Speaking at an international conference on Investment Opportunities in Pakistan - 2006, organised by E-commerce Gateway on 9th March, the Advisor to the Prime Minister on Finance, Salman Shah gave a highly positive picture of the economy.
The growth rate, according to the Advisor, would be in the range of 6.5 to 7.5 percent during FY06 as the large scale manufacturing sector was growing at 12 percent while the IT and banking sectors were performing according to the set targets. Foreign investment flows from the World Bank and other international financial institutions (IFIs) had increased from $700 million each to 1.5 billion each this year and despite an estimated current account deficit of $5.5 billion (or 4.5 percent of GDP), Pakistan's forex reserves will increase by $2 billion due to inflows from these sources and the privatisation proceeds.
The inflation rate was estimated at 8.3 percent as against the target of 8 percent. The target for next year was being fixed at 6.5 percent with the aim of further pushing down the inflation rate to 5 percent.
About 5.5 million jobs were created in the last two years, of which 2.8 million were in the rural areas. Almost every industrial unit was expanding to increase production, generating job opportunities. Per capita income would cross $800 million by the end of this year, which would be the highest in the sub-continent.
In the open discussion following the presentation, Salman Shah said that the Utility Stores Corporation (USC) will continue to sell sugar to low-income groups at Rs 27.50 per kg (cheapest in the world) till normalisation of sugar prices.
The Trading Corporation of Pakistan (TCP) was supplying 30,000 metric tons of sugar to the USC every month and its stocks were sufficient for 6 months. In the meantime, TCP will build up its sugar stocks to meet domestic requirements. In India, sugar was being sold at Rs 33 per kg while the government of Pakistan was selling it at Rs 27.50 per kg to one-third of the population. Flour price in India was also higher at Rs 19.20 per kg as compared to Rs 13 per kg in Pakistan.
The Advisor's observations at the conference, in our view, are very optimistic and do not truly reflect the state of the economy. It is true that the GDP growth rate is projected at about 7.0 percent during 2005-06 but most other economic variables are not moving in the desired direction. The widening of both fiscal and external sector deficits is a cause of worry.
The Finance Ministry had admitted that the fiscal deficit was likely to be above 4 percent of GDP during FY06 as against the target of 3.8 percent and last year's level of 3.3 percent. In the external sector, both trade and current account deficits are high and continue rising.
A deficit of 4.5 percent of GDP in current account means that the country is living much beyond its resources and the gap has to be filled by external borrowings. The investment flows from the IFIs to which Salman Shah alluded in his presentation are not some kind of outright grants but would create additional external liabilities with the known adverse consequences. Privatisation proceeds to bolster foreign exchange reserves is also a one-off phenomenon.
The government has so far failed to put together any form of a realistic plan to bridge the huge increasing gap between exports and imports of the country. In the absence of both short and long-term corrective policy measures, the twin deficits in the external sector and the budget may soon reach unsustainable levels.
It also needs to be pointed out that the public at large still remains unconvinced about the improvement in the level of employment and the relief provided through the sale of sugar at subsidised rates at various USC outlets. The government should not announce and try to take credit for reducing poverty and unemployment unless it is prepared to release all the aspects of income and expenditure survey, its methodology and parameters as well as other critical details so that the credibility of data is established. It may be mentioned that previous figures on poverty were released in 2003 and serious concerns had surfaced about its methodology and coverage.
The government also needs to be aware that most of the subsidised sugar released through USC is grabbed by profiteers and does not reach the deserving sections of society. Also, it is not very appropriate to compare prices of certain items with India when it suits the authorities and ignore the Indian comparison when the reverse is true. It would, therefore, be better to recognise the present weaknesses of the economy and act accordingly rather than trying to make believe as if everything is hunky-dory.