Dr Ashfaque H KhanTuesday, September 13, 2011
Owing to a variety of factors, Pakistan’s macroeconomic situation has deteriorated over the last four years. These factors include the political leadership’s total neglect of the economy, an economic team beset by weaknesses and frivolity, a worsening security environment, persistent political instability, an energy crisis and weakening of state authority as a result of poor governance.
These factors have not only severely damaged the economy but also clouded the future of the economy. People are losing faith in their country and the private sector is relocating its industries abroad. Most significantly, the younger generation is uncertain about its future. Few Pakistanis are getting jobs and fewer are climbing out of poverty because of the attenuation of the economy.
What is all the more worrisome is that the traditional secularity of the economy is being endangered at a time when neither the government nor anyone else outside the government is interested in arresting this disturbing trend. We hardly see any discussion on the state of the economy on TV during the prime time. We should all therefore be ready to be held responsible for the destruction of our economy.
Pakistan’s economic growth has slowed to an average of less than three percent per annum during the last four years as compared to an average of seven percent per annum over the previous five years. The longer our economic growth remains around three percent, the more likely we are to lose opportunities for generating more jobs, critically needed to absorb almost two million new entrants to the job market each year. If the current trend persists, I am afraid that we are likely to be confronted with rising social and political stress.
It is against this backdrop that the emerging fiscal and balance of payment situation has become a matter of concern in terms of the further deterioration of the macroeconomic situation in the country. There has been no credible fiscal policy in the country over the last four years with the exception of 2008-09. I feel sorry for the current finance minister who has presented two budgets with, unfortunately, none of them seeing the light of the new fiscal year.
It is absolutely clear that the fiscal framework for 2011-12 has evaporated because it was neither based on sound footing nor were any serious efforts made to prepare it. Accordingly, it had to become non-operational anyway. We are in the middle of the first quarter of the current fiscal year and still debating about the new revenue target of the FBR.
I have noted this in the past and would like to repeat that the fiscal framework for 2011-12 will have to be revised, and the sooner we do this, the better it is for the country. The FBR tax collection target of Rs1952 billion was a non-starter even with the ‘success’ of the ‘high tech’ operation conducted during the first week of July. My calculation suggests that the FBR may collect in the range of Rs1800 billion to Rs1830 billion, if we assume a base of Rs1550 billion. Anything beyond this would once again compel the government to indulge in the infamous ‘high tech’ operation.
There are major risks associated with non-tax revenue. Prominent among these are the sale of licences of third-generation cellular services, the Coalition Support Fund, and Rs200 billion from the profit of the SBP in the midst of a declining discount rate. The expenditure plan, therefore, needs to be adjusted downward accordingly to achieve a fiscal deficit target of four percent of the GDP in 20011-12. Budget deficit has averaged over 6.3 percent of the GDP during the last four years. Let the fifth year budget deficit be lower than the average of the past four years for which the government should be ready to take difficult and unpleasant decisions. Lest we do this, the future economic outlook is likely to remain gloomy.
On the balance of payments side, Pakistan has been a beneficiary of external developments. The collapse of food and fuel prices in 2008-09 benefited Pakistan immensely by narrowing current account deficit from 8.4 percent to 5.3 percent of the GDP – an adjustment of over three percentage points of the GDP on account of global development. Pakistan’s current account turned surplus in 2010-11 with major contribution coming from textile exports (over three billion dollars) owing to the unprecedented surge in the cotton prices breaking a 160 year old record and peaked at $2.43/lb in March 2011 from $0.85/lb on June 30, 2010.
Pakistan’s balance of payment is likely to come under pressure in the current fiscal year. Last year’s export performance will not be repeated because of the decline in cotton prices already down by 60 percent from their peak and 40 percent from April 2010. We would be lucky to register a flat growth in the current fiscal year. With imports growing at a normal rate of 10 percent, the trade balance would widen by 39 percent or four billion dollars. Holding other things constant, the current account deficit would likely widen in the range of three to four billion dollars.
The capital account would deteriorate significantly because of the rapidly declining foreign investment, rising debt servicing (amortisation payment) owing to the sharp jump in payment to the IMF (about $1.1 billion as opposed to $268 million last year), sharp decline in disbursement from the multilateral agencies and declining grants assistance. Such developments may create a financing gap which will force Pakistan to seek balance of payments support from the IMF even if the government wants to avoid it.
The future economic outlook appears dismal. No one is taking an interest in improving the situation. Political machinations are taking place all around. Economics is being neglected and the ultimate sufferers are the people of Pakistan.
The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk
