One of the main concerns about economic recovery is rehabilitating large-scale manufactoring that has shown a negative growth of 6.0 per cent. It is causing multiple losses to the economy: higher trade deficits, low exports and increase in unemployment
By M. Sharif
One of the main national concerns, now a day, is about economic recovery in the midst of a quite challenging fiscal, monetary and security environment. Managers of national economy since past a few months have been on borrowing spree from internal and external resources to stabilise economy in accordance with the bench marks mutually agreed between them and IMF officials. They had the compulsion of doing so to avoid sovereign default and bridge fiscal gap. Macroeconomic stability achieved thus far, despite being in the right direction, is not robust enough to make economy self-reliant and self-sustainable within stipulated timeframe of around two years.
Analysts and ministry of finance in Economic Review, July to March, are of the view that economy is yet to come out of troubled waters. It is likely to take more time and effort to implement structural and other changes to make economy macro-economically stable, self-reliant and achieve sustainable economic growth. One of the key concerns is about high cost of debt servicing that would have quantum increase in next fiscal budget. Would economic growth and capacity to pay back the debt be compatible with the total debt liabilities (TDL) and development needs during the next few years or once again the country would slip into debt trap?
Borrowing spree: justification and risks
According to SBP Annual Report and Economic Survey 2008, TDL remained steady between years 2001-07. The situation reversed during FY 2008 and thereafter it has been getting precarious. By the end of last fiscal year, TDL stood at 57.4 per cent of GDP with domestic debt component of 31.2 per cent and external debt component of 26.2 per cent. Interest payments amounted to 4.7 per cent of GDP during last fiscal year and were 32.6 per cent of total revenue excluding grants and 26.3 per cent of current expenditure according to finance ministry. A senior finance ministry official is reported to have said, “the government borrowed a whopping Rs1231 billion from internal and external sources during first half of current fiscal year,” to meet its fiscal needs. The government had to borrow Rs483 billion during first eight months that has pushed total domestic debt to Rs3.75 trillion. The major concern is that these figures are likely to soar further in the next fiscal budget. The situation of external debt is no better than domestic debt.
According to SBP AR, 08 external debt liabilities (EDL) that stood 51.7 per cent of GDP by June 2000 declined to 28.1 per cent by June 2007. It further declined to 26.9 per cent by end March 2008. Foreign debt grew at compound average rate 1.2 per cent between FY2001-07, at far less rate than growth in nominal GDP. In absolute terms, it increased from $37.2 billion to $40.5 billion during six financial years but grew at unprecedented pace of 13.3 per cent between July 2007 and March 08, from $40.5 billion to $45.9 billion. Major stakeholders in EDL are Paris Club (36.3 per cent), multilateral institutions (53.7 per cent) and IMF.
A number of factors such as deceleration of non-debt inflows, weakening of USD with respect to other international currencies like euro, SDR and yen, borrowing for earthquake affectees and deterioration in balance of payments contributed to surge in EDL that, in fact, had started soon after FY2005. According to latest estimate, “external debt could grow by around $7.25 billion that is likely to raise the external debt stock to around $52.5 billion by end of current fiscal year, around 31.0 per cent of projected GDP for current fiscal year. It would be higher than 27.6 per cent ($46.3 billion) for last fiscal year.
Economy has been supported during current fiscal year by FDI that fetched more than $3.0 billion despite financial liquidity crunch in international financial market and global economic recession and remittances by expatriates that are likely to be around $6.0 billion by the end of current fiscal year. Despite these positive developments the economy remains highly dependent on foreign loans and grants to address its external account. There are two viewpoints about it. First, external debt is within acceptable limit of GDP and hence it should not be a point to worry. It is also asserted in the same context that the government has no other option except to contract foreign debt to meet it foreign, fiscal and economic development needs. The other viewpoint is that indiscrete external borrowing could lead to a situation where new external borrowing might become essential to pay back old foreign debt.
Pakistan’s EDL are closely monitored by the IMF. According to its estimate, they are to increase to around 31.6 per cent of GDP by the end of FY09-10 and to 32.5 per cent by the end of FY 10-11becasue of substantial financing from multilateral institutions. The debt servicing will increase from 15.0 per cent of export of goods and services to 20.0 per cent during the same period. IMF makes conscious of the fact that, “relatively benign outlook is subject to serious downside risks. They include risks from higher non-interest current account deficit, lower growth, higher depreciation, higher interest rates, as well as lower FDI flows.” These observations are significant and need to be noted in the context of on going economic recovery.
