A critical review of the economic situation in Pakistan 2008-09

By Mehmood-Ul-Hassan Khan
There is a general perception in the country that the economy is on the road to recovery.
But on the other hand, the ongoing global economic and financial crisis, also, with the
deteriorating law and order situation, and furthermore, the continuous energy shortages in
the country can be concluded as the real risks to macro-economic situation.
The latest report by the ministry of finance stated, that the fiscal deficit target, 4.3 per
cent of GDP (Gross Domestic Product), and the current account deficit target of 5.9 per
cent of GDP were achievable. This can also be verified from the current studies
undertaken by the IMF (International Monetary Fund) and the World Bank. It also stated
that the global economic recession was affecting our economy in various ways, such as
the volumes of exports and FDI’s declined substantially, which can also be verified in the
current reports by the State Bank of Pakistan. Despite the financial support from the IMF
and other bilateral and multilateral donors, Pakistan’s external account remains dire.
Other reasons for why economic growth remained weak was because of the declining
ratios of tax collection, low inflows of foreign direct investments and the delayed and
diminishing privatisation process.

Signs of recovery
The report also shows some signs of improvement in economic variables such as the
stabilisation in the inflation rate, also, a significant increase in the build-up of foreign
exchange reserves, which recovered from a low of $3.5 billion on October 31, 2008 to
$7.8 billion on April 17, 2009. Furthermore, import compression and net zero
government borrowings from the State Bank of Pakistan by the end of April are evident.
The IMF, satisfied with the progress made by the government in stabilising the economy,
agreed to release the second tranche of its $7.6 billion assistance programme. There were
also some indications that the amount/assistance available to Pakistan could be increased
further, if the country continues to proceed on the track it has been following. Other
variables in the economy which have also shown various signs, they include the
following:

(a) GDP growth

As stated in the report the GDP will be in range of 2.5 per cent to 3.5 per cent.
Agriculture ratio to GDP will be positive which is based upon anticipated high wheat
crop and above target growth of minor crops including a reasonably good outturn by the
livestock sub-sector.

(b) LSM
It is projected that large-scale manufacturing (LSM) ratios will be negative due to many
local and international reasons. It depicted a negative growth of 5.73 per cent during July-
Feb 2008-09 as against 5.27% positive growth last year. The economic recession and cost
of production has deficiently affected the LSM growth.

(c) Agriculture sector

The agriculture sector is likely to achieve its growth target of 3.3 per cent for the current
year. According to the report, all livestock products witnessed an increase in prices and
thus the target of 3.2 per cent would be achieved as the demand for livestock products
was growing at a phenomenal pace. Moreover, disbursement of credit to the agriculture
sector by commercial and specialised banks has increased by Rs13.3 billion (9.6 per cent)
on a yearly basis to Rs151.9 billion during nine months of the current fiscal year from
Rs138.6 billion from the corresponding period of the last fiscal year which is
instrumental to achieve macro-economic goals.

(d) Services sector

The service sector showed some resilience in the current fiscal year. The banking and
financial sectors of the country showed substantial growth which would contribute a
positive impact on the economy in the near future.

(e) Inflation
The ongoing global inflationary pressures continue to affect the economies of Thailand,
India and Pakistan. Despite the diversified but integrated efforts of the government and
SBP the country still faces a high double-digit inflation rate. The manipulators, weak
regulatory bodies, poor execution of laws and the withdrawal of subsidies were the main
causes of high inflation ratios in the country. It is expected that the average inflation for
the year (2008-09) as measured by the CPI will be close to 20 per cent.

(f) Capital market

It seems that the stock exchanges of the country are on the road to recovery but their
sustainability factor is still questionable. The local bourse remained buoyant throughout
the month of March 2009. The recovery phase of the premier stock exchange after floor
removal has been hopeful and an outstanding performance has made it one of the best
performing markets of the world in 2009, as in the past six weeks Pakistani capital
market’s value has improved by 20 per cent.

(g) Fiscal management

Due to many internal adjustments (cut in development spending), integrated financial
policies/reforms (reduction of oil subsidies) and other external factors such as loan
facilities from the IMF, pledges from the friends of Pakistan forum and record worker
remittances. The fiscal health of the country is improving and the government received
Rs141.1 billion in gross external inflows against outflow of Rs104.1 billion which means
net availability of Rs37 billion. Pakistan is geared up to keep trade deficit to 4.3 per cent
of GDP and current account deficit within the range of 5.9 per cent.

(h) Tax collection

Tax revenue collected by the Federal Board of Revenue (FBR) stood at Rs813.6 billion
(net) during the first nine months of the current fiscal year (2008-09) compared with
Rs679.9 billion in July-March (2007-08) posting a healthy increase of 19.7 per cent. But
it is again seemed that the tax revenue target of Rs1250 bn may not be achieved during
the current fiscal year, as the federal government has already lowered its targets of tax
collection in the ongoing fiscal year.
(i) External sector
According to the report the external sector has shown some signs of improvement. The
current and trade account balance has improved. Worker remittances (according to the
SBP in April, the overseas workers sent the highest ever amount of $739.43 million
surpassing the December 2008 record of $673.50 million. The remittances were also
higher by 22.79 per cent over the previous month) were on the peak despite the
substantial decrease in the ratios of FDI and FPI.

(j) Current account balance

The CAB decreased by 20.8 per cent during July-March 2008-09. Current account deficit
shrank to $7.6 billion during this period as against $9.6 billion during the same period of
last year. What Pakistan probably needs is an investment driven current account deficit
neutralised to some extent by rising savings level.

(k) External debt

External debt and liabilities (EDL) stood at $49.7 billion or 30.7 per cent of the projected
GDP for the 2008-09 at the end of March 2009 which is higher than end-June 2008 stock
of $46.3 billion or 27.6 per cent of GDP.

(l) Rise in public debt

According to the ministry of Pakistan our public debt is expected to increase by over Rs2
trillion by the end of 2008-09, the highest ever in a single year. Public debt is estimated
to cross Rs7,931 billion by end June 30, up by 34 per cent from Rs5,901 billion in 2007-
08 because of massive depreciation in the value of the rupee, and external loans obtained
for budgeting the balance of payments. Furthermore, foreign currency debt will reach
Rs4,811 billion and domestic currency debt to Rs3,120 billion by the end of June 2009.
Public debt share as percentage of GDP will rise to 59 per cent during the year ending
June 2009 from 56.3 per cent in the last financial year. It will be in violation of the fiscal
responsibility and debt limitation (FRDL) act 2005, which calls for gradual reduction in
public debt. The rupee depreciation in the first quarter has an impact of Rs447 billion on
the stock of public debt. The significance of this depreciation effect is highlighted by the
fact that even though the stock of foreign currency debt has gone down in dollar terms by
$400 million, there has been an increase in rupee terms of Rs414 billion in the first
quarter. The depreciation of the rupee against the dollar has been responsible for
approximately 66 per cent of the total increase in public debt, as stated in a debt policy
report submitted to the National Assembly.

Concluding remarks
The review of economic situation for the first nine months of the current fiscal year
released by the ministry of finance can be a wakeup call for the policy makers, as the
present review reflects an objective assessment of the macro-economic situation. For a
sustainable growth, the government needs to pursue the permanent reform processes and
resist in slowing them for short-term political gains.