January 6, 2003	Monday	Ziqa’ad 2, 1423

Most of the economic indicators have entered a positive mode in recent months. However, despite the remarkable improvement in the revenue collection in the first half of the current fiscal, the annual domestic savings rate is not likely to improve beyond 14-15 per cent of GDP because of the unending demands on the national resources from the financially unmanageable, and chronically inefficient Wapda and the KESC.

And with domestic savings at such low levels, overall investment is likely as well to remain no more than 15 per cent and that too only if the public sector investment aided by official help from abroad is kept at least at the current levels in absolute terms. As of today the private sector is showing no signs of life. But even if both public and private sector were to become suitably active and between them try to improve the investment rate, the abysmally low rate of domestic savings would not let them take the rate to more than 16 per cent.

But Pakistan needs an investment rate of about 22 per cent in order to be able to grow at a sustainable rate of about 7 per cent without which it cannot sustain the modicum of macro economic stability it has achieved in the last three years and get out of its under-development grove, more so in the face of its current rate of population growth which is still nearer to an unacceptable 2.5 per cent. But how does one take the investment rate from 16 per cent of the GDP to 22 per cent when the domestic savings rate is no more than 14-15 per cent, bridging a gap of a good 7 per cent of the GDP. In normal circumstances such a gap would be attempted to be filled by combined investment efforts of the public and the private sectors, with the former being helped by official donors and the latter being generously boosted by foreign direct investment.

Let us first take the public sector efforts that were made in the first quarter of the current fiscal year. The total revenues during this period increased by over 33 per cent compared to what was collected in the same period last year. This increase was partly offset by over 9 per cent increase in expenditure made up of over 60 per cent increase in development expenditure and over 16 per cent in current expenditure. While in percentage terms these increases appear rather significant, in absolute terms they mean next to nothing as their respective baseline were too low.

Long-term capital (official) posted the sharpest reversal from outflows of $261 million in Q1-FY02 to inflows of $91 million during the same period this year. This is due to the availability of significant funds for the structural adjustment programmes from the World Bank and the ADB. The inflows on account of project assistance from countries like Japan, the US, Germany and France were also increased. Looking forward, the foreign economic assistance is likely to increase as IFIs and donor countries have recently increased their commitments to Pakistan. Still, official foreign dole has never been able to make much of a difference in the overall investment picture and even if it did in extraordinary times, it has never sustained beyond a couple of years.

The performance of the domestic private sector investment activity can be gauged from the credit take-off in the first quarter. It was too slow. According to the State Bank’s first quarterly report. this slower take-off was understandable. Higher retirements, sharp increase in tax refunds, bad loans write-off, lower input prices, etc,were the important contributors to the apparent decline in net credit figures. Since then, the prospects of the economy have improved substantially with domestic interest rates at their lowest, a strong recovery by exports, a reduction in border tensions with India, etc; all of which should have spurred economic activity ( and increased funding demand). In the event , according to the SBP report, the net take-off for Q1-FY03 proved substantially lower than even for Q1-FY 02 figure.

This is obviously contrary to expectations, as quarterly projects had envisaged an expansion of Rs9 billion. The picture according to the report becomes even more depressing considering the adjusted net credit figures. This is despite the fact that the retirement in the key sub-component net credit for export finance in Q1-FY 03 (Rs7.7 billion) is lower than the Q1-FY02 (Rs12.1 billion). The gross disbursement figures according to the report provided a more interesting comparison. On the face value, it seems that the gross disbursement are immune to the slowdown visible in the net credit figures; Q1-FY03 gross disbursements of Rs263.8 billion were almost unchanged from the Q1-FY 02 figure of Rs 264.6 billion. However, this also means that gross credit disbursement has failed to increase for the first time in the last 6 years.

The SBP report tries to explain away this slow-down in credit off-take by attributing it to the following three factors:

1. The massive increase in remittances, which essentially represent an inflow of resources to the private sector. A substantial portion of these could have been used for self-financing of business activities.

2. Expectation of a further sharp decrease in domestic interest rates, which prevailed for much of Q1-FY03, would have led business to minimize the credit off-take at prevailing interest rate levels. In fact, this would also help explain the difference between the gross and net credit figures, i.e., businesses could be even more relying on short term funding, which would be repeatedly rolled over ( increasing gross credit even as net credit remained unchanged), in anticipation of an interest rate cut in the near term.

