May 5, 2003	Monday	Rabi-ul-Awwal 2, 1424

IN an article in Dawn entitled, “Are we near take-off stage?”, the writer disputed the claim by President Pervez Musharraf that Pakistan had attained macroeconomic stability and reached the take-off stage.

The author believes that the claim is an exaggeration of the actual state of the economy and he cites the recent Joint Staff Assessment (JSA) of the Poverty Reduction Strategy Paper (PRSP) Progress Report prepared by the staffs of both the World Bank and the IMF and submitted to the executive boards of the two institutions.

The covering note of the JSA of PRSP Report, dated April 2003 (IMF Country Report No 03/102), along with the covering note, is available on the website of the IMF; http;//www.imf.org. It says, inter alia: “A JSA evaluates the strength and weaknesses of a country’s poverty reduction objectives and strategies, and considers whether the PRSP or I-PRSP provides a sound basis for concessional assistance from the Bank and Fund, as well as for debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC) Debt Initiative. The boards then decide whether the poverty reduction strategy merits such support.”

This was a general statement about the JSA, and has been interpreted to suggest that these two institutions (World Bank and the IMF) are now considering to treat Pakistan as a Highly Indebted Poor Country, which, like African countries, qualifies for debt write-off. The point is also made that in the 1990s, Pakistan had tried its inclusion in the ambit of HIPC countries, but was denied that status because it was a relatively developed country as compared with the African states. But now, it is suggested, Pakistan’s economic situation has worsened, with around 40 per cent people living below the poverty line and per capita income is falling; therefore, these two institutions (WB, IMF) are now considering giving Pakistan the status of an HIPC initiative country.

The purpose of this article is twofold. First, to clear the misconception about Pakistan being considered for HIPC status and second, to relate some facts for readers to judge whether Pakistan has reached the take-off stage or not.

The IMF’s executive board had established the Enhanced Structural Adjustment Facility (ESAF) in 1987 to better address the macroeconomic and structural problems faced by low-income countries. It offered loans with lower interest rates and for longer terms than the typical IMF market-related arrangements. The principal objectives were to promote balance of payments viability and foster sustainable long-term growth. Alarmed by the rising levels of poverty in low-income countries, international financial institutions (World Bank, IMF, ADB, etc) in recent years changed their lending strategy by bringing poverty reduction to centre-stage.

Accordingly, ESAF was replaced by Poverty Reduction and Growth Facility (PRGF). A country, when it faces serious macroeconomic imbalances, approaches the IMF for balance of payments support. The country then develops a nationally-owned or home_grown action plan for policy reforms, set forth in a Poverty Reduction Strategy Paper (PRSP). The PRSP outlines the commitment of the country to put in place sound macroeconomic policies and structural reform with a focus on poverty reduction.

Since the World Bank is also actively involved in poverty reduction in low-income countries, it works with the IMF in providing financial support. Therefore, the staffs of both the institutions jointly assess the strengths and weaknesses of a country’s PRSP or I-PRSP and considers whether it provides a sound basis for concessional assistance from the two institutions.

It is well-known that Pakistan is receiving financial support at highly concessional terms from the IMF under the PRGF on the basis of its I-PRSP since December 2001. The World Bank is also providing assistance on the basis of the same I-PRSP. Pakistan is at the final stage of its preparation for the full PRSP which will form the basis for future assistance from the various multilateral and bilateral donors on concessional terms. The JSA Report referred to above basically reviewed the progress made by Pakistan from I-PRSP to full PRSP.

There is yet another set of countries receiving financial support from international financial institutions. These countries, numbering 41, mostly from Africa, have been identified by creditors as potentially eligible for debt relief under the HIPC Initiative. Of the 41 countries, 23 now have debt relief agreements in place with relief already flowing. Pakistan is not on the list of 41 countries. It has never sought such a status, and did not do so even when its debt problem was at its peak (end-June 1998).

As to whether or not Pakistan has reached the take-off stage, it is a well-established fact that the decade of the 1990s was a decade of lost opportunities for Pakistan. While many nations made progress, Pakistan lurched from one crisis to another, mainly of its own making. As a result of weak macroeconomic management, lack of commitment and courage to undertake difficult structural reforms, and the deteriorating state of decision-making, Pakistan, at the fag end of the 1990s, was confronted with serious macroeconomic difficulties. Indeed, Pakistan witnessed its economic growth slowing down, investment rates declining, the debt burden reaching alarming proportions, foreign exchange reserves plummeting, exports stagnating, relations with international financial institutions in total disarray, poverty rising and poor governance beginning to be the norm.

Some three-and-a-half years ago, the government was confronted with four major policy challenges. First, how to stabilize the country’s debt situation with a view to restoring macroeconomic stability; second, how to revive economic growth; third, how to prevent people falling below the poverty line; and, fourth, how to improve governance. These four policy challenges were interconnected with each other. For example, a rising debt burden which consumed almost 66 per cent of total government revenues on account of debt servicing alone compelled a curtailment of public sector investment. Being complementary in nature, private sector investment also declined. The decline in the overall investment rate also caused a decline in economic growth which, in turn, reduced the employment generation capacity of the economy.

The obvious outcome of declining economic growth was rise in poverty. The deteriorating state of law and order in the major growth poles of the country, senseless taxation, frequent downward adjustment of exchange rate (devaluation), and poor governance also contributed to slowing Pakistan’s economic growth and raising the levels of poverty.

