Pakistan's economy to remain robust: survey
ISLAMABAD (March 31 2006): Pakistan's economy would remain robust this year with gross domestic production (GDP) growth rate at 6.5 percent, says the Economic and Social Survey of Asia and the Pacific-2006.
However, there are concerns about the overall budgetary deficit in years ahead as it may rise again. Besides, weak buoyancy of tax revenue, unemployment and poverty still remain the big challenges.
The survey launched here on Thursday points out that the economy of the Asian Pacific region grew strongly in 2005, aided by a buoyant global economy and the region should maintain its growth momentum in 2006, barring any unfavourable external events.
For 2006, the survey forecasts that oil prices will fluctuate within the range of $50-55. There are fears, however, that they may touch $100 a barrel within the next four years.
Despite high global energy prices, the price pressures rose only moderately in 2005 and are expected to remain muted or even ease slightly in 2006.
The Unescap has praised Pakistan's impressive economic growth in 2005. The GDP growth of 8.4 percent in 2005 was the highest in the last two decades. The factors which contributed to acceleration were strong domestic demand, better weather conditions for agriculture, continuity of economic policies and a robust financial sector.
The government had set a growth target of 7 percent of GDP for 2006, less than the rapid 8.4 percent achieved in 2005 but higher than the long-term growth trajectory of 6 percent.
A number of factors may interfere however; agriculture, prone to weather-related fluctuations, may perform below expectations. On the other hand, large-scale manufacturing may achieve the target and growth in services is expected to remain strong. Sustaining a higher growth rate is thus possible.
The earthquake is expected to have a minimal impact on economic growth. Natural disasters, damage and destroy assets, however, the repair and rebuilding of these assets generates economic activity that can help growth. Keeping all these factors in view, the surveys indicates that the GDP should grow 6.5 percent or higher in 2006.
There are indications that the economy as a whole is not likely to lose momentum in the short-term as a result of the devastating quake.
There was a sharp increase in nominal investment supported by strong macroeconomic fundamentals, increased availability of credit and a significant rise in foreign direct investment (FDI).
However, the investment to GDP ratio has remained at about 17 percent in the last four years. On the supply side, agriculture performed exceptionally well in 2005, with good weather and supportive government policies contributing to growth rate of 7.5 percent, an increase of 2.2 percent than in 2004.
Large-scale manufacturing recorded an impressive and broad-based growth rate of 15.4 percent in 2005. The service sector grew by 7.9 percent in 2005, in line with the higher growth in the commodity-producing sectors.
Inflationary pressure strengthened considerably in 2005, as inflation rose from 4.6 percent in 2004 to 9.3 percent.
Three years of strong economic growth, complemented by record low interest rates and the ongoing structural shift of many households towards higher consumption have injected new vigour into domestic spending.
This spending, coupled with rising oil and other commodity prices, contributed to a sharp increase in inflation in 2005. Food inflation reached double digits, a heavy burden on the poor who spend most of their income on food.
The government took several measures to ease inflationary pressures by not passing on to consumers the entire increase in the international prices and it began to tighten monetary policy to ease demand pressures.
The inflation is expected to drop to about 8 percent in 2006, pulled down by the decline in aggregated demand implicit in the lower growth estimate, a high base effect for 2006 prices and an anticipated improvement in food supplies.
However, prices of construction materials are expected to increase at a faster pace because of supply bottlenecks associated with the reconstruction work in the wake of the earthquake.
Budget deficit brought down to a relatively low level in recent years may rise again. In fiscal year 2005, it stood at 3.3 percent of the GDP.
Tax revenue buoyancy remained weak, as reflected in the continuing fall in the tax to GDP ratio that limits the government's ability to provide adequate funds for infrastructure and social programmes.
High growth of exports was outpaced by even higher growth of imports and current account turned into deficit. In 2005, while exports grew at a healthy rate of 16.9 percent, imports grew almost twice as fast, at 32.3 percent.
Higher oil prices led to a substantial increase in import payments and to higher shipment charges and so to higher prices for other imports as well. While growing domestic demand boosted import, imports of machinery and raw material also increased substantially.
Coupled with these large remittances, gains from the lower interest payments on Pakistan's external debt and liabilities partially offset the impact of the large trade gap. As a result, the current account deficit was contained in 2005.
The survey points out that there has been a significant increase in net inflows of capital in 2005. Capital inflows included mainly one-off inflows and an increase in concessional long-term loans from the World Bank and the Asian Development Bank. Foreign Direct Investment (FDI) reached $1.5 billion in 2005, 61 percent higher than in 2004. New FDI is so far concentrated in a few sectors such as telecommunications, finance and insurance and oil and gas exploration.
Following the adoption of a robust strategy of debt reduction, Pakistan's external debt declined from $37.9 billion at June-end 2000 to $36.6 billion at March-end 2005.
Highlighting the challenges, the survey says that the government expenditure related to the earthquake is likely to put pressure on the budgetary balance but with the continuing fiscal discipline, prudent monetary policy and focused attention on improving infrastructure and social sector indicators, the economy should maintain its medium-term growth trajectory.
Besides, enhancing the buoyancy of tax revenues, the growth in current expenditure needs to be curtailed and imbalances in the external sectors need to be addressed to ensure that the economy does not deviate from the growth path, achieved in the past few years.
Volatile oil prices: The current bout of high oil prices is hurting countries and if oil prices rise further by $10 a barrel, GDP growth of a developing country such as Pakistan can drop by 0.5 percent, inflation can rise up to one percent and current account deficit can widen up to 0.3 percent of the GDP.
The Challenge of Avian Influenza: The region has suffered significant human and economic losses as a result of the outbreak of H5N1 and estimates of human deaths from a possible global pandemic of the highly pathogenic avian influenza range from five million to 150 million people.
As a conservative loss in GDP from a pandemic would amount to $200 billion in just one quarter and in a worst case-scenario could plunge the global economy into recession.
