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Old Saturday, May 17, 2008
Engr.Aftab's Avatar
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Post Challenges facing Pakistan economy

Challenges currently facing Pakistan economy


The government is seriously considering of lowering GDP of 6.5 or 7 per cent and has approved to raise prices of petroleum products which will be gradually increase. The increase in utility bills is also in offing. The government has also reviewed the budget targets for the current fiscal year 2007-08.

The ongoing severe energy crisis has darkened the future prospects of industries as well as people. The LSM is on the decline and ongoing energy crisis will add miseries to the problem. Serious energy shortage, food crisis, inflation, trade deficit, current account deficit and high oil prices in the international markets are supposed to emerge a major risk to the macro-economy. The government estimated power shortage to remain in the range of 1000-2000 mw but it has already touched 3600 mw which has increased the worries of the government. The economy is being running at a 30 per cent energy shortage.

According to the Federal Bureau of Statistics (FBS), Pakistan’s oil import bill reached $3.768 billion which is 14.75 per cent higher from the $3.284 billion last year. The country’s oil import bill is expected at around $10 billion by the end June 2008, which will create problems in the balance of payments for the government and that the new elected government will definitely face this difficulty. It showed that share of oil in total import bill reached 26 per cent during the period under review. On a monthly basis, the import bill of oil has increased by over 39 per cent in November 2007. It indicates an upward trend in the oil import bill which may escalate in the months ahead. Official figures showed that the break-up of the oil import bill showed that the crude oil increased by 12.63 per cent to $1.819 billion in July-November of the current fiscal year to $1.615 billion of last year.

It is estimated that the wheat imports during the current fiscal year of about 2 million tons will be an extra burden of more than $1 billion on the national exchequer. Wheat inflation in Pakistan has been in the double digits mainly as a result of drought in Australia which is one of the top three exporters of the grain. This is driving up global prices for the commodity by 40 per cent last year as the world’s stockpiles fell towards a 26-year low. Local investors of commodity trade are fast moving out of the business. Sugar, edible oil, pulses, rice, milk and eggs are already costly and the prices of many of these items is going further up as the political situation is unstable.

Two of three kharif crops i.e. cotton and rice has not been up to the mark. It is predicted that three million bales of cotton will have to be imported. It would push up the import bill further and would also increase the production cost. Rice production is below target and is already being sold at a higher price. This may cause a spur in the import demand for goods and the import bill at the end of June 2008 may touch $36 to $37 billion. The trade deficit by June may swell over $15 billion and it may cross to $16 or even $17 billion. With cotton production expected to decline by 11 per cent in FY-08, coupled with a wheat crop to post a stagnant to negative growth, real GDP growth for FY-08 could end up much lower than the government target of 7.2 per cent.

The mantra of gross root devolution, people’s participation in decision making, trickle down effects, and self-reliance magnetism are loosing its importance, scope and utility.

It seems that the government has now fully realised its ambitions of the tax collection target for the current fiscal year i.e. Rs1.25 trillion. After the demise of Benazir Bhutto the cumulative outflow reached $37.163 million, leaving only $2.594 million invested. According to the SBP (January 2008) USA, and UK investors withdrew $13.3 million from the equity market on January 8. In the current fiscal year, US investors pulled out $1.183 billion, British investors $885 million, Swiss investors $56 million, Sri Lankan investors $63 million, Hong Kong investors $188 million and Australian investors $48 million, the total foreign investment comes to $2.169 billion during July-December 2007-08 instead of $3.184 billion in the same period of last year. The major drop was witnessed in financial business as the FDI fell to $351 million against $517 million and in the power sector where it fell to $34 million from $92 million.

The principal inflationary pressures in the national economy have firmed up in FY-08, with consumer price index inflation rising to 8.7 per cent in November 2007 over a year earlier. Consumer price index (CPI) rose to 9.3 per cent YoY, in October 2007 principally driven by a 14.7 per cent YoY jump in CPI food inflation. Similarly, WPI inflation accelerated to double digits in November 2007.

The ADB issued its latest report “the Asian Water and Development Outlook (ADWO) once again highlighted Pakistan’s water and sanitation woes and suggested to increase the yearly investment in this very important sector up to 1 per cent of GDP. The country has reached the water scarcity threshold of 1,000 cubic meters per person a year and has been ranked among the worst performers in Asia in terms of water use. Pakistan is ranked at the 17th position among 23 developing countries of the region in the index of drinking water adequacy (IDWA). Spending in the sector currently stands at 0.25 per cent of GDP, or 47 times less.

Concluding remarks

It is seemed that highly projected economic blues has been encircled by dark shadows. The economy is faced with many challenges which are food inflation, wheat crisis, declining exports, high widening trade, current account deficits, severe power shortage, looming budget deficit, low literacy rate, paramount political and geo-strategic issues, stagnating health facilities, poverty, unemployment, regional and provincial disparity are the hallmark of our macro-economic sustainability and stability.
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Old Wednesday, June 11, 2008
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Survey of the economy

1. **Inflation stands at 10.3 per cent for the period from July 2007 to April 2008 period. The fiscal deficit is estimated to balloon from its target of Rs398 billion or four per cent of GDP to an astonishing Rs683.4 billion, or 6.5 per cent of GDP.
2. ** The real rate of GDP growth during 2007-08 was significantly lower than the target of over seven per cent, settling at 5.8 per cent.
3. ** Per capita income rose by 18.4 per cent.
4. ** The key factor in determining long-term growth – the savings rate – has declined to 13.9 per cent of GDP.
5.** Nothing was done with regard to diversifying exports, developing new export products, finding new markets for existing exports or even to curb non-essential imports.
6. ** Coming on to the matter of the public debt, this too is a cause for concern because in almost a decade public debt as a percentage of GDP has risen.


