WITH oil prices still rising, a lower or stagnating global demand, and Pakistan’s tragic earthquake, isn’t Pakistan’s $100 billion economy heading towards a slowdown?
It is too early to project the after effects of the October eight earthquake and what it will turn out to be in terms of its destruction cost, effects on industrial and farm output, purchasing power in the affected areas, and the rehabilitation/reconstruction costs. But the effect on the economy could be significant, to say the least even at this early stage. However, analysts differ on its impact.
The market reaction to the earthquake disaster was quite pessimistic to begin with, but later the sentiment improved. Bourses were down for a day, soon after a 316 point or a 3.5 per cent rise in share prices, Karachi Stock Exchange had recorded in the week ended October 7. But KSE rose to 8,791.94 by Wednesday and the sentiment was bullish.
The country’s business and financial hub of Karachi and other major cities have been hit by virtually several thousand workers returning to their homes in the devastated Northern and North-western parts of Pakistan—-Hazara, Azad Kashmir and NWFP. They worked in transport, construction and industrial sectors.
However the country’s major industrial and commercial centres of Karachi, and big production bases like Hyderabad, Lahore, Gujranwala and Faisalabad, have stayed unaffected by the earthquake itself, which is a plus point in forecasting the future trends in the economy.
“With the epicentres of the losses in the northern area, the impact on the overall economy will not be large. In fact, as reconstruction picks up, it will be positive for the economy,” said Sakib Sherani, ABN Amro’s, chief economist.
He is sticking to his GDP growth projection between 6-6.5 per cent for 2006. An ABN Amro Bank report projects the 2006 budget deficit at a 4.1 to 4.3-—that is more than the previous forecasts. Tax collection target may shrink by 1.3 pc. CPI inflation is expected in the 9-10 per cent range.
As a result of relief, rehabilitation and reconstruction, the domestic demand, in fact, may rise for the related items, reckon some independent economists but loss of purchasing power of the people in the affected regions will have to be discounted for, while making any such projections. However the government’s economic spokesman Dr Ashfaq Hassan Khan said: “the disaster will have no impact on the government’s budgetary targets.”
“The effect will be limited if the world at large is generous in doling out financial aid to Pakistan for providing relief to victims, rehabilitating them and reconstructing the affected areas. But the impact can be tremendous if Pakistan does not get enough financial assistance from the international community and the government is forced to finance rehabilitation and reconstruction from its own resources,” he says.
The disaster has hit the economy as forecasts for fiscal 2006, by the government, international financial institutions and independent economists were already painting a much less robust picture than the actual performance in fiscal 2005.
What will influence fiscal 2006? Four factors—-a decidedly reduced heat of the economy after a peaking performance in 2005. A wearing off of the baseline effect, that is better performance in 2005 compared to 2004. And finally, rising energy prices.
And a slowdown in the global economy, slashing part of the demand, that in turn can adversely affect our exports. The earthquake disaster, to work out the human, rupee or dollar cost of which will still take considerable time— beyond the present short and medium-term emergency, rehabilitation and reconstruction operations.
The government in Islamabad is still shock-bound because of the earthquake. The top leadership including President Pervez Musharraf and Prime Minister Shaukat Aziz are busy in relief operations of the disaster victims. In view of this, it is still too early for the prime minister to start looking ahead at the economic direction.
Only days before the tragedy, the economists and business leaders, generally, appeared buoyant, in the near-glow of fiscal 2005. But there was the realization that, as growth moves ahead, hopes, plans and targets need to be scaled down for 2006. This was the view despite the improved economic fundamentals, continuation of Islamabad’s pro-growth policy, sustainability of private sector investment on the back of rising purchasing power of, at least a part of the population fuelling larger domestic demand, a stable rupee, and a decent growth in foreign trade.
This picture of the domestic and global situation had spurred buoyancy. Add to this, the improving relations and brightening prospects of larger business turn-over nearer home-—with India and Afghanistan. The growing winds of peace may help attract larger FDI inflows. But there is a growing consensus that the country will have to lower its sights for 2006.
