Review of the economy

The nine-month review (July-March, 2004) of the economy released by the Government of Pakistan on 21st April underlines once again a steady improvement in most of the economic indicators.
Higher-than-expected wheat and rice output owing to 29 percent increase in water availability, and extraordinary industrial production have improved the growth prospects to 5.8 percent as against the target of 5.3 percent during the current fiscal year.
Tax collections during July-March, 2004 stood at Rs 352 billion as against Rs 310 billion last year, showing a marked rise of 13.6 percent, and Rs 10 billion higher than the target of Rs 342 billion set earlier by the government. Credit to the private sector expanded by Rs 237 billion which was almost two-and-a-half times higher than Rs 101 billion in the same period last year.
The Karachi Stock Exchange Index moved up from 3,433 points on 1st July, 2003 to 5,582 points on April 16, 2004 while the market capitalisation increased from Rs 754 billion to Rs 1490 billion, implying an increase of 97.5 percent.
Although trade deficit widened from $1.17 billion to $1.6 billion, exports registered an increase of 13.3 percent and are likely to easily exceed the target during the year.
Workers' remittances, though lower than last year, are also expected to reach the target of $3.6 billion.
Foreign exchange reserves of the country stood at $12.57 billion as on April 15, 2004 as against $10.73 billion at the end of June, 2003. Exchange rate of the rupee in the interbank market also appreciated marginally during the review period.
As against these favourable developments, there are certain weak areas which could be easily noticed. Inflation rate is higher than last year. In particular, food inflation has gone up to 4.6 percent compared with 3.3 percent in the corresponding period last year.
The increase in inflation was due to price hike in some core items like wheat, beef, mutton, wheat flour, vegetable ghee and onions in the last five months. Total foreign private investment was down.
While direct foreign investment decreased from $658 million to $632 million, portfolio investment registered on outflow of $45.5 million as against the inflow of $6.5 million last year.
Overall, however, there are indications that most of the targets of the key economic indicators would be surpassed by significant margins.
According to the review, it is generally perceived, within and outside the country, that Pakistan's economy is now back on the path of high economic growth as it experienced in the 1980s along-with macro-economic stability.
Certain facts can easily be discerned from the report. It is obvious that the process of streamlining Pakistan's economic fundamentals that began four years ago, has more or less succeeded and is gaining ground with the passage of time.
The country has overcome the menace of widening deficits of budgetary balance and external sector account which at one time appeared to be out of control.
The debt profile has been greatly improved and solvency of the country is now more or less assured. Thanks to the success of structural reforms and macro-economic stability, Pakistan is now poised for a higher growth trajectory of 6 percent and even beyond.
However, there are certain endemic problems which are usually highlighted by the top officials of the government, but refuse to go away or even subside. Poverty and unemployment is, by most indications, growing in the country.
The fact that inflation is rising and that too because of a sharp increase in the prices of essential items like wheat flour, edible oils and onions is a matter of great concern. This would make the lives of poor people even more miserable.
The government was quite optimistic about the increased inflow of FDI and its positive impact on growth, creation of jobs and poverty reduction but the developments during the year so far are not encouraging.
In order to increase FDI and tap its potential, the government needs to do much more in concrete fashion than lip service. Mere seminars and conferences cannot influence the decisions of foreign investors in a significant manner.
Some other policies also need to be revisited. A large part of expansion in private sector credit may have been attributable to the pick-up in economic activity in the country, but some of its uses appear to be sub-optimal.
Although the State Bank has limited commercial banks' exposure towards equity markets to 20 percent of capital yet their overall investment in shares market continues to be large, if the credit lines to major brokerage firms are added in this portfolio.
This together with abnormal growth in personal loans which might have been utilised for buying shares has pushed up the stock exchange indices to dizzying heights and have no correlation with the productivity of individual companies.
The financing of this kind of speculative activity generally does not add to productive capacity or employment generation. On the other hand, it could promote a gambling culture or the desire for easy money in the society. Also, Badla rates in the market are several times higher than the average lending rates, which means that agents with easy access to credit lines are taking undue advantage of their privileged position.
The channelising of credit in this way sends wrong signals to the genuine investors and is not judicious.
As the review indicates, portfolio investment is on the decline and this should prompt the policy makers to investigate the causes of this trend and the role of credit in financing speculative activities and undertake necessary measures to channelise credit towards more productive activities.
Government policies and bank credit were also expected to be geared to promote construction activities and SMEs for very justifiable reasons, but no major headway seems to have been made in this direction due to various constraints. Title of lands needs to be streamlined along with certain other improvements to induce the banks to advance more loans to the housing sector.
Land for construction of housing units should be auctioned to the developers and, like other countries, prospective home owners should be encouraged to mortgage the property.
The present practice of developing the land at a great cost by the local authorities and then giving it to the army and civil servants at a low fixed price is highly inequitable.
The lack of a proper system has resulted in a situation where cost of houses has gone out of the reach of even upper middle classes, banks are reluctant to commit themselves on a long term basis and vested interests are making a lot of money without some real effort.
SMEs, which were supposed to be the engine of growth and employment generation, are so much shackled by outdated laws and fearful of corrupt practices that they don't want to be registered as such.
While, overall, we are pleased with economic policies and performance, there are still certain areas that require immediate attention of the authorities for promoting balanced growth and employment.