Economy is passing through a crucial period as international and domestic events have started diluting the hold of the government on macro-economic stability of the country.
The inflation is rising, rupee is under pressure, interest rates are moving up and the trade deficit is increasing.
The stability of all these factors is crucial for sustained economic growth. Some economists are concerned as such pressures were not tackled prudently in the past.
This time around most of the measures taken for minimising the damage have so far mostly been sensible.
The economic managers would have to remain focused and refrain from disturbing the open market policies pursued during last five years. Any restrictions at this stage would send a wrong signal to the international investors.
The foreign exchange reserves of $11-12 billion looked rosy when the imports of the country were in the range of $10-12.
These reserves covered 12 months import bill of the country. Now the imports are above $15 billion expected to cross $16 billion that means that the reserves would be sufficient only to cover seven months import bill.
Even this level of foreign reserves is acceptable and comfortable according to internationally accepted standards. However any depletion in reserves would alarm investors. This perhaps is the reason that the central bank realising its limitations has stopped protecting the rupee against dollar. Realistically speaking the strength of a currency against currency of another economy is determined by the inflation difference between the two.
Inflation in the US has remained 3-4 percent less than that in Pakistan. It is therefore logical that the rupee should decline by this margin against the green back. The decline is realistic and not speculative, which is the reason that the central bank has not reacted to sharp decline in rupee value.
Though the economy was managed prudently during recent past the slippage of targets on most measures occurred due to below par performance of the administrative departments that failed to support the efforts of the regulatory bodies.
The wheat crisis for instance occurred due to the failure of the government to check the hoarders of this commodity. The credit made available for commodity finance by the SBP was used to hoard the commodity.
The central bank played its due role; the provincial governments however failed to identify and nab the wheat hoarders. The increase in wheat rates had a major impact on food inflation.
Similarly, Ministry of Finance kept SBP in the dark when it co-ordinated with Pakistani banks to convert the PARCO yen loan into Pak rupee for early repayment. SBP was faced with a "Fait Accompli" and had conduct dollar swaps in forward sales of around $220 million on the interbank bank market.
This resulted in putting the pressure on the market and initiated the slide of the rupee against the dollar.
After all prepayment of ADB loan amounting to $1.1bn was managed by SBP without impacting the forex reserves or the rupee/dollar parity. A sinking fund was created well in advance to conduct the transaction smoothly.
The administrative lapses were tolerated by the economy due to highly strong macro-economic situation. Such lapses in current relatively weakened situation would have a larger impact.
The government would have to ensure higher level of governance to ensure sustainability of growth.
Inflation in general was already on rise due to increase in international oil prices. The central bank and the federal government tried to minimise the inflationary impact of higher oil rates by freezing retail rates of petroleum products and through planned increase in interest rates.
The central bank however has no mechanism to control the food inflation as it could not be controlled through fiscal measures.
Even the relief in petroleum rates would be passed on in form of further increase in inflation if the tax collectors failed to plug the revenue gap that has occurred due to waiver on petroleum levies.
The potential to increase revenue is there as apart from normal growth in tax revenue the higher growth rate and depreciation of rupee should increase tax revenue. The competence of the tax collectors would play a crucial role in this regard.
The increase in world oil rates has affected most of the economies including that of countries competing with Pakistan in export markets. Thus there should be no unusual pressure on exports as the competitors are facing similar increase.
Pakistani exporters in fact operate with certain advantage. The government has been able to reduce the impact due to conscious policy of the economic planners to make a major shift from petroleum to natural gas.
The increase in oil consumption is much less than the corresponding increase in the growth rates of the country. In India and China the increase in growth rates has been accompanied with corresponding increase in oil imports. This has put relatively higher pressure on their economic fundamentals.
The healthy foreign exchange reserves built up by the State Bank of Pakistan (SBP) during past four years did provide the cushion to offset the growing balance of payment deficit.
The drain on foreign exchange reserves could have been avoided or reduced had the administrative controls on physical movement of foreign exchange been as stringent as documentary control of SBP. Rampant corruption is the main cause of this slippage.
Low interest rates played a crucial role in accelerating the growth rate of Pakistan. These rates have started creeping up as the central bank tried to control inflation and depreciation of rupee.
The bank has now managed to maintain a balance between interest rate that has not largely affected the targeted GDP growth rate.
The Asian Development Bank has revised upwards the growth rate estimates of Pakistan recently after factoring in the impact of higher oil rates. It has however; down graded the growth rate estimates in India and China after increase in world oil rates.
The growth in Pakistan would have been much higher had the level of acceptance and implementation of reforms been uniform in all public institutions.
The reforms in State Bank of Pakistan for instance were far more transparent and effective than the reforms introduced in the Central Board of Revenue. The erring institutions would have to match the performance of efficient departments ensure better performance in adverse situation.