Pakistan looks to faster growth
By Syed Fazl-e-Haider
KARACHI, Pakistan - Economic growth in Pakistan will pick up this fiscal year
to as fast as 3.3%, driven by the services sector, according to the country's
latest central bank projections.
The forecast comes in higher than the 3% growth in gross domestic product (GDP)
projected by the International Monetary Fund (IMF). The economy grew 2% in the
fiscal year to June 30, 2009.
The major impetus for growth is expected to come from the services sector,
according to the central bank's first quarterly
report on the state of the economy for the current fiscal year. The report is
based on data available up to mid-December.
Manufacturing and export industries are being held back by rising power and gas
tariffs. Last month, the government shocked consumers by increasing electricity
tariffs by 13.4% and removing a subsidy for lifeline consumers (with
consumption of less than 50 units per month). The government had reportedly
allocated 121 billion rupees (US$1.4 billion) for electricity subsidies during
the current fiscal year, including 7 billion rupees for lifeline consumers.
Pakistan agreed in November 2008 to an IMF emergency loan package of $7.6
billion to avert a balance of payments crisis and shore up reserves. The fund
increased the loan to $11.3 billion in July and released a fourth tranche of
$1.2 billion last month. The IMF conditioned the next tranche of the loan on
the removal of electricity subsidies.
The country's power sector lies at the heart of much of the country's
commercial and industrial problems, with a poor infrastructure leading to
regular blackouts and resulting in the country's export-oriented industries
being unable to ensure on-time delivery to foreign buyers.
"Power blackouts cripple commerce and cause suffering in the daily life of
millions of Pakistanis," Richard Holbrooke, US Special Representative for
Afghanistan and Pakistan, said during a recent visit, according to the Dawn
newspaper. "An efficient system of power generation and distribution is a
critical factor in spurring economic development to the benefit of all."
The US has agreed to provide US$1 billion in assistance over the next four
years to boost Pakistan's energy sector. Under an agreement recently signed by
Economic Affairs Secretary Sibtain Fazal Halim and US Ambassador Anne W
Patterson, the US will provide $16 million for improving the operational
capacity of the Tarbela dam hydroelectric plant. It will help generate
additional electricity of 375 megawatts. Rehabilitation of the Tarbela dam
capacity is part of a $125 million programme announced by US Secretary of State
Hillary Clinton in October last year.
The local business community has strongly objected to the government's decision
to increase power tariffs from January, saying the move will bring already
ailing industries to the verge of total collapse.
The removal of subsidies is adding to the rising costs facing consumers and
industry after inflation had been pulled back from a high of 25.3% in August
2008 to 8.87% last October.
"The inflation outlook [year-on-year] has been revised from 9 to 11%," the IMF
said in its latest review. "This reflects the rebound in the prices of fuel and
a larger second round impact of the increases in electricity tariffs."
Given the present inflation trend, the IMF said it did not expect any easing of
monetary policy. The central bank is due to announce monetary policy for
February and March by the end of this month and local analysts expect the key
policy rate to remain unchanged under IMF pressure. The central bank cut its
policy rate by 50 basis points in November to 12.5%.
High interest rates are considered an important factor behind declines in the
country's industrial output. The textile industry, which accounts for
two-thirds of the country's exports, is one sector struggling to compete with
international rivals. Exports of apparel from Pakistan in the past 10 years
have increased to only $3.5 billion from $1.5 billion, compared with a surge to
$12.5 billion from $1.5 billion in rival Bangladesh.
The central bank report said improvement in the tax-to-GDP ratio was also a
major challenge in the economy. The increase of only 0.6% year-on-year in tax
collection during the July-November period of the current fiscal year is a
source of concern; if this continues, Pakistan's tax-to-GDP ratio will decline
from an already low 9.8% achieved in the last fiscal year.
The country's trade deficit widened by 52.6% in December as imports rose faster
than exports. The central bank report projects that total exports may remain
between $18.5 billion and $19.0 billion this fiscal year, and imports between
$30.5 billion and $31 billion. The fiscal deficit is forecast at between 4.7%
and 5.2% and the current account deficit between 3.7% and 4.7% of GDP.
The IMF has estimated that the country's external debt is likely to grow by
more than 43% over the next five years, to about $73 billion in 2015-16 from
about $50.76 billion early this year. The debt will increase by about 13% this
fiscal year, according to the IMF.
Syed Fazl-e-Haider(www.syedfazlehaider.com) is a development
analyst in Pakistan. He is the author of many books, including The
Economic Development of Balochistan (2004). He can be contacted at
sfazlehaider05@yahoo.com.
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