Assessment of the economy
Pakistan’s economy has been in a transient state for the last couple of years because of the far-reaching liberal reforms enacted by the Nawaz Sharif Government. The revolutionary changes have taken place during a time of world recession and thus we have been passing through a difficult economic period. Despite the continuing law and order problem in the Province of Sindh (reduced considerably now due to the Army’s intercession over the past six months) and other factors affecting steady economic growth, an ingrained resilience in the economy has ensured that the transition period has not been inordinately effected and the predicted economic disruption has been avoided because of a combination of good economic management and divine Providence.
When one looks at the overall economic balance sheet there are three main areas of satisfaction when judged in relation to policy targets set forth by the present Government. Firstly, there is continued growth in the economy with two basic features, industrial growth has picked up while growth in the agriculture sector continues to be lop-sided in its dominance of the economic performance. The reason for the impressive agriculture growth is largely due to a bumper cotton crop. Overall the growth rate has gone up from 5.6% of the GDP in 1990-91 to 6.4% of the GDP in 1991-92. While this may not be a spectacular increase, it is an indication that the economy is certainly picking up.
Secondly, despite the various pressures on the prices due to the unstable world economic environment, it has been possible to contain inflation in 1991-92 to a single digit 9.6%, coming down from the 12.7% of 1990-91. All present indicators point that inflation is expected to go back into double digits at 10% plus in 1992-93. The principal reasons for the relatively satisfactory price performance in the past year, reflected both in the domestic price spectrum and by the very small decline in the value of the Pakistan Rupees against the US dollar, comes less because of the formal sector and more from such areas as continuing investment in small scale industries, the continuing activities of the informal sector and because of the segments of unregulated, undocumented accounts. These are the sectors which may continue to provide a cushion to the ever increasing economic expenditures and demand beyond the normally acceptable reasonable limits but this may not last long and it would have been more desirable to keep this cushion for a more difficult period. Drug money is being pumped into the economy in large doses, we cannot accept this as a continuing bolster to the economy.
The third area where one is relatively satisfied with the economic performance is the economy’s positive response to the series of liberalising reforms taken by the Nawaz Sharif regime in the past couple of years. The greatest visible progress is the private sector’s perception of an improved policy environment, in particular decisions now seem to be dictated by market forces rather than by central regulation and direction. One positive indicator of this is an impressive increase in private sector investment. The newly liberalised economic environment has attracted a fair amount of foreign investment although it would be too early to rate the size of this investment as something which is substantial or for that matter an extremely significant response to the new policies unless the inflow of funds continues unabated for a few years. In addition to foreign investment substantial resource inflow has also taken place in form of foreign currency accounts and through other debt-related instruments such as FEBCs, etc. As a result of this inflow of resources it has been possible not only to finance a record import of goods and services but foreign exchange reserves have shown an impressive rise to above US$ 1 billion. Pertinent to the virtual abolition of foreign exchange controls and the relative stability of the Rupee-dollar parity, there has been the considerable generation of confidence among that part of the public that is already savings-oriented as well as the investors but more importantly that confidence has generally permeated among the masses of the country as to our financial viability, that perception is as important as the actual fact.
The aforementioned development needs to be evaluated in the context of the economic targets proposed and the medium term viability of the principal indicators of the economy. Whereas the growth rate and relative price increases can be deemed to be satisfactory, the economy has not been without strains felt elsewhere, by this we mean the magnitude of the fiscal deficit, deficit in external accounts and the relative failures in terms of achieving the much touted self-reliance. The fiscal deficit is reportedly over 7% of the GDP in 1991-92, which, though lower than the 8.8% of the GDP of the previous year 1990-91, is something with which the economy and the government cannot continue to live with in the medium term. This fiscal deficit is poised to again grow larger in this financial year. There is an unsatisfactory rate of national savings and our contentment in the continued dependence from abroad indicates a deep sense of national malady. Both the government and the people are sparing no efforts in striving to live beyond their means, something that is at variance with the basic spirit of what the economist call the process of capital formation and enhancing of production capacity. We have to learn to stay within Budgetary limits and avoid continuing deficit financing. Examples of austerity have to be set by the Government, Junejo’s Suzuki-slogan is an example to be emulated. There is too much mass poverty for us to be ostentatious. Not unjustifiably the budget deficit has grown at present to such a magnitude that it has been rated by some economists and policy makers as the major problem requiring priority attention. What follows from this is the mode of financing the deficit and the implications for growth, financial stability and external accounts. Reportedly the build-up of the deficits has been met with wide-scale borrowing from the banking system. Apparently this has been the case for the past 2 years or so and could ultimately become an invisible potential for a sustained increase in prices. This is walking a very dangerous economic path indeed as this will invariably lead to double digit inflation, that in turn would cause commensurate loss of confidence in the basic strength of the economy by all concerned. Combined with other factors including the devastation to the economy by the floods of autumn 1992, double digit inflation is very much on the cards.
In addition to the aforementioned, the size of the deficit in the external account has also grown very large and is tending to grow larger because we cannot control our urge for imported consumer goods. Here we run into severe problems relative to our ability to go for short-term borrowing, our ability to service foreign debt and above all the perception of foreign economic agencies about the financial and economic stability of the country. The large deficit is estimated to be around US$ 2 billion and cannot be financed on a continuing basis in the given external finance and economic environment. There may be increasing pressures to shift to commercial borrowing where the rule of the game are widely different from the borrowing from multilateral aid agencies and from that obtained on bilateral basis. The plight of the South American and Latin American countries in the 70s and 80s was only assuaged because the western banks themselves got into trouble because of the size of the red ink and had to bail out by short selling their debt back to the debtors, sometimes as low as thirty cents on the dollar. The only answer to close the external deficit is to have an aggressive campaign for export expansion together with necessary changes in the tariff structure and investment away from consumer goods to the industrial sector. Some areas are particularly important, one is a definite improvement in productivity through necessary changes in labour policy, job training, diversification of production and further incentives to the industrial sector. As yet our foreign indebtedness, which has risen from US$ 16 billion in 1990-91 to US$ 20 billion in 1991-92 is still within manageable limits, mainly because the commercial debt is relatively small, but we should not put further pressure on our safe cushion as otherwise it may precipitate an economic crisis.
All said and done, Pakistan’s economy continues to remain basically strong and resilient, that is not a mean achievement given the various external and internal pressures. The basic strength and framework which includes a high rate of growth and economic stability have survived four different governments in no less than 5 years. Gradually this margin of survival may be wearing thin and unless we review our priorities and increase national savings while resisting the temptations of spending beyond our limits, we may soon be on the fringes of financial crisis.
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Leave a comment