Mid-term review of the economy
Pakistan’s economy is in a state of rapid transition from a regulated and controlled environment to a completely free and market oriented operation of economic forces. Whenever there are such drastic economic reforms as has been carried out in Pakistan, there is bound to be a period of uncertainty and we are on the “self-doubting curve” where the reformers themselves become under-confident because of the difference between projected goals and actual targets achieved. While there is reason to be careful and apprehensive, there is no need to take to panic stations.
Looking at the macro-economic indicators, we find that all of them, viz (1) growth rate (2) prices (3) balance of payments (4) fiscal performance and (5) level of national savings and investments are under severe pressure. At least three of the aforementioned indicators stand out strikingly because of continuing imbalances, the most important being the adverse situation in the balance of payments.
From 01 Jul 1990 to 29 Feb 91, Pakistan’s exports amounted to a total of US $ 3.68 billion while imports ate up US $ 4.92 billion of our precious foreign exchange. The trade deficit on 01 Mar 91 thus amounted to US $ 1.24 billion in the 8-month period ending at a total of US $ 2.1 billion trade deficit on 30 Jun 91. While exports increased marginally in the corresponding 8-month period from 01 Jun 91 to 29 Feb 92 to US $ 4.09 billion (plus US $ 0.41 billion or 11%), imports increased a total of US $ 1.17 billion from US $ 4.92 billion to US $ 6.09 billion (23%) i.e on a pro-rata basis the increase in imports was double to that of exports. Projected upto 30 Jun 91, last year’s trade deficit of US $ 2.1 billion should rise beyond US $ 3 billion. To correct this imbalance, the government is taking emergency measures to enhance export figures. Frankly speaking, an increased trade deficit will put tremendous pressure on the economy. The invisible component of cash inflow will also show deterioration as the traditional volumes have been diverted to Foreign Currency accounts and may be further diverted to the Foreign Currency dominated Bonds which are now on offer by Government of Pakistan (GoP).
The greatest accomplishment of the reforms enacted by the present Government is that the prices of commodities and factors of production as well as all economic flows reflect their scarcity prices and not those prices of commodities when they are kept on a tight leash while being regulated and/or controlled. As we are seeing happening in Russia and the other Republics of the Commonwealth of Independent States (CIS), drastic reforms usually means extremely painful adjustments by the masses, but is a necessary evil if the process of reforms are to be completed. Thankfully, Pakistan has been blessed with living with a mixed economy, part public and part private sector, this is further mixed with our parallel economy over the past two decades and has kept the pains of transition from being as acute as we are seeing in the CIS.
There are three major reservations about the balance of payments sector, (1) the base of exports continues to be extremely narrow, despite various incentives/facilities given to the export sector such as removal of credit ceilings for export finance, etc. The response is less than encouraging. This has been further accentuated by a marked decline in the international market with respect to prices of cotton (from US cents 90 per lb to US cents 50 per lb) which has made a huge dent in our foreign exchange earnings, as reflected in the increasing trade deficit. One hopes that once the tariff structure is adjusted, a conducive export environment will be created for the exporters to expand the market (2) the consequences of virtual convertibility of the Pakistani rupee has caused uncertain conditions in the declining value. This could take some time to settle and may have implications for the present Current Account. Ultimately there will be increased confidence in GoP’s trend of liberalizing policies and openness of the economy, thus providing a stronger mooring to our foreign exchange sector (3) foreign assistance is marked with uncertainty, however the international financial institutions like the IMF and World Bank have shown a positive attitude in helping Pakistan, contrary to fallacious media reports. Recently the Vice President of the World Bank, Mr Woods, along with a high-powered delegation, visited the country for an on-the-spot assessment and their vote of confidence in the ongoing measures has been reflected in the release of some of the promised loans only a few days ago. The World Bank has released the Second Tranche of the Financial Sector Adjustment Loan (FSAL) worth US $ 75 million, a matching amount is expected from Japan through its Overseas Economic Cooperation Fund (OECF).
The second major imbalance pertains to the fiscal area. Last financial year i.e, 1990-1991, the budget deficit was 8.8% of the GDP i.e in Rupee terms it amounted to Rs 89.4 billion. In its present budget, GoP had made an ambitious target of bringing this deficit down to 5.5% of the GDP. Though this is an extremely laudable target, the various measures taken by the government, such as Resource Mobilisation, have not taken off and early indications suggest that the attainment of the projected goal was not possible. There are indications that the growth rate target has been set at 5.8%, this may not be too ambitious to accomplish even in the face of the budget deficit.
Because of a number of factors relating to shortfall in revenues and trends in expenditures, it appears that the actual fiscal deficit may be significantly larger than 5.5% of the GDP. The revenue collection has not responded so well as was expected (1) because of structural charges and (2) because the private sector has not responded by the willing payment of due governmental taxes. While GoP must tighten its revenue collection measures, the private sector must realise it is creating problems for itself by not paying its due taxes. The fact remains that the Nawaz Sharif Government has instituted very far-reaching reforms in a bold, swift manner meant to ensure that the beneficiaries of the regulated and controlled economy do not stall the reforms. The speed of GoP’s action has ensured that the reforms are not easily reversible or tampered with. By withholding cooperation, the private sector is playing into the hands of those who have (for the four decades) obtained easy loans, permits, licences, etc by nepotism, favouritism and outright graft instead of engaging in the free market competition inherent in the newly inducted liberal economic system. These parasites have become rich by the use of patronage and bribes and would like nothing better than a return to the old system where merit has no chance in competition to them. By not making legitimate sacrifices now, by not paying their due share of government revenues, the private sector risks providing a political basis for future leadership to resort to draconian measures and even the reversal of policies.
There is also a decline in the less costly Public (non-bank) borrowing by GoP with a corresponding increase in borrowings from the banking sector, this may eventually lead to a position where the GoP will have borrowed a large amount from the banking system but substitution of non-bank borrowing is unlikely to have a deficit effect on prices. Related to the fiscal deficit, prices are showing a declining rate in increase (9% instead of the 12% last year). Present indications point to the fact that given the basket of variables, GoP may manage a one-digit inflation. This will result mainly from reduction in fiscal deficit compared to last year and a larger balance of payments of deficit. A serious shortage of everyday consumer goods has been experienced during the year. While the inflow in the foreign currency account has contributed to relative price stability, it has also meant pressure on reserves, more borrowings and additional burden in the region of foreign debt and servicing.
The third imbalance among the macro-economic indicators pertains to Savings and Investments, this is essentially a long-term issue. Our rate for National Savings has been 14%, however there are clear and incontrovertible indications that the investment within the country has positively responded to improvement in policy environment. Domestic investment shows a clearly rising trend and while the information on foreign investment available is rather fragmentary, it also shows a positive development. However, our biggest challenge is to enhance National Savings volumes without which the much-trumpeted goal of self-reliance may remain a distant dream.
Frankly speaking, the transition period is always one of uncertainty. In our case it has exposed the many structural weaknesses that must be overcome if we are to go forward to economic emancipation. The problems only serve to highlight the long-term problems that regulation and control fosters on any economy. Nawaz Sharif has to be commended for bold, constructive steps to un-shackle the economy. GoP now needs cooperation from the private sector to ensure that these initiatives do not end in failure. It is now upto all of us to support the liberal policies that have done much to bring hope to the economy.
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