China has a new growth challenger, Pakistan
Updated: 2005-06-07 09:17
The world's second-fastest growing economy after China is no longer India. It's Pakistan.
According to figures released over the weekend by Pakistan's Prime Minister Shaukat Aziz, the $110 billion economy is estimated to have grown 8.4 percent in the current fiscal year that ends June 30. That compares with 9.5 percent expansion in China's gross domestic product last year, while India recorded 6.9 percent GDP growth in the 12 months ended March 31.
Now that Pakistan is within striking distance of China's growth, it aims to catch up. The growth target for the next fiscal year, as set out in the nation's annual budget yesterday, is as much as 8 percent, the same as Beijing's goal for the year.
That may be a trifle over optimistic. Pakistan isn't yet ready to sustain 8 percent growth year after year -- not until it can push up its savings rate, which is languishing at 14 percent of gross domestic product.
Inflation is at an eight-year high of 11 percent, a clear indication of an economy overheating from too much consumption. (China's problem is too much investment.)
Still, another year of strong growth is eminently achievable in Pakistan, provided the central bank can maneuver deftly to suppress inflationary expectations, even as the government goes ahead and steps up investments in public works.
Even a slightly less rapid expansion than this year would go a long way in boosting personal incomes, which have risen a very impressive 27 percent in U.S. dollar terms in the past two years.
Sept. 11 'Windfall'
Sure, Pakistan's retreat from the brink of a balance-of- payment crisis in 1999 had a lot to do with its Sept. 11 "windfall," as some commentators termed it. Pakistan received grants and debt waivers and additional textile quotas from the Bush administration for helping it topple the Taliban in Afghanistan.
That was in 2001.
In 2005, what's helping sustain growth isn't U.S. largesse, but a revival of investor interest, which is evident from the list of bidders short-listed by the government for a proposed sale of 26 percent in state-owned Pakistan Telecommunication Co.
Bidders for the phone service provider, whose market value is about $5.5 billion, include telecom companies from Singapore, China, Malaysia, United Arab Emirates, Turkey and Saudi Arabia.
Yesterday, the benchmark Karachi Stock Exchange 100 Index plunged 1.5 percent after the government said it would delay the stake sale in the phone company because of pressure from labor unions. The government said it isn't scrapping the sale, which it now expects to go through by end-June.
The risk of such setbacks will remain, though the broad outlines of an investor-friendly regime should stay intact at least until 2007 when President Pervez Musharraf will, according to news reports, shed his army uniform and seek re-election as a civilian. Musharraf, an army general, took power in a coup in October 1999, and appointed himself president in June 2001.
While poverty still remains endemic, and only 18 percent of women aged 35 to 44 are part of the workforce (compared with 96 percent for males in the same age group), a new middle class has started to emerge in Pakistan.
Private consumption is up 17 percent from a year earlier in the 12 months ending June 30. Per capita income has surged to $736. Once Pakistan crosses the $1,000 threshold, like China did last year, it'll become a middle-income country with a lucrative domestic market of 154 million consumers.
Further income growth in Pakistan will require new jobs. And there's no sign yet of a reduction in urban unemployment, which has risen almost 3 percentage points in the last nine years to reach 9.7 percent. For now, GDP growth appears to be driven by more productive use of domestic capital, supplemented lately by an inflow of foreign savings. The current account now has a full- year deficit equal to 1.2 percent of gross domestic product.
Capital flows have been buoyant, as Aziz, a former executive at Citibank NA, has made good use of easy global liquidity conditions to raise cheap money from bond sales.
From investor such as Temasek Holdings Pte, the Singapore government's investment arm that bought 25 percent of a Pakistani bank in April, it helps that Pakistan's relations with India are improving as businesses in the two fast-growing economies press for closer ties. The neighbors have fought two of their three wars over Kashmir, a half-century-old dispute that remains unsettled.
There's help coming from another quarter. Raw cotton, yarn, cloth and garments account for three-fifths of Pakistan's overseas shipments. Along with China and India, Pakistan is widely expected to gain from the new quota-free system of global textile trade.
Yesterday's budget scrapped a 15 percent tax on materials imported by the country's textile industry.
A textile windfall would be a big bonus for an economy brimming with optimism, and quite deservedly. After all, it has been two decades since it last grew as fast as this year. Mimicking China's growth may be a tough act to follow, but Pakistan seems determined.