June 9, 2003	Monday	Rabi-us-Sani 8, 1424

The perspective on the recent economic developments in the country has been coloured by divergent perceptions - the product of a sharply polarized political picture that has continued to haunt our turbulent history. The schools of thought that deliver these judgments fall in two broad categories i.e.. the take-off school and the demolition school.

The take-off school is backed by a strong statistical armour. The achievements that they cite are impressive. The fiscal deficit has been reduced from an average of 7 per cent in the l990’s to 4.6 per cent. The domestic debt which was growing at 24 per cent in 1980’s and 16 per cent in 1990’s has stabilised. The stock of domestic debt as a percentage of GDP has declined from 52 in 1999-200 to 43 per cent in 2002-03. Tax collection by CBR has increased by Rs152 billion in the last four years, compared with Rs83 billion in the preceding four years. The tax revenues are currently growing at the rate of 15 per cent. Inflation is 3.4per cent against 10 per cent in 1990’s. Private sector credit is up by 53 per cent (July-March 2002-03). The stock market has reached the record level of 3100 (KSE index) and has been described as the best performing market in the world during 2002-2003.

The latest external accounts show a current account surplus of $3 billion equivalent to 4 per cent of GDP, no mean performance for an economy which accumulated current account deficits to the tune of $32 billion during l990s building up external debt to the level of $38 billion in 2000. The stock of debt has now been reduced to $35 billion. The debt service which used to pre-empt 65 per cent of the state revenues is expected to be contained within 44 per cent next year. Exports are expected to reach $10.5 billion for the first time. Foreign exchange reserves have beaten all previous records and reached a level of $10.5 billion. Rupee has appreciated against the dollar by 11 per cent since July 2001.

These macro-economic improvements have facilitated return to a higher growth path, which is expected to be 5.1 exceeding the target of 4.5 per cent for this year, against the lacklustre record of 3.3 per cent in the preceding three years. Large scale manufacturing which had been showing anaemic growth earlier has turned around and expected to record growth of 8 per cent this year.

The demolition school has, over time, extended a measure of grudging recognition to the performance on the stabilization front. But they insist that these were in the nature of a windfall from the events of September 11. They also stress that the structural fault lines of the economy have persisted, even worsened. The social indicators place Pakistan at the bottom along with some of the African countries. In human development index Pakistan ranks at 138 in a list of 173 countries.

The population below the poverty line has doubled since 1988 from 17 to 34 per cent, (according to estimates of some multilateral agencies 40 per cent). Infant mortality per 1000 live births is 136 compared with 107 for Nepal, 96 for Bangladesh, 83 for India and 18 for Sri Lanka. Adult literacy is 44 per cent compared with 53 per cent for Bangladesh, 88 per cent for India and 91 per cent for Sri Lanka. Primary enrolment rate is the lowest in South Asia. Educational expenditures have fallen from 1.8 per cent of GDP in 1998 to 1.6 per cent in 2001 - the lowest level in South Asia. Unemployment at 7 per cent has reached a record level. If under-employment is factored in, it increases to 10.4 per cent.

On the macro-economic side they cite the poor record of growth in the first three years (3.3 per cent) The ratio of investment to GDP has declined from 20 per cent in early 1990’s to 15 per cent in early 2000’s, in fact to 13.8 per cent last year. The improvement in large scale manufacturing is attributed mainly to the expansion in the output of automobiles and electronics whose demand has been spurred by provision of credit.

This contradictory scenario is characterised by lack of objectivity on both sides. The take-off school uses this phrase light-heartedly. Take off, meaning self-sustained growth without policy stimulus, is not operative even in the most advanced economies like USA, Germany and Japan. As regards the improvements in the macro-economic indicators, this school is reluctant to acknowledge the contribution of exogenous factors like the phenomenal increase in the availability of multilateral aid — post-September 11 the dramatic growth of remittances, the generous rescheduling of external debt and excess liquidity in the banking sector which has driven down interest rates to extinction and provided fiscal space for development and pro-poor expenditures. It seems to operate on the premise that its claim to fame has to be unreserved and exclusive— not to be shared with others.

