KARACHI, July 24: Enormous foreign capital inflows have brought cheers to the market, stimulated economic growth and elevated the standing of the country's economic managers. But the two-year buoyancy in the external sector appears to be losing its momentum.
The cheap money that improved the balance-sheet of the corporates and the government is becoming costlier. A sharply rising trade deficit ($3 billion per annum) and plummeting balance of payments surplus is impacting adversely on the exchange rate. The rapid monetary expansion and increase in domestic demand emerging from a high growth economy has fuelled inflation contained till recently, by low purchasing power of the consumers.
It appears that the emerging trends are making the macro- economic stability look fragile and are putting sustainable economic recovery under potential threat as the rupee comes under renewed pressure and inflation rises with adverse implications for savings, investment and growth.
The picture signals potential risks and indicate the reversal of the direction in which the key drivers of the economy were moving. After all, the robust external sector was not the outcome of a vibrant economy with strong fundamentals but a result of favourable exogenous shock.
That brings into question what are the accomplishments of the much-lauded economic reforms. The fault lies in trying to integrate the national economy into a volatile global financial market. If the Americans raise their interest rates, Pakistan cannot escape its impact.
As past experience has shown, a fast depreciating rupee has not helped boost exports and has made cost of investment prohibitive when combined with high rate of interest. Instead cheap money with stable exchange rate has encouraged short-term investment. An investment-led growth is yet not within easy grasp.
The State Bank promises to raise interest rates gradually so as not to risk incipient economic growth. Its efforts may be frustrated to an extent by increased government borrowings, expected to be higher at Rs199 billion for the current fiscal year against Rs177 billion last year. The IMF and the World Bank want the State Bank to reveal in full detail the borrowings by the federal and provincial governments.
In the fiscal year 2004-05, the rupee would be under pressure because of continued import demand and lower net capital inflows. A lower foreign direct investment is seen by the market because of unlikely progress in the privatization of PSO and PTCL. The FDI is seen buoyant in oil and gas exploration and telecom sectors and at best may remain at last year's level. The government plans to retire $400 million worth of loans against off-shore foreign currency loans of the private sector. It, however, intends to raise some money from the Middle East that may shore up the rupee value to the extent of the borrowed amount. Such measures may help tide over short-term balance of payments problems but the long-term issue is to focus on import substitution where there is no recurring foreign exchange liability, with local technology and indigenous resources.
Trade deficit should be reduced by import substitution and a national policy of self-reliance. Indigenous production of oil and gas, edible oils, wheat and cereals needs to be enhanced. Food self-sufficiency should be the first priority. Although the textile vision, engineering vision and the leather vision were developed, the only one on which the government focused was the textile industry, whose contribution to tax revenues, CBR sources say, is negative.
National self-reliance has not been given the right priority. Policy-makers suffer from group thinking, with everyone talking and saying the same thing with no relevance to ground realities. The group thinking led the Bush administration to a misadventure in Iraq. It is through the clash of heterogeneous thinking that realities surface and correct policies are formulated.