The Economic Survey for the outgoing 2007-08 fiscal year unveiled by the finance minister on Tuesday confirms much of what has been said about the economy in recent days. What the finance minister said makes for worrying listening but hopefully measures will be taken in the coming fiscal year to address these pressing macroeconomic problems .Inflation, he said, stands at 10.3 per cent for the period from July 2007 to April 2008 period. The fiscal deficit is estimated to balloon from its target of Rs398 billion or four per cent of GDP to an astonishing Rs683.4 billion, or 6.5 per cent of GDP. Clearly, the previous government massively spent much more than it had earned in revenue and hence the massive gap – which we all will have to pay for in the coming years in the form of reduced government expenditures on socio-economic development. Furthermore, it is likely, though those in the former government may not be willing to admit it, that this deficit financing contributed its part to the inflation being experienced now.

The real rate of GDP growth during 2007-08 was significantly lower than the target of over seven per cent, settling at 5.8 per cent. April 2008 registered the highest rate of both inflation and food inflation in over the last 30 years and this means that the government and the State Bank have their work cut out for them in trying to combat rising prices. That they will have to do this at a time of decelerating GDP growth is only going to complicate matters further. The rise in the price level, with food inflation its chief driver, has disproportionately affected those from low- and middle-income backgrounds and hence it is likely that efforts to curb poverty will continue to be undermined. As for income levels, the finance minister said that per capita income rose by 18.4 per cent. However, this tells us nothing about how the income was distributed, and again the likely possibility is that in the type of economy that Pakistan has, with a few in control of much of the resources, it is likely that the benefit of economic growth would accrue more to those who are already affluent. Besides, the impact of inflation is going to dent such gains. The government's assertion that the level of poverty went down from 23.94 per cent of the population in 2004-05 to 22.32 per cent for 2007-08 may generate some controversy since it is likely to be questioned by independent economists. In any case, what was the compulsion to compare the past year's poverty figures to those three years ago – wouldn't the logical comparison be to juxtapose them with figures from 2006-07?

In recent days, most of the talk about the current ailing health of the economy has been dominated by a blame game. The present government continues to blame its predecessor while the latter actually accuses the caretakers of messing things up. The politics of who is to blame aside, some facts need to be acknowledged and realized – because once that is done, the government will have no distractions in getting on with the very important job of finding solutions to the various macroeconomic problems that the country currently faces. For instance, while food prices are high in much of the developing world, and Pakistan is by no means the only country affected in an acute manner, the fact remains that the nature and structure of the Pakistan economy is such that all manners of cartels and market distortions thrive within it and that those behind them profit at the expense of the ordinary consumer. This was seen during the days of the previous government not only in basic food sectors such as wheat and sugar but also oil and cement as well, where hoarders ruled the market and faced no challenge from the government in determining prices, and hence making hefty profits.

Furthermore, as pointed out by several experts on television as the survey was being released, the previous government practically did nothing to make the economic growth of the last four years sustainable. It failed to achieve the political consensus that was needed to build new dams, which would augment the water available for irrigation (and hence a likely catalyst for the almost-moribund agriculture sector), or to bridge the widening gap between demand for and supply of electricity. How any country can sustain a growth of above five per cent without doing anything to increase its power-generation capacity is a question that obviously seems to have eluded Shaukat Aziz and his advisers – and that is why the economy finds itself in the mess it is in, with industry suffering because of crippling power outages.

A closer look at the Economic Survey for 2007-08 also reveals that a key factor in determining long-term growth – the savings rate – has declined to 13.9 per cent of GDP. This is far lower than what it should be for a developing country, especially given that comparable economies have savings rates in the region of 20 per cent and that savings is the primary vehicle for investment and hence sustainable GDP growth. As far as inaction is concerned, the former government also seems to have done little to stem the widening trade deficit, the highest ever in the country's history. To blame this all on increasing oil prices, as former finance adviser Salman Shah has been doing, is to be disingenuous because the warning signs have been coming from the State Bank for the past three years. In practically every quarterly report that it has issued on the macroeconomy during this period, the SBP has warned the government to do something to stem the deficit, which has risen dramatically. While oil imports do play a major role, the fact of the matter is that nothing was done with regard to diversifying exports, developing new export products, finding new markets for existing exports or even to curb non-essential imports. This is also why foreign exchange reserves have declined by over four billion dollars, a figure that may well be higher for 2008-09.

Coming on to the matter of the public debt, this too is a cause for concern because in almost a decade public debt as a percentage of GDP has risen. The reason for this is massive borrowing that the government had to make to bridge the budget deficit for the outgoing fiscal year. This necessarily means that for 2008-09 some austerity measures will have to be adopted and the government's ability to finance its annual expenditures will be severely compromised. The previous government's profligacy has in fact already taken a toll, as the survey notes of a massive cut of Rs100 billion in the public sector development programme – which is most unfortunate given that it will clearly serve to compromise the state's ability to educate and nourish its citizens. Obviously questions will be and should be asked as to why defence doesn't get, like all other sectors, its share of a cut, especially given that the threat from the eastern borders is not what it was, say, five or ten years ago, and considering that the country is now one of the largest recipients of American aid.
Courtesy: Editorial The News on 11 June,2008.
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