According to the latest assessment of the Asian Development Bank (ADB), Pakistan's economy has made a robust recovery during the last four years, but there are some areas which may face downward shifts during 2004-05.
The year 2003-04 was particularly good in certain respects. GDP growth rate accelerated to 6.4 percent from 5.1 percent a year earlier, with the industrial sector contributing almost half of the expansion.
Gross fixed capital formation surged strongly to 14.7 percent from 1.0 percent in 2002-03. As a share of GDP, investment, inclusive of accumulation of stocks, rose from 16.7 percent to 18.1 percent.
Tight fiscal stance was maintained, as a result of which overall budget deficit declined further to 3.3 percent from 3.7 percent a year earlier. Also, there was a welcome shift in sources of financing the fiscal deficit from high-cost non-bank borrowings to low-cost bank borrowings. Public debt-to-GDP ratio declined from about 74 percent to 68 percent.
However, inflation picked up to 4.6 percent from 3.1 percent during 2002-03, while the State Bank continued to pursue an easy monetary policy through most of the year.
The current account surplus fell by more than half to $1.8 billion due to more than threefold widening of the trade deficit, a reduction in official transfers as a result of discontinuation of the Saudi Oil Facility in January, 2004 and a decline in workers' remittances.
In sharp contrast to the previous two years, the State Bank had to sell foreign currency to prevent a sharp fall in the value of the rupee, and the external debt outstanding remained virtually unchanged at $33.4 billion.
As for the outlook for FY-2005, the economy is likely to grow by 6.5 percent because of sound macro-economic fundamentals, pick-up in private investment and sharp increase in the Public Sector Development Programme (PSDP).
However, the inflation forecast has been raised from 4.0 percent to 5.5 percent due to a large liquidity overhang, surge in oil prices and most of the industries approaching full capacity.
Current account is projected to move into deficit as imports would grow faster than exports and official transfers are expected to decline.
With GDP growth expected to remain well above 6 percent and substantial increase in imports, tax revenues should grow by 12 percent and fiscal deficit target of 3.5 percent of GDP is likely to be achieved.
The ADB's comments about medium-term prospects of the economy are comparatively much more incisive and relevant for designing future economic policies of the country.
While the Bank is quite confident about the prospects of the economy due to better economic fundamentals and improved relations with India, it believes that several downside risks are also apparent. If international oil prices remain high, "projections for imports, the fiscal deficit and inflation will have to be revised upwards.
High oil prices could also damp the global economic recovery, so lowering Pakistan's export growth.
On the domestic front, water availability for the winter crops is now projected to be significantly lower than in FY2004. Finally, the possibility of an increase in terrorist incidents cannot be ruled out."
It is quite obvious from the contents of Bank's Update that its authors are fully aware of the economic situation of the country and have done a much better job this time than before in highlighting the weaker areas of the economy.
In our view, the importance of the write-up, however, lies in its sound prognosis of the economy which is generally at variance with what the government wants the people to believe.
For instance, authorities in Pakistan are persistently propagating that everything is hunky-dory on the economic front, all the economic indicators are improving and the fruits of development would trickle down to the common man in the not too distant future, whereas the actual situation, as confirmed by the ADB, is somewhat different.
Inflation is accelerating while current account balance is likely to register a deficit of around 1.3 percent of GDP this year.
The situation in the medium-term could get even worse and weaknesses could extend to more areas of the economy.
The ADB seems to be particularly concerned about the adverse impact of rise in international oil prices, lower availability of water for irrigation and increase in terrorism on Pakistan's economy.
Unfavourable developments which are either very much on the cards or likely to happen could cause lot of problems for the economy of Pakistan and its people in the medium-term.
The ADB has really done a service by informing publicly about the real situation so that people and policy makers are able to analyse the facts in a more objective manner.
The ADB's observations could be useful to the economic managers of Pakistan. Obviously, nothing much can be done to change the exogenous factors affecting the domestic economy but the country could attune its future policies in a way so as to minimise the adverse impact originating from foreign developments.
The emergence of inflationary pressures and deterioration in current account balance, for example, could be checked by undertaking proper monetary and exchange rate measures respectively.
The ADB has also tried, though indirectly, to warn the country about the economic repercussions of terrorism and poor relations with India.
Such a warning could help the policy makers to factor in the cost of these adverse developments and enable them to devise appropriate policy responses well in time.
We don't know whether it was intentional or not, but the ADB has avoided any reference to the level of poverty, skewed income distribution and rising unemployment.
This, in our view, is a major lapse because in a country like Pakistan where to most of the people entering the labour market are unable to find a job or are living from hand to mouth, the strength of macro-economic fundamentals makes little sense, unless it is accompanied by improvement in their living conditions.
Most of the analysts agree that fruits of overall economic growth in Pakistan have not yet reached the poorer sections of society. If this is true, the phenomenon of inflation which is raising its ugly head once again would make the lives of ordinary people more miserable.
There is also no mention in the ADB report about the perpetual under utilisation of funds allocated for PSDP which is considered one of the major planks of economic management to improve the quality of life of ordinary people.
These omissions make the ADB's write-up less useful for policy direction to a certain extent.