As the number of stakeholders increases with liberalization and privatization of the economy, the need for reliable information on key economic variables becomes all the more important as they have to personally face the consequences of economic decisions. Transparency has become one of the buzzwords.

In Pakistan, this information about the performance of the economy becomes available in two annual documents, namely the Economic Survey, published by the Ministry of Finance,and the Annual Report of the State Bank of Pakistan. The former, is released on the eve of presentation of the Budget, mostly in mid-June.

Due to the time constraint, the data is partial and in the nature of estimates, rather guesstimates. As a result, the assessment based thereon is, at best, tentative. The State Bank’s Annual Report comes out three to four moths after the financial year is over and most of the required information for the year is available. Based on a firmer data the assessment can be more realistic. The State Bank, being the central bank of the country and an autonomous agency not hampered by any slant considered necessary for government, is expected to give an objective assessment.

The events of 9\11 in New York are to prove a watershed in human history as it has unleashed cataclysmic forces that are gaining force and new dimensions every day. As a result, the world is not going to be the same for sure. Pakistan has been deeply affected by the event. The massive military operation launched by the US government against terrorism in Afghanistan has once again made Pakistan the front state for the US.

The full implications of Pakistan becoming the lynch pin of the campaign are not yet fully realized and are gradually manifesting themselves, If any thing, over night an international pariah became the darling of the US and its other Western allies. In purely economic terns, this has been a God-sent; relieving Pakistan of the bind it was in. All doors of financial help had been slammed in its face in response to the nuclear explosion in May 1998 and a default in international obligations stared in the face. They have suddenly opened and with a red carpet. Money in various forms and from diverse sources started pouring in. The SBP report details the temporary set back and subsequent benefits supporting the country’s balance of payments. In short, a bulk of the external debt has been rescheduled or re-profiled and the country never had it so good so far as the foreign exchange reserves are concerned. Authorities are crying hoarse about the comfortable reserve position and also claim to have reduced the stock of external debt. These are very rare events for Pakistan and must be looked into closely.

There has been an increase of $2.8 billion to $4.8 billion in the reserves held by the State Bank during 2001-2. The Report gives the details on page 167 as to how this has come about. This is a very useful piece of information that can help understand whether this is attributable to any fundamental improvement in the economy or is of fortuitous nature and hence temporary and not sustainable.

There was a total gross receipt of $6.65 billion coming from: purchases from the market ($3.9 billion) of which $1.4 billion was from the kerb market and $2.5 billion (net) from inter-bank; loans $1.5 billion; grants ($0.7 billion) from the USA ($0.6 billion), the UK (0.04 billion) and SAMA ($ 0.05 billion); and other receipts ($0.6 billion), accounted for by logistic support ($0.3 billion), UN troops ($0.06 billion), receipts ($ 0.2 billion) representing interest on deposits ($0.09 billion), CRR ($0.07 billion) and Libyan deposit ($0.05 billion). On the other hand, payments were $ 3.9 billion, mostly on account of external debt and FCAs. Thus the explanation lies primarily in receipts, of which the US campaign in Afghanistan directly accounts for as much as $1.1 billion or over one-third (39.3 per cent). As will be discussed later, the availability of external loans broke the unofficial embargo against Pakistan and this was also made possible by the Afghan affair. They contributed more than half (53.6 per cent) of the inflow. This leaves the purchases from the market.

The very fact that the State Bank could make the purchases without causing a ripple in the exchange rate was indicative of the market depth and the supply and demand situation there during the year. The demand had slackened due to lower imports, and new difficulties in travel abroad. At the same time, supply improved considerably due to a phenomenal increase in the workers’ remittances from abroad in cash through official channels. The remittances more than doubled from $1.021 billion in 2000-1 to $ 2.341 billion during 2001-2. The State Bank Report has explained it: “Indeed the turning point was the international crackdown on Hundi network, and the consequent collapse of the kerb premium favourably changed the market dynamics.” There is more to it.

It is very significant that the increase in the remittances took place after 9/11 and almost entirely from non-conventional regions and countries, rather unexpectedly. The remittances during Oct 2001 through June 2002 were $ 2.02 billion as against $ 0.671 billion in the corresponding period a year earlier. During July-Sept. 2001, they were only $ 0.325 billion. Countries in the Gulf Region have been the traditional source of remittances.

They were, however, relegated to a secondary position as the share of non-Gulf countries rose to 54.3 per cent during 2001-2 from 32.1 per cent in the preceding year. Within this group, the most spectacular increase has been in the case of USA, from $ 135 million to $ 779 million, its relative share in total remittances improving from just 13.2 per cent to 33.3 percent. The reason is quite obvious. It is the environment that has developed there in the post 9\11 era for Muslims in general and Pakistanis in particular.

The situation in regard to external debt has certainly eased. That sword of Damocles, that is the constant danger of default has been averted, at least for some time, and fresh inflow has increased substantially. This has been a big help in building up the foreign exchange reserves, as indicated earlier. Authorities are creating a kind of euphoria and a false sense of complacency in the country by using the euphemistic terms of “aid”, “assistance” or “donation” for the ugly word of loan.

