April issue 2002
Slow and Steady
The State Bank of Pakistan in its quarterly report for the period October- December 2001 played the prudent card, in perhaps a deliberate ploy to enlist increased multilateral co-operation from international financial institutions.
Whilst praising the military government of General Pervez Musharraf for its unstinting efforts in improving macro-economic indicators and maintaining a hard line on domestic fundamentalist organisations, the bank took a depressing view of the effects of increased foreign and external developments on domestic growth, investment, budgetary revenues and employment, stating that there was still negligible improvement on this front. Pakistan received a nod of confidence from the IMF, bagging the second tranche of 107 million dollars out of the 1.3 billion dollar aid package approved last December under the Poverty Reduction Growth Facility to alleviate poverty and improve social sector reforms.
Anne Krueger, the First Deputy Managing Director of the IMF said, “The Fund commends the authorities for the broadly satisfactory progress towards the programme’s macroeconomic objectives in a difficult context. However, growth prospects had to be scaled down, reflecting the repercussions from September 11 on export orders, and tax revenue was lower than targeted. Inflation was lower than expected, and strong private capital inflows and low imports contributed to a large accumulation of official reserves and a nominal appreciation of the rupee. Progress on the structural front was broadly in line with programme expectations. Most performance criteria and benchmarks through end-2001 were observed. In view of the economic performance so far, the authorities’ strong commitment to reform, and their recent implementation of corrective measures, waivers were granted for the non-observance of two end-2001 performance criteria. Looking ahead, the uncertainties surrounding the economic outlook on account of September 11 and related events have decreased and with the recent buildup of international reserves the economy is now better equipped to deal with adverse shocks.”
Mohammad Sohail, head of research at Invest Capital Securities, commenting on market expectation stated that, “Pakistan has been, on the whole, meeting most IMF targets. Policymakers now face the tough task of reviving the real sector of the economy, which has not yet improved inspite of a better external account situation, due to huge foreign aid and grant inflows.”
He added that adequate rainfall and effective taxation measures in the context of an improving global economy would help Pakistan trim its deficit and improve its exports.
Zubeida Mirza, however, feels that it would be unfair not to acknowledge the efforts of the government which has made tangible progress on a number of key issues. GST exemptions have been phased out, tax rates are being rationalised and deregulation and privatisation pushed forward. “Pakistan is an economy in transition,” she emphasises. “Whilst meeting domestic targets (GDP growth, deficit etc) is important, the pace of reform has to take precedence. Therefore we expect the IMF- indulgence to remain in place.
“Traditional answers to increasing revenue collection and reducing the fiscal deficit hover around widening the tax net and austerity measures. And as such, we expect these tenets to figure prominently in the upcoming budget. People have to understand that rather than direct intervention the government’s job is simply to frame policies encouraging the private sector. In this regard, the government has already relaxed monetary policy (discount rates have come down from 14 per cent to 9 per cent). Export finance rates have already followed suit while lending rates are next in line. Therefore, barring further exogenous shocks, it is only a matter of time before industrial production and exports will pick up.”