Mid-year Economic Review
The Government’s rhetoric expounding the economic miracle that they are supposed to have wrought in the space of a year and some is so different from the actual facts on the ground that when compared with the relatively moderate performance by the present regime, it comes out in bad light. Given that the economic morass we had descended to in 1993 due to the political freeze, for which the present regime has to accept a major share of responsibility because it was the gridlock of administration that they, as the then Opposition, used as a modus operandi to bring down the Nawaz Sharif government, we are not in as bad a shape as we could be, again relatively speaking. The general performance of the economy is considerably short of the over-ambitious expectations and targets, that is the major reason for the increasing loss of confidence in the policies of the Government of Pakistan (GoP). Four areas can be highlighted to give a comprehensive overall economic review, viz. (1) Growth, GDP and Production (2) Public Finance (3) Relations with IMF and lastly but most important (4) Inflation and Prices.
The Growth Target of 6.7% set for 1994-95 is unlikely to materialise. This is both due to natural and artificial factors viz. (1) severe shortfall in cotton production (2) its commensurate fallout effect on cotton ginning, manufacturing, export and related services and (3) industrial production will also fall far short due to (a) the law and order situation (b) power failure and load shedding (c) in a Catch-22 gridlock, the drag effect of the cotton industry and (d) compounding of the problems faced by the financial institutions in recovery of capital and mark-up acts as a further dampener. The cumulative effect of all this is that despite the rosy picture that GoP would have us believe the Growth Rate would be lucky to hover around 5.0%, almost 25% below the projected 6.7%. Given the adverse extenuating circumstances the Growth Rate by itself would have been acceptable but not when compared to the projected target.
The second area of problem is Public Finance. Despite the fact that GoP has made a significant dent in the normal rise in expenditure, government revenues have not enlarged sufficiently to keep up with the rising demand. The major problem remains the considerable shortfall in revenues. Again this is mainly because (a) the initial targets to collect revenues were too ambitious and (b) because of the euphoria in government in terms of reduction of fiscal deficit to 5.9% in 1993-94 from a high of 7.9% in 1992-93, GoP went ahead and tried for an impossible target of 4%. In fact fiscal deficit would remain more than 5%. Despite a firm resolve otherwise GoP has continued to be vulnerable to and give exemptions to the lobbies of vested interests. The most neglected area has been the administration and collection of taxes, this has been complicated by the frequent transfer of officers. Again despite great rhetoric and public fanfare, there has not been a requisite effect to plug the holes and leakages. Taken together with low elasticity of taxes with respect to income and rising prices, this has contributed to a less than satisfactory result. In addition the structural changes have not yielded the expected results i.e. fall in revenues because of reduction in tariff levels has not been compensated by yield from newly introduced General Sales Tax (GST). Therefore where even areas like Income Tax have done reasonably well, the sectoral gains have been lost because of the overall low performing GST.
The third area of major concern is our future relations with the IMF. For the most part GoP has been successful in the observance of conditionalities imposed by the IMF so far but looking at the area of fiscal policy, etc, it looks difficult in the present economic circumstances to maintain the required fiscal discipline. Resource mobilisation has not yet reached an adequate stage where IMF would be satisfied that their “battlefield surgery” on our economy has achieved satisfactory results. Even the required quarterly instalment to IMF for Oct-Dec 94 has been accomplished with great difficulty involving the raising of money from abroad amounting to US$ 300 million (Pak Rs.10 billion) to meet our obligations. For a nation that boasts of US$ 3 billion in foreign exchange reserves, albeit in private funds mostly in the stock market, it is rather strange (and embarrassing) that the government has had to scramble to meet its international financial commitments. To give layman’s example of how financial numbers in the future do not seem to add up, for every US$ 100 million in investment in the fossil fuel-based energy sector, the interest obligations will be about US$ 16 million and the fuel purchased from abroad about US$ 9 million i.e. about US$ 25 million annually or 25% of total project cost. For a country having difficulty in meeting short-term IMF commitments, what would be the effect of US$ 5 billion investment? Foreign exchange outlays (including debt servicing) of about US$ 1.25 billion annually, another US$ 300 million per quarter. An attempt to keep up with our financial obligations for US$ 5 billion may be beyond intelligent financial assessment, how do we react when talking about US$ 10 billion, US$ 15 billion or US$ 20 billion in expected investment, at least according to the MoUs signed? These figures do not include the US$ 7 billion Gordon Wu proposal, which is yet not clear whether it is a scam perpetrated by Mr. Wu on GoP or (as it is being increasingly felt) by the GoP on the people of Pakistan? All this does not include the residual compound effect on prices.
The most important and worrisome area is inflation. For fiscal 1994-95, the targeted price increase was 7%, this has already been exceeded in the first 6 months of this financial year. At this rate we will end June 1995 at more than double the targeted rate of increase in prices, almost 15%. This is a most sensitive issue because not only does this effect savers and consumers but more importantly the people’s confidence in the present GoP’s policies is eroded and the purchasing power of money is lost. If the people’s expectations are further shaken by a sustained prospect of inflation, there may be commensurate reaction in the streets. Given the present delicate political state of the nation this may well get out of hand, increasing the pressures on the economy in a Catch-22 situation. To the credit of the State Bank of Pakistan (SBP) and GoP respectively, both the monetary policy and to a larger extent, the fiscal policy respectively are on track and have thus effectively curtailed demand, otherwise we would be in a much more serious position with respect to inflation. Inflation at substantially higher levels is basically a short supply phenomenon. Shortfall in agriculture production but more importantly, inordinate increase in demand for consumer goods has contributed to the galloping inflation. This is especially acute in food prices which are above the normal inflation rates. This has severely affected the common man as it is affecting the average middle class family. The wholesale smuggling of consumer products and food essentials to Afghanistan and beyond to Central Asia, food essentials to Iran and India, has contributed to the inflationary prices. While the theoretical argument would be to try and stop smuggling, because of large-scale involvement by our border population for whom this remains the only source of livelihood, this is almost impossible. The only pragmatic solution is to increase production and supplies. Much will therefore depend upon the forthcoming wheat crop which is going to be a decisive factor in the rate of inflation.
GoP has done well to keep down commercial bank borrowing and generally staying within IMF recommended parameters, however the immediate prospect depends on the vagaries of Divine nature with a more than outside chance of reaction in the streets. While the economic outlook is certainly not bleak, the overall evaluation is that it is certainly far from the rosy picture suggested by GoP’s boundless rhetoric. As a credible economic barometer, the country’s plunging stock markets are a fair indicator that the light we see at the end of our economic tunnel is still elusive.
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