Economic recovery challenge
Economic recovery challenge needs to be viewed in three different contexts of achieving macroeconomic stability, sustainable economic growth and finally the capacity to pay back TDL and EDL. Current global economic recession, security environment and development strategies to be implemented during next 3-4 years are quite relevant in this respect. According to the Ministry of Finance report, ‘ Review of the Economic Situation (July-March 2008-09)’, the economy is getting back to its original confidence after implementing measures according to $7.6 billion economic stabilisation programme that started from November,08. According to the report, “improvement in economic variables such as fiscal deficit, FX reserves build up, import compression and net zero borrowing from the SBP by end of April is quite visible.” This viewpoint has also been endorsed by the IMF although it wants to see much more improvement in many areas of the economy.
Prices of commercial commodities like oil and food commodities have relented substantially from mid-2008 during current fiscal year. It has eased pressure on the economy and helped achieving macroeconomic stability. Fiscal deficit during first ten months (July-April) is registered at 3.1 per cent of GDP and is likely to be lower than the limit of 4.2 per cent set by the IMF. It has not been reduced by generating more revenue but by drastically reducing development expenditure and by implementing few structural reforms such as removing subsidies on energy and increasing support price of cash crops mainly wheat. According to MoF, trade deficit is geared to be 4.3 per cent of GDP and current account deficit is likely to be around 5.9 per cent of GDP by end of current fiscal year. FX reserves with the SBP of Pakistan have increased mostly on borrowed money from paltry low $3.5 billion in October 2008 to $7.8 billion by around mid-April, 09
Agriculture sector is set to achieve growth target of 3.3 per cent thanks to bumper wheat crop. The latest estimate of 14 districts of the Punjab province show a surge of 30.0 per cent in wheat production and even if production in other provinces remains unchanged, overall wheat production may rise to 25.7 metric tons, well above the target. Cotton and rice have also registered positive growth of 7.3 per cent and 13.5 per cent respectively. Livestock sub-sector is also likely to achieve growth target of 3.2 per cent. Agriculture sector growth would augment over all growth of economy.
There are certain areas of the economy that have been influenced by domestic security, political and energy crisis and international recession. Export target and tax revenue collection targets are unlikely to be met. FBR collected Rs898 billion during July-April and it is unlikely to collect slightly more than Rs400 billion during last fiscal quarter to meet Rs1.3 trillion targets. Notwithstanding the positive trends in economy, high inflation, negative performance of LSM and high cost of debt servicing remain some of the weak areas of the economy.
Food and over all inflation have proved quite stubborn even by IMF standards that wanted the latter to be reduced to 12.0 per cent by end of current fiscal year. MoF Review gives a candid state of inflation. Food inflation during July-March period of the fiscal year was recorded 28.0 per cent against 13.8 per cent during corresponding period of last fiscal year. High food inflation is attributable to, “the stubbornness of the prices of some key commodities such as edible oil, pulses, rice, milk, sugar, poultry, meat, wheat, wheat flour and fresh vegetables.” Non-food inflation was recorded 19.2 per cent against 6.3 per cent during corresponding period of last fiscal year. It has remained persistently between 18-20 per cent through out the current fiscal year and is likely to stay at this level by end of current fiscal year. Keeping in view the current inflationary pressure, it is difficult to share the optimism of financial advisor the PM that inflation would be reined in to 6.0 per cent by end of next fiscal year.
One of the main concerns about economic recovery is rehabilitating LSM that has shown a negative growth of 6.0 per cent. It is causing multiple losses to economy such as comparatively higher trade deficit, low exports and increase in unemployment. Notwithstanding security concerns and global recession that have certainly negatively affected LSM, energy crisis and high interest rates on commercial borrowings have also negatively affected it. Economy is to register a growth of around 2.5 per cent.
Conclusion
The real issue is about sustaining macroeconomic stability for real economic recovery. It won’t be possible unless inflation is reduced considerably; LSM growth recovers, tax revenue collection increases according to potential of economy and dependence on foreign credit is reduced to bare minimum.
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