“Cutting development expenditure can be another option”

Q. Even before the latest predictions by the State Bank of Pakistan that the economy will grow slower than expected, people were saying that the rate of growth we achieved in previous years was unsustainable…

A. The slowdown is deliberate and is part of the business cycle. But the economy is still expected to grow at 6.5 per cent by the end of the current fiscal year. This is quite high by any standards.

How long do we need to grow at six to seven per cent before the growth becomes sustainable? Our own people don’t believe us but the world does. Whenever we float a bond, the response is overwhelming. Through these bonds, outsiders have invested billions of dollars in Pakistan’s economy. They have done so after thoroughly analysing the economy. Pakistan has one of the fastest growing economies in Asia, rising at an average annual rate of seven per cent. This is the longest spell of high growth in the country’s history and it has reduced unemployment from 8.3 per cent to 5.3 per cent. By creating more jobs, the economic growth has also resulted in poverty alleviation. Our budget deficit was on average seven per cent throughout the 1980s and 1990s, now it is half as much. In 1989-1990, investment stood at 15.6 per cent of total output. Now it is 23.8 per cent. By 1999, total domestic production had reached only 63 billion dollars. By the end of 2007, another 87 billion dollars had been added. This happened because reforms took place and policies changed.

Q. Critics say that the current high growth is the result of expansion in the services sector and a boost in consumer spending at the cost of the manufacturing sector and agriculture…

A. The services sector and consumer spending serving as engines of growth are not peculiar to Pakistan. It happens all over the world. As an economy grows, the share of agriculture in it goes down and that of non-agriculture rises. If this does not happen, we will remain an agrarian, rural economy. Malaysia was a tin, palm and rubber economy in the 1970s. Now the share of agriculture in the Malaysian economy is as low as seven to eight per cent. This is also happening in our economy. People’s incomes rise as an economy grows but their expenditure on food relative to their incomes declines while that on non-food items increases. This is good because it means a structural transformation is taking place in the economy. In 1969-1970, the share of agriculture in our economy stood at about 90 per cent. Now it has come down to 20 per cent.

But as far as the manufacturing sector is concerned, it has been growing steadily. In fact we have a seven per cent annual growth rate because of the high growth in the industrial sector.

Q. This might have to do with phenomenal expansion in the production of automobiles, especially cars and motorcycles…

A. When growth is calculated, 100 industries are taken into consideration and every industry is allocated a certain weight while calculating overall industrial growth. The total weight accorded to the automobile sector is 3.2 per cent and the sector does not represent cars and motorcycles alone. It also includes tractors, diesel engines, trucks, jeeps and vans. So the weight of the automobile sector in total industrial growth will be quite low even if it grows at an annual rate of 50 per cent.

Q. Still, the government seems to be ignoring agriculture by increasing input costs while doing nothing about the prices of the main crops…

A. There is nothing that can be done to the input prices. Already the government is giving subsidy on fertiliser as well as keeping import duty on it fixed at 2,000 dollars per tonne. By doing so the government is foregoing revenue. Agriculturists say that support prices for the main crops should increase because of the increase in input prices. But when the support price increases it has an inflationary effect on the prices of flour and other food items, and that in turn increases input costs. It is a vicious circle. There is no focus on raising the yield per acre. Flaws in agriculture have never been corrected and will remain so because people heading the agriculture ministry strongly believe that the only thing to take care of is crop price. We have a fixed area under cultivation. We, therefore, need to increase yield in order to keep meeting our rising food demand.

Q. What about high energy prices, which businessmen say are making Pakistani products uncompetitive in international markets?

A. We have made a habit of crying foul. Even though international energy prices have increased, we haven’t passed them on to consumers. So where does the advantage lie? In countries which have passed on the energy prices to consumers, or in Pakistan which hasn’t? In fact, energy prices have decreased in Pakistan if we adjust them for inflation. A Swiss firm has done a study for the commerce ministry on competitiveness, comparing Pakistan with India, China, Bangladesh, Indonesia, Sri Lanka and a host of other countries. The study finds that Pakistan is the most competitive of the countries examined. Everyone in the industrial sector knows this. But they need to do something instead of always looking to the government for help.

If the industry is not competitive it is because two generations of industrialists have enjoyed protection. They lived on quotas. They had no incentive to grow and expand. Even when they expanded, they did not become competitive. There has been no improvement in productivity. The government provides them billions of rupees for research and development. They should be asked if they are spending this money on research, development and training their workers.

Q. How can we hope to grow and remain competitive with electricity generation and gas production falling behind demand?

A. The presence of energy shortages and traffic congestion are empirical evidence of a country’s growth. Pakistan is not peculiar. China is also facing an energy deficit.

Q. We could have done something to fix the problem before it became serious…

A. In 2001, we had 4,000 megawatts of surplus electricity. We did not know what to do with it after negotiations with India collapsed in December 2001. By earlier projections, the gap between supply and demand would have ended in 2010-2011, with demand for power growing at three per cent annually. We thought this did not need be so. We believed the surplus would end in 2006 if both the economy and demand for energy grew at six per cent per annum. But in reality, demand for energy grew at 10 per cent and the economy grew at nine per cent above expectations. We therefore started having shortages in 2004-2005. Now, do you invest in new electricity plants while sitting on surpluses? You don’t. A new power plant needs three and a half to four years to set up. We are witnessing these shortages because we could not exactly predict when the surplus electricity would end.

Q. What do you say about the dangers of the widening budget deficit and rising current account deficit?

A. Last year, average oil prices were 64 dollars per barrel. This year we had predicted that they will stand at 69 dollars a barrel. But actually they have risen to 92 dollars a barrel. This is the only problem that we are facing. This is putting pressure on the budget deficit because we are not passing it on to consumers. The last adjustment in oil prices was done in January 2007. Prices have increased by 76 per cent since then but we haven’t passed them on.

In the current fiscal year alone, the government has paid 72 billion rupees from its budget on maintaining oil prices. We are a poor country. We cannot afford it. Also, the price of furnace oil has increased to 30,000 rupees per tonne. Independent power producers are selling electricity to the government keeping that price in mind, but the government is not passing that on to consumers. Oil prices are also putting the current account under pressure. Due to high oil prices, it has shot up to 10 billion dollars. Oil prices are inducing food inflation through increased transport charges. Also, high oil prices have changed the economics of food commodities. Corn in the US, palm oil in Indonesia and Malaysia and sugarcane in Brazil is being used in the production of alternative fuels rather than for food, driving the prices of these commodities higher.

In short, oil prices are the root cause of all our current problems. But containing oil prices will mean our budget deficit will increase by 165 billion rupees by the end of the current fiscal year in addition to four per cent of the total budget already provided. This will increase government borrowing, leading interest rates and the debt burden to increase. Cutting development expenditure can be another option if we don’t want to pass on the oil prices and risk the budget deficit rising.