Economy of pk

PAKISTAN`S economy is failing rapidly on many fronts: the growth rate stagnates, inflation persists and public debt has ballooned
due to macroeconomic imbalances; the infrastructure cannot meet requirements of power, transport and water resources; roads
and port facilities are rapidly deteriorating and are further burdened by the transit use of Isaf forces in Afghanistan.
Human development indicators are low, the social infrastructure needed to address the needs of a growing population inadequate; poverty is
growing; local government which is critical to providing health and education services is dysfunctional; the environment for doing business is
neither cost-efficient nor corruption-free; the rule of law so essential to nurture private enterprise is challenged by a democratically elected
government in the Supreme Court daily. And law and order is hostage to the destabilising effect of the US war in Afghanistan. This piece is
about stabilisation of macroeconomic imbalances which is the first step required to save Pakistan from a total collapse.
Growth in GDP after peaking at 6.8 per cent in FY07 averaged just 2.5 per cent during the last four years officially, but was actually lower
when glaring exaggerations are excluded. For instance, in FY11 GDP grew by 2.4 per cent officially on the basis of implausible growth in
small-scale manufacturing (exactly 7.5 per cent for the fifth year in a row, despite long hours of loadshedding), buoyant livestock sector (3.7
per cent growth despite 1.2 million cattle lost in floods) and over 13 per cent expansion in value added by public administration and defence
services.
The latter reflects ballooning war expenditures, salary increases, rising debt service, politically targeted subsidies and transfers to public
corporations to cover losses due to corruption. None of these are meaningful contributions to GDP. Excluding these, GDP growth is unlikely
to exceed one per cent in FY11. Sectoral details of GDP reveal a more dismal reality. Production of major crops declined three years out of
the last four; growth in industrial production was negative twice during the period, while finance and insurance services, which are pivotal to
growth in a modern economy, shrank three years in a row for a cumulative decline of nearly 30 per cent since 2007.
These numbers point to an alarming decline in private-sector activity and shrinking productive sectors of the economy during the last three
years.
With population growing at 2.1 per cent annually, unemployment is rising. Over 50 million people have now slipped below the poverty line
especially due to erosion of purchasing power by inflation. Reminiscent of Musharraf`s regime, economic managers claim mockingly that per
capita income now exceeds $1250, another sleight of pen by converting the inflation-based GDP into dollars at an overvalued exchange rate.
The result is nothing more than an illusion. The last four years have also seen acceleration in inflation, with year-on-year inflation peaking at
over 25 per cent during late 2008, but persisting subsequently, fluctuating around 15 per cent until recently. This is the longest spell of
inflation Pakistan`s economy has suffered, threatening the social order.
Economic managers blame dismal conditions on factors outside their control: war on terror, global financial crisis, the subsequent economic
recession and the floods of 2010. Only some are relevant and their impact is overstated, while policy-controlled factors have been more
important: the floods of 2010 caused a loss of over Rs800bn but policy- and mismanagement-induced losses in the public sector exceeded
Rs400bn last year as well; the war on terror was only one factor that impacted investment, other rectifiable factors that discouraged
investment were macroeconomic mismanagement, the rising cost of doing business, energy crisis and corruption.
The contagion from the global financial crisis never reached Pakistan because we are not integrated in markets globally; and the world
economic recession has mostly ended without impacting our exports significantly. On the inflation front, factors like the impact of floods on
food supplies in 2010, adjustments in the prices of electricity and gas and surging international food and commodity prices have periodically
affected inflation, but the main reason for the persistence of inflation has been the inability to control monetary expansion.
Contrary to official claims, the main reasons for the undeniable economic slowdown and persistent inflation in Pakistan are domestic, a mix
of wrong fiscal and monetary policies and an inappropriate exchange-rate response, carried out by three successive economic teams.
While the economy was growing rapidly pre-2007, the initial spurt of inflation was triggered by the State Bank of Pakistan`s inability to control
monetary expansion in the face of large foreign exchange inflows. While still coping with this monetary policy failure, the election year and
every year subsequently, saw irresponsible fiscal expenditures financed by borrowings from the SBP that further expanded liquidity and
fuelled inflation.

The budget deficit and the way it is financed has now become the root cause of economic imbalances and persistent inflation. The SBP
responded to the runaway growth in monetary aggregates by raising interest rates, an instrument used to control private-sector credit
expansion, despite the fact that it was public-sector credit that was expanding and not private. This was yet another policy mistake and
continues today with the discount rate at 14 per cent.
Naturally, increases in the discount rate have not reduced inflation but further stifled private-sector activity, dampening supply responses
which fuels inflation. High discount rates have also contributed to the rising cost of government borrowing from the commercial banks, thus
increasing the deficit and perversely encouraging the government to continue borrowing from the SBP instead of commercial banks.
Consequently, the vicious cycle of large deficits, more borrowing and high interest rates have again placed Pakistan in a debt trap as in the
late 1990s. In the process, commercial banks have practically given up on financial intermediation to support private-sector activity and are
making billions just lending to government in risk-free treasury paper.
Private-sector activity has also been adversely affected by policy failure to maintain Pakistan`s competitiveness in the face of foreign
currency inflows, which caused the real effective exchange rate of the rupee to appreciate, a predicament called the Dutch disease.
In the period since September 2008, measures of competitiveness indicate that the rupee is now overvalued 15 per cent despite the gradual
erosion of the exchange rate of the rupee against the dollar. The erosion of competitiveness is unmistakable; the recent surge in exports is
due to higher export prices, and would have been greater in the absence of loss of competitiveness.
The importance of the FY12 budget for correcting macroeconomic imbalances cannot be overstated. Achieving a budget deficit target of four
per cent of GDP would be the minimum to curtail inflationary pressures but which must be achieved through quarterly monitored fiscal
discipline, while protecting development expenditures. The deficit should be financed mainly with non-bank borrowing to prevent `crowding
out` of the private sector. Subsidies are poorly targeted in Pakistan and help only a few thousands, but the resultant budget deficit fuels
inflation which erodes the meagre purchasing power of 50 million poor Pakistanis.
To revive growth in incomes and employment, the new growth strategy is irrelevant; what we need is a reversal of policies that are stifling
private-sector activity. Lower interest rates, restore competitiveness by devaluing, unleash the comparative advantage of agriculture sector,
lower the cost of doing business. And most importantly address the energy crisis economically and efficiently. The world is witnessing
currency wars through competitive devaluations to gain market shares and stimulate economies; in contrast, Pakistani policymakers are
rejoicing in maintaining an overvalued rupee.
The writer is a former commerce minister and has worked for the IMF.