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A Critical Review of the Economic Situation in Pakistan 2001

A critical review of the economic situation in Pakistan 2008-09 By Mehmood-Ul-Hassan Khan There is a general perception in the country that the economy is on the road to recovery. But on the other hand, the ongoing global economic and financial crisis, also, with the deteriorating law and order situation, and furthermore, the continuous energy shortages in the country can be concluded as the real risks to macro-economic situation. The latest report by the ministry of finance stated, that the fis
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  A critical review of the economic situation in Pakistan 2008-09 By Mehmood-Ul-Hassan KhanThere is a general perception in the country that the economy is on the road to recovery.But on the other hand, the ongoing global economic and financial crisis, also, with thedeteriorating law and order situation, and furthermore, the continuous energy shortages inthe country can be concluded as the real risks to macro-economic situation.The latest report by the ministry of finance stated, that the fiscal deficit target, 4.3 per cent of GDP (Gross Domestic Product), and the current account deficit target of 5.9 per cent of GDP were achievable. This can also be verified from the current studiesundertaken by the IMF (International Monetary Fund) and the World Bank. It also statedthat the global economic recession was affecting our economy in various ways, such asthe volumes of exports and FDI’s declined substantially, which can also be verified in thecurrent reports by the State Bank of Pakistan. Despite the financial support from the IMFand other bilateral and multilateral donors, Pakistan’s external account remains dire.Other reasons for why economic growth remained weak was because of the decliningratios of tax collection, low inflows of foreign direct investments and the delayed anddiminishing privatisation process. Signs of recovery The report also shows some signs of improvement in economic variables such as thestabilisation in the inflation rate, also, a significant increase in the build-up of foreignexchange reserves, which recovered from a low of $3.5 billion on October 31, 2008 to$7.8 billion on April 17, 2009. Furthermore, import compression and net zerogovernment borrowings from the State Bank of Pakistan by the end of April are evident.The IMF, satisfied with the progress made by the government in stabilising the economy,agreed to release the second tranche of its $7.6 billion assistance programme. There werealso some indications that the amount/assistance available to Pakistan could be increasedfurther, if the country continues to proceed on the track it has been following. Other variables in the economy which have also shown various signs, they include thefollowing: (a) GDP growth As stated in the report the GDP will be in range of 2.5 per cent to 3.5 per cent.Agriculture ratio to GDP will be positive which is based upon anticipated high wheatcrop and above target growth of minor crops including a reasonably good outturn by thelivestock sub-sector. (b) LSM It is projected that large-scale manufacturing (LSM) ratios will be negative due to manylocal and international reasons. It depicted a negative growth of 5.73 per cent during July-Feb 2008-09 as against 5.27% positive growth last year. The economic recession and costof production has deficiently affected the LSM growth. (c) Agriculture sector  The agriculture sector is likely to achieve its growth target of 3.3 per cent for the currentyear. According to the report, all livestock products witnessed an increase in prices andthus the target of 3.2 per cent would be achieved as the demand for livestock productswas growing at a phenomenal pace. Moreover, disbursement of credit to the agriculturesector by commercial and specialised banks has increased by Rs13.3 billion (9.6 per cent)on a yearly basis to Rs151.9 billion during nine months of the current fiscal year fromRs138.6 billion from the corresponding period of the last fiscal year which isinstrumental to achieve macro-economic goals. (d) Services sector The service sector showed some resilience in the current fiscal year. The banking andfinancial sectors of the country showed substantial growth which would contribute a positive impact on the economy in the near future. (e) Inflation The ongoing global inflationary pressures continue to affect the economies of Thailand,India and Pakistan. Despite the diversified but integrated efforts of the government andSBP the country still faces a high double-digit inflation rate. The manipulators, weak regulatory bodies, poor execution of laws and the withdrawal of subsidies were the maincauses of high inflation ratios in the country. It is expected that the average inflation for the year (2008-09) as measured by the CPI will be close to 20 per cent. (f) Capital market It seems that the stock exchanges of the country are on the road to recovery but their sustainability factor is still questionable. The local bourse remained buoyant throughoutthe month of March 2009. The recovery phase of the premier stock exchange after floor removal has been hopeful and an outstanding performance has made it one of the best performing markets of the world in 2009, as in the past six weeks Pakistani capitalmarket’s value has improved by 20 per cent. (g) Fiscal management Due to many internal adjustments (cut in development spending), integrated financial policies/reforms (reduction of oil subsidies) and other external factors such as loanfacilities from the IMF, pledges from the friends of Pakistan forum and record worker remittances. The fiscal health of the country is improving and the government receivedRs141.1 billion in gross external inflows against outflow of Rs104.1 billion which meansnet availability of Rs37 billion. Pakistan is geared up to keep trade deficit to 4.3 per centof GDP and current account deficit within the range of 5.9 per cent. (h) Tax collection Tax revenue collected by the Federal Board of Revenue (FBR) stood at Rs813.6 billion(net) during the first nine months of the current fiscal year (2008-09) compared withRs679.9 billion in July-March (2007-08) posting a healthy increase of 19.7 per cent. Butit is again seemed that the tax revenue target of Rs1250 bn may not be achieved duringthe current fiscal year, as the federal government has already lowered its targets of taxcollection in the ongoing fiscal year.    (i) External sector According to the report the external sector has shown some signs of improvement. Thecurrent and trade account balance has improved. Worker remittances (according to theSBP in April, the overseas workers sent the highest ever amount of $739.43 millionsurpassing the December 2008 record of $673.50 million. The remittances were alsohigher by 22.79 per cent over the previous month) were on the peak despite thesubstantial decrease in the ratios of FDI and FPI.(j) Current account balanceThe CAB decreased by 20.8 per cent during July-March 2008-09. Current account deficitshrank to $7.6 billion during this period as against $9.6 billion during the same period of last year. What Pakistan probably needs is an investment driven current account deficitneutralised to some extent by rising savings level.(k) External debtExternal debt and liabilities (EDL) stood at $49.7 billion or 30.7 per cent of the projectedGDP for the 2008-09 at the end of March 2009 which is higher than end-June 2008 stock of $46.3 billion or 27.6 per cent of GDP.(l) Rise in public debtAccording to the ministry of Pakistan our public debt is expected to increase by over Rs2trillion by the end of 2008-09, the highest ever in a single year. Public debt is estimatedto cross Rs7,931 billion by end June 30, up by 34 per cent from Rs5,901 billion in 2007-08 because of massive depreciation in the value of the rupee, and external loans obtainedfor budgeting the balance of payments. Furthermore, foreign currency debt will reachRs4,811 billion and domestic currency debt to Rs3,120 billion by the end of June 2009.Public debt share as percentage of GDP will rise to 59 per cent during the year endingJune 2009 from 56.3 per cent in the last financial year. It will be in violation of the fiscalresponsibility and debt limitation (FRDL) act 2005, which calls for gradual reduction in public debt. The rupee depreciation in the first quarter has an impact of Rs447 billion onthe stock of public debt. The significance of this depreciation effect is highlighted by thefact that even though the stock of foreign currency debt has gone down in dollar terms by$400 million, there has been an increase in rupee terms of Rs414 billion in the firstquarter. The depreciation of the rupee against the dollar has been responsible for approximately 66 per cent of the total increase in public debt, as stated in a debt policyreport submitted to the National Assembly. Concluding remarks The review of economic situation for the first nine months of the current fiscal year released by the ministry of finance can be a wakeup call for the policy makers, as the present review reflects an objective assessment of the macro-economic situation. For asustainable growth, the government needs to pursue the permanent reform processes andresist in slowing them for short-term political gains.
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