Now that the election process has been completed, the members of the Parliament taken oath, the new Prime Minister too has taken oath, and the new government assumed its challenging responsibilities, it is indeed an opportune moment to look back and evaluate the overall economic performance of the previous government, take cognisance of their achievements and shortcomings and, thereby, delineate the myriad economic challenges that the new government shall be facing.
At the outset, it would be pertinent to mention here the very recent remarks of the Governor, State Bank of Pakistan, wherein she warned of the "destabilisation threat to Pakistan's macro economic balance." Admittedly, the past eight years have seen a number of economic achievements and which are indeed noteworthy. In brief, these achievements are:
-- An average annual GDP growth of 6%,
-- Almost doubling of the annual export level (from about $9 billion to over $17 billion),
-- Strong inflow of Foreign Direct Investments,
-- Privatisation of a number of state owned units thereby drastically diminishing the role of the government in business,
-- Strong level of FX reserves (over $15 billion),
-- A vibrant financial sector, which is now primarily managed and owned by the Private Sector, generating high levels of net profits,
-- A high and growing level of Workers Remittances (over $5.5 billion per annum),
-- Rapid expansion in the telecommunication sector with users of mobile phones in excess of 60 million,
-- Thriving stock markets, which has rapidly and progressively grown despite some major hiccups in between,
-- A significant reduction in the level of domestic debt as a percentage of GDP,
-- An improvement in the country's credit rating, et al.
The ruling party/parties were, thus, blowing their trumpets, that their exceptional economic performance, would ensure them an outright victory in these general elections.
The fact that the people have probably seen through this illusion and then spoken loud and clear is indeed striking. In a rather overwhelming manner, the people have rejected these claims. This is indeed an immense reflection on the maturity, the understanding and acumen of the Pakistani people.
Apparently, most of the economic decisions were, enveloped in fancy words, lacked an in depth analysis of the alternative options available to the country, the economic benefits were restricted to a certain class, with limited seepage to the ordinary people and this coupled with the unabated and spiralling level of inflation (primarily of essential items, like wheat, edible oil, pulses, sugar, vegetables), the acute energy shortfall, the very high borrowing cost, the deteriorating law and order situation, etc eroded the achievements. More importantly, this has meant that the country's long term interests have been apparently adversely affected.
Undoubtedly, the outgoing governments - both at the Federal level as well as at the Provincial levels - had an extremely rare opportunity, that is, to plan, implement and deliver on economic issues and matters that were and still are crucial to the nation's economic well being.
The results of these critical decisions would have significantly improved the life of the average citizen. There wasn't any significant opposition, of any nature, from any quarter.
Neither the respective legislatures, both at the Federal and Provincial levels, nor the civil society, nor the informed class, nor the media, were even a tiny impediment in economic policy-making and, thereby, the economic goals, activities and results that these governments - both federal and provincial - achieved in these past five years. Retrospectively, this opportunity was indeed rare, if not unique.
However, in such an ideal environment, where on one hand the Provincial governments had the support of the Federal government, as the ruling parties were the same, and on the other hand, there was limited opposition or dissent, both within the legislatures as well as within the country, the critical issues that were confronting the country should have been effectively addressed on a timely basis. This congenial atmosphere was further reinforced with strong support from the US and other western governments (primarily as a result of 9/11), as well as from the Arab world.
With such a congenial atmosphere, domestically and internationally, an aggressive, long term economic development program should have been undertaken so as to change the direction and contributions from the critical and productive sectors of the economy and, thereby, make Pakistan an effective and prominent economic player.
How come, despite the rather impressive economic performance (as stated above) both the benefits to the average citizen have been limited, as well as the future economic outlook of the country is in turbulence, is indeed intriguing.
The consequential implications of correcting this are going to be demanding to say the least. None of these necessary measures will be palatable ones. At the same time these are essential for the country's long term economic health.
These "legacy" issues will have to corrected as limited attention has been paid to the development of the real sectors of the economy - anchored in the development of human resources and the infrastructure, as well as the exports of manufactured goods - and probably reducing the emphasis on the financial and services sectors.
INFLATION: The past two/three years have seen an unabated and accelerating increase in the inflation rate. The prevailing annual inflation rate is well in excess of 10% per annum (for the past two months, on a year-to-year basis, it has been more than 12% per annum). This is of a greater concern as a significant element of this spiralling inflation is now being contributed by food items, while the full impact of the global oil prices has not been fully passed on to the economy.
This, in itself, has significantly eroded the quality of life of the majority of the people with the profound threat that this inflationary pressure in the coming periods will further impinge upon the quality of life of an average citizen.
