Fundamental Flaws of Pakistan Economy

[TopCat]

Pakistan's economy grows by two per cent

Afzal Bajwa
The Nation (Pakistan)
Publication Date: 12-06-2009







Growing by 4.7 per cent agriculture alone saved Pakistan’s economy from negative zone and country’s GDP growth rate, according to Economic Released here on Thursday, stood at 2 per cent despite
substantive contraction in industrial sector.

In the Survey, the government underlined massive “power outage, weak security environment, and political disruption in March 2009,” as major factors causing decline of 7.7 per cent in large scale manufacturing sector during first ten months of the outgoing financial year.

Launching the annual official economic document covering July 2008-April 2009, Advisor to Prime Minister on Finance, Shaukat Tarin and Minister of State for Finance, Hina Rabbani Khar explained that economic growth of 2.0 percent seems reasonable in the wake of global recession and indigenous economic melt down. As a matter of fact, Pakistan’s economic growth rate not only missed this year’s target of 4.5 percent but also fell way short of 4.1 per cent last year. Looking in the backdrop of global economic recession Tarin termed positive growth as rare exception.


Described the 2008-09 as ‘year of consolidation’ for the revival of economy, he reiterated that the current government inherited economic setbacks from the previous government.

According to the Survey, the agriculture sector depicted a stellar growth of 4.7 per cent, as compared to 1.1 per cent last year and the target of 3.5 percent for the year. Meanwhile the Advisor described Federal Board of Revenue performance as not satisfactory. Consequently tax to GDP ratio came down to 9 per cent as against the target of 10 per cent.

Manufacturing sector contracting by 3.3 per cent in 2008-09 compared to expansion of 4.8 percent last year and target of 6.1 percent, the sector put major pressure on the economy. Small and medium manufacturing sector maintained its healthy growth of last year at 7.5 percent. Thus the mail ill of the manufacturing sector was the
large-scale manufacturing that came down by 7.7 percent as against growth of 4 per cent last year and 5.5 percent target for the current year.

According to the Survey, the services sector grew by 3.6 per cent almost half the target of 6.1 per cent and in comparison with last year’s growth of 6.6 percent. Value-added in the wholesale and retail trade sectors grew at the rate of 3.1 percent again less than 5.4 per cent target for the current year and compared to 5.3 per cent in last year.

Others that also showed negative growth were finance and insurance sectors at the rate 1.2 percent in 2008-09.

The Advisor explaining this phenomenon said it shows that Pakistan’s financial sector was integrated in the world economy and is feeling the heat of the crisis plaguing international financial markets.

Transport sector and communication sub-sector depicted a sharp deceleration in growth to 2.9 percent in 2008-09 as compared to 5.7 percent of last year.

Per capita real income also faced the wrath of international economic slow down as it could rise by 2.5 per cent in 2008-09 as against 3.4 per cent last year. This nominal growth in per capita income could be translated in dollar terms rising from US$1042 last year to $1046 in 2008-09 marginally up by 0.3 per cent.

Total investment declined from 22.5 per cent of GDP in preceding year to 19.7 per cent in 2008-09, according to the Survey. Fixed investment decreased to 18.1 percent of GDP from 20.4 percent last year adding that private sector investment was decelerating persistently since 2004-05 and its ratio to GDP declined from 15.7 percent in 2004-05 to 13.2 percent in 2008-09.

Public sector investment to GDP ratio has risen persistently from 4 per cent in 2002-03 to 5.6 percent in 2006-07. However, it declined to 4.9 percent in 2008-09.

National savings rate surprisingly improved to 14.4 per cent of GDP in 2008-09 as against 13.5 per cent last year. However, domestic savings declined substantially from 16.3 percent of GDP in 2005-06 to 11.2 percent of GDP in 2008-09.

The overall foreign investment during the first ten months has declined by 42.7 per cent and stood at $2.2 billion as against $3.9 billion in the comparable period of last year. Foreign direct investment (FDI) showed some resilience and stood at $3205.4 million during July-April (2008-09) as against $3719.1 million in the corresponding period of last year, thereby showing a decline of 13.8 percent. Private portfolio investment on the other hand showed a net outflow of $451.5 million as against net flow of $98.9 million during the same period of last year.

During 2007-08, the SBP continue with tight monetary policy stance thrice raising the discount rate and increased the cash reserves requirements and statutory liquidity requirements. During July-May 2008-09 money supply (M2) declined 4.59 percent against 8.96 percent last year.

Net domestic assets (NDA) were limited to just Rs442.1 billion as compared to Rs655.4 billion in the preceding year. During the 2008-09, the slow expansion in private sector credit has led to slow growth NDA of the banking system. This is shared both by NDA of SBP and Scheduled Banks. Net foreign assets of the banking system also recorded a decline of over Rs227.1 billion during the first ten months of the current fiscal year to May 9.

According to the Advisor, the government’s budgetary borrowing from the banking system decreased by Rs339.9 billion during July-May 2008-09 against an increase of Rs360.4 billion in the same period of last
financial year.

The Survey described the inflation rate at 22.3 percent during July-April 2008-09, as against 10.3 percent in the comparable period of last year. The food inflation is estimated at 26.6 percent and non-food 19.0 percent against 15.0 percent and 6.8 percent in the corresponding period of last year. The Sensitive Price Indicator has recorded increase of 26.3 percent during July-April 2008-09 against 14.1 percent of last year. According to the estimates, the average inflation for the year (2008-09) as measured by CPI would be close to 21.0 percent.

Overall exports recorded a negative growth of 3.0 percent during July-April 2088-09 against the positive growth of 10.2 percent in the corresponding period of last year. Imports registered a negative growth of 9.8 percent in July-April 2009 as compared to the same period of last year, he added.

