Production is down, exports are stagnating and revenues are falling. The situation was confounded further by the adverse impact of September 11 tragedy on our exports and investments. On the other hand, we can take pride in the fact that Pakistan was able to complete for the first time ever an IMF programme successfully and obtain a larger and better one( Poverty Reduction and Growth Facility) from the Fund and in the process also has been granted debt profiling amounting to a write-off equivalent to at least 30 per cent of the $12 billion of bilateral official loans and postponement of repayment for the rest by at least 30 years.
The US has given cash grants of $600 million plus $400 million of further assistance and since all sanctions have been lifted both the OPIC and the EXIM Bank operations have been resumed for Pakistan. Japan has promised to resume its bilateral aid stopped due to nuclear related sanctions. The Europeans have been generous too and they have also allowed Pakistan an increased access to their markets. The US has also promised to do the same. And the last but not the least, the window of economic opportunity that is expected to be opened for Pakistan following the commencement of reconstruction of Afghanistan estimated to cost as much as $20 billion in as many years makes the future look very bright for this country.
The first six months of the year which were the last half of the last financial year ended on a very bleak note as Pakistan’s aggregate growth for the year ( 2000-2001) showed an improvement of only 2.6 per cent against the full year target of 5 per cent. This was attributed officially to the so-called ‘persisting drought conditions’ despite bumper cotton and wheat crops.In aggregate terms , value added by agriculture declined by 2.5 per cent against a target of 2.6 per cent. On the other hand despite a disappointing performance of textile sub-sector, the largest contributor to the large-scale manufacturing(LSM) sector, the LSM recorded an unbelievable growth rate of 8.4 per cent. In the external sector for the first time in its history, Pakistan was able to post a current account surplus of $ 331 million but this achievement is attributed to the State Bank of Pakistan’s kerb purchases and the recognition of the Saudi Oil Facility (SOF) as an official transfer( grant).
According to the annual report of the State Bank, because of the SOF, Pakistan’s balanace of payments position (BoP) has experienced a windfall improvement for the past three years, with a surplus in the last financial year. Also for the first time since 1982 when the rupee was moved to a managed float, the Pak currency depreciation during the last financial year by a record 18.6 per cent.
In the next six months of the current calender year which is the first half of the current financial year the economy appeared to have been caught in what seemed to be the good and the bad of the aftermath of the September 11 tragedy while at the same time the recessionary bout deepened further.The positive developments in this period were the increase in home remittances due to international curbs on the hundi system, lower inflation because no economic activity of signficance took place and narrowing of trade deficit because of lower imports. Also, the outlook for kharif crops is promising. Export and tax revenue growth, on the other hand, were disappointing while private sector credit has not taken off. The rupee-dollar parity remained fairly stable but experienced a sharp appreciation at the end of the first quarter. And overarching all this is global forecast for the next 9 months which is expected to be much more severe than earlier projections.
According to the latest IMF report, the synchornized slowdown in the global economy should result in growth of 2.6 per cent this year, compared to 3.2 per cent that was forecast earlier. US growth in the second quarter had slipped to an annual rate of only 0.2 per cent, while industrial production has declined to an annualized rate of 4.8 per cent—consumer spending in the US continues to slow down.European economy has not fared any better and gloom about the Japanese economy has been reinforced by recent data. The September 11 tragedy has further intensified the global recession, which is clearly shown in financial markets the world over. Stock indices in the US and Europe had fallen 7 to 15 per cent, with the negative ‘wealth effect’ stalling consumer spending. After an initial price hike immediately following the tragedy, international prices have slumped on account of low demand.
According to the State Bank of Pakistan’s report global recession was likely to spread through international trade. Commodity prices are forecast to fall by 7 to 8 per cent on the average this year. More specifically, the price of cotton in world markets has declined to 35 cents a pound which has lowered lint prices in Pakistan by 25 to 30 per cent compared to last year. Demand for Pakistani exports in the EU and US, which together account for 55 per cent of total exports, has slackened and is likely to worsen. In addition, in the short run a number of factors have come into play. These are: 1. increase in freight rates and the imposition of war-risk insurance have raised the cost of imports and made Pakistani exports more expensive; 2. cancellation of air cargo flights by foreign airlines have disrupted trade flows;3. manufacturing units have to maintain higher inventories and 4. the departure of expatriates from the country and the suspension of visits by foreign buyers has not allowed the country to maintain normal trade relations. Furthermore, revenue collection also suffered due to lower imports while the continuous influx of Afghan refugees added further pressure on Pakistan’s limited resources and infrastructure.
