NO doubt, a conspicuous rise in GDP growth rate (8.4 per cent) and per capita income now resting at $736 have brought laurels for the country’s economic managers. Yet, at the same time they are faced with the challenge of sustaining the growth trend for at least next ten years to enable the country to achieve its committed millennium targets.
Sustainability of growth pattern is vulnerable to both internal and external shocks customary to South East Asian region including Pakistan.
The recent move by Pakistan to enter various trade pacts and taking initiatives for regional cooperation as well as entering in serious dialogue with India to resolve all political and economic issues has reduced economy’s vulnerability to external shocks to an extent.
However, internal shocks, mainly poor law and order situation and the frequency of natural calamities affecting various sectors of economy in one way or another, continue to be the imminent threats to growth rate.
There is an urgent need to arrest growing trade / current account deficit by enhancing volume of exports rather than curbing import of industrial raw material and machinery. Oil import impact has also to be kept in limits.
Budget deficit neede to be brought within internationally accepted limit of three per cent, which in present scenario seems unachievable. The challenge is to achieve cyclically adjusted budget in a shortest possible time, which is close to be a balanced or surplus budget. This obviously can be achieved by bringing down external debt ratio to GDP by ensuring zero increase in existing external debt liability.
In the face of quite a low saving and investment ratio of 19 per cent to GDP, it is difficult to get rid of fresh external borrowings unless sizable increase in domestic savings and investments and foreign direct investments is mobilized.
No doubt, sale of PTCL to Dubai buyers has given unprecedented fillip to foreign investment during the current year, there is need to sustain this level of investments by creating congenial environments for foreign investors.
The Medium-Term Development Framework draft for next five years (2005 – 2010) released by Planning Commission in March 2005 focused on achieving high economic growth rate with macro economic stability, drastic improvement in domestic savings and investment, bringing down internal and external debt, trade deficit and inflation. Keeping in view these vital goals, an average GDP growth rate target has been set at 7.4 per cent for the period from 2005 to 2010.
Apparently, prospects of achieving sustainability of projected growth rate for the targeted period are quite promising. Inflow of remittances from overseas Pakistanis at an incremental rate and offers of aid / assistance from United States and other western donors for adopting a role of front line state in combating terrorism, are in sight. Besides that, more viable lending programmes are in wake from the World Bank and the Asian Development Bank in view of better performance of the economy.
Recent fiscal measures announced in budget would further enhance growth rate of both large and small-scale manufacturing and agriculture industry. Accordingly, growth rate target of exports is likely to be achieved.
However, ground realities do not give a very rosy picture of the economy. The fiscal deficit continues to increase. Similar fiscal measures announced in the past failed to improve tax–GDP ratio and instead this ratio has gone down by 0.4 per cent during the current fiscal year.
The focus should be on improving tax–GDP ratio by broadening the tax net. Fiscal and monetary incentives announced for agriculture sector justify taxing agriculturists. This will substantially enhance tax-GDP ratio. But indiscriminate imposition of tax is to be avoided. Farmers having lands of subsistence level be exempted from payment of any tax/tariff and beyond that criteria for imposition of tax on various levels of holdings should invariably meet the requirements of equity and justice
To sustain targeted growth rate for years to come, it is essential, as stated earlier that ratio of investment to GDP needs to be improved. Keeping in view domestic price level of consumer and capital goods, ratio of investment to GDP should not be below 25 per cent, whereas this ratio has oscillated between 16 to 19 per cent, which is far from satisfactory.
Low domestic savings ratio to GDP makes capital expensive, slows down investment and productivity of small and medium size domestic industry, which already suffers from restricted access to formal sources of credit. Increase in investment demands with saving rate remaining the same would further aggravate current account position as more external funding / assistance would be needed. This would create more economic imbalances.
Rising inflation, poor law and order situation and slashing down of profit rates on government saving schemes and bank deposits and lack of needed infrastructure has adversely impacted people’s propensity to save and invest.
