THE government has given an undertaking to the World Bank and the IMF that medium-term macroeconomic objectives will be gradually raised in order to achieve 5.2 per cent GDP growth rate in 2003-04 and at the same time keep inflation at 5 per cent.
The current financial year’s growth rate target had been revised downward from 4 per cent to 3.7 per cent almost immediately after the announcement of the budget. But now the State Bank and major international donor agencies estimate 2.6 per cent growth rate in 2001-02 due to September 11 events compared to 3.9 per cent growth rate of 2000-01.
“While the government expects some pick-up in private investment as confidence returns, the tight external financing constraint and the limited room to expand public investment will contain the overall investment rate at about 17 per cent of the GDP through 2003-04”, says the latest official communication to the World Bank and the IMF. Realization of the growth target would thus rely mostly on enhanced productivity through structural reforms.
The current account deficit (excluding official transfers) is projected to decline to 2.6 per cent of the GDP in 2003-04. A steady accumulation of foreign exchange reserves is targeted to raise reserves to the equivalent of at least three months of import by June 2004, which is seen as a minimum for strengthening confidence in the government’s ability to maintain macroeconomic stability.
The government’s macroeconomic policy mix will be geared to consolidate macroeconomic stabilization, and reduce the public debt burden, while directing expenditure efforts at poverty reduction and social development. The government says it is fully aware of the need to reduce the debt overhang to be sustained by substantial fiscal consolidation and a continuous reduction in the fiscal deficit over the three years period. The government, therefore, plans a sustained fiscal adjustment to reduce the budget deficit to 3.2 per cent of the GDP in 2003-04 and allows a reduction of (net) public debt-to-GDP ratio to 83 per cent. On the other hand, widespread increasing poverty and large needs for basic infrastructure and services will be tackled through stepped up social and development expenditures and the raising of efficiency of public expenditure.
The government expects that its tax policy and tax reforms will generate a gradual but continuous improvement in tax revenues up to 14.3 per cent of the GDP by the end of the 2003-04. To ensure a controlled execution of the budget, the government will continue to release social sector allocations in full at the start of each fiscal exercise, while staggering the availability of other allocations according to the revenue development. In the 2002-03 budget exercise, the government is likely to make special budgetary allocation to fund a financial restructuring package needed to bring kESC to the point of sale.
The maintenance of a market-based and competitive exchange rate will remain at the core of the country’s exchange rate policy, while the functioning of the foreign exchange market will be strengthened. The State Bank of Pakistan will gradually discontinue its kerb market purchases and promote the integration of the kerb market into the interbank market so as to further reduce the spread between the two rates. The government expects the recent narrowing of the spread to shift workers’ remittances from the kerb to the interbank rate, accelerating the integration of the two markets. Intervention in the inter-bank foreign exchange market will be limited at ensuring smooth functioning of the interbank market, while ensuring the SBP’s reserves accumulation objective during the next three-year period.
The monetary policy, the government assures the donors, will be geared towards containing inflation and supporting a steadfast accumulation of reserves to reduce external vulnerability. The SBP will maintain a prudent monetary stance and will use interest rates flexibility to preserve appropriately tight domestic liquidity conditions to ensure the inflation target, in view of the expected continued instability of money demand. In case of the strong pressures on the exchange rate, monetary policy will be tightened. In addition, the central bank will deepen its analysis of the functioning of monetary transmission mechanisms, while strengthening the operational framework of the interbank market for liquidity management purposes, in view of preparing the move to an inflation targeting framework towards the end of 2003-04.
“We will implement an ambitious reform agenda aimed at raising growth, reducing poverty, and restoring the confidence of the private investors in the potential of our economy”, the government assures the donors.
The key areas of agenda include: restructuring of public expenditure towards growth-enhancing and poverty-reducing outlays; improving monitoring and transparency in public finances, tax policy and tax administration reform, public enterprise restructuring and privatisation; and financial sector and foreign exchange market reforms. In all these cases, the central challenge is to address governance problems that remain a major obstacle to higher growth and better social services.
Two additional dimensions of governance will be tackled. First the government will assess existing regulation and procedures affecting the interaction between the administration and the business community with a view to eliminating red tape and, with it, corruption opportunities. Second, with the support of the Asian Development Bank (ADB) the government is undertaking a long term access to justice reform programme aimed at strengthening the rule of law and enhancing the transparency and accessibility of the legal system by modernising the court system at all levels and strengthening capacity, effectiveness and accountability of law enforcement agents.
The government further pledges that over the medium term, it plan to allocate a rapidly growing share of budgetary expenditures to growth-enhancing and poverty reduction outlays. Specifically, it aims to increase the development budget by 1.2 percentage points of GDP over the next three-year period, and broadly defined social and poverty related expenditure by 0.6 percentage points. A start has been made with the 2001-2002 budget, while further plans will be formulated once various major initiatives (such as education reform strategy detailed in the Interim Poverty Reduction Strategy Paper) are costed and appropriate monitoring mechanisms are in place. At the same time, the government will reduce the share of other categories of spending, including the defence related expenditure.
The devolution initiative will play a key role in this strategy, as it empowers local communities to formulate and implement development strategies that correspond to local needs. Starting from next fiscal year, the districts will be in charge of preparing their own budgets, based on transfers from the provincial governments and their own resources, while being permanently subject to a “balanced budget” constraint that does not allow them to borrow from scheduled banks or the State Bank. The hiring of civil servants will not be devolved to local governments over the programme period.