But, the emerging negative factors should not be lost sight of. The rising oil and energy prices are proving to be a big setback. Its damaging effects are real as oil/energy prices raise the cost of production and transportation.
The crude oil prices currently are moving around $65 a barrel— nearly double what these were just a few months ago. The option of the government now is to substantially scale down petroleum prices by reducing the present, unjustified, taxes that total Rs20 a litre. I don’t wish to turn the government’s budgetary apple cart upside down, but what other options exist for it to contain prices and provide a relief to consumers? Doesn’t the transport system also need a relief, because its operational costs spill over the whole of the economy and inflate the prices?
Now when the nation is beset with these problems, macroeconomic numbers will have to be adjusted accordingly. Which way the GDP growth goes? The government forecast, previously, was seven per cent. But among IFIs, including ADB and independent economists the current talk in Islamabad is 6.5 per cent or even less, compared to the actual of 8.4 per cent in 2005.
The 2005 GDP growth rate claim has been questioned by some independent economists and farm experts who maintain that wheat production was much less than 22 million tonnes.A substantial part of agricultural GDP is contributed by wheat.
However, farm output is projected to decline from 7.5 to three per cent in 2006 because of the high base effect. Large scale manufacturing (LSM) growth is projected at 11 per cent down from 15.4 per cent in 2005.
The government is looking at service sector to sustain a high growth , especially banking as in spite of the credit costs moving into double digit, the demand for credit is strong.
The telecom that recorded the highest growth in 2005 will expand further as more services are being offered, including wireless and other facilities to feed the demand in the vast countryside.
Some reckon that exports growth may be restricted to 15 per cent down from 16 per cent in 2005, because the global economy is slowing down. Imports can rise by 18 per cent, compared to 38 per cent in 2005. Trade deficit may widen to $6 billion. The current account gap is likely to widen to $3.5 billion or 2.8 per cent of GDP. The inflows of disaster relief assistance and reconstruction should, should anyhow, be treated separately.
Prime Minister Aziz early this week reported an inflow of $400 million foreign assistance for disaster relief while more money is coming in. The United Nations has made a flash appeal for $ 272 million. The assistance both financial and material is pouring in this week, and is likely to continue.
The country’s foreign exchange reserves are reported at $12 billion and may not face a large adverse effect. But, it is doubtful whether the inflation rate target will be attained. In fact, at present all indications are, it will go up further. The reasons include the rising cost of credit—-already in double digits— that will get reflected in prices of a very wide range of goods and services.
Prices of utilities, food, passenger transport and freight, and social services are looking up. Karachi Inter-bank Offered rate (Kibor) is already 9.10 per cent. Consumer Price Index was already up 8.7 per cent in the first two months of fiscal 2006—July and August, compared to the like period of fiscal 2005. Prices of goods required for relief of earthquake victims are soaring.
There is a question mark over government’s plan to restrain its budget deficit at under four per cent. It is likely to be wider, depending on the earthquake-related foreign aid inflows. It can widen in view of the cost of disaster relief and rehabilitation, part of which Islamabad will have to meet domestically.
Just an illustration: Azad Kashmir Prime Minister Sikandar Hayat has, for instance, initially called for a Rs35 billion grant to bring Muzaffarabad and the other areas to a modicum of normalcy. He got Rs2.0 billion this week.
NWFP Chief Minister Akram Durrani got just Rs1 billion inspite of huge devastation at Balakot, Mansehra and Hazara. That also goes for confining the current account deficit target in the range of 2.5-3 per cent.
But, one will have to wait several more weeks to be able to work out new numbers for various segments of the economy, and what it holds for the nation as fiscal 2006 moves forward.
WITH oil prices still rising, a lower or stagnating global demand, and Pakistan’s tragic earthquake, isn’t Pakistan’s $100 billion economy heading towards a slowdown?