Additionally, the galloping non productive expenditure by the government, coupled with ever increasing defence expenditure, as well opting to create unnecessary reserve money (over 15% in last financial year and already over 11% for this current financial year) has caused this situation to almost spiral out of control.
Fiscal policy (and thereby fiscal measures), if not in tandem with monetary policy, will generate inflationary pressures and create severe macro-economic imbalances in the long term. More worrisome, to correct these massive distortions that have been unnecessarily created, the medicine has to be strong and bitter (and could take an exceedingly painful shape) and, more significantly, would be over a rather extended duration of time.
Compounding this agony is the fact that, unfortunately, this lack of fiscal discipline has now left barely any space for resources to be used for investment into key areas - infra structure, education, health, etc. In other words, the only option now left probably is to drastically reduce the Annual Development Plan (with its consequent implications on the aforesaid key investments), so as to control the rapidly increasing fiscal deficit.
INTERNAL SECURITY: Investment opportunity or money is fungible. It goes to the place where not only the returns are more attractive, but where there is a perceived highest level of safety too. This flow of investment or money is guided by a lot of hard analysis but, ultimately, money flows in the direction where in the eyes of the investors, there is an overall high degree of safety.
Thus, investment, that is capital, flows in the direction where there is a high degree of internal security and uniform application of rule of law. On both these counts, vis-a-vis our direct international competitors, we have been left behind and it is imperative that we take necessary remedial measures.
THE CURRENT ACCOUNT DEFICIT: The unsustainable and growing current account deficit is indeed a daunting task and which needs immediate corrective measures. With oil prices in excess of $100 per barrel, and coupled with the rising consumption of petroleum products, it really limits the options which will be available to the new government.
This current account deficit, presently running at over $1.35 billion per month, is neither sustainable for any country with limited means (and more so for a country like Pakistan) nor are there immediate alternatives to correct it. With limited if any exportable surplus, rising import requirements, decreasing level of Foreign Direct Investment, larger net payments for services, dividend, royalty, etc; the degree of flexibility available to the country's economic managers is decreasing.
Thus, in the process, we are sliding down so rapidly that the present FX reserves can easily erode away in a matter of few months. Thereby, we may once again be confronted with the pressures on our FX reserves and, thereby, the consequential economic difficulties that we faced in the 90s (for a totally different set of reasons this time).
The present ones are primarily self inflicted and not due to the economic sanctions triggered by the Pressler Amendment, imposed by the West, for our then clandestine nuclear programme. The fact that for the time being there is limited potential of exports to grow to cover this yawning gap only accentuates the problem.
THE FISCAL DEFICIT: The rapidly accelerating non-development expenditure of the government, coupled with increased outlay by the Defence forces, has eroded away whatever benefits that we were able to achieve with respect to our external debt repayments after 9/11. While the overall tax collection in absolute terms has increased but, more significantly, as a percentage of GDP, it has significantly decreased.
DECLINING TAX TO GDP RATIO: This ratio which was 13.2% in 1999 has illustrated a declining trend in these past eight years and has now plummeted to 9.4% (in 2007).
To meet the immense demand of the country, as well as ensure that all segments of the society make their contribution to the long term benefits for the nation, this ratio has to be significantly increased and that too at an accelerated pace. Without exception all sectors of the economy have to contribute in paying taxes and the latitude given to some sectors in this matter needs to be permanently and immediately addressed.
EXCHANGE RATE STABILITY: The over reliance on subsidy (opting for short term hypothetical gains over long term ones), the excessive indulgence in consumption and the rapid acceleration of Consumer Loans (primarily used to finance the purchase of imported consumer goods, coupled with insufficient growth in our exportable surplus) has put the exchange rate under immense pressure.
Added to this is the high inflation rate that we have encountered in these five years vis-a-vis our neighbours/other emerging markets (India, China, Bangladesh, Thailand, etc) as well as the US to whose currency we are pegged.
Barring the balancing, replacement, and modernisation efforts by a section of the textile sector (solely driven by the "survival" need in the highly competitive international markets) and the expansion in the cement sector, the other major components of the industrial sector have witnessed no significant major investments to manufacture exportable goods thereby increasing reliance on the goods and products that have historically contributed in this area.
ENERGY: The rapidly increasing demand and consumption of electric power, significantly caused by the domestic users (driven to a large degree by Consumer and/or Personal Loans offered by commercial banks for the purchase of air conditioners, televisions, washing machines, household appliances such as electric irons, heaters, etc) and commercial users (most shops and stores adopting a practice of opening late at about 1100 hours and then staying open till 2200 hours) has created a major shortfall in energy.