On the other hand, the demolition school, (or shall we say the structuralist school) - ignores the fact that poor social indicators are not the creation of the present regime. They have a long history. Of course, these may have worsened due to the government’s pre-occupation with the policy prescriptions of the IMF whose interest in poverty alleviation awaits the verdict of time.

But this incremental change needs to be isolated from the underlying long-term trends. Undeterred by such reservations, the take-off school claims that the population below the poverty line is not 34 or 36 but 32.1 per cent - declining to 31.8 per cent as a result of 5 per cent post-enumeration recheck, at “user’s” initiative. Why should that happen in the presence of a rigid austerity programme, declining subsidies, increasing prices of gas, electricity and petroleum products, a sharp expansion at a regressive sales tax regime and rising unemployment, remains a mystery.

Be that as it may, the conflict between stabilization and poverty alleviation should now be declining. The change has been brought about by reprofiling of external debt, and declining interest payments on domestic debt. The consequential budgetary savings are approximately twenty per cent of revenues, likely to increase further. The real challenge is a judicious and strategic use of the resources thus released, instead of frittering them away, in largesse.

Another area where more effort is needed is the export sector. After many years, the growth in exports has been a healthy twenty per cent. This is a welcome. But it is difficult to find a link between this development and the policy initiatives of the government. On the contrary the lack of diversification has worsened, with predominant reliance on textiles, comprising 64 per cent of total exports.

As competition with China intensifies after 2005, this may pose a big challenge. In most of our exports, the increment in unit values is sluggish. Improvements in quality, grading and standardization are less than remarkable. And do we have a well-spelt out strategy to face the challenges of a post-2005, quota-free open trading regime? Indeed, the impact of continuous reduction in import tariffs, which now have a ceiling of 25 per cent (except for the automobile industry whose monopolistic privileges have been sanctified) our share of even the domestic market is declining. This is a serious turn of events. It may, in fact, be the main factor inhibiting private investment. We also lack effective institutional mechanism to respond to dumping into the Pakistan market, and the frequent resort to dumping charges levied against us, in the export markets.

One of the most favourable developments has been the growth in remittances expected to exceed $4 billion this year. This reverse flight of capital has no linkage with domestic policies. It is a bonanza emanating from the hostile environment fostered by USA in its fight against terrorist financing and money laundering. We welcome the positive turn of history, but let us not claim its authorship. We should also ensure that the monopoly of remittance management, which has accrued to the banking sector does not erode their efficiency.. The possible impact of remittances, in building up an assets bubble, in the stock market and real estate, should also be carefully monitored.

In the contemporary economic analysis, the link between remittances and the sharp fall in interest rates, triggered by the large increase in liquidity that they generated, has been either ignored or under-emphasised. The entire benefit of decline in debt service is being attributed to relief in the external debt and the restraint on fiscal deficit. Interest is the largest segment of debt service. Interest payment on domestic debt constituted 58.2 per cent of the total debt service in 2000-01, which came down to 43.3 per cent in 2002-03 - enlarging the fiscal space significantly.

The areas that still dominate the outstanding agenda, include the increase in defaulted loans from Rs150 billion to Rs190 billion, uneven devolution (largely from the provinces to the local government and not from the federation to the provinces); the perilous financial state of Wapda and the KESC involving government subsidy of Rs55 billion, the persistence of poverty, and the lack of progress in regional peace.

The shift of growth strategy from supply side to demand expansion with focus on consumer financing has also to be handled with care. Debt carrying capacity has a close relationship to the income levels and fast credit expansion could generate sizable default. Of course, the most glaring problem is poverty. The government now has the fiscal space to address this problem, but measurement of poverty must be objective and consistent.

In conclusion, the achievements on the stabilisation front are truly remarkable, deserving acclaim, not mere acceptance.. At the same time the reach of our policies should not be extended to areas which lie beyond their frontiers. And we need to accept the fact that October 99 does not mark the dawn of history.

(The writer is the former Deputy Chairman, Planning Commission).