Challenges to growth

Monday, 08 February 2010 11:35

EDITORIAL : Pakistan Institute of Development Economies (PIDE) is a premier economic policy research organisation of the country. Serious consideration must, therefore, be given to its views whenever these are made public.

In its latest Macroeconomic Brief, it has warned that persistent inflation, sluggish activity in the real sector, internal security environment and weak recovery in the global economy present a challenging environment for reviving growth. Inflation had receded in recent months on account of the strong base effect of the previous year, but this effect was expected to phase out by early 2010. Controlling inflation had been problematic due to the depreciation of the rupee, and rising cost of food items, including wheat and sugar. Rising oil prices in the international market would also have an impact on domestic oil prices, leading to increase in inflationary trends.

The Brief notes that a balancing act was required by the government to keep its stabilisation policies on track while maintaining economic activities. External debt had soared by almost $3 billion during the first quarter of 2009-10 due to the persistent increase in external borrowings and the country could again face debt-servicing difficulties. This does not augur well for the fiscal balance in future . Foreign direct investment had dried up due to weak economic growth globally and the law and order situation in Pakistan.

Tax collection, as a percentage of GDP, had actually declined, raising questions about the availability of the much-needed fiscal space for economic stimulus. Increased government expenditures in the past two quarters, on account of the war on terror, the IDPs and the ambitious expenditure outlays by the provinces, combined with lax taxation efforts, do not bode well for fiscal consolidation. On the external sector front, the high cost of inputs, the power crisis and dampened external demand pose substantial barriers for the rapid recovery of exports.

The current account balance had shown a remarkable improvement but there are two warning signs in this development. First, much of this improvement owes to a surge in home remittances and there are questions regarding sustainability of this unusual phenomenon. Second, the trade gap is beginning to widen again as import growth has outstripped export growth in December 2009, on a year-on-year basis. Industrial production has shown some recovery, but a combination of factors, including continued power outages and a tariff hike, increased cost of imported raw materials, the law and order situation and depressed external demand pose significant risks to a lasting recovery in this sector.

The assessment of the economy by the PIDE, highlighting the challenges to economic growth, would appear to be quite pessimistic but, in our view, it broadly reflects the prevailing situation on the ground. There was no need to mince words when the real purpose of the exercise was to raise the awareness level of the public about the gathering storm on the economic horizon. There is no need to go into details, but it would transpire from the analysis of the PIDE that vulnerabilities of the economy and risks to sustainable development have grown to an extent that only a miraculous change of events or a Herculean effort by the government could save the economy from going into a tailspin. Unfortunately, both domestic and external developments have combined simultaneously to give a jolt to the economy. On the domestic front, apart from negative trends in economic fundamentals like stagnant tax revenues and the declining saving rate, non-economic factors, including the war on terror, the increasing challenge to the writ of the government and the power crisis have started to dominate the scene and impact the country s development in a huge manner. This is not all. Continuing squabbling between the political parties, deteriorating governance, increasing corruption and overall uncertainty have added so much to the despondency of the people that they find themselves unable to see the light at the end of the tunnel.

On the external front, rising commodity prices and weak demand for exports are major constraints on our capacity to grow. The irony is that most of the people in authority are aware of the crisis but are unable to do much to reverse the situation. The recent, widely reported resignation by the Federal Finance Minister was probably an indication of his helplessness to successfully tackle vested interests and powerful lobbies and improve the public finances of the country.

The two achievements often cited by the government at various forums are: an improvement in the external sector accounts and a deceleration in the inflation rate. Looking closely, even these positive developments may be hard to sustain. One could easily imagine the consequences of a drop in home remittances or withholding of foreign assistance by donors on the current account. Obviously, nobody can be certain about the continuation of inflows from these sources. As rightly pointed out by the PIDE, a higher base of 2008-09 is largely responsible for the recent deceleration in the inflation rate and this phenomenon is not likely to continue in the coming months.

All told, the economic situation of the country is really tough at the moment and there is no doubt that the government has to fight on a number of fronts to overcome the challenges facing the economy. Such a task is bound to be all the more difficult when it has to continuously contend with terrorism and political bickering most of the time. Honestly speaking, it is very easy to find faults with the economy, which we often do, but very hard to fight on so many fronts and, at the same time, devote the needed attention and energy to ensure sound economic management.