THE economy is well on track and that PPP government has many achievements to its credit in the economic sphere, according to the President’s address before the joint sitting of parliament. Is this the case?

Before we look at the economic performance of the present government, it seems in order to outline the state of the economy inherited by it.

The last five years of the Musharraf era (October 1999-March 2008) are generally touted as a period of economic boom characterised by robust economic growth, stabilisation of the exchange rate and record increase in workers’ remittances and foreign direct investment(FDI).

Between FY04--FY08, the economy grew at seven per cent per annum on average—though during the FY08, growth rate fell significantly to 3.7 per cent. Exchange rate remained relatively stable—although, again, the second half of FY08 saw sharp depreciation of the rupee. The country on average received FDI inflows of $3.25 billion a year and both during FY07 and FY08, FDI crossed $5 billion mark.

However, other major economic indicators presented a bleak picture. Trade deficit increased to a record $20.74 billion in FY08, current account deficit exceeded $14 billion—8.47 per cent of GDP. Fiscal deficit rose to Rs777 billion--7.6 per cent of GDP—while revenue-GDP and tax-GDP ratios fell to 13.7 and 9.9 per cent respectively. External debt and domestic debt reached $46.16 billion (31 per cent of GDP) and Rs3.21 trillion (32 per cent of GDP) respectively. Average CPI inflation was 12 per cent at the close of FY08. Investment-GDP ratio was 21.6 per cent, while savings-GDP ratio was 13.9 per cent.

This means that the economic growth during the Musharraf regime was not based on strong fundamentals and the growth was largely on account of inflow of foreign capital. By October 2008, the external account position deteriorated to such an extent (foreign exchange reserves depleted to $7.31 billion—as on October 17, 2008—and the exchange rate nosedived to Rs82.37 per dollar that the government was forced to borrow from the IMF.

Let’s now see how the economy has performed under the PPP government during last four years. During FY09, the first full financial year under the present set-up, the economic growth rate fell to 1.7 per cent, which was one of the lowest in Pakistan’s history. Even that low growth rate was made possible by downward revision of GDP growth to 3.7 per cent from the original figure of 5.8 per cent.

A modest economic recovery was made in FY10 as the growth rate increased to 3.8 per cent. However, the next year (FY11), economic growth rate receded to 2.4 per cent well below the 4.5 per cent target. For the current fiscal year, FY12, economic growth of 4.2 per cent was targeted. However, according to independent sources, the growth rate is likely to be between three and four per cent.

Fiscal deficit, which formed the main pillar of the edifice of the Standby Arrangement with the IMF, was to be reduced to 4.2 per cent of the GDP in FY09, and to 3.4 per cent in FY10. The FY09 target was missed as the fiscal deficit was recoded at 5.3 of GDP, though much lower than the 7.6 per cent budget deficit during the preceding year. The FY10 fiscal deficit target was subsequently increased to 4.6 and then 4.9 per cent. However, the budget deficit of 6.3 per cent was recorded during that year.

The fiscal deficit target for FY11 was four per cent of GDP, which subsequently was enhanced to 4.7 per cent. However, the fiscal deficit went up to 6.6 per cent. For the current fiscal year, fiscal deficit target of 4.7 per cent was set; however, it is likely to go up to nearly seven per cent. The fiscal deficit reached about Rs532.52 billion (2.5 per cent of GDP) by the close of the first half of the current fiscal year (FY12 H1) compared with Rs490 billion in the corresponding period of the preceding fiscal year.

There has been improved performance in containing the current account deficit. During FY09, the current account deficit was reduced to $9.26 billion (5.7 per cent of GDP) and further to $3.50 billion (two per cent of GDP) in FY10. The current account, unusually, moved to surplus (0.1 per cent of GDP) in FY11 in the main due to record levels of exports ($24.81 billion) and remittances ($11.20 billion).

During first seven months of the current fiscal year (FY12 July-January), current account deficit of $2.63 billion was recorded compared with $96 million during the corresponding period of FY11. In the ensuing months, the current account deficit is likely to grow faster due to increase in prices of petroleum products.

Foreign investment inflows have dried up. During FY09, FDI fell to $3.72 billion and further to $2.20 billion in FY10 and $1.63 billion in FY11. During FY12 (July-January), FDI receipts of $597 million were registered compared with $1 billion during the corresponding period of FY11. The fall in FDI is largely due to precarious law and order situation and political uncertainty.

The exchange value of the domestic currency continues to decline. At the close of FY11, the rupee-dollar parity was 85.5, which has surpassed 91. Foreign exchange reserves have also come down from $18.24 billion at the end of FY11 to $16.77 billion (as on February 10, 2012). The reserves are likely to come under further stress as Pakistan has to pay back $1.1 billion to the IMF before the current fiscal year comes to a close.

Notwithstanding a rather restrictive monetary policy, strong inflationary pressures persist. The average inflation increased to 21 per cent during FY09, declined to 12 per cent in FY10 and rose again to 14 per cent in FY11.

The average inflation was 10.8 per cent in the first seven months of the current fiscal year (July-January FY12). The major cause of inflation is the fiscal deficit and the way it is being financed (bank borrowing). Another cause is the energy crisis driven aggregate demand-supply gap.

A singular economic achievement of the present government is the institution of the 7th National Finance Commission (NFC) Award. Making a departure from the past, the present NFC Award has a multiple criteria. Though population (82 per cent weightage) remains the chief criterion, poverty/backwardness (10.3 per cent), revenue collection/generation (five per cent) and inverse population density (2.7 per cent) have also come into play.

The government’s singular failure in the economic sphere is its inability to widen the tax net. In FY08, revenue-GDP ratio was 13.7 per cent, in FY09 it dropped to 13.2 per cent and slightly increased to 13.8 per cent in FY10 before falling to 11.7 per cent in FY11. During the first half (H1) of FY12, revenue-GDP ratio was 5.4 per cent. Tax-GDP ratio, which was 9.9 per cent in FY08, came down to 9.8 per cent in FY09 and slightly rose to 10 per cent in FY10 before falling to 8.9 per cent in FY11.

During FY12 (H1), tax-GDP ratio was 4.3 per cent. It was the government’s failure to undertake necessary tax reforms, particularly the introduction of the reformed GST that led to the premature termination of the IMF programme.

hussainhzaidi@gmail.com