The downside risks to national economy is growing from the external sector, now under pressure from the volatility of the international markets. If the oil prices continue to remain at record levels, official projections of imports, fiscal deficit and inflation may have to be revised upwards , says the Asian Development Bank.
While listing some of the down side risks in it's " Pakistan Economic Update the ADB also cautions that, "high oil prices could dampen the global economic recovery, which in turn can lower Pakistan's export growth."
Whether Pakistan's exports would be hurt or not, only time would tell. In case of recession in industrial economies, the demand of the low income groups for cheaper goods from the emerging markets has a tendency to picks up.
Yet, in all probability, the oil prices will remain high. Shell Pakistan chairman Farooq Rahmatullah told Dawn that oil prices are unlikely to ease soon because of higher seasonal winter demand. He reckons that the oil import bill may go up by $one billion to touch $4 billion in current fiscal year.
It cannot be denied that exports are becoming more vulnerable to volatility and shifting demands in the global markets. Much of the export growth in South East Asia is fuelled by China's growing needs. Earlier, it was the United States that opened its markets to the region to check the advance of Mao's brand of communism.
Soaring oil prices have added to the uncertainties of Pakistan's export potentials created by the WTO challenges coming from January 2005. But there are positive forecasts also.
Some studies indicate that textile exports from Bangladesh may dry up once the quota-free WTO trade order comes into force. With domestic advantage, the gainers may be China, India and Pakistan.
Asian Bank signals about downside risks to the national economy comes at a time when some fears are being expressed that stagflation, a much dreaded menace witnessed for the first time in 1970s, may stage a comeback.
According to news reports, South Korea has been hit by a mild attack of stagflation. And noted economists working in international security houses reckon that the average return on equity in the United States in next ten years may drop to 50 per cent of that over the past half century.
Perhaps, the fragile economic recovery in industrialized states indicates that recessionary trends would not go away in the short-term with their economies hit by high oil prices. It does not augur well for global trade.
The Asian Tigers, who roared on the back of massive exports, now recognize that the suppression of domestic private consumption to promote export-led industries has created imbalances in the economy, inefficient resource allocation, poor income distribution and vulnerability to external volatility. This is all the more true for Pakistan which has suffered from a perennial trade deficit often funded by unsustainable foreign debt.
At the second Asia Economic Summit held at Kuala Lumpur earlier this month, presentations made by noted economists demonstrated that national economies of South East Asia with exports and domestic consumption as key drivers are performing much better than those dependent on export-led growth.
The export-led economies of Taiwan and South Korea recorded a growth rate of 3.2 per cent and 2.7 per cent respectively in 2003. With weaker rise in consumption, Indonesia and Philippines did better with growth rates of 4.1 per cent and 4.5 per cent.
But the best performing economies were those whose key drivers were exports and consumption. For example, economies of Malaysia and Thailand grew by 5.2 and 6.7 per cent with their respective targets for 2004 set at 6.9 per cent and 9 per cent.
By reviving domestic consumption, Hong Kong is targeting its growth rate at 7.2 per cent for 2004 against 3.2 per cent in 2003. Communist China's growth of 9.1 per cent was private sector led.
Despite a high growth rate of 6.4 per cent, private investment in Pakistan is confined to short-term development spending and a significant portion of the low level foreign investment is explained by privatization proceeds. Pakistan's geopolitics which impacts on foreign investment, is outside the domestic control.
Pakistan has also made a beginning towards consumer-driven growth much limited in scope. Economic managers are still too much focused on an export-led industrial strategy that has not yielded positive outcomes.
On merchandise account, imports continue to exceed exports and the trade deficit is growing. In last fiscal trade deficit was to the tune of $3.2 billion and financial analysts see the figure go up to $4 billion this fiscal. The trade deficit is now being financed by remittances sent by non-resident Pakistanis.
No doubt, the State Bank is encouraging consumer financing which is partly responsible for raising domestic demand and pushing up the industrial output by 18.1 per cent in the last fiscal.
To boost domestic demand, the Public Sector Development Programme has also been enhanced significantly but needs prudent spending, strict monitoring and efficient execution. Financing of small and medium sized industries (SMEs) has not gone beyond the rhetoric stage.
Though a good beginning has been made in housing and construction, the issue of land and other problems relating to the provincial governments has not been resolved. Poor governance by the provinces, denied autonomy and run by puppets by Islamabad, is responsible for snags in all spheres of economic activity. The only exception is the government of Punjab which has taken good initiatives in the field of land and housing development.
Speculation in real estate has made prices soar beyond the reach of most of the genuine buyers. Housing schemes of defence housing authorities have become speculative business with official papers for a plot of 500 yards in projects, still not off the ground, being sold for a premium of Rs2.5-3.0 million.
One begins to wonder what is the real value of money/currency? High prices of building materials and cars have a negative impact on consumer spending and mortgage creation.
Official housing policy is supposed to be the key driver in growth of the domestic economy. Mortgage financing is the principal plank of consumer financing. Yet there are many overwhelming problems relating to housing that need to be tackled to benefit both the low and middle income groups. Housing should be freed from the domination of speculators.
But a consumer-driven growth is not possible, if 60 per cent of the population living in the countryside is excluded. Since the ownership of agricultural land is highly skewed, any increase in farm output benefits the big farmers disproportionately.
The distribution of state lands among the landless should be expedited and all government lands should be exclusively earmarked for the poor. A prosperous peasantry would buy more industrial goods and services.
Rising inflation is a major issue for the consumers. The government must evolve a multi-dimension approach to tackle the problem of price stability. But in tackling the issue of price stability, the government should ensure that employment and growth do not suffer.
The crux of the matter is how to manage the trade-off between employment and inflation. Pakistan has some experience of fighting stagflation in the 1970s with reduced unemployment and poverty.
Here it may be pertinent to quote the then prime minister Zulfiquar Ali Bhutto:" both inflation and unemployment are bad and bothersome. But a choice has to be made between the two evils, advanced countries would prefer higher unemployment to more inflation.
- In developing countries, it is more important to provide employment even at the cost of inflation because a large section of population is affected more by unemployment than inflation.
Besides, in developing countries, there are no worthwhile social securities for the unemployed. The choice between unemployment and inflation is not a simple one. Neither of them are without grave repercussions.
But an ideal solution is not available." Though Bhutto was not an economist, top US economists now tend to agree that there is no right answer to trade-off between inflation and unemployment.