And as Pakistan entered into the three-year $1.3 billion PRGF programme in the first week of December, the country’s chances of escaping an extended and a more longish bout of recession, notwithstanding the new opportunities offered by debt reprofiling and lifting of all sanctions, have become highly doubtful. The post-September 11 opportunities perhaps would only postpone by, say, a year or two the fate which Argentina, a country under an IMF programme for the last three years, met in the third week of December this year. Here it would not be out of place to quote some excerpts from a speech Stanely Fischer, the recently retired first deputy managing director of the IMF, had made on June 25, 2001 at the Argentine Bankers Association meeting at Buenos Aires. After going over the achievements of Argentine’s economy in the past decade and the challenges it was facing currently, Mr. Fischer said:
“ The question that has to be asked at this time of recession is whether Argentina really needs fiscal adjustment. The obvious concern that such an adjustment would only impede the recovery of the economy. After all, neither the public debt( at around 50 per cent of GDP) nor the fiscal deficit( at around 2.5 per cent of GDP) are particularly high by international standards—indeed both would satisfy the Maastricht criteria, as would its inflation performance. The problem is that with the current level of spreads on Argentine bonds, the debt dynamics are on an escalating path. In addition, Argentine’s gross financing requirements are large although to be sure the recent successful debt exchange significantly and importantly reduced the gross financing needs for the next few years. High interest rates, in turn, stifle prospects for sustained recovery, worsening the debt dynamics.
“ So, it seems obvious that the fiscal deficit should be cut. Nonetheless we have to ask the question: won’t a fiscal contraction only contribute to a vicious circle of low growth, leading to a worse budget situation, leading to a more fiscal contractions, leading to yet lower growth etc, ( that is exactly what had happened preceding to the IMF riots of December 2001 in Argentine). But experience in several countries (including Ireland, Denmark, Italy and Brazil) suggests that fiscal tightening can be expansionary—can lead to virtuous circle ( there was no virtuous circle on the Argentinean streets when the IMF riots broke out). How? The answer is simple—by producing a sustained reduction in the risk premium and domestic interest rates. And no-one doubts the need for lower interest rates. There is now widespread acceptance of these realities in Argentina, as is evident from the passage and general understanding of the Fiscal Responsibility Law ( for zero fiscal deficit). The current crisis was triggered by bad fiscal news in Q1, which threatened to see the deficit come in at more than $10 billion instead of $6.5 billion laid down in the programme and the Fiscal Responsibility Law. So the authorities announced measures in April worth $3.8 billion including $2.5 billion from the financial transaction tax and $900 million in spending cuts. The authorities are also expecting a modest further net boost to revenue from the measures announced last week.
“ But there is significant uncertainty about the yield of some of these measures, especially in view of their administrative complexity. We are concerned about the strains this complexity will place on an already weak revenue administration. Much needs to be done on the expenditure side. The evidence is very clear that expenditure cuts are more effective than tax increases in sustaining fiscal consolidation and boosting growth. For example, there is a need to ensure that the wage bill is under control. To this end, keeping spending by the provinces under control is essential. The federal government has been more successful than the provinces in improving its fiscal position. Argentina is certainly capable of a stronger fiscal performance.It was done by your neighbour, Brazil; it has been done elsewhere in this hemisphere; and it is being done in Turkey.”
So, Argentina followed the advice of the IMF to the letter and ended up where it is today. If Pakistan too follows the advices contained in the PRGF to achieve what it aims at ( fmacroeconomic stability, growth and poverty alleviation) all at the same time, there is no way Pakistan can escape the fate of Argentina no matter how much concessional cash flows into the country and how much of its debt is written off.