October 22, 2007	Monday	Shawwal 9, 1428

Pakistan’s economy is under mounting pressures which could upset the growth projection for the current fiscal year. There are alarming reports of pest damage to the two main autumn crops — rice and cotton — and the international oil prices now at $88 are rising.

Shopkeepers in Karachi reported a staggering 30 per cent drop in Eid sales this year. It shows a huge erosion of the consumers’ purchasing capacity because of the inflation and more particularly high food prices. Food inflation is in double digits for the last several months. The drop in Eid sales is a manifestation of shrinking market for consumer goods.

Construction picked up in the city in last few years but the number of unoccupied apartments is on the increase as many of those who booked flats and houses are finding it difficult to meet rising costs. Construction companies offer one price for booking flats and then demand an increase on one pretext or the other. In many cases, the increase in their demand ranges between 30-40 per cent of the original offer.

Banks thrived most in last five to six years. Their profits touched almost Rs100 billion in the year 2006. But they now fear a 22 per cent drop in their profits during 2007.

Exports are moving at a much slower pace than imports and the trade deficit is widening Inflation and current account deficits are seen by many as two major threats to the economy.

All these negative trends have appeared after an impressive average growth rate of over seven per cent over the last five years. But then there is a consensus that the average growth was mainly driven by domestic consumption without corresponding increase in the domestic industrial and agricultural production and hence the doubts about its sustainability.

‘’Purchase of import-oriented-electronic appliances and cars was driven by bank loans’’, a young researcher in a private bank said and pointed out that banks are now reporting growing loan defaults and a sharp drop in demand of consumer credit. ‘’The crunch has to come, if not today than tomorrow’’, he said. Customers prefer to curtail their demand because of high interest rates and rising service charges.

However, there is another view also. A top garment exporter who has strong links in USA and EU is of the view that emerging political scenario for early 2008 will matter a lot. Pakistan can expect a bail out by the international financial institutions and a relatively better market access for its products in western countries.

For the year 2007-08, the government projected a 10 per cent growth in export targeted at $19.2 billion. Imports growth in the current fiscal year was expected to be moderate at nine per cent to claim $29.6 billion. In the first quarter, the export grew at less than five per cent to $4.25 billion. The imports grew by 8.5 per cent to over $8 billion.

‘ ‘Trade deficit during current fiscal year is bound to be close to $15 billion or 50 per cent more than projected by the government’’. a well-known garment manufacturer and exporter anticipated who does not want to be identified for portraying a bleak economic picture. Export growth is sluggish for last three years and is showing no signs of recovery even though the exchange value of currencies of Pakistan’s two main competitors in textiles--India and China-has appreciated.

‘ ‘But India and China continue to provide visible and invisible cash subsidy to their exporters in a number of ways’’, argued the garment exporter. Adil Mahmood, the Chairman of the newly-formed All Pakistan Textiles Association (APTA) informed from Lahore by telephone that about one million spindles of textiles are inoperative because of closure of about 160 textile mills. Two top knitwear companies in Lahore are said to have been closed down while a few in Karachi, Faisalabad and Multan are considering to pull shutters down.

Cotton prices are crawling upwards and banks are not ready to oblige millers with fresh credit lines as they have been unable to pay off their previous loans. The President of the Federation of Pakistan Chambers of Commerce and Industry, Sheikh Tanvir Ahmad, has pleaded on a number of occasions for a two-year moratorium on repayment of loans. The APTA has indicated about Rs200 billion outstanding loans against textiles.

Textile is expected to net in about $12 billion export earnings during the current fiscal year. It could hardly fetch $10 billion export in 2006-07. ‘’Even to maintain last year’s export level has now become a daunting task’’, a local textile manufacturer said.

Industry leaders now fear a further hike in production cost from the impact of rising international oil prices. ‘’The 2007-08 budget was drawn up on assumption of $56-58 a barrel cost’’ a business analyst said. But within less than four months, the oil prices have gone up by more than 45 per cent with no signs of respite. Thanks to the Presidential elections and expected general elections early next year, the government has spared the consumers from the impact of rising oil prices and is apparently taking hit on its budget. But how long will government absorb the rising cost of oil import and provide a cushion to consumers?

The special secretary, ministry of finance, Dr Ashfaq Ahmad Khan avoided a direct answer when asked by a private television channel recently as to when will the petroleum prices be reviewed. He feared media will come down rather harshly on the government whenever a price review was made. But industry leaders apprehend an increase in energy cost very soon which is bound to push up the production cost with an adverse impact on exports.

‘’The government does not have any contingency plan to meet the challenging situation, ‘’ economist Asad Saeed said. Pakistan has managed to weather these difficult times because of the depreciation of dollar. But Asad and many businessmen are of the view that the government should now give a hard look at the foreign exchange reserves. ‘’Foreign currencies of our reserves should have something to do without exports and imports’’ a businessmen said.

With little hopes of export growth showing some recovery, the government is expected to pay more for imports in 2007-08 as oil price is on the increase. The government has already started importing wheat after having claimed to have harvested a record bumper crop of more than 23 million tons. Wheat flour availability is still a problem for the consumers who are paying Rs18--20 for a kilogram. The government has been forced to import tomatoes. International import prices of edible oil, milk powder and pulses are also on the rise. Import of all these food items are being made after the State Finance Minister Omar Ayub Khan claimed of having achieved complete food autarky in his budget speech in June. In all probability, the import bill this fiscal year will go beyond $32 billion.

The State Bank of Pakistan in its monetary policy statement early this year conceded rising inflation. Tight monetary policy made credits expensive for private sector but failed to control inflation. The situation is bound to aggravate with impact of rising international oil prices. The National Economic Council has set 6.5 per cent inflation target. The Consumer Price Index is being driven by food prices. Inflation hurts fixed income group and it has deep implications for export-oriented production.