ISLAMABAD, April 28: Pakistan’s large scale manufacturing growth declined significantly, investor confidence remained weak and investment declined as both unemployment and fiscal deficit increased during the year 2001-02.
Noting this, the Asian Development Bank has shown cautious optimism about Pakistan’s economic outlook for 2003-04. It says the growth rate is expected to surpass targeted 4.5 per cent mainly due to improved outlook for both agriculture and industry but inflation would increase.
In its report “Pakistan Economic Update, July 2002-March 2003,” (Asian Development Outlook 2003) released here on Monday, the ADB said economic uncertainty has reduced. But it warns that the trade deficit would double and surplus on the current account is projected to fall.
“Although the outlook is generally positive, the above scenario is subject to risks, such as the possibility of renewed tensions on the border with India, political uncertainties that may unfold given that coalition governments are in place in the centre and in two provinces, and the ambiguities surrounding the future course of the global economy, the bank said.
The ADB said: “in the immediate future, Pakistan’s economy faces challenges arising from the conflict in Iraq and its consequences, as well as possible social and political instability and a loss in investor confidence in the medium term.”
MACROECONOMIC ASSESSMENT: The economy experienced several external shocks in FY02 (year ended 30 June 2002), generated by the post-September 11, 2001 conflict in the subregion, tension on the border with India, continuing drought, and slow growth in the global economy.
However, due to improvement in macroeconomic fundamentals achieved through stabilization policies of two years, closer relations with the G-7 after the September 11 events, and fortuitous developments like increased remittances and larger foreign grants, the economy was in a better position to absorb the external shocks.
GDP growth rate is estimated at 3.6 per cent compared with 2.5 per cent in FY01. With the population rising by 2.2 per cent a year, per capita income increased by 1.4 per cent after negligible growth in the previous year.
The net contribution of the external sector also rose by over 30 per cent, as exports picked up sharply in the second half of FY02. However, investor sentiment remained weak throughout the fiscal year because of the uncertainty generated by the post- September 11 events and tensions with India.
According to provisional estimates, total investment declined to 13.9 per cent of GDP in FY02 from 15.9 per cent in the previous year.
National savings rose to 15.4 per cent of GDP in FY02 from 13.9 per cent in FY2001, largely due to a significant increase in net factor incomes from abroad.
The medium-term prospects for the economy greatly improved in FY02 as macroeconomic indicators remained stable, the external account improved, and the government’s reform programme remained on track.
Economic growth is thus expected to pick up significantly in the medium term, provided that the internal and external security situations do not deteriorate.
The agriculture sector’s performance is expected to strengthen further in FY03 because of some improvement in water availability.
Large-scale manufacturing was the sub-sector most affected by the aftermath of September 11, and growth declined from 8.6 per cent in FY01 to 4.0 per cent in FY02. The slowdown was fairly broad based, except for textiles and petroleum products.
The services sector accelerated to 5.1 per cent growth in FY02 from 4.8 per cent in FY01. This was mainly due to a sharp increase in value-added public administration and defence services (18.2 per cent compared with 1.2 per cent in the previous year).
The overall rate of unemployment was 7.8 per cent in 2000. Given past trends, and the slow growth in the last 2 years, it is estimated that unemployment is likely to have increased to about 9 per cent in 2002.
The overall fiscal deficit narrowed to 5.1 per cent of GDP in 2002 from 5.3 per cent in 2001, when one-off expenditures are excluded, but widened to 6.5 per cent if they are counted. Such expenditures in 2002 included Karachi Electric Supply Corporation’s re-capitalisation of Rs30 billion, and the settlement of excess taxes paid by banks on unrealised profits through 2000 of Rs22 billion.
The revised target for the budget deficit for 2002 agreed with IMF under its Poverty Reduction and Growth Facility was 5.7 per cent of GDP, and the underlying deficit is significantly below this target. Total revenues increased by 15 per cent, with most of the additional receipts coming from non-tax revenues and surcharges on petroleum and gas.
Pakistan’s balance of payments improved significantly during FY02 due to a sharp increase in remittances from workers abroad, larger inflows of foreign loans and grants, and receipts for the use of civil aviation facilities by the international coalition forces.
The capital account balance, however, worsened in FY02, primarily because of SBP’s deliberate policy to pay off expensive debt and short-term liabilities. The sharp improvement in the balance of payments observed in the last three quarters of FY02 also continued in the first quarter of 2003, with the current account remaining in surplus by $1.2 billion, in contrast to a deficit recorded in the corresponding quarter of 2002.
Pakistan’s external debt stock and liabilities also declined in 2002 as SBP retired its expensive, short-term liabilities, from $37.1 billion at the end of 2001 to $36.5 billion at the end of 2002.
Privatization picked up momentum in 2002, with one nationalized commercial bank, United Bank Ltd., privatized in September 2002, and 20 per cent of the government’s stake in the National Bank of Pakistan having been divested through the stock market besides mutual funds, working interests in nine oil fields and non-core gas assets.
OUTLOOK FOR 2003-2004: Prospects of realising and possibly surpassing the government-projected growth rate of 4.5 per cent in FY03 are quite bright. This optimism is based on an improved outlook for the agriculture and industry sectors.
Both supply and demand factors are expected to boost domestic economic activity. Increased availability of water should boost agriculture and hydropower generation. The textile industry is also better placed for increased production after heavy investment in the past two years.
Demand factors include larger remittances (of $2.1 billion in the first half of 2003, which are expected to increase to over $3.5 billion by the end of the fiscal year) and the associated increase in construction activity, as well as aggressive marketing of consumer credit by financial institutions.
Total investment is expected to show marked improvement in the medium term, rising to 16.0 per cent of GDP by 2004.
It is anticipated that an easy monetary policy will continue through at least 2003.
The rate of inflation has shown an upturn in the first quarter of 2003 due to an increase in prices of food items and an upward adjustment in domestic oil prices. The trend is likely to continue over the medium term, and inflation may rise to 5 per cent in FY04.
The modernization of the textile industry that has been under way for the last couple of years has started showing results in the form of a substantial increase in the industry’s output and in export volumes.
Both for this reason, as well as a greater level of activity in the domestic economy and better access to EU markets, exports are likely to grow significantly in the medium term, registering increases of about 12 per cent and 10 per cent in 2003 and 2004, respectively.
Exports and imports strengthened by 16.6 per cent and 18.7 per cent, respectively, in the first half of 2003, compared with the corresponding period of 2002. Increased domestic activity, particularly higher growth in manufacturing, together with a reduction in import tariffs and a strong local currency, is likely to lead to strong growth in imports, which are likely to rise by about 14 per cent in 2003.
The trade deficit is thus expected to almost double from 2002 levels, to over $600 million in the medium term. The surplus on the current account, which is the result of fortuitous developments since September 11, 2001, is expected to fall to about $638 million in FY04.
FDI is expected to pick up significantly in the medium term provided that the domestic political situation remains stable, and that there is no recurrence of subregional tensions. The planned major privatization moves, such as that of Pakistan State Oil and Habib Bank Ltd., are likely to be major factors in increasing FDI during the next 2 years.
The outstanding external debt stock is expected to be maintained at about $32 billion over the medium term, with further improvement in the debt profile, as expensive, short- term debt is replaced by long-term concessional borrowings and thus external debt servicing would fall to some 20 per cent of foreign exchange earnings by 2004.