State of the economy

Three reports detailing the state of the economy were released this week past. State Bank of Pakistan report titled Annual Report on the State of the Economy 2008-09 as well as Pakistan's Economic Update (first quarter fiscal year 2009-10) released by the Economic Advisor's Wing, presented an optimistic picture though the focus of the two were different time periods.
However, the third report, that issued by the World Bank on its website titled Economic Update September 2009 was considerably less optimistic. This divergence of opinion between internal and external data collectors and interpreters has become almost traditional in this country with state institutions periodically accused of presenting a picture more optimistic than is warranted. It is in this context that efforts are underway to establish a statistical department designed to withstand pressure from the executive to fudge statistics in its favour. However, a determined executive, be it military controlled or civilian, has railroaded efforts to strengthen institutions in the past, there is little indication that this is no longer a factor today. In other words for effective change it is critical that the mind set of the country's political leadership undergoes a change.
First the damning indictment of the state of the economy in 2008/09 by the World Bank: "economic activity significantly slowed down in 2008-09 owing to reduced domestic and global demand." The World Bank's medium term outlook states: "Pakistan's real GDP growth is projected to start slowly recovering in 2009/10 and increase gradually from 3 percent in 2009-10 to 5 percent in 2012/13. Aided by increased public spending - planned among other things in power and transport - gross capital formation is projected to rise and contribute to growth recovery and facilitate private sector activity gradually over time." In short in spite of executive rhetoric to the contrary the engine of growth is to be the public sector and not the private sector.
The question is: is it doable? Stagflation or a blend of declining productivity coupled with rising inflation were the hallmarks of Pakistan's economy in 2008/09 during which large scale manufacturing sector declined by 7.7 percent and inflation was above 20 percent. Pakistan is coming out of the throes of stagflation, so reveals the Finance Division first quarter report as large scale manufacturing sector registered plus 0.9 percent growth in September 2009, after 13 months of negative growth, and inflation was estimated at 10 percent.
This is in spite of major challenges acknowledged in the report that include: (i) mismatch between demand and supply of electricity, (ii) painfully slow materialisation of pledges made by the Friends of Democratic Pakistan (FoDP), (iii) flowing out of (ii) deficit financing is on the rise again, (iv) 24 percent less water for Rabi crop in comparison to last year and an ongoing attack of leaf curl virus that is negatively impacting the cotton crop, (v) seasonal gas shortage, and (vi) deterioration of the internal security situation. This comprehensive list of negative factors played havoc with private sector productivity last year and unfortunately are seen to continue to plague our economy. Thus the engine of growth by definition would have to be the public sector as indicated by the World Bank. However, what is unfortunate is that the government had placed heavy reliance on foreign assistance to transform its planned development budget into actual investment. And due to the 'painfully slow' pace of FODP pledges materialising, the envisaged public sector led growth is unlikely.
Newspaper reports sourced to the Ministry of Finance indicate that the largest single external assistance - not grant and carrying a market rate of return - remains the IMF. The World Bank report notes that "remittances increased, financial inflows (such as FDI and portfolio investment) dropped sharply - by over 37 percent - owing to macroeconomic instability, deteriorating security situation and global recession. Despite these developments, thanks to IMF disbursements, State Bank of Pakistan foreign exchange reserves rebounded to about US $9.1 billion (2.9 months of imports) by end June 2009." Thus IMF remains the major source of external assistance to this country relative to not only other multilaterals but also bilateral. And with IMF comes a set of stringent conditionalities that the government has been unable to implement.
The World Bank update, therefore, justifiably laments the failure of our economic managers to take policy measures with respect to some critical sectors as promised to the IMF. First the report states that 'FBR tax collection during July-August 2009 increased by only 3.6 percent compared to 19.5 percent to reach the annual target. Also, provincial governments have continued spending at high levels, and power subsidies have remained unaddressed by the federal government.'
The World Bank report makes a disturbing observation: "there is a risk that Pakistan may repeat past mistakes...to reduce the economy's vulnerability to shocks and avoid the repeat of past mistakes stepping up domestic revenue mobilisation would be critical." Blame for poor tax policy implementation must be more wide spread than what is usual in other countries. Ministry of Finance is the obvious culprit as it not only over stated its revenue targets but also failed to make realistic forecasts of FBRs revenue generation capacity.
However, part of the blame must be attached to our parliamentarians who continue to thwart government efforts to remove all exemptions inclusive of non levy of income tax on the rich landlords. The World Bank staff note this succinctly in the report: "limited progress with a number of key reforms suggest that the highest political level is not sufficiently convinced that the economic price of inaction outweighs the political cost of implementation. The ongoing conflict and geopolitical considerations as well as limited control over vested interests seems to be reinforcing this." This view is endorsed in the Finance Division report though in a back handed way which states that "the biggest contribution will be made by the continuation of a deep and sustained commitment to wide ranging structural reform."
What does the future hold for Pakistan according to the three reports? The State Bank of Pakistan envisages a growth rate of between 2.5 to 3.5 percent. The Finance Division has forecast a rate of between 2 to 3 percent and argues that this estimate is based on "the magnitude of uncertainty associated with the growth outcome in the current fiscal year, the range of estimated in the economy for 2009/10 is wider than usual." The World Bank projects a growth of 3 percent in 2009/10 but a rate based on increased public investment which may be extremely challenging for the government. In this context it is probably fair to take the growth figure given by the Finance Division as the most realistic.
To conclude happy days are not here - and the fault is not entirely in our stars, (read as policies of the former dictator as well as global recession), but in ourselves, (read as failure to implement reforms by the current batch of managers) that we remain underlings.