The State Bank of Pakistan has just published its half yearly report on the health of Pakistan’s economy. It is, generally speaking, a credible and realistic assessment of the strong and weak points of the economy. Here’s a layman’s guide to what it’s all about.
For Good: The economy (GDP) is forecast to grow at nearly 8% this year, which will be a historic record. But this is largely attributed to strong growth (4%) in the agricultural sector which still has a significant weight in the economy. In turn, this agricultural performance is based on a record production of over 14 million bales of cotton and near self-sufficiency in wheat. This is mainly because of improved water availability to this sector.
The large scale manufacturing sector has grown at over 16% on the back of the construction (largely cement), fertilizer, textiles, automobiles and electronics sub-sectors. But this is too narrow an industrial base on which to take off into self-sustained economic growth. It should be noted that the textile manufacturing sector grew by 16% in the last six months, thereby not just contributing to large scale manufacturing sector growth (it accounts for 1/3 of this sector’s production) but also by sustaining general export growth (in which cotton products account for nearly 65% of all value). Note too that construction is buoyant because of external contingent demand for cement in Afghanistan and Iraq while internal demand is contingent on urban asset and property appreciation based on inflows of expatriate capital seeking outlets at home. Significantly, too, fertilizer growth is directly linked to agricultural performance while automobile demand is based on friendly consumer lending/leasing policies of the banking sector.
For Bad: The SBP has noted a number of negative or disquieting tendencies. First, core consumer inflation is rising despite a gradual tightening of monetary policy. Food inflation was up by 10.4% as compared to 7.8% last year. While continuing agricultural growth may freeze food inflation, the core inflation trend will not be easily reversed unless oil prices decline significantly in the international market, which may not happen in the short term.
Second, the external account deficit (US1.2b) is widening because the trade deficit (US$2.3b) has deteriorated, which in turn is owed to a steep climb in the import bill (47.7%), nearly half of it on account of rising oil prices and one-third on account of imports of textile machinery and other non-food, non-oil products. But export growth (14.6%) has been below target largely because of sluggish textile exports in the last three months. This may compel the government to slightly devalue the rupee in order to spur exports, in line with the position of forex reserves held by the SBP which have declined by about US$1b since March 2004 despite major inflows of about US$1.7b from the World Bank and the Asian Development Bank as well as US$600m in receipts from Pakistan’s first Islamic sukuk bond.
Third, and incredibly enough, the SBP report is ambiguous about the state of employment. On the one hand it says that the unemployment rate has decreased from 8.3% in 2002 to 7.7% in 2004. But it then goes on to attribute this gain to the rural areas only, and that too basically among women who constitute unpaid helpers in the family! Regrettably, the SBP report does not tell us what is happening to employment in the current fiscal year. Critically, a discussion of poverty alleviation is altogether missing from the report, even as there are ringing allegations from independent economists who insist that the poor have not benefited by the government’s trickle down economics.
Coclusion: The glass certainly looks half-full. But it may in fact still be half-empty. Much of this year’s growth is based on Allah’s bounty (good water supply has led to good fertilizer demand has led to good cotton crop has led to good textile production has led to good export performance). Extraneous factors that have spurred expatriate remittances and facilitated international loans on account of post 9/11 events have fueled a stock market, property and construction boom. But this could be jeopardized if a semblance of domestic economic certainty were to be ruptured by political upheaval. Direct foreign investment (US$446m) remains a pittance because Pakistan is not even remotely listed in respectable finance journals as an “emerging market”. Indeed, the emerging market for oil and gas exploration and development in Balochistan and the NWFP is seriously undermined by continuing instability and bad US-Iran relations. The spurt in domestic private investment in the textile sector in the last three years is also over. The stock market is dependent for its buoyancy on six or seven scripts which are dependent on disinvestment by the government. The banks are flush with money and are fueling consumer demand for automobiles because there isn’t sufficient demand for funds for productive investment purposes from the business sector. And so on.
This is a rather fragile economic and political base on which to build rosy scenarios of well being.