. The increase, announced by Finance Minister Naveed
Qamaris, is at odds with the claim by the coalition government, led by Prime
Minister Yousuf Raza Gilani, that it would "freeze" the defense budget.
Mitigating the budgetary impact on the poor, "vulnerable groups" will be
protected from price rises by a 34 billion rupee "Benazir Income Support
Program", which will hand out 1,000 rupees monthly to each qualifying
household. Beneficiaries of the program, named after the slain former prime
prime minister Benazir Bhutto, will also be provided with other welfare
facilities, such as skill development training for youths, medical insurance
and food subsidies.
The Public Sector Development Program (PSDP), the main instrument for providing
resources for development projects and programs, will also be increased, by 20%
to 550 billion rupees.
The challenging economic environment will put the collective wisdom of the
coalition government to test. In its third quarterly report, the country's
central bank has advised the government to take concrete steps to generate
resources and check expenditure to ensure the economy retains the "high growth
momentum" of recent years.
Real GDP growth in the year ending June 30, 2008, is expected to drop below 6%
for the first time in five years, and annual inflation is poised to return to
double-digits, according to the central bank. The fiscal deficit is forecast to
rise substantially and the annual current account deficit, as a percentage of
GDP, is projected to be at an all-time high.
The central bank does not see the trend of high inflation dissipating in the
near future. Domestic supply shocks have compounded the impact of strong
aggregate demand and high international commodity prices.
Pakistan's foreign reserves fell by US$373 million to $11.512 billion in the
week to May 24, according to the central bank. Total external debt and
liabilities of the country rose to $45.926 billion at the end of March from
$42.931 billion a year earlier. Pakistan, meanwhile, has to return $142 million
in short-term borrowing to multilateral agencies on top of $64 million to other
countries, and $4 million as commercial loans.
The Pakistani rupee is also continuously weakening against the US dollar, in
part due to a higher bill for oil imports. The weakness of the rupee is having
an impact on the stock market. The central bank is struggling to hold the rupee
from a free-fall against the US dollar, which is in increased demand from oil
importers and dealers.
Last month, both Moody's and Standard & Poor's cut Pakistan's credit
ratings to five levels below investment-grade. S&P gave a negative outlook
on the rating.
Moody's Investors Service said on June 13 that weak governance, political
tensions and flaws in the legal system will undermine institutions and
policy-makers, and heighten risks of a sudden shift in private investors'
confidence. It said, "Sharply widening deficits in Pakistan's fiscal and
current accounts are reversing a multi-year trend of fiscal consolidation and
debt reduction. Concurrently, renewed political discord is unlikely to provide
the stable and orthodox policy framework necessary for quickly limiting these
macroeconomic imbalances".
Trade deficit
Pakistan's trade deficit has surged 52% in the first 11 months of the present
fiscal year to $18.756 billion, from $12.311 billion in the same period of the
previous fiscal, when the 12-month deficit was $13 billion. The current account
deficit has spiraled to close to 9% of GDP, but the government has said it
expects to bring it down to 6.5%.
Driving the trade deficit increase is the rising import bill for oil, foodstuff
and consumer items. Imports jumped 29.56% to $35.943 billion in the first 11
months of this fiscal year, as wheat worth $770 million was imported to
overcome local shortages. The oil import bill is expected to rise 40% to $11
billion by June 30, compared with about $7 billion last year.
The $11.586 billion current account deficit in the first 10 months (July-April)
of the current fiscal is 75% higher than the corresponding period of the
previous fiscal, according to the State Bank of Pakistan, with the trade
deficit contributing more than 90% of the current account deficit.
The problems facing the country's new economic managers as they attempt to rein
in the deficit are exacerbated by a declining inflow of investment from abroad.
Pakistan is heavily dependent on oil imports, with fuel representing more than
30% of merchandise imports. The rising oil price has not been matched by a
comparable increase in major exportable items such as textile products. The
central bank considers the decrease in export growth and the rise in the cost
of financing for funding the external deficit as potential risks to the
economy.
Officials blame the previous government of Aziz for its failure to improve
export growth as the trade deficit rose. Its policy of relying on financing the
deficit instead is not sustainable, say experts, as the country's resources
will be exhausted in the next two years.
Yet if the increasing gap is not plugged, the country risks falling into a debt
trap, with debt servicing hitting development expenditure.
Inflation fears
Government pressure on the central bank to finance the current account deficit,
leading to high government borrowing, has helped to drive up inflation, despite
tighter monetary policy, according to the bank. Core inflation accelerated to
14.1% record in April.
The central bank had estimated that inflation in the 12 months to June 30 would
be in the range of 8% to 9%, against the 6.5% target for the year. It reached
10.27% in the first 10 months of the current fiscal.
Four increases in the oil price in the past two months have driven up the
prices of essential kitchen items, drastically hitting the budgets of the
country's poor, who spend a high proportion of their meagre incomes on food.
Tumbling stock markets
Political and economic uncertainties have driven confidence out of Pakistan's
stock markets, with investors dumping shares amid repeated and growing demands
for the resignation of President Pervez Musharraf and talk of his impeachment
by the major political parties, and possible dissolution of the main
assemblies. Foreign investors in particular are worried about political
stability, as they see a political confrontation between the contenders of
power in the coming weeks.
The benchmark Karachi Stock Exchange (KSE) 100 index, at 12,941 on Friday, was
down about 17% from April 21, although recovering from its this-year low of
12,130 at the end of May. The index, which declined in early trade on Monday,
lost 193 points, or 1.4%, last week, mainly due to political concerns, but
earlier across the board declines also followed central bank monetary measures,
including an increase in the discount rate to curb inflation and reduce the
current account deficit.
The central bank's initiatives helped to prod the KSE 100-share index to its
biggest one-day decline this year on May 23, when it dropped 4.52%, wiping out
187 billion rupees of market capital. The 615-point fall compared with a 696.83
point plunge, last year's largest single-session fall, after the assassination
of Bhutto on December 27.
Local traders believe it unlikely the market will start to recover until
political concerns are resolved. The two main political parties of the present
coalition government - the Pakistan People's Party and the Pakistan Muslim
League (Nawaz) - have not developed a consensus on the key issue of restoring
judges ousted last November when Musharraf imposed a state of emergency.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst. He is the author of six books, including The Economic
Development of Balochistan, published in May 2004.
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