The overall growth in these two components of Energy Consumers is higher than that of either the industrial or agricultural components. Thus, these components now consume a significant amount of energy than was the case about 8 years back.
With sharply increasing energy requirements and the large, if not worrisome, current account deficit, coupled with sharply depleting natural gas resources, power generation from thermal generation is not the long term answer. In other words, emphasis has to be given towards rapidly increasing nuclear, hydro, wind, and solar generation of power.
Simultaneously, the consumption pattern of the commercial and residential users has to be immediately corrected by introducing a tariff structure that supports the efforts of curtailing unbridled use of energy during the peak hours. This problem gets further accentuated as a comprehensive energy policy was not developed to meet the expanding needs or apportion this resource in an efficient manner.
INFRASTRUCTURE DEVELOPMENT: Notwithstanding the significant resources, both external and internal, the dilapidated infrastructure has been virtually ignored:
-- The rail tracks are still of the bygone, pre-partition years and the trains thereby move at a pace that is really slow;
-- The major highways are worn out and full of pot holes (it takes over 30 hours for goods to move from Lahore to Karachi or vice versa),
-- The port facilities and berths are obsolete compared to competing ones in the region with limited investment in new equipment, new technology for effective and smooth port operations, improvements in operating procedures, etc;
-- The availability of tap water is still the privilege of the few and primarily confined to the urban areas.
-- Lack of an efficient, economical and reliable public transport system. None of the major cities have an efficient mass transit system causing excessive load on the road network, particularly at peak hours, with substantial wastage of resources, time and money.
NATIONAL FINANCE COMMISSION AWARD: The final award amongst all the stakeholders, that is the federal government and the four provincial governments, has been held in abeyance, and the interim award given by the President is still applicable. Amongst other things this has lead to a sense of deprivation in the provinces, particularly the smaller ones. This should be urgently addressed and due share given to the smaller provinces to allay their concerns.
WATER DISTRIBUTION AMONGST THE PROVINCES: The final decision with respect to the distribution of water between the four provinces has not been taken (and thereby the royalty element that each province in entitled to) with its consequential impact on developing the hydro power resources. More precisely, almost a decade has been wasted without starting the construction of even one of the five major hydro electric sites.
INTER-CORPORATE CIRCULAR DEBT OF ALMOST RS 200 BILLION: The decision to go for short term gains and ad hoc measures has landed Pakistan in this real quagmire. The circular debt between the oil refineries, the oil marketing companies, the Independent Power Producers, Wapda and its allied companies is now of a staggering amount, according to one estimate in excess of Rs 200 billion.
While the international oil prices were rapidly increasing, for political expediency, these increases were not passed on into the market. So today we have a stockpile for adjustment to be done (some steps in this direction have finally been taken in the past 4 weeks) and given rise to this enormous problem. On the other hand, by not increasing the retail prices for petroleum products on a timely basis, both the oil marketing and oil refinery companies have apparently reaped undue benefits. Immediate corrective action is again absolutely necessary.
THE BANKING SECTOR DEPRIVING THE PRODUCTIVE SECTOR OF GENUINE EARNINGS: The past five to six years has seen that while the return for the depositors continues to be rather small (as per the website of SBP, the average cost of funds presently is a meagre 3.9%) the average cost of borrowing has continuously increased, the 6 month KIBOR is now over 10.25%, and adding to it the normal spread, the ultimate cost to the borrower is over 13 to 14% for the corporate/commercial customer and in excess of 18 to 20% for the consumer loan products.
Thus, for the banks it means a minimum effective spread of 9%, the highest spread in this region according to one study. More importantly, this is far above the international level of about 3% and gives rise to exceptionally high profits for the banks.
Profits, by definition, are absolutely essential for any sector of the economy, but when these are derived by utilising a monopolistic position, then these are detrimental to the economy. More significantly, in the case of commercial and/or corporate customers, this means taking the legitimate part of the earnings of the productive sectors of the economy, causing much lower net earnings for this sector, and thereby lesser available amount for ploughing back into the unit.
In order to encourage a higher degree of savings it is absolutely critical that the average saver (holding a saving accounts with a commercial bank) gets a return which recognises his/her contribution towards the stable deposit base of the bank. Isn't it totally unfair that while more than 54% of the total deposits in the country's banking sector are in the saving accounts category, the average return is less 2% per annum? Once the other fine prints that are applicable to the saving accounts are taken into consideration, with respect to the individual account holder, this triggers an effective return of an even lower rate!
(To be concluded)