KARACHI, Dec 31: Unlike in the past when Pakistan had to look for ways to avoid default on foreign payments the country is now wondering how to prosper on the back of rising foreign inflows.

For a layman the answer lies in this: use the inflows in a way that guarantees that the country would not need to carry the begging bowl again and chalk out a plan to help the economy grow on its own. But are the economic managers share this view — and if so what they are doing to achieve this goal?

In the three-year military rule (1999-2001) Pakistan followed a course of reforms sponsored by the IMF-World Bank that aimed at stabilizing the economy and the economy did gain some stability.

But independent economists have often pointed out that this stability was achieved at the cost of growth — a view not fully shared by the economic managers. “It is too early to draw such conclusions,” says a top economic manager who tailored the IMF- prescribed reforms to the specific needs of the country. “We may have to wait for another year or two to see the reforms giving birth to growth,” he said during a recent discussion with Dawn.

The government claims that the real GDP growth averaged 3.3 per cent during the three-year military rule against an average of 3.2 per cent in the preceding three years. Officials say this is indicative of the fact that the reforms programme that basically aimed at achieving economic stability would eventually lead to economic growth. In its first quarterly report released here on Monday the State Bank has also said that the current fiscal year may close after meeting the target of 4.5 per cent GDP growth. But the report does admit though not without questioning a big slip in the growth of large scale manufacturing that accounts for one fifth of the GDP.

The 50 per cent fall reported in LSM growth in July/September 2001 compared to the same period in 2000 becomes all the more troubling when seen in a clear shift in the banks lending policy. After failing to meet the private sector credit demand from large industries the banks are now out to give more loans for purchase of consumer goods such as TVs/refrigerators/motorcycles etc. The bankers say that this would lead to demand-pull economic growth.

But independent economists say liberal consumer financing is not going to attack the crux of the problem unless the high input cost of domestic industry is reduced. They say that reckless consumer financing may even create inflationary pressure through increased imports.

Central bankers and economists associated with the ministry of finance say with the interest rates falling sharply coupled with a recent cut in the power tariff the input cost of the industry is sure to decline.

But the discount rate and treasury bills rate cuts in the last two months do not guarantee a significant fall in the cost of borrowings of the private sector. Pakistan’s financial sector has become a free market where the central bank cannot dictate banks to bring down their lending rates. The easing in its monetary policy only conveys its desire to the banks that it wants them to make cheaper loans to the private sector. Many banks particularly those in the private sector find it too easy to avoid lending to the private sector and run risks rather than keep on investing in the government papers. Here again the falling yield on T-bills and long-term bonds only signal to them to find more profitable avenues of lending. But if the banks do fail in it the government securities being risk-free instruments of investment will always be in high demand.

Bankers say if the government and the central bank are really keen to see bank credit for private sector shooting up then such laws be enacted immediately that guarantees hassle-free takeover of defaulters assets by the banks. They say that experience has taught them to be more prudent in making big loans to industrial units which when go in default become a perennial drag on the banks profitability.

Now that an elected government is in place one can hope that banking laws would be updated with a view to removing whatever comes in the way of expeditious recovery of loans. If that is done banks would find it easier to make big loans to the private sector. Till such time comes the big corporates would have to rely more on raising debt from the market through term finance certificates — a practice that has already gained momentum after the death of the concept of development financial institutions in Pakistan.