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Fiscal year 2012-13 was one the most frustrating years for the economy of Pakistan. According to the Economic survey released on 11th June, a day before the Annual Federal Budget, most of the key targets fixed at the beginning of the year, were missed by a high margin. GDP could grow by only 3.6 percent as against the target of 4.3 percent and 4.4 percent in the previous year. Acute energy shortages, worsening inter-corporate circular debt, bailouts for loss-making PSEs, regional security environment, uncertainty surrounding political transition for most part of the year, etc, plagued growth prospects. The investment to GDP ratio fell to 14.2 percent in 2012-13 from 14.9 percent last year, with domestic investment mainly contributing to the decline. Private sector was particularly reluctant to invest due to non-availability of working capital, long spells of power outages, a deteriorating law and order situation and overall unfavourable investment climate. The SBP decision to ease monetary policy by 450 points during the last one and half years has not impacted positively on investment climate which suggests that the problem lies with other determinants of investment.

Fiscal deficit was sought to be contained to 4.7 percent of GDP. On the basis of downside risks and keeping in view actual deficit at 4.6 percent of GDP during July-March, 2013, fiscal deficit was likely to surge to over 8 percent of GDP. It would be 8.8 percent if the circular debt is settled within this fiscal year. Negative financing from external sector, non-realisation of privatisation proceeds and declining non-bank financing put disproportionate burden on financing from the banks. Money supply expanded by 9.9 percent up to May, 2013 and the major driver of monetary expansion remained the government borrowings from the banking system. Reserve money expanded considerably during this period, reflecting significant liquidity injections from the SBP to enable banking sector to buy government paper and facilitate payment system. Average inflation during July-May was 7.5 percent as against 10.9 percent recorded in the same period last year. It was likely to remain in the range of 7.5-7.8 percent as against the target of 9.5 percent. Inflation eased due to adequate supplies of essentials, and substantial relief from pass through of imported inflation owing to stable commodity and crude oil prices in the global market. Another challenge to the macroeconomic environment emanated from the external front. Although, current account deficit was lower than the same period last year, the external account remains challenging with scheduled payments to the IMF in the rest of FY13 and beyond. Pakistan's public debt reached Rs 13,626 billion or 59.5 percent of GDP by end-March 2013. While domestic debt rose by Rs 1,159 billion to Rs 8,796 billion, external debt registered a decline of Rs 200 billion to Rs 4,831 billion due to payments to the IMF.

Although, authors of the Survey have tried to give a positive spin to some of the developments, yet it was difficult to conceal the fact that the economy was in an extremely poor shape and a lot of efforts were needed to first stabilise the economy and then to put it on a sustainable path of recovery. The Survey itself admits that the economy has a growth trajectory of more than 6 percent but a severe energy crisis, bleeding public sector enterprises, economic mismanagement and the culture of informal economy has haemorrhaged the system. Only power shortage was wiping out 2 percent of GDP. In addition, investment which was the mirror image of the economy has nose-dived to 14.2 percent of GDP compared with 19.21 percent in 2008. Long hours of power loadshedding, ongoing war against terrorism and loss of mental peace and harmony among the masses have all contributed to a profound fall in investment and stagnation in the economy. Of course, nobody truly believes in the employment statistics released by the government with too many qualifications. Inflation has eased but it seems to be only a transitory phase. Money supply is increasing at a much higher rate than the GDP and it will show its effect with a time lag. The most challenging task is to reduce the fiscal deficit and improve the current account deficit to a sustainable level. The growth in FBR revenues was very sluggish during the year while expenditures on power subsidies and debt servicing rose sharply. It needs to be noted that contingent liabilities and guarantees provided by the government are not included in the deficit. Fortunately, provinces have done better this year but despite this, the fiscal deficit remains very high, forcing the government to increasingly rely on banking sources for financing the budget. Not only is this practice highly inflationary, it adversely affects the private sector activities and raises debt servicing of the government in future. Foreign sector is at present the most vulnerable area of the economy. Although current account deficit was lower than last year but bilateral foreign flows have almost dried up and huge payments have to be made to the IMF in the next few months while foreign exchange reserves held by the SBP are equivalent to less than two months of imports. This is of course a very difficult situation. Those who sometimes advocate the option of default don't know the risks involved. It was good to see that Finance Minister Ishaq Dar was aware of the negative impact of insolvency and publicly said in his press conference that there was no harm in taking fresh loans to retire the debt. According to some sources, the government is already in initial stages of negotiations with the IMF to get another facility to pay its previous outstanding debt. If it materialises, the pain of adjustment could be eased and the country could get breathing space to act on its reform agenda to stabilise the economy. Another worrying aspect in the external sector accounts is that workers' remittances, as suggested by this year's data, seem to have reached a saturation point. Also, the Saudi government has started sending back thousands of foreigners who have no sufficient or legal documents. According to some reports, 30,000 Pakistanis may be sent home which would certainly hit foreign remittances in the years to come and weaken the current account position of the country further.

Unfortunate though it may be but in the recent years non-economic factors like worsening security situation have also assumed so much importance in shaping the fundamentals of the economy that its prospects could, more or less, now be explained by their behaviour and the capacity of the government to deal with them properly. It means that the government has not only to concentrate on improving fiscal deficit, current account etc of the country but consume its time and energy to take all the political parties onboard and eliminate the negative impact of non-economic factors which had the potential to sink the economy. Looking at the Economic Survey, the job is cut out for the new PML-N government. For instance, it has to decrease or eliminate the circular debt, substantially raise the electricity generation capacity, put to an end militancy, improve the fiscal position a great deal, increase investment to GDP ratio to around 20 percent, avoid the chances of insolvency of the country, and chalk out a foreign policy which is conducive to peace, trade and development etc. The purpose should be to pave the way for growth with stability as soon as possible. The economy is in such a bad shape and faces so many downside risks that the present government has to make extraordinary efforts to show some measurable progress in each area. In short, Pakistan Economic Survey presented by Dar portrays a very bleak picture of the economy and points to a range of difficult tasks ahead for the new government to put it back on a sustainable path of development. People want results.

Copyright Business Recorder, 2013

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