Notwithstanding a series of domestic and external shocks such as a catastrophic drought, the events of September 11 and their aftermath, and the events of December 13 leading to the military build up by India, Pakistan’s economy has made significant progress during the last three and a half years as summarized below:

* Pakistan’s economy is now more stable, economic policies are transparent and predictable; confidence of the private sector is restored to a larger extent; and expatriate Pakistanis are bringing their capital back into the country. * Fiscal deficit which averaged 7.0 per cent of GDP for two decades is expected to decline to 4.6 per cent in the current fiscal year (2002-03). * Domestic debt which was growing at an average rate of 24.0 per cent and 16 per cent per annum during the 1980s and 1990s, respectively has slowed to 1.0 per cent in 2002-03. * Domestic debt as percentage of GDP has declined from 52 per cent in 1999-2000 to 43 per cent in 2002-03. * Declining trend in development expenditure has been arrested. As opposed to 3.0 per cent of GDP, development spending is estimated at 3.3 per cent in 2002-03. * CBR tax collection has increased by Rs152 billion during the last four years as opposed to Rs82.5 billion in the previous four years - 84 per cent increase. As opposed to an average increase of 4.6 per cent per annum during 1996-99, CBR tax collection has grown at an average rate of almost 14 percent per annum during the last three years (excluding the abnormal year of 2001-02 when tax collection grew by only 2.5 percent as a result of the events of 9/11). * CBR tax collection in the current fiscal year has remained above the target so far (Rs 310.3 billion as against the target of Rs 309 billion in July-March 2002-03).

Money and inflation: * Inflation at 3.4 per cent during July-March 2002-03 is below the target of 4.0 percent. It is much lower than the average of 10 percent in the 1990s. * Interest rates are falling. The weighted average lending rate is down from 14.0 per cent in June 2001 to 9.36 percent in February 2003. This means the cost of capital is declining. It is good for investment. * Private sector credit is up by 53 per cent during July-March 2002-03. * Stock market has remained buoyant during July-April 21 2003. The KSE - 100 Index has increased from 1770 points to 2967 points - an increase of 1197 points or 67.6 percent. This reflects the growing confidence of investors in Pakistani markets. * Pakistan’s stock market has been the best performing market in the world in terms of profitability.

Investment and growth: * Industrial production is up by 8.0 per cent during July-February 2002-03. * Investment is likely to rise to 16 per cent of GDP and economic growth is projected at 4.5 per cent - higher than the average of last three years (3.3 per cent during 1999-2000 to 2001-02).

External sector: Both exports and imports have picked up despite uncertain global environment. Exports are up by 20 per cent and imports are up by 23 per cent during July-March 2002-03.

* Pakistan’s exports remained stagnated at around $8.0 billion for six years (1994-95 to 1999-00), and at $9.0 billion during the last two years and is expected to reach $10.5 billion this year. * Workers’s remittances were around $1.0 billion in 1998-99. This is likely to reach $ 4.3 billion by end-June 2003 - all time high in the country’s history. * Foreign investment was as low as $403 million in 1998-99. It has already reached $665 million during July-March 2002-03 and is expected to reach $1.0 billion by the end of the current fiscal year. This is a reflection of growing confidence of foreign investors on Pakistan’s economy. * Most importantly, Pakistan’s current account balance is in surplus. Pakistan has maintained current account deficit at around 5.0 per cent of GDP in the 1990s. This year the surplus is expected to reach $3.0 billion or 4.0 per cent of GDP - a major turnaround in the economy. * Strong build-up in reserves has strengthened Pakistani rupee viz US dollar. Exchange rate has appreciated by 11 per cent since July 3, 2001.

External debt situation: * Pakistan’s external debt and foreign exchange liabilities which reached at unsustainable level by 1998-99 have started moving towards sustainability. * Pakistan’s total external debt and liabilities have declined by $3.0 billion - from $38 billion to $35 billion. As percentage of GDP, the external debt and liabilities stood at 64 per cent in end-June 1999, declined to 60 per cent in end-June 2002, and projected to decline to 50.4 per cent by end-June 2003. During this period, Pakistan added $9.4 billion in its foreign exchange reserves. Hence, Pakistan has not only succeeded in reducing its debt liabilities by $3.0 billion but has also succeeded in adding $9.4 billion in its reserves. This is a remarkable achievement by any standard. * Pakistan’s net debt and liabilities (total external debt and liabilities minus net reserves of the SBP) stood at $37 billion in end-June 2000 and is expected to decline to $26 billion by end-June 2003 - a reduction of $11.0 billion in three years. As percentage of GDP, it is projected to decline from 60.7 per cent in end-June 2000 to 37.4 per cent by end-June 2003. * Pakistan’s external debt burden has also declined significantly. External debt and foreign exchange liabilities as percentage of foreign exchange earnings stood at 335.4 percent in end-June 1999. It is expected to decline to 193 per cent by end-June 2003. * Since, Pakistan’s foreign exchange reserves have reached a comfortable level the government will be paying back expensive debt ahead of the time. This will reduce the country’s debt burden even further.

Macroeconomic stability has been achieved to a larger extent, both investment and growth are rising; interest rates are falling; inflation is low; private sector credit has picked up; both domestic and external debts are declining; exports are picking, tax collection is rising, current account balance is in surplus; and exchange rate is stable. This is the environment which constitutes for an economy to be the take-off stage. However, despite these improvements, there is no room for complacency. Much more effort as required to transform Pakistan into an economic power. The country is at the take-off stage and we will reach the destination provided we stay the course.

(The author is Director-General, Debt Office, and spokesman of the ministry of finance.)