WHEN finally realized, the provisional estimate that GDP growth will exceed eight per cent this fiscal would be a remarkable achievement. Despite the general weakening of the trickle down effect, such a high growth rate, sustained over time, can make a dent in poverty. It can also put Pakistan on the radar screen of global investors more vividly and lure foreign investment into diversified field of economic activity.
It needs to be acknowledged that over the past two years, national industrial consolidation has taken place on a more solid basis than during the foreign debt-driven development decade of 1960s, raising hopes that with renewed business confidence, Pakistan’s real economic potentials would be realized in the immediate future.
What is no less remarkable is that a major portion of growth has come from commodity producing sectors, from agriculture which is the backbone of the economy and large-scale manufacturing that leads growth in other sectors.
While a resurgent economy has hit over eight per cent growth rate, the phenomenon however has been accompanied by weakening of vital macro-economic indicators and is creating worries about sustainability of a high economic growth.
Going through the third quarterly report of the State Bank of Pakistan, one gains the impression that whether it is economic boom or downturn, both breed a set of new problems. For example, a high growth rate may or may not improve macro-economic indicators. This has implications for long- term sustainability of growth rates. Even developed economies are showing economic growth with weakening of some key economic fundamentals. The United States is one such country which serves as model for economic growth for all market economies.
The national economy is not immune from global trends as indicated by the SBP report. Having confirmed the official version that the economic growth may exceed eight per cent this year, the State Bank also cautions the government on the emerging macro economic trends and about its own worries about the sustainability of high economic growth in the long-term.
“The challenge for policy makers now is to sustain this growth momentum in the years ahead. This is no easy task , given that the country now faces significant macro-economic challenges.”
This is how the central bank sums up the situation and elaborates:
Inflation: If unaddressed, inflationary pressures could lead to serious repercussions on the long-term growth. The next few months will be critical to determine whether inflation pressures are receding or mounting.
External sector: Growing imbalances are a source of concern. These are clearly sustainable in the short-run. Though not a threat, persistent large external account deficits are clearly undesirable.
Debt: Another potentially serious threat is the re-emergence of rigidities in expenditures e.g. rising interest rates will raise debt servicing costs that may threaten the fiscal space created through reforms of yesteryears.
Tax revenue: The developments of last and current year suggest the momentum of growth in tax revenue may be significantly weakening.
While the 13.5 per cent growth in CBR tax revenues during July-March FY05 is acceptable by historical standards, the receipts have clearly not kept pace with economic growth. Tax buoyancy remained low. The tax GDP ratio is likely to drop for a second consecutive year. This is disturbing given that the tax-GDP ratio is already one of the lowest in the region.
Unfortunately, the required increase in developmental spending will not be possible unless the tax to GDP ratio can be stabilized at significantly higher levels.
Jobs: The growth policy needs to shift slightly from merely encouraging growth and focusing on improving delivery of basic services and targeted intervention towards the poor.
While the State Bank cautions the government against the emerging macro-economic trends, it has not lost its optimism. In the long run, says the quarterly SBP report, the rising investment in the machinery and inputs should be reflected in higher export earnings as well as import substitution. The State Bank’s optimism can draw support from the rising textile exports which touched $3 billion in first four months of new WTO quota-free regime. However, there is need for more emphasis on import susbtitution.
Unlike the preceding year, the State Bank says a high growth is expected to be shared by all major sectors of the economy. The growth in agriculture, industry and services is expected to exceed the targets. And the sharp improvement in the labour-intensive sectors is suggestive of an improvement in the pattern and the quality of growth leading to employment generation and poverty reduction.
A high economic growth has been primarily propelled by a robust external sector particularly nearly S4 billion remittances that include reverse flight of capital after 9/11. In a way, though not under rating national efforts, the growth has some artificial features. It is time to adjust policies to lay a more solid foundation of the economy on the basis of self-reliance.
WHEN finally realized, the provisional estimate that GDP growth will exceed eight per cent this fiscal would be a remarkable achievement. Despite the general weakening of the trickle down effect, such a high growth rate, sustained over time, can make a dent in poverty. It can also put Pakistan on the radar screen of global investors more vividly and lure foreign investment into diversified field of economic activity.
