Pakistan Observer

Pakistan’s current economic turmoil

Rashid Ahmed Mughal

Wednesday, October 19, 2011 - The Asian Development Bank (ADB) highlighted key challenges for Pakistan’s economy and suggested the country to develop a transparent revenue policy with effective operations. In a report Asian Development Outlook 2011, the donor agency said Pakistan’s economy faces considerable challenges, including the catastrophic aftermath of the floods in summer 2010, which hit the agriculture output and damaged transport and communication system. The report also forecast high annual inflation of 16 percent for the country during the current year. It also said that the current account balance is improving, but capital and financial inflows continue to decline. However, the ADB expressed hope that despite devastation and economic distress, growth will likely stay positive. “Pakistan, therefore, needs to develop a systematically transparent revenue policy and operate it effectively,” it added. The bank said that the energy shortfalls were lowering real growth by at least two percent points annually.

The bank said that the damage incurred due to severe floods also lowered the growth prospects in FY11 as estimated growth reduced to 2.5 percent. “Damage was less severe than initially feared, but agriculture and communication were hit hard. Total damage is put at more than $10 billion, half in agriculture,” it said. “For other areas, notably power and transport, the damage was mild, but widespread,” it added. The report said that inflation is expected to stay high through FY2011, for an average annual 16 percent. “It is, however, expected to recede in FY2012 to 13 percent as moderation in international food prices is likely to be at least partly offset by the electricity price rise.”

“With lower funding, deficit financing is expected to rely heavily on the domestic banking system,” the ADB said. “Government borrowing from this source surged in FY2011, reaching Rs.379 billion by February against Rs.330 billion for FY2010 as a whole,” it added. The record build-up of foreign exchange reserves of $17.4 billion in early February, amounting to more than five months of imports of goods and services are mainly attributed to the International Monetary Fund (IMF) loan and the Coalition Support Fund. On the current account side, the report said that while import growth remains modest, a significant expansion of exports during the first seven months of FY2011 moved the current account deficit into near balance at 0.5 percent of the GDP. But it is expected to widen to 1.7 percent for full year.

Being conscious of the spending needs for reconstruction and rehabilitation activities, the government scaled down and re-prioritized spending, introducing steep cuts in development spending. However, the potential gains from these measures could only be partially realized due to sharp fall in the non-tax revenue during the period under review. While tax revenue recorded 6.2 percent increase, non-tax revenues growth recorded a steep 35.5 percent fall during the first quarter of the current fiscal year. Hence, the weak performance of revenues resulted in the deterioration of all the fiscal performance indicators. The efforts, therefore, for improving revenue mobilization should also be complemented by sincere efforts for introducing stringent fiscal discipline on both the federal and provincial levels. As regards workers’ Remittances, financial experts have urged the government to plug illegal transfer of workers’ remittances in Pakistan, which at $167 per month/ worker is 2.5 times lower than the average remittances of $402 per month sent by the Indian workers, a World Bank data revealed on Monday.

According to the data, the total remittances to developing countries in the current year are expected to touch $325 billion. In 2009, the remittances to developing countries were $307 billion with India the top recipient of $55 billion sent by its 11.4 million overseas workers. Pakistan received over $10 billion of workers’ remittances from its 4.67 million workers this year, the data showed. The average remittance per worker comes to $2,009 per annum or $167 per month equivalent to Rs.14,362 per month.

World Bank data reveals that 12.6 percent of the Pakistani immigrants are highly skilled having attained tertiary education. Remittances from Bangladesh amount to $11.1 billion from emigrant workforce of 5.4 million workers at an average of $2.055 per annum that is still a little higher than Pakistan although its highly skilled workforce in foreign countries having attained tertiary education is only 4.3 percent of its total workforce. Remittances account for six percent of Pakistan’s GDP and 12.6 percent of the GDP of Bangladesh. Sending remittance bank home from certain destinations are very costly for specific countries. For Pakistan sending remittance from Singapore consumes over 23 percent of the amount meant for remittance on cost of transfer of funds, it said.

Foreign investment inflows, falling since the end of 2007/08, are unlikely to pick-up in the next calendar year owing to recessionary conditions in the developed world, massive corruption in government departments and poor law and order situation in the country, economists said. Foreign direct investment fell by 42 percent to $2.150 billion in 2009/10 and by 21.5 percent to $573 million during the first five months of the current fiscal year. Foreign direct investment inflows had declined across the world, since the financial crisis began in the developed world. ‘Pakistan is no exception’. Political uncertainty and poor law and order situation are hindering foreign investment. Besides the present government had framed no concrete policy to attract foreign investment.

The lack of security was the biggest deterrent to foreign investment. Foreign investors were unwilling to come to Pakistan because of poor security situation. Corruption in government departments is responsible for repelling several potential foreign investors. Bill Gates wanted to do business in Pakistan, but the fact that corruption is rampant here forced him to keep away. In spite of a bleak economic scenario, the financial managers do have the answer to address the stumbling blocks in restructuring the economy. It comprises of increasing tax-to-GDP ratio, maintaining the flow of augmented exports and workers’ remittances and above all, demonstrating strict financial discipline along with good administration to achieve socio-economic prosperity in the days to come. All we need is a firm determination to demonstrate financial discipline, eliminate corruption, control law and order situation, nullify the negative impression and perception in international community about Pakistan and above all assure the investors of security they demand for working in Pakistan. Not but not the least, the political parties have to rise from their individualistic and petty agenda and demonstrate national unity by joining hands to lift the country’s image, abroad. Then and only then can we be out of the mess, we find ourselves in, presently.

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