January 5, 2003	Sunday	Ziqa’ad 1, 1423

KARACHI, Jan 4: What is the future for a developing economy and an emerging market awash with liquidity? Is the economy poised for a take-off towards higher growth as perceived by the State Bank?

Economists reckon that there is an opportunity that should not be missed. Some indication of the future comes out from the quarterly report 2002-2003. Independent economists, however, do not fully subscribe to the optimism expressed by the central bank but concede that present momentum of growth may be sustained. For the take-off, they feel that the challenges in some key areas have to be overcome.

But first the positive developments. There is a marked improvement in the balance of payments position. A remarkable achievement is the building up of foreign exchange reserves to over $9 billion, that has strengthened and stabilized the rupee. The inflow of dollars is much in excess of the market and government demand. The opportunity to build up reserves has been offered by the absence of large-scale capital spending\investment that could serve as an engine of growth. “Indeed, they (reserves) reflect the country’s ability to meet the foreign currency claims arising from private or public sector spending,” says the SBP report. The forex reserves do not constitute the funds available to the government for investment. The government money comes from fiscal measures, a portion of which is earmarked for development.

The State Bank is using the money for pursuing monetary policy. It is intervening in the currency market to buy forex exchange in excess of the demand to support the dollar and manage a gradual appreciation of the rupee. And the rupee proceeds of these dollar purchases are mopped up through T/bills, because SBP says, the excess liquidity could plunge interest rates and force banks to increase exposure to higher risk borrowers.

So, neither the private sector nor the government is in a position to absorb a substantial portion of the dollars and the rupee sale proceeds. The challenge is to spend these dollars on economic development. It requires policy changes.

In the first quarter of current fiscal, the gross credit disbursement has failed to increase for the first time in the last six years. The comparable figures are Rs263.3 billion (2003) and Rs264.6 billion (2002). The slower offtake can partially be explained by a low 2.2 per cent growth rate in large-scale manufacturing industry.

A top banker says that slower off-take of credit indicates that there is a little recession somewhere in the economy. Yet another explanation offered by the banker is that the credit growth is no longer textile-driven for modernization. It is the energy sector that now is the top claimant.

But the State Bank differs. Lower credit disbursement, it says, “does not necessarily mean a slowdown in economic activity.” A portion of the massive increase in home remittances, (“reverse flight” of capital) could have been used for self-financing of business activities.

Besides, the improved corporate profits may have also been a source of internal financing.

The State Bank report says that 44 of the 100 companies in the KSE-100 index reported their full-year audited earnings for fiscal year 2002. On aggregate, the companies reported a 14.6 per cent earnings growth. Excluding HUBCO (which booked one-time accounting gains in FY2001), the aggregate earnings growth of 43 companies jumps to 31.6 per cent.

The balance-sheet of scores of companies have yet to come. To quote the Karachi Stock Exchange annual report 2002, only 340 companies have announced their results early December against 647 companies by early November 2001. The comparative figures for profit-making companies, for results announced, are 234 and 422 respectively.

No doubt, the corporate sector has strengthened its existing business. The growth in industrial sector output is explained by more efficient and enhanced utilization of existing capacity. Big textile groups are modernizing their plants to face WTO challenges. Many inefficient units have also closed down.

According to KSE report, the paid-up capital in listed companies rose sharply from Rs235 billion to Rs291 billion in 2002. The number of firms quoted on the exchange declined from 747 to 717 either due to de-listing or mergers. The number of new companies listed in 2002 was just four against three each for previous two years.

For realizing the growth potential of 5-6 per cent, new investment and more listed companies are required. A seasoned banker says that the demand for long-term finance is flat. There is surplus capacity in traditional industries like sugar and cement. The credit demand for investment in fertilizer is flat. Big public sector companies have been restrained from making long term investment, awaiting privatization. The is not much demand for credit.

The President of the Habib Bank, Zakir Mahmood, says it is the best time to borrow and to investment because of low interest rates which means less capital cost. He believes that interest rates have been sharply reduced and they cannot come down further to the extent they have been brought down over the past few years.

It takes some time to venture into new areas and to make a significant impact, said another banker, referring to funding of SMEs, housing and consumer durables. Rhetorics precede actual delivery. Chairman, Atlas Autos, Yusuf Shirazi says that Pakistani professionals living abroad want to come back but there is no opportunity for them. There is dire need to invest in high tech industries and production of value-added goods. He also complained large-scale industries are being discouraged.

The cost of doing business has also discouraged investment. Dwelling on cost structure in the company’s annual report 2002, the Chairman of Farooq Textile Mills, Mohammad Farooq Sumar, says the increase in fuel power costs went up by 12 per cent. He laments that despite a stronger rupee, oil imports have not kept cheaper.

To provide impetus to growth, the view that government spending must be increased substantially to boost business activities is gaining ground. “You have to put money into the people’s pocket,” to create domestic demand.

To some extent, the home remittances, including “reverse flight capital” is creating demands. The rise in real estate prices, the meteoric rise of the stock market and higher consumer durable sales are also explained by flow of remittances.

When countries suffer balance of payments,(BoP) they seek IMF bail-out. IMF steps in to help improve BoP. Pakistan no longer faces the balance of payments problem. The Fund is no longer needed and their prescriptions have become irrelevant. Now there is opportunity and also the fiscal space to raise development spending to kick-start the economy. Growing fiscal deficits can be sustained by prudent spending and productive use of money. If inflation rises by 1-2 per cent, it can be taken care of by growing employment.