zimmick
BANNED
- Joined
- Jul 12, 2012
- Messages
- 244
- Reaction score
- 0
Let me begin by summarising the outcomes of the fiscal year that ended on June 30, 2012. Real GDP grew by 3.7 percent in 2011-12. This number is not credible for the following reasons. After the change of base and rebasing of the national accounts fiasco, the Pakistan Bureau of Statistics (PBS) was given a few days to come up with national accounts based on old methodology and old base. Preparing the countrys national accounts at such short notice and coming close to the finance ministers desired growth rate (four percent) was indeed a risky job.
As expected, the PBS had to do some manipulation. For example the large-scale manufacturing for the month of July-February (1.8 percent) was used instead of July-March (1.0 percent) which was available at the time of preparing the national accounts. Furthermore, the growth rates of various components and sub-components of livestock of the last year (2010-11) were simply repeated in 2011-12. Investment at 12.5 percent of GDP in 2011-12 has been the lowest in the last 60 years. Even this number is inflated and not credible. Domestic saving rate at 5.8 percent of the GDP in 2011-12 is the lowest in the countrys history.
The fiscal policy is adrift and the reform process lost its momentum some three years ago. Owing to the massive slippages in revenue and expenditure, the fiscal year 2011-12 is expected to close with a budget deficit of almost 8.5 percent of the GDP including the so-called one-off elements of 1.9 percent of the GDP. The government borrowed Rs1.3 trillion from the banking system to finance budget deficit, of which, Rs564 billion was sourced from the SBP alone. Borrowing from the SBP is akin to printing money, therefore, the SBP printed Rs1.5 billion per day for the government.
External sector vulnerability also increased further in 2011-12. As expected, exports growth turned negative (-4.7 percent) and imports grew by over 11 percent, causing trade deficits to worsen by 36 percent to $21.3 billion. Although the current account deficit for the year is likely to be around $4 billion, a lower figure by Pakistani standard, the financing of the even low deficit has become difficult for Pakistan. Declining capital flows have forced the government to finance this deficit by drawing down its foreign exchange reserves. Accordingly, the foreign exchange reserves of the SBP declined by $4.0 billion or $11 million per day in 2011-12.
The large upcoming repayments to the IMF have enhanced Pakistans external sector vulnerability. Pakistan is expected to repay about $6.5 billion to the external creditors including about $4 billion to the IMF in the current fiscal year. In the absence of the IMF programme or financial support from friendly governments or multilateral development banks, Pakistans foreign exchange reserves may see a more rapid decline with the rising probability of a default in the current or next year.
Now, coming to more bad news for Pakistans economy. The PEW Research Centre published its report on June 29, 2012 on Pakistan. An overwhelming Pakistanis (90 percent) expressed their dissatisfaction with the countrys direction and its economy and a large number of them expected the economy to get worse over the next 12 months.
On July 13, 2012, Moodys downgraded Pakistans sovereign credit rating by one notch to Caa1 from B3 with negative outlook. The principle reasons for downgrading include: i) a deterioration in balance of payments over the last years; ii) the looming large repayments to the IMF; iii) the dwindling level of foreign exchange reserves; and iv) the institutional weakness stemming from political instability and constrained government finances.
The first three reasons have already been discussed above. The only point that needs to be highlighted here is the collapse of the foreign investment to $0.8 billion in 2011-12 from a high of $8.4 billion in 2006-07. Moodys has not only taken note of the massive decline in foreign investment but also noted that the growth in workers remittances is tapering off. Remittances grew at an average rate of 23.9 percent during July-February 2011-12 but decelerated sharply to an average rate of 8.5 percent in March-June, 2012.
Political instability has been identified as the fourth reason for downgrading. The perpetual instability has severely damaged the economy by shattering investors confidence. It has weakened the overall governance and eroded the states authority.
Moodys has downgraded Pakistans rating from B3 to Caa1 with negative outlook. The negative outlook suggest that Pakistans rating can further be downgraded if political instability further worsens and foreign exchange reserves declines sizably.
Finally, the bad news from the IMF which conceded that its $11.3 billion standby arrangement with Pakistan had failed to achieve the desired results owing to the lack of political support to honour its obligations. For any future programme with the IMF, political commitment at the highest level will be required to implement reforms, as well as vigorous consultations with stakeholders.
Pakistans economic difficulties are largely self-inflicted and the countrys political leadership and their economic managers are to be blamed. The economy has never been on the governments radar screen. Even today, while the business of politics thrives, the business of the economy has all but shut down as the economic managers, in true Neronian fashion, continue to enjoy vacations in US and Europe. Hence, the millions of poor must continue to face hardship.
The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk
More bad news - Dr Ashfaque H Khan
oor standing and are subjected to very high rich