3. Political uncertainty (and more specifically, policy uncertainty) ahead of the October 2002 elections would also have lowered credit demand.

If these explanations hold, the SBP report said, then the latter half of Q2-FY03 should see a relative improvement in net credit to the private sector once expectations on the interest rates and political uncertainty stand resolved( This, however, did not happen). This said, however, an increased element of self- financing is likely to keep net credit figures lower than the projection.

The situation on the front of direct foreign investment was even worse. According to the SBP report during Q1-FY03, the capital account saw a modest $26 million increase in net foreign investment over the corresponding period last year, but this low growth is a little deceptive. Excluding the repayment of Special US Dollar Bonds during the first quarter, the net foreign investment jumped to $157 million due to the exceptional growth in the Foreign Direct Investment (FDI), mainly in the oil and gas sector. The pick-up in FDI, according to the SBP report, could be taken as an indication that the commitment to economic reforms, and the lower foreign currency risk ( due to stronger reserves) could pay rich dividends going forward if complemented by investments in human capital and infrastructure.

In terms of foreign portfolio investment ( FPI), the outflows increased to $129 million during the Q1-FY 03 as compared to $53 million during the same period last year. However, , the Q1-FY03 outflow was driven mainly due to Special US Dollar Bonds whereas last year outflow was mainly from domestic equity markets;outflows from the stock markets decreased sharply from $47 million to $3 million during Q1-FY03, following an initiation of a bullish trend in KSE-100 index.

Other long-term capital comprise suppliers credit, PAYE loans and swaps. Despite the increased inflows under PAYE loans, the net outflows under this head posted a mild increase of $11.0 million to reach $358 million in Q1-FY03. The main reasons of this increased outflow were the closure of swaps ($230 million) and higher repayment of PAYE credits during the Q1-FY03.

Short-terms capital exhibited outflow of $50 million during Q1-FY03 relative to inflows of $32 million during the corresponding period last year. Traditionally, borrowings under this head largely represented short term financing for oil imports. However, the ample forex interbank liquidity led to lower borrowings during Q2-FY02 and Q1-FYo3. Also,, the lower FY02 borrowings meant that Q1-FY03 re-payments were correspondingly smaller.

So, the bottom-line is neither the public sector nor the private and not even the two together appear to be doing much to benefit from the macroeconomic space made available for accelerating investments. The government itself is not spending much on expanding social and physical infrastructural facilities to facilitate an expanded investment activity by domestic and foreign private sector. The domestic private sector is still living in the era of concessions, licenses and permits. It does not want to take risk and make the most of a given situation. Most of the rich in the world have made their money in times of uncertainties and in places where few would think of risking their investments.

But our private sector does not relish risk and uncertainty. It wants its investment decisions even its margin of profits ( at the most generous level)to be determined by the government. The foreign investor has a choice of the entire world. There are many places which perhaps are more profitable and less dangerous in the evaluation of the foreign private sector. The continuing Indo-Pak tension threatening a nuclear clash, the on-going war against terrorism in which Pakistan seems to have been caught up domestically as well and the continuing political uncertainties despite the transition from military to the elected rule all these factors perhaps make this evaluation rather unfavourable for Pakistan.

And finally, it may sound rather unpatriotic and against the national interest to some at this juncture, but Pakistan’s continued insistence that it would not establish normal economic relations with India as long as New Delhi does not agree to hand over occupied Kashmir to it is perhaps the single most important factor that is discouraging foreign as well as local entrepreneur from looking at Pakistan as a country with investment potential. India is not being affected by this factor because, it is a world in itself and can grow at good pace without foreign investment.

But Pakistan is at a disadvantage because of its limited market. The concept of private power production appeared attractive to foreign investors only when it provided them with an opportunity to produce power for the entire region as at that time India had expressed its willingness to buy power from Pakistan and Pakistan too was willing to export electricity to India. Pakistan has to be part of a wider market to be able to attract foreign ( even an expanded local) investment. It is, therefore, in the larger national interest that today we join hands with the regional countries for greater progress and prosperity for all.