Government claims and developments on the economic front

Our economic managers claim that they have made the economy vibrant, so much so that the country has now become a friendly destination for foreign direct investment (FDI). (Article published in Business Recorder dated 24th February, 2007). The claim is based on the following premises:
(i) The inflationary pressures have been mitigated; the CPI and core inflation - on year-to year basis has come down from 11.1 percent/7.8 in FY-05 to 6.6 percent/5.3 percent in January, 2007;
(ii) Higher workers' remittances inflow (rising from $1.1 million in FY-2001 to 5.5 billion in FY-07 have financed, on average, 98 percent of the trade deficit;
(iii) Privatisation programme was pursued along with a drive to attract FDI which fetched $10 billion and financed the country's 75 percent of the external account deficit. The privatisation has so far fetched Rs 378 billion (since 1990);
(iv) Foreign exchange reserves build-up will reach/exceed $14 billion by the close of the current fiscal FY-07 which will cover 6 month's imports;
(v) The investment/GDP ratio which was 20 percent in FY-06 will reach 21 percent by the close of FY-07;
(vi) Our current GDP growth track in the top half of the region's fast growing economies;
(vii) The services sector, and more particularly the banking sector, has become vibrant. Eighty percent of the banks' assets are now in foreign hands. (The banks are increasing profits by 100 percent p.a.);
(viii) During FY-04-06, a sum of $8 billion was fetched on account of foreign investment, including privatisation proceeds. It is expected that we shall attract FDI to the tune $6 billion in FY-07. Let us now have a brief look on the above claims:
INFLATION The year-over-year inflation (CPI) in January, 2007 has been placed at 6.6 percent but it has accelerated during the following month. State Bank of Pakistan's report for the quarter July-September, 2006 estimated that by the close of the fiscal FY-07, it may reach 7.5 percent which will be only marginally lower than FY-05's 7.9 percent.
The significant dent in the food inflation-which is vital for the poor people comprising over 29 percent of the population, according to the World Bank version and 24 percent according to the government of Pakistan estimates - is not visible. It is still believed to be in double digit.
The core inflation, excluding food and oil, may not have much relevance in our circumstances because our main problem is food which as per the SBP report mentioned above constitutes over 53 percent.
WORKERS' REMITTANCES AND TRADE DEFICIT The claim is that higher workers' remittances have financed, on the average, 98 percent of the trade deficit. It is said that the "average" at times "drown". The above said proposition may be true when we include in calculating the average earlier fiscals FY-01-04 when the trade was much lower.
The scenario has completely changed in FY-05 and FY-06 when this deficit rose to $4.514 billion and $12.844 billion respectively ie the deficit much exceeded the workers' remittances. Therefore, taking and providing solace under the premises that the workers' remittances cover 98 percent of the trade deficit is deceptive and misleading. The FY-07 position is likely to still worsen as the trade deficit is likely to cross $13 billion mark (remittance $5.5 billion).
PRIVATIZATION VS EXTERNAL ACCOUNT DEFICIT The programme of privatisation commenced in 1990s on the ground that the public sector entities were haemorrhaging the government exchequer by Rs 100 billion annually. The intention was to sell the loss-sustaining entities. But that could not happen. The profit-earning entities were/are being sold.
In the banking sector, two banks were sold after pouring in them public money amounting to over Rs 60 billion. The process of selling profit-earning assets continues without rationale obviously for tiding over balance of payments problems and this avowed policy is likely to continue till the last asset is sold.
The privatisation coupled with FDI fetched $10 billion which helped finance 75 percent of the external account deficit. The vibrancy of the economy presupposes that the current account is sufficiently surplus so that it could finance, at least a part of, the foreign exchange expenditure of the "investment" in the economy. But what we find is that we are selling the national silver to the foreigners and mobilising FDI to cover the current account deficit. How vibrant has thus our economy become?.
THE DETAILS OF THE FUNDS MOBILIZED UNDER THIS HEAD ARE CONTAINED IN TABLE "A": The present economic managers include the internationalisation (sale of national assets to the foreigners) proceeds of the assets in the FDI. Really speaking it is not so; it is rather a desperate effort to sell "household" to pay for the current expenditure.
True that it temporarily helps tiding over the current problems but nobody in the helm of the affairs is prepared to think that it is merely a one time operation and what will happen when all the national assets will be in the hands of the foreigners in the next 2-3 years and then wherefrom the country will provide foreign exchange for remittance of profits generated in Rupees on the internationalised assets?
As for the FDI, there is no fun in attracting FDI from wherever and in whatever form it is available. The FDI mobilised should be "Quality investment" by which we mean that when it is put in the economy, it should generate sufficient export surplus so that by exporting that country could earn foreign currencies not only covering the remittances outside Pakistan of the profits earned by the foreign entrepreneurs in local currency but could also add something to the country's foreign exchange reserves.
Alternatively, the investment should result in import substitution so that foreign exchange savings could be made by reducing the soaring imports. The FDI mobilized by the economic managers since FY-02 indicates that it has not been possible to attract the "Quality" investment described above.
TABLE "B" SHOWS FDI MOBILIZED IN A FEW SECTORS DURING THE LAST OVER HALF A DECADE: One can question how far FDI in sectors like food and banking is warranted? The nation can live without pizzas, foreign brand ice creams and chickens instead of getting itself buried perpetually under foreign exchange liability of the sector on account of import of the ingredients and remittance of profits. The position of the banking (financial) sector is no different. We could conveniently run the sector without induction of the foreign interest.
The Power sector is an important sector. But we do not see any sizeable FDI coming in it during over last half a decade. The only big inflow is on account of sale of KESC to the foreign buyer.
Similarly, no FDI in the fertiliser sector is visible during the period under review although this is an important "import-substitution" sector.
The investment in the Telecommunication sector is can not be adjudged as a "Quality" investment because it has too created perpetual foreign exchange liability on account of import and remittance of profits. That each is individual in the street is holding a cell phone is not a matter to be proud of. Whether PTCL was precluded from or it deliberately avoided introduction of cell phone in the earlier stages in order to provide foreign companies a foothold in the country is a matter to be pondered upon.
Had the PTCL introduced its U-phone in the initial stages, there would have no need of induction of many foreign companies which could obviate perpetual foreign exchange liability partially - if not fully. The internationalisation of profit-earning entity like PTCL also did not have any rationale except that it was an effort to tide over the difficulties in current account/fiscal sectors.
About half a decade back, there was a lot of euphoria about Information Technology (I.T.) sector; opening of technology parks in the big cities of the country and establishment of the institutes of world class to train the youths etc.
Nothing of the sort has happened. India is earning billions of dollars through the export of software and rendering of "outsourcing" services in the field. Our foreign currency earnings in the field may have hardly crossed $100 million. How much FDI, we could mobilise in this field is evident from the data given in Table "B" which is at least not sizeable. The position of the domestic investment may also not be much different.
IMPORT AND FOREX RESERVES The foreign exchange reserves by the close of FY-07 will cover 6 months' imports. It may be added that at the end of FY-03, the reserves were sufficient to cover 33.1 weeks' imports. This shows deterioration and not improvement.
INVESTMENT/GDP RATIO The rise in investment/GDP ratio from 20 percent (FY-06) to 21 percent (FY-01) is not much significant.
GDP GROWTH True that our GDP growth rate is higher than the top half of the region's growing economies. But mere high growth cannot benefit all the sections of the society unless there is equitable income/wealth distribution system.
The powerful vested interests do not permit the economic managers to initiate the equitable distribution system. So the high GDP growth would merely be an illusion for people hailing from the lower strata of life.
VIBRANCY OF THE BANKING SECTOR It is not a matter of national proud that 80 percent of the banking sector is now in foreign hands. In the current scenario, more than 50 percent of banking (deposits and advances) are centralised with 5-6 large banks. These large banks have rather formed a cartel.
They are not prepared to listen to the directive of the regulator to share their profits with the depositors by enhancing the deposit rates. The banking sector's progress, including upsurge in their profits, is based on squeezing the depositors for the benefit of the large borrowers, inter-alia, by paying minimal interest on deposits and throwing out the small depositors from their threshold by fixing minimum balance limits and where the balance falls below the prescribed limit, the depositor has to pay monthly penalties (this has been done with the concurrence of the regulator). The minimum balance limits and monthly penalties differ from bank to bank.
The conscious policy of the regulator is to drive the small banking institutions out of the market by forcing them to merge with the larger banks. The methodology adopted is that the small banks have been asked to raise their paid up capital to Rs 6 billion by 2009.
At present about 8 banks will be affected. Quite a few of these small banks are competing with the large banks even with the small capital base and their performance is not less than Habib Bank Ltd/United Bank Ltd. What is the rationale in coercing the good performing banks to become a part of banking monopoly or mafia, instead of allowing them to continue?

