Donors in Pakistan have entered into a policy debate differing with one another on the points of view of achieving stabilisation on the one hand, and addressing exports growth, on the other, to face up to current account deficit problem that arises each time the GDP growth crosses 6-7 percent, say officials. One side of the argument is that the balance of payments crisis can not be addressed just by making exchange rate adjustment.
It is a deep-seated issue and needs a structural answer. A recent publication of Asian Development Bank said: "This suggests that Pakistan's relative poor economic performance cannot be attributed to an overvalued exchange rate. The cause of Pakistan's relatively poor export growth is structural and deep-seated: it is not one that can be quickly and easily solved by an exchange rate adjustment".
Another donor, talking to Business Recorder, differed with this argument and said that Pakistan needs funding to finance its both current account and fiscal deficits on sustainable basis, so that investors, putting money here can have a long-term view of the country.
This is in addition to the exchange rate adjustment. The investors are not sure of repatriating profits or are unsure of secure investment. They would not even step into the market of Pakistan, says another donor, stressing on contradicting ADB's point of view which he said is just focusing on one side of the problem.
ADB's paper further quotes Economic Survey (2007-08), which recommends that its top priority should be "correction of imbalances through shaving off aggregate demand by appropriate policies. In other words, in spite of the high unemployment and the damage this would do to investment, the remedy advocated for the BOP problem is to curtail economic growth.
This would certainly solve the problem, as a slower growth of output would reduce the rate of increase of imports, while exports would be largely determined by the growth of world markets and hence unaffected by the reduction in domestic growth".
The Paper further says that Pakistan is running into, or is actually, experiencing a BOP constraint. However, the solution is not to reduce aggregate demand, but to introduce policies that will increase the growth of exports and thereby obviate the BOP constraint.
Other donors (opposing ADB's view), believe that stabilisation does not prevent growth ultimately, and without achieving stabilisation any country can not have growth, and there is a whole range of policy prescriptions designed by Finance Ministry with IMF, which concentrate on social safety nets and medium-term development framework (MTDB). They also opine that the same stabilisation will induce a higher growth path in medium term.
ADB's paper refers that the heart of the current problem lies in collapse of exports growth, which does not bode well for future growth. For example, since the 1960s "Pakistan's performance is clearly substandard, with only Afghanistan, the Kyrgyz Republic, Mongolia, Sri Lanka, Turkmenistan and Uzbekistan having lower export growth rates.
Other donors also believe that demand management does matter in achieving macro stability which provides spending for gaining better productivity. The government's support in improving productive capacity of industry always matter. In case the government's fiscal side is not balanced, how it would spend on industrial and overall infrastructure? This kind of spending on continuous basis would pave the way for a better investment scenario for local and foreign investors, conclude the officials.