Monday, May 21, 2007

World Bank's faith in Pakistan's economy


by Hasan Mirza

The World Bank's increased assistance is a measure of its trust in the economic policies being implemented by the Government and the positive impact they have left on the state of the economy in Pakistan. This confidence in Pakistan's economic health and the right direction of economic policies is not without reason. Facts speak for themselves. The GDP has registered a growth of over seven, in fact touching 8. This is owed to a 7.5 per cent growth in agriculture, 15.4 per cent in large-scale manufacturing and 7.9 per cent in the services sector. This is for the fifth time in Pakistan's 57-year history that a growth rate had exceeded eight per cent. In 1953-54, GDP growth was recorded at 10.2 per cent, while it was 9.4 per cent in 1964-65, 9.8 per cent in 1969-70 and 8.4 per cent in 1984-85.
The World Bank has announced to increase its grant to Pakistan. It will give $ 1.5 billion per year to Pakistan over the next three years. The World Bank has agreed to provide $ 2 billion for infrastructure development in Pakistan. The WB assistance will cover areas such as roads, ports, railways, etc. The announcement to this effect came from a WB team following its meeting with Prime Minister Shaukat Aziz. It was agreed during the meeting that a coordination cell would be set up by Pakistan's Planning Commission, to coordinate with the WB. Prime Minister Shaukat Aziz pointed out that an efficient infrastructure could save 1 to 4 per cent of GDP. Given Pakistan's developing needs, and with mega projects like Gwadar in place, the need for more and more investment in infrastructure in Pakistan cannot be overemphasized.
Higher growth rates in almost every sector of the economy have resulted in more jobs and additional liquidity in the market, improving the purchasing power of the people and creating a vast mass of middle class. Inflation, however, is high. The government is taking measures to bring it down. It is expected that inflation will be brought down to single digit, as also declared by the prime minister. The main cause of inflation is the rise in the prices of oil in the world market, and Pakistan being one of the main importers of oil has to spend more foreign exchange to run its industry and transport. Since this is an international factor over which Pakistan has no control, at best what the government can do is bear the main brunt of the oil spiral. Oil prices now touch $ 66 per barrel, which can sink any developing economy.
Using this economic improvement to address people's problems, more funds have been diverted towards education, infrastructure and energy, which is essential given their potential and utility in spurring national growth in both economic and human terms. Measures are being taken to increase the capacity of ports and improve the road network in the country. The present pace of the development is the result of the consistency in Shuakat Aziz's policies and reforms. With the advent of the WTO, which entails tough competition in the world market, Pakistan's economic about-turn could not have come at a better time, and the World Bank and other financial institutions' trust can be the most important factor in enhancing Pakistan's economic credibility.
As things stand, Pakistan's economy is all set to enter the phase of sustained growth. Budget deficit has been curtailed. The foreign exchange reserves that stood at a dangerously low level some years ago have gained strength. Pakistan's economy can sustain a rate of 7 to 8 per cent over the next three to four years with the private sector playing a leading role in it. With Pakistan's entry into ARF and its policy of expanding towards Central Asian Republics, SAARC, China, Japan and Latin America, Pakistani exporters are set to gain a foothold in new markets. This change in Pakistan's economic fate has been gradual. The growth rate of six is remarkable given that in 2001-2 it was 3.6 per cent and in 2000-1 it was 2.5 per cent. Since then owing to the policies ushered in by Mr Shaukat Aziz as finance minister and now as the prime minister, an overall improvement has been registered by the economy.
The soundness of Government policies can be gauged from Pakistan's economic performance even when some yeas ago, it confronted tensions on the border with India, lingering drought, world market recession, the wars in Afghanistan and Iraq -the latter having a negative effect on Pakistan in terms of rise in oil prices. Future economic projections are promising still: increased availability of water, as promised by water schemes, is expected to boost agriculture as well as increase hydropower generation. The textile industry, as also other sectors, is better placed for increased production after heavy investment in this sector in the past two years. Pakistanis' remittances, which have played the most vital role in enhancing the foreign exchange reserves, are likely to maintain their momentum. The construction sector and consumer-related schemes are showing results, thanks to the consumer credit schemes by banks and other financial institutions. Higher growth in manufacturing, together with a reduction in import tariffs, is likely to ensure growth in imports. That Pakistan is in for good times in the coming years would not be a wrong statement. After the attainment of the macro level, the trickledown will start at the micro level.
Foreign Direct Investment (FDI) remains the key player, however, it's expected to increase provided the internal political situation remains stable and no tensions erupt on the borders. In the context of the former, all political parties should make a commitment that they will adopt a mature attitude towards national issues. In the context of the latter, all sections of society should support Pakistan's efforts towards attaining economic betterment. It goes without saying that lawlessness created by foreign and local terrorists is an impediment that must be removed. In this context, support from masses is of great importance.
Coming back to foreign investment, FDI is an important instrument for facilitating a developing state's strides towards development. The most important role it can play is in the form of supply of capital. In order to increase the level of foreign capital inflows, developing countries liberalize their trade and investment regime by relaxing governmental controls and offering a number of financial and trade incentives like tax concessions and tariff reductions. The Govenment has perfectly done this by way of a slew of incentives. It is better to look at the trend of FDI. Total FDI inflows into Pakistan from 1993-94 to 2003-04 stood at $6.68 billion, which came to $610 million a year, which's not a satisfactory level. The most damaging factor behind this low inflow was Pakistan's decision to go nuclear in 1998 that prompted several countries to impose economic restrictions. It's promising in this regard that owing to efforts by the government of Shaukat Aziz and Pakistan's move to curb nuclear smuggling, Japan, the US and other countries have now lifted embargo on aid to Pakistan. To make matters worse in 1998, foreign currency accounts were frozen to offset the economic repercussions of the blasts by the then government, which needless to say severely affected FDI.
The FDI level however is improving due to the efforts of the present Government’s economic policies: in 2002-03, FDI was $798 million, while in 2003-04, it increased to $ 949.8 million. The largest amount of FDI has been made in the energy sector, which accounts for more than 42 per cent of total FDI. The share of manufacturing has been about 25 per cent followed by the services sector whose share is 21 per cent. More foreign and local investment can be attracted provided political situation remains stable.
The strengthening of local government system in Pakistan is slowly but surely incorporating the concept of true democracy, as envisioned by President Musharraf, by way of devolving power to people at the grass roots. This process must continue as democracy in its true form is necessary to make economic gains and then trickle them down to people at grassroots.