Lately heavy diversion of funds from government sponsored saving schemes to speculative trading in stock exchange securities and properties and thereafter sudden crash experienced in shares prices and its spill over effect on speculative trading in properties has greatly shattered the confidence of small savers and investors. In this regard, legislative measures are needed to curb speculative and unethical business practices.
Speedy development of much needed infrastructure is also to be given due attention. No doubt, public sector development programme (PSDP) has made an outlay of Rs126.26 billion for infrastructure, which is almost 75 per cent more than what was last year, but to ensure that an effective strategy is put in place, priorities must be set on the basis of country’s actual requirements. Of course, this need to be undertaken after its cost benefit analysis and more importantly after seeking consensus of all the provinces, ensuring that no set back is encountered by economy of any province on launching of any such project.
In this regard, proposal of setting up a ‘multi billion dollar infrastructure fund’ out side the budget through launching of public-private partnership, to avoid further increase in budget deficit, will be a step in the right direction.
The fund will be initiated by contribution from government and international agencies. The Asian Development Bank has already agreed for providing financial assistance of $3.6 billion spread over three years for the purpose, starting from current year, in collaboration with the World Bank and other international donor agencies.
Input from these agencies for the proposed fund will be utilized for undertaking mega projects like sub-regional connecting project of linking Pakistan with Central Asian States through Afghanistan for improving trade relations.
Construction of small dams, water supply schemes and roads will also be area of focus of this funding. The fund will also act as financial intermediary to extend funding in the shape of guarantees to fill the viability gap of a private sector project, which on commencement of operations and generating funds would refund guarantee encashed amount to proposed infra structure fund.
A ‘wait and see’ policy need be totally abandoned and timely implementation of the projects be ensured at all levels. At implementation stage, all projects need to be monitored vigorously by an outside agency comprising highly competent persons of relevant field not associated or linked with those responsible for implementation of the project. Technocrats associated with proposed ‘infrastructure fund’ will also be a valid choice.
To embark on achieving optimum employment level, development of small and medium enterprises (SME) sector needs to be focussed in all development plans. Investors should be encouraged to set up small and medium size enterprises, particularly relating to vending and agro-based businesses through liberal fiscal and financial incentives.
Next, it is to be seen whether economic growth achieved is being reflected in development of social sector or not. Is there a visible improvement in Human Development Indicators (HDIs). It is the established fact that economic prosperity alone is not an effective remedy to arrest growing poverty and unemployment in the country.
Improvement in education and health sector needs to be evaluated on the basis of its impact on development of human capital, which is essential to sustain high economic growth rate. Education and health policies should be tailored to produce highly skilled and energetic workforce, capable of making use of new technologies. There is urgent need to promote both vocational and higher education in all disciplines.
Spending on health sector is to be enhanced substantially, not only to improve life expectancy, but also to provide healthy and energetic workforce. It has rightly been stated in report titled as ‘health challenge’ produced by ‘Dr. Mehboobul Haq Human Development Centre’ that health policies of South Asian countries need to be evaluated on totally different grounds. Mere improvement in life expectancy at birth should not be taken as criteria for effectiveness of health policy. It should be judged as to how far it has helped in improving the economic productivity/growth of a country.
Until the mid-nineties, education and health sector were allocated funding equivalent to 2.7 and 0.7 per cent respectively of GDP, being much lower than internationally established standards. Minimum funding for education committed to UNESCO by all member countries is four per cent of their respective GDPs. In late nineties, allocations for social sector as a whole were further slashed down due to falling/stagnant growth rate of the economy.
However, from 2003 onward yearly funds allocation for education have been on incremental rates. Recently announced PSDP of Rs272 billion has allocation for education almost 50 per cent above last year’s figure. Funds for development of health sector have also been increased. Under the given circumstances the funds allocated for social sector development are enough, provided these are utilized effectively and for that strict monitoring and supervision is a must.
Efforts should be intensified to make all economic and social sector development plans gender-sensitized with the sole purpose of mainstreaming women in economic and social development process, which in turn is essential for sustaining high growth rate of the economy.
