An impressive industrial recovery during the fiscal 2004 was driven by the domestic demand stemming from rising investment as well as strong external demand.
Yet, the quality of economic growth was poor compared to 2003 as it was concentrated in few sectors like large-scale manufacturing, electricity and gas distribution, construction and wholesale and retail trade, says the State Bank's Annual Report. The growth in service sector has decelerated.
The performance was also marked by the vulnerability of the national economy to shocks as key crops suffered from heavy natural vagaries and the pressures on the external sector mounted due to much larger than expected trade deficit of $3 billion.
As the industry is substantially dependent on imported inputs as well as external demand, the economy is more sensitive to external shocks. Food imports touched $1 billion and are still rising on account of wheat imports.
No doubt, as the State Bank reckons the larger share of industrial output in the GDP growth, if sustained, will have very significant implications for the national economy.
Perhaps, the vulnerability of the economy to exogenous shocks would be minimized by the increasing investments in diversified economic activities. Economic growth may come from existing capacities but investment-led growth leads to economic development and much more employment.
The good news is that growth was led primarily by industry and particularly large-scale manufacturing with spread effect. A whole range of labour-intensive small industries, like garments in textiles and vendors in automobile industry are dependent on their growth and sustenance on large-scale industries. What is more significant is that the industrial growth stems from increased investment activities.
Over the past 3-4 years, the budgeted public sector development programme ( PSDP )has doubled from around Rs100 billion to over Rs200 billion, a sizable part of which has gone into building up of physical and social infrastructure. Similar is the pace of the inflow of direct foreign investment (DFI) that touched $950 million in the fiscal 2004.
In the past three years, disbursement of bank finances against fixed industrial investment to private sector went up to Rs34.5 billion from $18.5 billion. The share of manufacturing in fixed investment during the fiscal 04 increased to an all-time high of 19.8 per cent. Overall investment growth has jumped to a record 22.3 per cent, pushing the investment GDP ratio to 18.1 per cent.
But investment in agriculture that provides raw material and markets for manufacturers, declined by 6.1 per cent in the fiscal year 2004 despite a 17.6 per cent increase in public sector investment due a negative contribution by the private sector that typically contributes 90 per cent of the total investment.
But for agriculture, the factors contributing to industrial growth are now more diversified. There is a mix of investment- driven domestic demand with much less credit-led consumption and robust external demand. In right proportion and balance, the three ingredients can ensure sustained economic growth.
A sector-wise break-up reveals that manufacturing, ownership of dwellings and transport and communication have strengthened their share in total fixed investment. In the absence of poor response of the private sector, public sector investment has also picked up in the fertilizer sector.
Though FDI is increasing, its rise is very slow, and in absolute terms, the FDI flows into Pakistan are still below $1 billion mark, which is less than one per cent of the FDI flowing towards developing countries.
The service sector has attracted the highest share in FDI(on the HBL sale) followed by oil and gas, mining and quarrying. The share of trade, transport, storage and communications in total FDI rose from 19.2 per cent in the fiscal 2003 to 28 per cent in the FY 04 followed by financial business with a share of 25.5 per cent. The USA investment were primarily directed towards oil-gas explorations, mining and quarrying.
Investment from UAE ($146.5 million) was concentrated mainly in petroleum refinery, petrochemicals, trade, transport, storage and communications. FDI from the UK ($49.9 million) and Saudi Arabia ($5.3 million) decreased by 70.4 per cent and 83.4 per cent, respectively. Decrease in the FDI from the UK is due to heavy disinvestment in the power sector.
The trends in investment over the past few years indicate that the momentum of industrial growth will continue in the medium-term despite the possible deterioration in the macroeconomic indicators. The growth momentum takes time to pick up and also does not peter out abruptly.
But what is important that policies that help sustain economic and social growth should be evolved and pursued with vigour to minimize business cycles of boom and bust. As the initial progress indicates, Pakistan is poised for a more balanced economic growth.
But it also requires a balance between self-reliance and external interdependence, between the market and the government and between the services sector and the commodity-producing sectors.
A key area where policy adjustments is required is foreign trade to make vulnerable external sector robust by self-sufficiency in food grains and engineering goods. The level of prosperity of a nation depends on the sources of its economic growth. Foreign trade provides an impetus to economic growth.
But investments in export-oriented industries may provide very few jobs unless they are labour-intensive and linked to large scale industries. Imports make a negative contribution to the Domestic Gross Product and they provide jobs to foreign workers in countries from where the imports are made.
For boosting trade surplus for exports, the domestic demand is currently suppressed through increased indirect taxes and subsidies on exports. Export-led growth not only increases poverty but also leads to distortions in the economy and inefficient allocation of resources.
As the decision of the State Bank to make payments from its foreign exchange reserves for import of oil indicates, free trade within national frontiers has to be combined with restrictive international trade practices as long as Pakistan does not have current account surpluses which are sustainable over the long-term.
Going by the tough competition in the global market, trade surpluses between countries may eventually have to be made at cost price of goods and services. As for the credit-led growth in consumption, the USA's experience indicates that unless incomes of the middle income groups keep rising, it would land the borrowers into a debt trap, specially in times of economic downturn.
The best option for a developing economy like Pakistan, is an investment-led growth in order to increase and diversify the production base, for exports and to cater to the domestic demand.
To sum up, Pakistan has to develop its home-grown model while learning from experiences of other countries. There is no role model which can be copied because specifics differ from country to country.
The great impediment has been bad politics. No other country has suffered from loss of half of its territory and political instability with alternate military and civilian rule, law and order, wars between neighbours and consequences of conflicts in Afghanistan like Pakistan has.
Despite these factors, the national economy has shown great resilience. Given political stability and regional peace, the economy is poised for robust growth at least for medium- term.