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Table "A". Foreign investment (Figures in US$ million)

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2001-02           2002-03  2003-04   2004-05    2005-06    2006-07*

A Direct investment

 (without privatisation)

367.8               610.0    750.4    1161.0     1980.7      1962.8

Total foreign investment

("A" + "B")

484.8               798.0    949.4    1524.0     3521.0      2096.0

Total "A"

(2001-02-2006-07)                                6832.7      72.90%

Total "B"

(2001-02-2006-07)                                2540.5      27.10%

Grand total

"A" + "B" (2001-02-2006-07)                      9373.2        100%

C Portfolio investment

-10.0                18.2    -27.7     152.6      351.5       697.4

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-- Total "C" (2001-02-2006-07) US $1182 million.
-- Figures for July, 2006 to January, 2007. Source: State Bank of Pakistan website.
-- Table "B" - Sector-wise Foreign Direct Investment (Figures in million US$)

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Sector          2001-02     2002-03     2003-04     2004-05     2005-06     2006-07

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Food                7.6         6.0         3.3        10.0        51.3         8.4

Textiles           18.4        26.1        35.5        39.3        47.0        38.0

Chemicals          10.6        86.2        15.3        51.0        62.9        18.6

Oil & gas         268.2       186.8       202.4       193.8       312.7       328.5

Exploration    (117.0)*     (10.0)*

Power (Thermal)    29.8        12.1       -21.4        69.3       319.7       101.6

                                                               (255.0)*

Power (Hydel)       6.5        20.6         7.1         4.1         0.9         0.8

Tele

communications      6.0        13.5       207.1       494.4      1905.1       512.3

                                                   (260.0)*   (1186.0)*    (133.2)*

I.T. Services

(Software

Development)        3.5         4.4         6.3         8.8         5.0         2.9

I.T. Services

(Hardware

Development)        0.4         1.2         1.3         3.9         1.1         1.8

I.T. Service        2.4         4.2         6.2         9.6        24.2        27.9

Financial

business            3.5       207.6       242.1       269.4      329.2        553.6

                            (178.0)   *(199.0)*    (103.8)*     (99.3)*

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