According to 2nd Quarterly Report 2008 of State Bank, Pakistan is not likely to achieve its economic targets, a ground reality conceded, which I have been consistently forecasting in my regular columns for a long time and the said report has finally endorsed my reservations.
As per State Bank's report the GDP of the country for the current year is likely to come down to 6-6.5% from 7.2% target, whereas, agricultural growth is expected at 4.8%. In 2004 growth rate of our large scale industries (LSM) was 18%, which last year decreased to 8.3% and during the current fiscal year would further decline to 4.5%.
Local borrowing by the government from State Bank has reached all time high at Rs 359.3 billion, which is 1330% higher compared to last year. Similarly, exports of textile sector has reduced by 3.4% than last year. This year tax collection target is also unlikely to be achieved. Since 1995 inflation and price hike of daily consumable items has increased by 18.2% in January 08.
During the first eight months of current fiscal year, trade deficit has shot up to US $13.2 billion and would be about US $15 billion at the end of the current year, which is highest ever trade deficit in the history of the country. As per data released, all sectors of economy have performed poorly. Additionally, wheat and power crisis inherited by the new government will be a constant threat and a serious challenge to the government to overcome the crisis.
Banks loan defaults increase by 20% reached Rs 170 billion in 2007 compared to Rs 141 billion in 2006 showing an increase of 6.5%. Consumer financing increased by 111% to reach Rs 18.6 billion in 2007 compared to Rs 8.8 billion in 2006, major share is vehicle lease financing defaults caused due to high mark up of the banks.
On the basis of attractive profit earning on consumer financing, banks did not make investment in long-term projects of the corporate sector instead they earned huge profits on State Bank Treasury bills and consumer financing.
Total financing of the textile sector is Rs 565 billion due to crisis in textile sector their NPL reached Rs 51 billion, which is also due to high mark ups of the banks and increase in cost of production. Additionally, due to unannounced load shedding and power break down the industrial production and exports have badly suffered and eroded profitability in the textile sector.
Poor economic performance is weakening country's capability of paying off external debts. During all this period, the sector whose performance can be termed good is stock exchange. But bullish trend in stock exchange despite negative aspects of economy is beyond understanding and common logic. Seeing huge profits in stock exchange investors are making investment in this sector as a result, no new industry has been set up, one of the reasons of unemployment causing increase in poverty.
Rupee has marked a downslide by 3.5% during the last eight months. At the advent of current fiscal year the dollar has made steep rise and reached Rs 63.00 from Rs 59.00 and 60.00. Rupee has also gone down vis-a-vis other currencies. Our foreign exchange reserve has declined and stands at US $14 billion. Pakistanis abroad should be commended as foreign remittance with 22% increase from July 07 to January 08 reached US $3.6 billion.
Due to price hike, the least earning group (Rs 3000/) has to bear additional financial burden of 13.4% whereas highest earning group (Rs 12000/ and more) has to bear by 10%. Due to excessive borrowings by the government there has been sharp increase in Reserve Money Supply (M-2) by 17.3% causing inflation and monetary imbalances. The higher mark up of bank loans has increased the financial cost of business as a result investors are reluctant to invest in the industry for expansion or new projects. From my prospective the tight monetary policy of State Bank has given negative affects on the industrial growth, which is a matter of serious concern.
This is very unfortunate that country's business tycoons are moving to Dubai to invest in real estate and construction business because of huge margin of profits. I would suggest new government to announce special incentives in the construction sector in coming budget to bring these investments back to Pakistan. There are almost forty different allied sectors in construction industry. Steel, cement, sanitary, electric, labour, plastic and glass industries, which grow with development in construction industry. So, it is imperative to attract local and foreign investment in the local construction industry to avoid flight of capital and to provide ample job opportunities in the country.