August 28, 2006	Monday	Sha'aban 3, 1427

CONSENSUS is emerging in the international donors’ community that inflation and the growing imbalance in the external sector are the two potential risks to medium-term economic growth.

The World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB) believe that without appropriate policy action, these two risks may further build up during 2006-07 and beyond. They also maintain that any large expansion in public expenditure on the eve of the 2007 general elections may further widen the fiscal deficit.

These donors have also expressed their concerns over what was termed “rising undue non-productive expenditure” being incurred by undertaking unviable development projects and schemes which did not have any significant rate of return.

Some government officials do admit that fiscal deficit is bound to rise due to the initiation of large scale new development schemes and also because of 15 per cent increase in the salaries of government employees, announced in the current budget.

“And that is why international donors are reluctant to finance those development projects which are not economically and financially viable and their internal financial rate of return is zero”, a concerned official said.

He said the government has been told by the World Bank and the ADB to conceive only economically and financially viable development projects, failing which it would be difficult to arrange funding for them.

The example of Wapda is being cited which has finalised a number of power projects which are not financially and economically viable and their foreign funding has not be arranged so far but these projects are to be started from the current financial year.

It was in that backdrop Wapda authorities urgently sought Rs2.9 billion from the Centre to start its rural electrification programme in NWFP to provide electricity to 3158 villages (175 villages per month). “The government has still to arrange finances from foreign donors for this rural electrification project (July 2006 to December 2007—an 18-months programme)”, Wapda informed the Planning and Development Division.

The donor’s fear that the hard-won fiscal discipline may be lost, a possible downturn in the US economy after 2006, could hurt Pakistan’s exports.

In the longer run, the overall continuing low level of investment despite recent increases in specific sectors could depress economic growth.

Some developments are very disturbing. For example trade deficit has surged from $3.2 billion to $12 billion. The current account with a surplus at $1.8 billion is now burdened with a deficit of over $5.5 billion. Fiscal deficit has jumped from 2.4 to 4.2 per cent of GDP and more alarmingly, the overall tax-to-GDP ratio has gone down from 11 to 10.4 per cent. All these developments could pose a serious threat to the economy specially when they continue to be on the higher sides”, a source in the local donor agency said.

But the donors see the overall future outlook for the economy as Positive, says the source. The government’s growth target of 6-8 per cent looks achievable during the next three years. A new ADB’s assessment of the economy says that recent substantial public sector investment in irrigation and private investment in agricultural mechanization should boost agricultural growth.

The ending of quotas as well as the substantial investment in industry over the past several years, will continue to strengthen manufacturing expansion. Improving relations and increased trade with other countries in Asia, including China will also help the economy. The boom in services, particularly banking and telecoms, is likely to continue, principally because the policy environment has become very favourable with the deregulation and privatization of the past few years.

Also, significantly strengthened through reforms and privatization, banking is well positioned to support economic growth by channeling savings to productive uses.

The outlook is based on the assumption that the economic policies pursued in the last half decade will be maintained and that macroeconomic fundamentals will continue to improve. It also hoped that the government will continue to use the fiscal space created over the past few years to improve physical infrastructure and finance pro-poor development programmes.

The SBP is seen as keeping to its tight monetary policy and containing monetary expansion. On the external front, it is assumed that the global economy will maintain healthy growth and that oil prices will remain close to their current levels.

Banking is expected to continue its rapid growth. Wholesale and retail trade will benefit from double-digit rises in imports and exports. The import of sugar, wheat, and other food items has already improved the food supply and reduced food inflation.

The ongoing capacity expansion and balancing, modernisation, and restructuring in key industries, as indicated by strong expansion in private sector credit and by a sharp rise in imports of machinery, will help the industry sector sustain its high growth trajectory in 2006-2007.

The telecoms and oil and gas sectors are also expected to continue robust growth, given substantial inflows of foreign investment and technical know-how attracted by the improved policy environment of recent years.

Heavy investment in agricultural mechanisation should also boost sector output during the current financial year.

Economic growth is, therefore, likely to be on the target of seven per cent in 2006-07. The relaxation of capacity constraints and continued tight monetary policy, as well as a high-base effect, is expected to bring down inflation during the current financial year. The ongoing investment will result in a higher exportable surplus and value addition, and greater import substitution, thus improving the balance of payments.