October 29, 2001	Monday	Shaba'an 11, 1422

IN the wake of rapid developments following September II, 2001 terrorist attacks on New York and Washington and the resulting US-led allied attack on Afghanistan from October 7, Pakistan economy faces a severe crisis.

At least, the next eight to ten weeks are very crucial and Islamabad may have to review its economic and fiscal targets for financial year 2001-02 in the third quarter between January and March 2002 to make adjustments vowing to the circumstances thrust on it after becoming the front-line state once again.

The economic mangers’ team of General Pervez Musharraf headed by Federal Finance and Economic Affairs Minister and Governor State Bank of Pakistan have, in fact, been put to test for the first time in two years of the army regime rule and in would be interesting to watch as to how both of them manages to tackle the crisis and save the national economy from severe crisis..

According to the initial estimates, based on a report jointly prepared by the Ministry of Finance and the Planning Commission, Pakistan’s economy has been put under heavy strains by the prevailing circumstances and it would be very difficult, rather impossible, to achieve various economic and fiscal targets like revenue generation, budget and trade deficits, balance of payments, exports etc.

How much the national economy is to suffer, according to the initial estimates is briefly discussed in the following paragraphs:

Pakistan’s balance of payments position, the gap created by revenue generated through exports and amount utilised on imports, would be adversely affected by the prevailing uncertainty which may prolong for months together.

The trade deficit will increase enormously. In terms of exports, it will be difficult to achieve rather ambitious target of $10.1 billion for 2001-02 and the earnings may be around $8 billion at the maximum.

Revenue collection target of the already downwardly revised target of Rs444 billion may also not be possible to achieve as the first quarter of July—September, 2001, has ended on a loss of Rs5 to 7 billion in revenue collection and no signs of improvement on this front are visible.

The fiscal deficit for financial year 2001-02 had been targeted at 4.2 per cent of the gross domestic product (GDP). But it may instead go up to between 4.8 to 5 per cent by the end- June 2002. Likewise, inflation was projected to be around 6 per cent for the current financial year which now may be higher though still in one digit.

Not only foreign trade has virtually come to a grinding halt and turned into negative but tourism, aviation, hotels and insurance sectors have also suffered heavily with business slump in just the first of the prevailing crisis.

Tourists traffic has reduced considerably with people avoiding air travel. PIA earnings have come down with a number of domestic and international flights being cancelled for want of passengers. With substantial increase in reinsurance charges in view of the current developments, insurance business has already suffered a loss to the tune of more than 30 per cent.

Furthermore, letters of credit are not being opened and those already opened with the banks are not being honoured and imports have come down by almost half. Less imports would obviously have severe adverse effects on revenue collection by way of import duty, customs duty, sales tax etc.

With exports also down the slide and considerably reduced level of imports, the overall industrial production is being hit. Due to reduced production activities, the industrial sector may be forced to lay off one shift of its workers during the next calendar year as there are no signs of any improvement.

In view of this and much more, it was assumed that the revenue receipts and budget estimates may have to be revised and fiscal deficit may increase substantially.

In the report on economic situation, it was pointed out by the team of economic managers that under the prevailing circumstance, Pakistan would require at least $2 to 3 billion assistance annually for the next couple of years or may be even more. There have been announcements of assistance by donor countries and agencies but no firm commitment or disbursement has so far been made.

For tiding over the economic crisis, the army regime is seeking $5 billion under the Poverty Reduction and Growth Facility (PRGF) Programme from the IMF and relief by way of writing off and rescheduling of bilateral loans of $12 billion from USA, UK, Japan, France and other members of the Paris Club.

Apart from the conditionalities involved, the IMF officials have informed Islamabad that since Pakistan’s quota in the Special Drawing Rights (SDR) is about $1.3 billion and as such Islamabad’s request for $2.5 billion in the first phase of $5 billion under PRGF programme cannot be acceded to. At best, Pakistan can get $1.5 billion under PRFG at a mark up of 0.5 per cent and another &1 billion under Extended Fund Facility (EFF) with a mark up rate of 6.5 per cent per annum.

This much for the first three years and rescheduling of $1.8 billion from the Paris Club members will also be done for the same period subsequently.

The IMF want Islamabad to comply with the conditionalities already agreed upon whereas the Finance Ministry insists that Pakistan has already fulfilled the metrics of the Fund and the World Bank.

Pakistan want to secure Fund assistance maximum by November 30, 2001 but the indications are that though assistance would be coming but not earlier than early next year.

On the whole, the international donor agencies, namely the IMF, the World Bank and the Asian Development Bank are working on a package of about $6.2 billion for Pakistan but the process of formalities would take sometime. The next 8 to 10 weeks are very crucial for the national economy as its will be determined during this period: whether it grows or stagnates.

Adverse impact can be faced without substantial assistance from the donor countries and agencies. But this would not be a smooth sailing. Islamabad would have to pay a heavy price for being the front-line state once again.