December 30, 2002	Monday	Shawwal 25, 1423

Many positive developments were witnessed on the economic front during the last 12 months. To start with, foreign exchange reserves soared to $10 billion. The foreign trade came out of its mode of stagnation and both exports and imports showed a marked improvement with the trade gap shrinking noticeably compared to what was recorded in the previous 12 months.

The rupee gained considerably vis-a-vis the dollar and a new kind of strength was clearly visible in the domestic currency. Consequently, the current account deficit also posted a marked improvement. Revenue income too showed a new kind of vibrancy with the collection in the first six months of the current financial year surpassing the targets, especially in the sales tax sector. Inflation as usual remained very low.

Banking reforms going on for the last ten years seemingly started yielding the desired results as interest rates came down significantly during the year.Meanwhile, the stock exchanges too remained extraordinarily bullish in a period when most other stock exchanges in the world kept dipping all the time. Though in the first six months of the current year, the government borrowing for the budgetary purposes remained rather on the higher side but with the stabilization of most of the macroeconomic indicators, the fiscal year is likely to end with both the overall budgetary deficit and the GDP growth rate meeting the targets fixed for the period.

During this period(last 12 months), the multilateral aid agencies, like the World Bank, the IMF and the Asian Development Bank, kept injecting highly concessional resources in Pakistan’s economy. Most of these resources, amounting perhaps to about a little over a billion dollars were disbursed by these agencies to help the country finance the long term reforms in various sectors of the economy. Bilateral assistance which had gone up to nearly 2 billion dollars in the previous fiscal year tapered off to almost next to nothing in the last six months.

Still, the resources coming in through the private channels connected to the US assisted operations inside the country against the suspected Al-Qaeda elements did contribute significantly to the expansion of the irregular economy. Meanwhile, almost all the major official bilateral donors have signed their respective debt rescheduling agreements with Pakistan giving a concrete shape to the generous accord which the members of the Paris Club had signed with Islamabad last year in December.All these positive developments point to a turn-around in the domestic economy despite the continued drought inside the country and a depressing external economic environment.

The real economy, however, appears to be still in a kind of doldrums. Despite the significant decrease in bank rates and expansion in the liquidity with the banks, there appears to be no enthusiasm in the private sector to come out of its hibernation and start taking major investment decisions. That is the reason why despite the extraordinary performance of the domestic stock exchanges, there is a concern among the knowledgeable circles about real investments. In the last three years including the 12 months under discussion no new company was floated on the stock exchanges.

Small savers do not know where to invest their money. Stock exchanges, on the other hand have become more like gambling casinos. Overall production has continued to stagnate. The rate of unemployment continues to soar. Poverty, despite the so-called improvement in the delivery system at the grass roots due to installation of local governments and implementation of various relevant programmes under the three-year Poverty Reduction and Growth Facility (PRGF) over the last 12 months, appears to have expanded. Life in rural Pakistan continues to be very difficult with income sources for the poor disappearing further because of the continued drought.

The microfinance efforts do not seem to have begun yielding the desired results so far. The urban centres which depend crucially on the farm sector for keeping their machines moving too as a result of lower agri production seem to continue to find it ever more difficult to accelerate the wheels of their industrial units. The government has allocated over Rs. 150 billion this fiscal year for public sector development projects. The allocation though considerably higher than what was budgeted annually in the previous years, is still too small to make any positive difference to the overall situation.

The government continues to claim that most of the mega projects—about 12 or so in all— which were announced by the President in August last year have been taken in hand and that they were in various stages of implementation. But the impact of such a massive economic activity in the public sector does not seem to have been felt by the masses at large so far. Without meaning to cast doubts about the official claims in this respect, one would like to be convinced, in the larger national interest, that what is being claimed is not all propaganda.

There are three major factors affecting the real economy in this country—food production, population growth and the rate of literacy. In order to be able to reach the take-off stage, we must be able to produce our own food on a sustainable basis, keep the population growth rate within reasonable limits of say less than 2 per cent and acquire a rate of literacy of at least 75 per cent. All this cannot be achieved even in a decade. But a real beginning needs to be made at this juncture and urgently in the right direction by making the most of the turnaround in the economy achieved in the last 12 months.

The government still appears rather reluctant to expand public investment because of the conditionalities of the multilateral aid agencies. The government has convinced itself that the macroeconomic stability that it has achieved over the last 12 or so months is the result of keeping a tight leash on public spending over the last three years. This the government has come to believe was the reason why the rate of inflation has remained so low all these three years facilitating a significant cut in bank rates. It has come to believe as well that the expansion in exports and imports and increase in revenue collection too have come about because of these IMF-driven tight monetary policies. And the biggest success story of the regime—the accumulation of record $10 billion in the foreign exchange— too is being attributed to the same policies. However, the regime’s official economic managers seem to have missed the trees because of the forest.

They seem, for obvious reasons, rather reluctant to factor in all the positives that came their way after the 9.11. Until 9.11 the world had wanted to keep Pakistan from drowning fearing a domino effect which would have impacted adversely on the regional economy. It had actually wanted to keep it afloat by providing it small doses of timely relief and assistance. The 9.11 incident changed all this. Now the world was more interested in keeping in business the regime itself which agreed to take a complete political U-turn. So, came the billions and a historic bout of debt relief. This more than neutralized all the 9.11 related negatives which otherwise would have caused our economy to go the Argentinean way because of the strict adherence to the IMF conditionalities, the major thrust of which had been macroeconomic stability through lowering budgetary deficits.

The Fund and the World Bank seem to have convinced the official economic managers that once they achieve the so-called macroeconomic stability through strict observation of the conditionalities, the private sector would automatically start investing in real earnest and that will bring the country to the take-off stage. In the first place, no country in the world has so far been able to enter the take-off stage by following the IMF mantra. In fact by the time they entered the final stages of the Fund programmes, most of these recipient countries have been gripped by what is commonly known as IMF riots.

And secondly, Pakistani private sector is not a genuine private sector. It is a product of permits, licences, protection, concession and spoon-feeding by the government. To expect that this community would enter the unchartered territory of making profits by taking genuine business risks is like asking a man who has never entered the water to take a dip in a rough sea. So, while we have been saved by 9.11 from certain IMF-induced economic chaos, the continued wait for the domestic private sector to start doing what it had never done is likely to make us miss the chance of a life time provided by the 9.11-induced turnaround in the economy.

It is therefore, necessary that the government should immediately take in hand an expanded public sector development programme so as to enable the economy to start growing at a reasonable rate, generating the needed resources for the government and the required number of jobs to accommodate the increasing troops of the unemployed. As of today, there appears to be no hope of Pakistan attracting foreign investment in any significant amounts first because of the disturbance in the region over the threat of war against Iraq.

Secondly, the continued uncertain law and order situation inside the country seems to have served as the biggest dampener against such a development. So, the government should stop expecting the investors, both local and foreign to enter the market to make profits taking advantage of the macroeconomic stability it has achieved and start investing instead on its own so as to facilitate lowering of the poverty line from the present 40-45 per cent to 20-25 per cent in the next 10 years or so.