On both domestic and external fronts, ‘Pakistan’s economic outlook for 2012 is challenging’, according to Finance Minister Abdul Hafiz Shaikh. The challenges facing the economy emerge from the fears of a double dip global recession, possible rise in oil prices owing to tensions in Iran and the Gulf region, persisting domestic energy crisis, delays in reforming public sector entities and expected currency depreciation owing to export competition with India, he summarised in a special interview to Dawn’s Economic and Business Review.
The finance minister attributed some of the current economic weaknesses and difficulties to the legacy of the past. The government inherited a fragile economy in 2008 with macroeconomic imbalances — sharp depletion of foreign reserves, depreciation of rupee and loss of business confidence. By July 2008, the international oil prices had risen to historical high of $145 per barrel.
On top of this, the global financial crisis in September 2008 saw recession in developed economies. On an average, negative growth of 3.7 per cent was recorded in advanced countries while growth rate in developing and emerging economies fell to 2.8 per cent. During these times, Pakistan’s growth rate also declined to 1.7 per cent.
These factors necessitated the government to devise options for economic revival including accessing the IMF credit when the Fund had overhauled its non-concessional lending facilities and related conditionalities. Many other countries also took advantage of these new conditionalities and signed loan agreements.
The IMF agreement signed in late 2008 allowed Pakistan to revive business confidence and start implementing a new set of economic policies aimed at stabilising the economy as the highest priority, leading to sustainable and inclusive growth. The main principles for macroeconomic stabilisation included reviving growth, reducing inflation, improving foreign reserves and current account position, and renewing efforts for structural reforms.
He said in theory, correcting external account imbalances require reduction in aggregate demand, which comes with a price of slow economic growth and unemployment. However, reducing aggregate demand while maintaining employment became a challenge for the government. Reduction of aggregate demand affects the lowest percentile of poverty and therefore, the government responded with decision of employment in the public sector and policies aimed at transferring incomes to the rural sector.
While Pakistan was heading towards economic revival, floods of 2010 and again of 2011, affected the economic stabilisation programme. In addition, the security crisis worsened and Pakistan had to take difficult decisions on its support towards war on terror, the minister maintained.
Challenges The minister said that despite these difficult conditions, the economy showed resilience and averted recession. However, challenges to the economy are not over.
The fundamental challenge — reduction of its budget deficit — remains This challenge emanates from difficulty in increasing tax revenue and reducing subsidies. Removing public sector inefficiencies has always been difficult for economies around the world. Reforms in public sector take time and require careful planning and implementation, which at times can result in short-term difficulties.
But the government is committed to accelerate reforms in the public sector for improving efficiencies and later reducing government control and allowing private sector to play its role in economic building of the country, he said.
Reviving growth and providing employment opportunities is another important challenge. The low economic growth in 2009-10 and 2010-11 was attributed mainly to devastation caused by the two great floods, which reduced the agriculture output that also affected industrial output. The energy crisis further added to the misery of industrial growth. Despite this, growth in the services sector is constantly on the rise since 2008-09.
Another important challenge remains fixing energy crisis that is resulting in reduced industrial growth. The energy problems stem from reduced investments in hydroelectric generation that resulted in an increased reliance on thermal generation that skyrocketed cost per unit due to price of furnace oil. The government however, took the brunt of this rapid increase in oil prices and did not pass on the full price to the consumer based on the principles of economic welfare.
Poverty reduction is yet another challenge. With decrease in economic growth and increase in inflation, the most affected remain lowest percentile of the poor. To address this important challenge, the government formulated a policy to reduce poverty by diverting limited budgetary resources to areas that improves lives of the poor. Improving security and dealing with corruption to revive business confidence is also important, the minister emphasised.
Strengths Talking about inherent economic strengths, the minister said, Pakistan’s economy is strong on many areas. It has a good mix of government control and free-market economy. Gradual deregulation in many sectors including media, telecom, banking etc. had resulted in rapid economic growth and increase in taxation for the government. In addition, vast industrial base, high agriculture produce, infrastructure comparable to fast developing economies, thriving services sector and availability of skilled labour force carry huge potential for rapid economic growth.
He said, the democratic form of economic decision making in the country means that the policies implemented have wider penetration and sustainability attached to them. The consensus-driven approach results in strengthening federation and lays the foundations of a more inclusive growth.
Another important strength is the geographical dividend.
Geographically, Pakistan is situated near countries with high growth rates and offers trade corridors that can lead to enhanced supply routes.
Pakistan is also rich in its natural resources. The huge coal, copper, tight gas and mineral reservoirs offer a vast potential for their exploration and production.
Outlook 2012 As to why the year 2012 is challenging, he said, the global activity has weakened and become more uneven, confidence has fallen and fears of global economic recession are growing and likes of 2008 recession are being debated. A number of shocks have hit the international economy last year, including the devastating Japanese earthquake and tsunami, unrest in some oil-producing countries, and the major financial turbulence in the Eurozone
“The economy is susceptible to international economic developments,” he said. The oil prices have recently risen to around $110 barrel while the economic projections by the IMF remain pessimistic. In this instance, Pakistan’s current account deficit may reach close to $3 billion.
Trade balance is likely to remain between $14 and $14.5 billion. Exports are likely to increase to $26 billion while imports are likely to be below $40 billion. Remittances are expected to remain robust with close to $12.5 billion inflow. However, Pakistan’s economic position suggests that the external account position is unlikely to deteriorate and high probability is that foreign reserves on June 30th, 2012 will remain between $17- $18 billion.
For this year, the growth rate is forecast to improve to 3.6 as compared to 2.4 per cent achieved last year. Dr Shaikh said there are also pressures on the rupee. Indian rupee has devalued by more than 18 per cent since January 1, 2011 giving it competitive advantage over Pakistani rupee in international textile exports.
The budget deficit is likely to be below five per cent of GDP while the FBR tax revenue is likely to reach Rs1,952 billion, 25 per cent higher than 2010-11. Inflation is likely to reduce due to improvements in supply, government’s resolve to limit borrowings from the State Bank of Pakistan and stagnation of international commodity prices.
However, international recessionary fears, further rise in oil prices due to tensions in Iran and Gulf states, persistence of energy crisis in Pakistan due to low hydrogeneration and low gas reserves, and delays in reforming public sector entities add to risks in the economy.