Domestic economy’s resilience By

INCE December 2009, Pakistan’s external debt and liabilities have gone up by 38 per cent to $15 billion, while the growth in exports and workers’ remittances is not strong enough to obviate the need for more foreign money. Foreign direct investment is also shrinking, keeping the external sector somewhat vulnerable.

Putting the economy on the path of recovery requires larger quantum of external capital and financial inflows. The economic growth has decelerated due to recession in major economies, increasing cost of the war on terror and structural imbalances.

While the level of bilateral assistance is very low, multilateral assistance is significant. Out of the pledged IMF credit of $11.35 billion, the country has so far received four installments totaling $6.54 billion and the fifth installment of $1.2 billion is expected by the middle of this month. Later on, Pakistan can seek $3.61 billion more if it meets the IMF’s strong performance criteria.

While the trade and balance of payments gaps are lower, they are not enough to manage the external sector comfortably in view of the reversal of trends.

The pace of deceleration in imports seen in the first quarter of this fiscal year has weakened aggregating the year-on-year decline to 8.2 per cent between July-February. Exports, on the other hand, have risen 2.7 per cent during the period.

A pickup of 2.3 per cent in large-scale manufacturing during July-January may boost export earnings further, if the output continues to grow. But it is uncertain whether exports would rise fast enough to offset the impact of likely growth in imports.

While the home remittances have increased by an average 17 per cent year-on-year over July-February, monthly remittances are on the decline since December 2009 and have fallen in February this year vis-à-vis February 2009. Has a declining trend set in? If that is the case, the gains made so far in the external account would weaken, also because of the drop of 52 per cent in foreign direct investment in eight months of this fiscal year.

While the external factor’s vulnerability seems to have increased, a resilience in the domestic demand do raise some hopes. A gradual rise in the international demand, though still clouded by fears of a double-dip recession, may give exports a boost.

So far the recovery in domestic demand has been supported by a relatively easy monetary policy, higher fiscal spending and a rise in rural incomes on the back of improved prices for agri-commodities, according to the recently released second quarterly report of The State Bank of Pakistan.

“The sustained demand recovery is evident from increase in input requirements,” the report reveals, adding that while the first quarter of this fiscal year saw a modest increase in demand for key inputs, the second quarter was marked by a sharp rise in domestic energy requirements, import of raw-materials as well as bank loans.

Whereas the overall growth in large-scale manufacturing averaged at 2.3 per cent in July-January, growth in the second quarter alone was four per cent—the highest in the previous seven quarters. The report says that construction sector seems to have recovered on the back of lower building material prices and higher fiscal spending.

A small recovery in LSM, rebound in trade volumes from the second quarter onwards and a modest growth in agriculture sector has brightened the prospects of services sector. Wholesale and retail trade activities are particularly likely to benefit from recovery in commodity producing sector and growth in imports.

Transport sector has benefited from domestic and international trade of commodities. Finance and insurance sub-sector is likely to rebound following the recovery in loan demand from private sector. And telecom earnings are expected to gain from improved earnings of PTCL as well cellular companies. In agriculture sector, higher cotton and rice production have been somewhat offset by lower outputs in wheat and sugarcane.

On balance, the domestic economy shows signs of modest recovery and resilience in domestic demand. The challenge is to strengthen these trends through reforms.

“Implementation of structural reforms focused on elimination of subsidies, reduced role of government in price setting, formulation of effective regulations to ensure optimum market-based outcome, are needed to sustain growth and enhance resilience of the economy,” says the SBP’s second quarterly report. These reforms, “must be complemented with introduction of second generation reforms centered on institution building and governance.”

Besides, there is a need to encourage domestic and foreign investment in power generation without which a faster economic growth in future cannot be achieved and sustained. Investment in other infrastructure projects like construction of farm-to-market roads, modern grain, fruit and vegetable storage facilities, water courses, ports and shipping, railways and road transport are necessary to ensure a sustainable high growth in agriculture and services sectors.

Equally important is the need for encouraging local investment in particular in human resources and skill development for value-addition in all sectors of the economy and for preparing the base for information technology/ knowledge economy.

This would help Pakistan increase the share of external trade in its GDP enabling it to take advantage of the emergence of neighbouring China and India as two main driving engines of global economic growth.

Our over-reliance on external debts cannot be checked effectively if the policy makers do not make strategies to exploit fully the sources of non-debt creating inflows of foreign exchange. Involving the exporters as well as overseas Pakistanis in this exercise is crucial.

The public and the private sector, for example, may enter into joint ventures for setting up more of captive power plants to meet electricity requirements of export-oriented industries. Banks need to realise the need for making consortia and venture into development financing in agriculture, services and manufacturing sectors to boost exports and obtain import substitution.

Finally, we need to put billions of dollars of overseas Pakistanis to better use for economic progress. Schemes can be introduced under public-private partnership to utilise foreign exchange sent back home by expatriate Pakistanis in the fields of health, education, small-scale industries and centres for agriculture and industrial research, capacity building and transfer of technology.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/domestic-economys-resilience-540