Fri, 02 May 2003

Economy on the mend

The Dawn Asia News Network Karachi

In its report "Pakistan Economic Update, July 2002-March 2003", the Asian Development Bank has projected an optimistic outlook for Pakistan's economy in the medium term. The estimated growth rate of over 4.5 percent for 2002-2003 is a significant improvement on the 3.6 percent of gross domestic product growth achieved in 2001-2002 and more so compared to the previous year.

Improvement in agriculture, industry, exports, and imports, and a significant increase in investment, savings and foreign capital inflows have contributed to the current growth rate.

The ADB report attributes this improvement -- in the face of external shocks during fiscal 2002 following Sept. 11, tensions on the border with India, continuing drought, slow growth in the world economy and upheavals of the Iraq war -- to the sustained stability of macroeconomic indicators, improvement in the external account and the government's firmness in maintaining the momentum of the on-going economic reforms.

According to the report, both demand and supply factors are expected to speed up domestic economic activity. Increased availability of water should boost agriculture and hydropower generation. The textile industry is also better placed for increased production after heavy investment in the past two years.

Demand factors include larger remittances expected to reach US$3.5 billion during the current year and the consequent increase in construction activity, as well as aggressive marketing of consumer credit by financial institutions. Increased activity, particularly higher growth in manufacturing, together with a reduction in import tariffs and a strong local currency, is likely to ensure growth in imports.

Foreign domestic investment should pick up provided the political situation becomes stable. The external debt stock is expected to be maintained at about $32 billion over the medium term, with further improvement in the debt-profile, as expensive, short-term debt is replaced by long-term concessional borrowings. External debt servicing then fell to some 20 percent of foreign exchange earnings by 2004.

However the projected increase in the rate of unemployment to more than nine percent from around eight percent in 2000. Also, inflation is likely to rise to five percent in 2004.

Thus it is more than likely that more people would fall below the poverty line by the time the current three-year Poverty Reduction and Growth Facility (PRGF) program of the IMF amounting to over a $100 comes to an end in 2004. Of course, there is hardly anything one can do to keep the rate of inflation from galloping at a time when economic activity is gaining momentum.

But the government could do a lot more to save the poorer sections from absolute destitution without upsetting its reform agenda. If it takes a good number of employment generating physical and social infrastructure projects, it will not only expand the absorption capacity of the economy but also speed up reform. Meanwhile, it could also make plans to distribute the resultant hardships of the reforms equitably. As of now the rigors of reforms have mainly been borne by the poorer sections.