Workers’ Remittances were among the rare sector maintaining positive growth as they soared to $6355.6 million in July-April 2008-09 as against $5319.1 million in the comparable period of last year, depicting an increase of 19.5 percent.

According to the Advisor, Foreign Exchange Reserves amounted $11.6 by the end of May 2009. As per the breakup, the State Bank of Pakistan held reserves stood at $8.28 billion and reserves with banks stood at $3.32 billion.

Tarin informed the media that the government has initiated survey on poverty, which would be completed in next three months.

Rather than just relying on the foreign assistance, the government would allocate considerable allocations for the internally displaced persons, said Tarin. He said that the government expects Rs180 billion from Friends of Democratic Pakistan in the forthcoming budget adding that IMF would also provide next tranche of loan by June end.

 

[TopCat]

The economic bonanja that Pakistan saw after 2003 is mainly due to Govt spending. Private investment is decreasing since 2003 in the middle of economic boom.
Domestic savings is only 11.2. Not a good indicator at all. Those who are expecting Pakistan's early recovery could be heart broken soon. External resource or US help could provide Pakistan's much needed breathing space but will not change the fundamentals of economy.

 

[Neo]

Picture of a squeezed economy...​

The Economic Survey for 2008-09 released in Islamabad by the adviser to the prime minister on finance, Mr Shaukat Tarin, fleshes out the economic contraction he had repeatedly outlined in the recent past. The year was spent by the nation under a PPP coalition; hence the responsibility for what has transpired lies at the doorstep of the incumbent government. Yet, much of the trouble that still stymies the national economy is a carryover from the past that belonged to the PMLQ-Musharraf incumbency. The expectations of the PPP government have been belied: the projected GDP growth rate was set at 5.5 percent, then revised down to 3.5 percent, and finally fixed at 2.5 percent with the help of the IMF. That target too has been missed.

Much of what has happened was expected and it would be wrong to wring one’s hands and fling accusations at the PPP government to increase the pressure being built for a mid-term change of government. But the truth is that a proportion of the negative performance is owed to the fact that a new government was trying to handle the legacy of the past and couldn’t come out shining. Another mid-stream change will not be helpful. In fact we need to set a path to continuity and certainty in policy. Therefore the need is to look at the economy realistically and think hard about what new initiatives can be taken in hand for the next year. The country is still not “normalised”. The insurgency that we face has its tentacles all across the national territory and our resolve to finally stand up to it will have further consequences for the economy before things are normal again.

Some of the negative readings in the Survey belong to the economic perennials of the state: revenue collection estimate was blown up irrationally, then revised and finally not achieved. We don’t collect at the level which India manages and have failed to improve collection even after years of high growth. After the contraction we allowed through a tight monetary policy and the downturn in the sectors linked to exports, revenues are expected to sink even more. Agriculture, which was deliberately targeted for quick growth, has over-produced, creating other familiar problems associated with glut, and may not yet be ready for taxation. Mr Tarin says the feudal lobby is so strongly set against agricultural tax that he fears “martyrdom” if he tries to squeeze it for revenues.

In the coming days, TV channels will register a generally plaintive mood of the various stakeholders. Tight fiscal policy has prevented hyper-inflation but it has depressed the manufacturing sector dependent on easy credit. All over the world interest rates have been lowered to jump-start the economy but in Pakistan high inflation is more feared than low production. The country has been attacked by dollar flight, pushing the value of the rupee down and thus undermining the inflation targets set by the government. The reason for the conversion of assets into dollars prior to flight was the advance of the Taliban into more and more territories formerly controlled by the state. People with assets feared losing everything in the event of a Taliban victory. Law and order in Karachi and the rise of ethnic violence compounded the feeling of insecurity created by suicide-bombings in all parts of the country. Now that the Taliban are in retreat in the face of a “national consensus”, and the Gulf economies are past their boom, the situation will change.

The past year was perhaps tougher than any year faced by the earlier regimes that avoided adverse economic trends by not challenging the rising tide of the Taliban and Al Qaeda. The energy crunch — and the “circular debt” that perpetuated it — was the legacy that the PPP government could not push back. But it achieved something else that lay in the realm of foreign policy but was to have a direct bearing on the country’s economic survival. It has been able to convince an economically troubled United States and Friends of Pakistan to lend money for the period of its trouble with the Taliban. The IMF stand-by arrangement has allowed Pakistan to pay for essential imports — long enough hopefully steady the ship of the economy.

 

[TopCat]

Pakistan needs to revisit its economic policy. I think they need to start from square one. Currently the govt is working hard to get the macro economic stability in place which is good. But what is the plan for long term. Instead of paying too much attention on growth rate they should pay more attention to national savings. If you dont have savings then there is no question of investment as there is no money to invest for. Also the data indicates that PK businesses are not making enough money which could contribute to the savings and could turn to real investment. Quick fix could be to send more and more people to work overseas. This could serve in two way, first will bring Balance of Payment under control and second will contribute to the national savings.
The longer term fix could be to let PK business to make some money. Provide them with some protection from import and FDI. FDI is good but not with the cost of domestic investors. FDI should be confined within export sector for few more years. Let the parivate sector to invest in large scale infrastructure project through public private partnership but should only open to domestic investor. Foreign investment will put more strain on balance of payment in the long run.
I am suggesting all these things as Pakistan had not done enough homework before allowing uncontrolled FDI. You need large scale domestic investment to offset all the evil effect of foreign investment.

 

[Patriot]

Who will invest when there is a blast daily?We need good LAW AND ORDER Situation first.

 

[TopCat]

Who will invest when there is a blast daily?We need good LAW AND ORDER Situation first.

Good point. I should had put that in priority number one!!!