Pakistan recovery fragile at best
By Syed Fazl-e-Haider
QUETTA, Pakistan - The severe deterioration of Pakistan's economy in 2008 has
moderated since the turn of the year. Yet political uncertainty, high inflation
and social instability still threaten to undo what little progress has been
made.
Improvements are visible in terms of inflation, foreign exchange reserves,
import growth and the exchange rate. That will help the country's argument for
receiving a second, US$750 million, installment of a hard-fought $7.6 billion
deal reached with the International Monetary Fund (IMF) last November to stave
off a balance-of-payments crisis.
A review of the IMF standby agreement, reached after Pakistan's
foreign-exchange reserves had shrunk 75% and donor countries
declined to provide funds, is to be conducted in Dubai in the United Arab
Emirates between February 14 and 24, before the second installment is paid,
probably by next month, according to a report in the Daily Times.
The review is expected to give positive findings after covering economic
performance and economic data relating to the second quarter (October-December
2008) of the country's financial year.
Key performance benchmarks include maintenance of a budget deficit at or below
4.2% of gross domestic product (GDP) during the current fiscal year and central
bank borrowing at 258 billion rupees (US$3.24 billion) at the end of each
quarter. Pakistan's budget deficit had been estimated at around 2% of GDP, much
less than the target agreed on with the IMF, while central bank borrowing has
been maintained at the agreed level.
But the continuing uncertain political environment and security threats pose a
challenge to the government's efforts to maintain fiscal discipline, according
to a Business Recorder report.
"Exogenous price shocks (oil and food), debilitating power cuts and the
deteriorating security environment in the NWFP [North-West Frontier Province],
which contributes 10% of national GDP, have led to falling domestic output,"
the Recorder quoted Sayam Ali, economist at Standard Chartered Bank, as saying.
A range of issues has kept Pakistan in a state of instability since February 18
polls last year, ranging from restoration of deposed Supreme Court judges to
frequent tussles between the coalition government. After the exit of
then-president Pervez Musharraf late in 2007, the differences between the
Pakistan People's Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), the
two major political parties of the ruling coalition ultimately widened to the
split of the alliance and an open fight between the two parties.
The two parties have differences on policy matters related to the "war on
terror", restoration of the deposed judges, and abolition of Musharraf's 17th
amendment to the constitution, which concerns the head of state also being the
army chief. Senate elections to be held next month are also likely to raise the
political temperature.
The Taliban-led militancy is seen as the gravest threat to efforts to stabilize
the economy. The country has suffered a series of suicide attacks in different
areas in the past two months.
The World Bank plans to provide up to $2 billion in credit to Pakistan this
fiscal year to support economic growth and the government's poverty-focused
programs.
"Pakistan is now moving in the right direction, and its reform program will lay
the foundation for inclusive and sustainable growth," the Business Recorder
quoted Ngozi Okonjo-Iweala, the World Bank Group managing director, as saying
after he concluded a visit to Pakistan last week.
Taming inflation
Inflation, though declining, remains high at 20.5% in January, as measured by
the Consumer Price Index, compared with a three-decade high of 25% last
October, and according to the latest government forecast may decline to only a
20% annual rate by the end June 2009, against an earlier projected target of
12%. Core inflation slightly increased to 18.9% in January from 18.8% in
December.
The central bank in its monetary-policy statement on January 31 kept its
benchmark interest rate unchanged at 15%.
"The decline in oil prices and stable food prices have had a positive impact,"
Bloomberg reported, citing Imran Khan, the head of research at First Capital
Equities Ltd in Karachi. "In its next review, there's a bright chance of an
interest-rate cut by the central bank," Khan said.
The central bank has increased its benchmark interest rate five times in the
past 18 months to tame core inflation (that is, excluding food and energy), but
the decision to maintain present high rates clearly indicated that this policy
had not yielded the required results, according to a report published in the
daily Dawn newspaper.
Businessmen also criticized the bank's stance. "The government's stance not to
reduce the interest rate was illogical, whereas lack of new developments in the
policy also did not help fight the economic woes in any way," The News
reported, citing, S M Muneer, chairman of Businessmen Panel, a group of NWFP
traders and industrialists.
"Never before in the last 61 years have Pakistan's business been so
hard-pressed as it is now and it is being ignored by the elected
decision-makers," Dawn reported, citing a senior garment exporter.
Trade deficit
Improvements in the country's trade deficit also look fragile. The deficit
narrowed to $1.17 billion in January from $2.05 billion a year earlier, but
widened from $815.92 million in December, according to the Federal Bureau of
Statistics (FBS).
The deficit has increased 3.5% to $10.727 billion in seven months
(July-January) of 2008-09 from the corresponding period a year earlier, mainly
due to costly imports of oil, fertilizer, wheat and other essentials and a
decline in the textile sector's dyeing exports.
While exports in the first seven months rose 8% to $10.93 billion compared with
$10.12 billion in the same period last year, the $22.10 billion export target
for the fiscal year ending in June seems beyond reach.
"The task is impossible because production cost has gone up manifold, rendering
us uncompetitive in the world market," Dawn quoted textile industry leader
Shabbir Ahmad as saying.
Foreign exchange reserves
The country's foreign exchange reserves meanwhile continue to decline, falling
by $44 million to $10.163 billion during the week ended on January 31. Central
bank reserves dropped to $6.792 billion on January 31, compared with $6.872
billion a week earlier. Reserves held by commercial banks nevertheless
increased $35 million to $3.370 billion on January 31, compared with a week
earlier.
Pakistan this month began phasing out use of central bank foreign exchange
reserves to pay for oil imports, whose cost rose 38.6% to $5.88 billion during
the first half of this fiscal year compared with a year earlier.
"The move was made to comply with an undertaking to the IMF in November,"
according to a report published in The News. From February 1, the central bank
no longer provided dollars to pay for imports of furnace oil, used to fuel
power stations, and from August 1 it will stop providing the currency for
imports of diesel and other refined products. The central bank will carry on
providing currency for crude oil imports until February 1 next year.
Fiscal deficit
The country is likely to miss its annual fiscal deficit target of 4.2% of GDP
set for the current fiscal year ending June 2009. "If the current trends
persist, and strong corrective measures are not undertaken promptly, the annual
fiscal deficit target of 4.2% of GDP for 2008-09 may not be met," according to
the Fiscal Policy Statement 2008-09 recently released by the Finance Ministry.
The statement stressed that a rules-based fiscal policy should be implemented
rather than the government, which depends on a relatively narrow tax base,
relying on discretionary measures to cope with day-to-day economic issues.
The government has cut spending on subsidizing petroleum products, cooking oil,
petrol, diesel and kerosene oil, helped by a sharp fall in the international
price of crude oil in the past six months, and has withdrawn subsidies on
wheat.
Even so, its spending continues to rise and it has been unable to raise funds
from the international market. Domestic debt rose by 9.27% during the first
half of the current financial year.
Critics have called for reform of the tax system to bring in more income. The
tax-to-GDP ratio stands at around 10% to 12%, and broadening the tax base by
bringing into the net sectors which are either untaxed or under-taxed would
help to increase the ratio to between 16% and 17%. This could be done by
reducing exemptions, incentives and concessions.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including
The Economic Development of Balochistan, published in May 2004.
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