International financial institutions are called “donors” in stead plain “lenders.” A thorn remains a thorn whatever beautiful name it may be given. The fact of the matter is that aid, assistance and donations without any future liability for the recipient are things of the past and are now only an exception. With the end of the cold war, there is, no “free lunch.” Another confusion quite prevalent in Pakistan is between debt liability on account of principal or the stock of debt and its cost by way of interest or by any other name like service charge.

A relief in the latter is presented as if it has reduced the former. For a proper perspective the nature of debt relief available after 9\11 must be indicated. Rescheduling or reprofiling of debt simply means that the period of repayment of principal is stretched and it need not be paid during the grace period. In any case the liability on account of principal remains. The arrangements also deal with the question of interest and this is negotiated afresh. The new rates may be higher if the lender wants to make up for the cash flow loss because of the grace period and longer maturity of the loan. It can be less if the lender is considerate enough.

In case of rescheduling and reprofiling obtained by Pakistan under the Paris Club, the period of maturity has been extended to 5-38 years with a grace period of 3-15 years. The new interest rates have been indicated but were to be negotiated with the individual creditors. The process was to be completed by end-Sept 2002 but Pakistan has sought and obtained extension till end-Dee 2002. This amounts to shifting the burden from the present generation to the future generation.

Other elements in government strategy to deal with external debt have been to replace expensive short-term debt by cheaper medium and long-term debt. As a result, public and publicly guaranteed debt has seen a significant structural change. Over the year 2001-2, short-term debt fell from $257 million to $ 183 million while medium and long-term debt rose from $27.9 billion to $ 29.1 billion. Within the latter category, expensive commercial loans/credits dropped from $1.1 billion to $ 0.314 billion.

Has this brought any significant immediate balance of payments relief to Pakistan? The answer is emphatic no, not because of the arrangement but because of large fresh borrowing. The US authorities rewarded Pakistan for its willingness to go along by withdrawing economic sanctions that it had imposed after the nuclear explosion and a cash grant of $ 600 million. This was a signal to national as well as international financial institutions and other allies to unlock their purses.The IMF promptly responded with a $ 3 billion cheap Poverty Reduction Growth Facility.

Other IFIs also became keen to lend. Pakistan expected debt write-off by the US in a big way but this did not materialize. Instead, the US acceded to the Pakistan request of debt write-off of $1 billion but is dragging its feet through the procedural requirement, even though a year has passed by. Actual loan disbursements increased from $2.8 billion to $ 3.0 billion External debt further increased by $1.276 billion over the year to $ 33.400 billion as of end-June 2002.

This is quite paradoxical to official announcements that government has successfully reduced external debt by as much as $ 2 billion. Here is a problem of semantics. Pakistan’s foreign exchange liabilities have two main components namely external debt and foreign exchange liabilities, the latter relate to FCAs held by Pakistanis. In order to comprehend the both, the official term is “Pakistan’s External Debt and Liabilities.” In claiming credit for reduction, the full title is not used but only the first part and that makes it confusing, if not misleading. It is true that the overall amount has declined not in external debt but in external liabilities.

That is hardly any comfort. It is not the first time that these liabilities are being liquidated. There was a huge reduction due to notorious episode of May 1998 and just by a stroke of pen the foreign liabilities to Pakistanis was liquidated to the tune of $ 11 billion. The reduction of $ 1.9 billion in these liabilities is a natural sequel to that. These liabilities are the periphery of the problem and the core is external debt and that should be the main focus of any policy-making and its execution. It is very significant that external debt will not show any reduction in future but continue to grow.

According to the SBP report, (p. 151) medium and long term debt will increase from $ 27.3 billion in 2002, to $28.2 billion in 2003 and $ 29.1 billion in 2004.The liability to the IMF, which rose from $ 1.529 billion in 2001 to $ 1.939 billion in 20.02, will further increase to $ 2.115 billion 2003 and to $ 2.168 billion in 2004 largely on account of the much touted low cost PRGF. Short term commercial and IDB loans will go up from $ 497 million in 2002 to $ 940 million in 2003 but come down to $ 837 million in 2004. On the other hand, defence and Euro and Sainak bonds will decline by $ 391 million to $ 870 million over this period.

The events after 9\11 have proved a blessing in disguise for Pakistan, so far as its overall impact on the economy is considered. However, it must be recognized that this has been due to special factors and is in the nature of temporary respite, providing sorely needed breathing space. Meanwhile, the economic fundamentals have continued to be very weak.

National income accounts are the best indicators of performance of an economy. It is a sad commentary on the statistical system of Pakistan that revised accounts for 2001-2 are not available as yet even with a time lag of four months. The State Bank Report had, therefore, to use the Estimates based on the actual performance of the economy during the first nine months of the year supplemented with guess for the remaining period released in the Economic Survey in June 2002.

