The Economic Survey for 2006-07, released by the government a day before the budget, depicts a highly positive picture of the economy. The most outstanding achievement was the continuation of growth momentum at a very healthy rate. Real economic growth accelerated to 7.0 percent in 2006-07 primarily due to the robust growth in agriculture, manufacturing and services.
The resilience of Pakistan's economy can be seen in the fact that GDP grew at an average rate of 7.0 percent per annum during the last five years and by over 7.5 percent during 2004-07.
Compared with other countries in Asia, this put Pakistan as one of the fastest growing economies of the region, along with China, India and Vietnam. Per capita income in current dollar terms was up by 11 percent, reaching $925 from last year's level of $833.
Other impressive developments include a sharp pick-up in the rate of investment. As a percentage of GDP, total investment touched a new high of 23 percent as against 21.7 percent last year. Over the last four years, total investment has increased by 6.4 percentage points, rising from 16.6 percent in 2003-04 to 23 percent in 2006-07.
Investment in both private sector and public sector recorded strong growth. Despite monetary policy tightening, credit to the private sector continued to grow at a healthy rate on the back of improving investment climate. On the fiscal side, the government was well placed to meet the overall fiscal deficit target of Rs 373 billion or 4.2 percent of GDP. Pakistan's debt profile also improved sharply. Exchange rate continued to remain stable despite widening of trade and current account deficits.
The successful launch of a new $750 million 10-year sovereign bond in the international debt capital market, which was heavily over-subscribed, was the defining moment in Pakistan's history as it reflected a strong vote of confidence by global investors in the country's economic prospects.
The country's economy, however, was not without certain weak spots. Inflation rate continued to be high. The CPI-based rate of inflation averaged 7.9 percent in the first ten months of the fiscal year which indicates that the inflation target of 6.5 percent for the current fiscal is impossible to achieve. Food inflation averaged 10.2 percent as against 7.0 percent in the comparable period last year.
The core inflation, which excludes food and energy costs from headline CPI based inflation, nonetheless, exhibited a decline, averaging six percent during the first ten months of 2006-07 as against 7.7 percent in the comparable period last year.
One of the factors responsible for higher inflation could be an increase of 14 percent in money supply as against the annual target of 13.46 percent and last year's expansion of 12.1 percent for the same period. Foreign sector of the country also came under tremendous pressure.
The merchandise trade deficit widened to $11.1 billion in July-April, 2007 of the current fiscal year as against $9.5 billion in the same period last year. Based on current trends, current account deficit of the country for 2006-07 is likely to be around 5.0 percent of GDP as against 4.4 percent last year.
External debt and liabilities at the end of March 2007 were $38.86 billion, which were higher by $1.6 billion and represented a 4.3 percent increase over the position at the end of FY06.
Looking at the totality of the picture, the most positive development during the outgoing year, in our view, was a record level of investment both in absolute terms and as a percentage of GDP. Such a sharp pick-up in investment gives rise to hopes that growth momentum witnessed in the past few years can be sustained because investment is a key determinant of economic growth.
It also reflects the buoyant mood of domestic as well as foreign investors, which is a good omen for the prospects of the economy. However, the rise of per capita income, though significant, has largely failed to improve the standard of living of a vast majority of the people because the gains of development have largely been restricted to the upper echelons of society and contributed to greater income inequalities.
The biggest failure of government policy has, however, been a sharp increase in the prices of items of daily use. More than double-digit rise in food inflation has rendered the life of ordinary people more miserable. Policy makers have obviously borrowed the idea of core inflation to appease the local population by a comparison with the developed countries where expenditure on food items as a percentage of income is not very significant.
Here in Pakistan, food inflation should be considered as core inflation for all intents and purposes because most of the people have to spend a greater part of their income to feed their families.
Dr Salman Shah's assertion that food prices world-wide have risen by 18 percent and the country's growth rate is one of the fastest in Asia is no consolation to the ordinary people of this country. It is not only inflation and unemployment which are adversely affecting the lives of ordinary people, but certain other factors are also adding to their miseries.
Electricity shortages, particularly in Karachi and lawlessness bordering almost on anarchy all over the country would scare away many investors, increase general level of frustration and give rise to perceptions that the country is drifting in the wrong direction.
A rosy picture of the economy given in the Economic Survey cannot trade off against despondency and desperation writ large on people's faces. Another negative development during the year was a high level of deficit in the external sector, witnessed both in the merchandise and current accounts of the country. By all indications, this is an unsustainable situation but amazingly no policy seems to be under serious considerations of the government to reverse this trend.
The successful launch of external bonds, of which the government is so proud, is in fact an effort to bridge the present widening gap in the external sector, but this would, in the final analysis, cost the country dearly in the future.
Monetary policy as suggested by the increase in overall liquidity in the economy this year is still not too tight to affect price levels in an adequate manner. To think that monetary policy does not affect food inflation is incorrect.
We would urge the authorities to attend seriously to all weak areas of the economy. We do recognise that this is an election year, but emerging weaknesses of the economy are too important to ignore and if we still, ignore them we shall be doing so at our peril.