While an early economic recovery does not appear possible, some macroeconomic indicators are showing signs of improvement since the IMF released the first loan tranche of $3.2 billion in November and the government started implementing its economic stabilisation plan.

“I don’t see an early economic recovery,” says Navaid Hamid who teaches economics at the Lahore School of Economics.

In its first quarter report of the current fiscal to September released last week on the state of the economy, the State Bank of Pakistan (SBP) has expressed cautious optimism about economic recovery. At the same time, it has underlined the need for continuing “effective policies and implementation of the reforms to regain macroeconomic stability and meet economic challenges”.

The sense of crisis gripping the economy in the initial months of the current financial year has visibly eased by November as the government moved to address the most immediate risks and entered into a macroeconomic stabilisation programme to support medium-term reforms under the oversight of the Fund, says the bank.

It says the “disbursement IMF loan tranche meant that any immediate risk of default on external obligations receded with a substantial improvement in foreign exchange reserve adequacy indicators. Also, export growth has strengthened and import growth moderated somewhat.”

“This lent strength to the rupee, reducing the impact of an important generator of inflationary pressures. The gains on the external account was helped by a sharp fall in international commodity prices that is expected to substantially lower the import bill, offering the possibility of a decline in the very large current account deficit, and lower inflation.”

“This supply-side improvement has been reinforced by the reasonably good performance of crops during kharif FY09. These factors appear to have already halted the persistent uptrend in inflationary pressures in the economy. Together, they could also help support a very modest improvement in the growth outlook for the current financial year.”

Much of the bank’s optimism about modest growth recovery, argues Hamid, stems from the relatively improved performance of summer crops and the likely increase in wheat output, as well as some improvement in a few areas of the services sector.

“The manufacturing, nonetheless, continues to be dragged down by the persisting energy shortages, and is feared to post negative growth,” Navaid says. The large-scale manufacturing has already shown a broad-based 6.4 per cent negative growth in the first quarter and is unlikely to make recovery as the energy crisis deepens

The economic data so far available shows that exports have grown 12.7 per cent in first five months to November compared to 6.5 per cent last year. The growth in imports, on the other hand, has reduced to 16.5 per cent from 18.4 per cent.. Trade deficit, however, rose marginally by 4.9 per cent from 4.6 per cent.

The relatively stronger growth in exports and decline in global commodity prices is estimated to help ease pressures on external account and reduce the current account gap to 6.2- 6.8 per cent of the GDP from 8.4 per cent last year. In the first five months, the current account gap has grown by 3.9 per cent from 2.8 per cent a year earlier.

Headline inflation fell to 24.7 per cent in November from 25.3 per cent in August but is still expected to breach with wide margin the annual target at 12 per cent to reach 20 - 22 per cent. Fiscal deficit, one of the major worries of the government, is reported to have dropped to one per cent of GDP over the first quarter from 1.5 per cent in the same period last fiscal. The drop in fiscal deficit is said to have been helped by drastic reduction in food and energy subsidies, sharp cut in development expenditure and 24 per cent increase in tax revenue during the first five months.

In spite of improving economic indicators, businessmen insist, the growth outlook will remain gloomy unless the government moves to address the “real issues” facing the economy. “The IMF loan and stabilisation plan has helped stop “economic free-fall, shore up foreign currency stocks, and slash inflation slightly”, Navaid says.

“But it is absurd to expect these two factors to make the economy rebound and lure fresh investment, which is badly needed for recovery. Huge energy shortages, poor law and order conditions bad economic management and tensions with India will keep investors at bay. These issues need to be resolved and settled before domestic and foreign investors begin investing. In these circumstances, only those who get free credit or are offered lucrative, guaranteed returns on their money, invest,” he contends.

The All Pakistan Textile Mills Association (Aptma) chairman, Tariq Mahmood, says the sense of crisis has eased because of the IMF assistance and reduction in the import bill. But economic recovery largely depends upon the government, he says.

“Exporters are faced with domestic and global slowdown in demand and a renewed competition from their regional and global competitors as governments across the globe cut interest rates. With credit available to our industry at 20 per cent, it no longer is possible to compete in the global markets”.

“Secondly, the industry is forced to cut its production by at least one-thirds due to massive, unannounced power blackouts, and gas supply cuts. We need to put our house in order and make our industry viable before we think of economic recovery.”

He, however, believes that the textile industry – which contributes around 60 per cent of total export earnings and employs 45 per cent of non-farm labour, not only can maintain its share in the world markets but also enhance it if its exports are made competitive and viable.

Some businessmen feel that the government is incompetent to solve the economic difficulties. “True, the macroeconomic stability has improved a bit. But what about the micro level mismanagement? People don’t have gas to burn and petrol to move. Things are getting worse. I fear large-scale unemployment in next couple of months if the industrial downturn is not stalled by immediately reducing credit cost and improving supply of power and gas to the industry,” says leading auto vendor Almas Haider.

The State Bank too warns against complacency despite “the relative positives” seen in the economy.

“While many of the macroeconomic indicators may no longer be worsening, the imbalances are nonetheless still quite large,” it says and adds resolving them will require disciplined efforts over an extended timeframe. “This challenge is all the greater because of the difficult international economic environment, which has restricted the country’s ability to tap international capital markets and carries risks for other external receipts – exports, remittances, FDI, etc.),” it says.

Former Lahore Chamber of Commerce & Industry (LCCI) president Pervez Hanif finds a wide gap between what the State Bank has stated in its report and the ground reality. “They (the government) may say what they want to say. But it is not going to help it or the economy. They need to get down to start resolving the real issues – energy shortage, price and exchange rate stability, credit cost, etc – if they are interested in the recovery of the ailing economy,” he says.