As the experience has been, there is an element of optimism in the Estimates and the actual performance almost invariably turns out to be much less. Delay in availability of fiscal data used to hold back revision of national income accounts but this difficulty has since been removed. The State Bank Report has the revised fiscal data. Intuitively the revised growth rate for 2001-2 may be expected around 3 per cent. This would be closer to reality, even though it may not please the purist. Sticking to the official Survey rate of 3.6 per cent, the average growth for 3 years has been 3.4 per cent, according to official Estimates, This does not compare favourably with the average rate of 4.6 per cent for “The Lost Decade” of the l990s and 6.5 per cent for the l980s.

At the present stage of development in Pakistan, the behaviour of commodity pProducing sectors is of crucial importance. This rate of growth, according to the preliminary official estimates was only 2.1 per cent. Though better than last year’s dismal rate of 0.2 per cent, it falls short of the rate of population growth in the country. The average rate of growth for the last 3 years works out to 2.03 per cent. In the 1990s it was 4.7 per cent The rate of growth in the agriculture sector during the year was only 1.4 per cent, the 3-year average being 1.5 per cent. The services sector improved from 4.8 to 5.3 per cent because of Public Administration and Defence which more than offset the drop in the rate for other sub-sectors. Increasing at the unprecedented rate of 18.2 per cent, as against 1.1 per cent in the previous year, its relative share in GDP has improved from 6.4 to 7.3 per cent.

There is an inherent significant bias in the methodology which help show better growth rate. The constant rates of growth are assumed for years at a stretch for small scale manufacturing (5.3 per cent), ownership of dwellings (5.3 per cent), and other services (6.5 per cent). Together, these sectors account for no less than 27 per cent of the GDP. These assumed rates are obviously unrealistic. For instance if the rate of change in cement output is taken as a proxy for ownership of dwellings, the rate during 2001-2 should be 2.7 per cent.

Economic growth has a positive correlation with investment. This too continues to be a very weak area. The rate of gross total investment continued to decline and was down to 13.8 per cent during 2001-2 from 16.2 per cent in the preceding year. The 3-year average works out to 15.7 per cent The fall during the year has been in the public sector where gross fixed investment dropped from Rs 214.8 billion to Rs 175.8 billion or by 18 per cent. Another disturbing aspect of the investment-saving equation is a further reduction in domestic saving whose rate to GDP dropped to 13.8 per cent from 16.9 per cent. In other words, the marginal rate of domestic saving, instead of being positive, has been negative and this does not augur well for economic management.

It is not only the quantum of investment that matters for growth, the nature and quality of investment and the efficiency with which the resources are used. A chandelier in PM’s office worth Rs 20 million may count as investment but does not in any way enhance the productive capacity of the country or more efficient office management. It only increases consumption of electricity, adding to the existing acute shortage forcing frequent load shedding. A lot of investment for balancing and modernization of textiles is reported but the machinery being installed is second hand. Apart from the possibility of over invoicing of such imports, Pakistan cannot hope that the output of the discarded machines and technology would be able to compete in international market with that of the state of art machines and technology.

Improvement in efficiency in use of resources, captured under productivity, has as much, if not more, bearing on growth as the stock of resources. This aspect given so much importance in developed countries as to be studied constantly, has been completely ignored in Pakistan. There has been no study worth the name to record and analyze productivity trend in the country. It is only recently that a book entitled “The Rise and Fall of Industrial Productivity in Pakistan’ by Shahida Wazarat has come out. As the name of the book goes, the study is confined to the industrial sector and stops at 1990-1. Even so, it is extremely useful and can and should serve as an eye opener. It reveals that Total Factor Productivity Index, which had improved to 132.39 in 1964-65, gradually dropped to only 25.53 in 1990-1. There is no reason to believe that the rot has stopped subsequently. This is quite obvious from the large unutilized industrial capacity in the country.

Another crucial area of concern is exports performance. Despite the avowed official attention, exports have remained practically stagnant. It is a pity, to say the least. The problem is not with the availability of exportable surplus but its handling. Only two instances should explain this. Pakistan has been in the business of export of raw cotton from day one, but it has to be sold in international markets at a discount because it is contaminated. There is an exportable surplus of wheat to the tune of 2 million tons but is not moving and is rotting for want of inadequate storage. During 2001-2, the quantity of wheat actually exported was only 0.643 million tons worth $ 71 million. The reason is no secret; it is not clean according to the international standards. Iran and Iraq need wheat in a large quantity and evinced interest in import from Pakistan, but shied away on that very account.

With respite in the foreign exchange situation, all stakeholders must now seriously address the structural weaknesses in the real fundamentals of the economy. To this end, it must be realized that the malaise is quite deep and there is no quick fix even in normal circumstances. It will be all the more difficult, if not impossible, in the new radically different environment in which international norms and not the local traditional ways will prevail. In this, there will be no place for weaklings and only the fittest will survive, both abroad and at home.