October 26, 2001	Friday	Shaba'an 8, 1422

KARACHI, Oct 25: Pakistan’s emergence as a front line state against the Taliban has inducted potential risks for the economy, and the country finds itself once again at the crossroads.

The nature, scope, magnitude and duration of the ensuing events will determine the long-run outcome. Before the September 11 developments, the economy appeared poised for recovery, though there were significant challenges that needed to be tackled through reforms.

A study by a leading foreign bank says that chief, among the possible risks, is the potential derailment of the economic recovery under way, as well as an interruption of the reforms process. These are, however, outweighed by the likely pay-off associated with Pakistan’s instance. In the best case scenario, Pakistan’s external account vulnerability can be significantly reduced in the medium-term.

The research report indicates that the economy was on a much firmer footing during fiscal 2001 in terms of fiscal adjustments, external account, volume growth in exports, output increases in large scale manufacturing, credit demand by the private sector and the degree of movement in structural reforms. However, the lingering areas of concern were: Anaemic economic growth, lack of robust private investment, continuing flight of capital and slow pace of restructuring of key public entities such as PIA and KESC.

Speaking at a seminar recently, Dr Javed A. Ansari of College of Business Management, however, observed that “the expectation is that the economy will not perform better in fiscal 2001-2002 than it did in the previous year.”

An outright forgiving of all bilateral debt by G-7 can restore current account stability immediately but will not stimulate private capital flow or significantly enhance import capacity which will ultimately depend on export growth. And exports are unlikely to grow fast at a time when global trade is shrinking and voices of protectionism are being heard from the US textile industry. The economic growth cannot be export-led.

Foreign trade is more likely to stagnate in a deepening recession in the US, which is the largest export market for Pakistan. The improved access to European and US imports may or not help exports in a significant way.

Official sources here indicate that major donors like Japan and the US are yet to be convinced that Pakistan’s bilateral debt that is 40 per cent of the total foreign debt stock, needs to be written off. Islamabad is therefore seeking cash grants. Similarly, Dr Ansari sees no major reversal of capital flight in the front line state helping to prosecute a war.

Some of the challenges Pakistan would face in the scenario emerging after Sept 11 were listed by him as follows: A continuing decline in investors confidence, cancellation of foreign investments in oil and gas sector, halt to privatization of financial sector, sharp fall in exports due to cancellation orders, increase in export/ import costs due to substantial increase in freight and insurance rates, and drop in IT exports due to global collapse of computer-related industries.

With falling oil prices in the international market, foreign investors may review their commitments for investment in the oil and gas sector. Personnel working for foreign oil companies, as of other multinationals, have left the country last month.

In the United States, a fiscal stimulus of $140 billion has been cobbled to fight deepening recession and economists see “big governments back in business.” If past experience can serve as guide, protectionism prospers in economic recession, whether by policy decisions or ground realities.

Some economists believe that it is massive injection of funds that can kickstart the economy. It can neither come through significant increase in export earnings or capital inflows in the form of portfolio or direct foreign investment. It is only through massive development spending that domestic business activity can be revived. And the required fiscal space has to be provided by the donors who want Pakistan to help them prosecute their war. At the moment, the prospects appear not to be very remote.