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A glimpse at Pakistan's economy.

One year of Pakistan's economy under a democratic government has been a subject to comment. In any such comment it has to be borne in mind that it is the policy of IMF in proxy which is being implemented under the conditionalities imposed by IMF/World Bank.

As the conditionalities go, there are some hopeful sign. Deficit financing has been brought down to less than Rs. 5 billion (88-89) as against Rs. 18 billion (87-88). Revenue has increased by 15 per cent by broadening the base of sales tax. Inflation has also been brought down. Sensitive price Index has gone up by 5.8% against 13.4%. Monetary expansion has been controlled. It has 13 per cent in 1987-88 but during 1988-89 it came down to 5 per cent. In fact, in November it was less than 2 per cent. As for the balance of the payment, the current Account deficit has been higher than the previous year. On the production side, cotton production has reached 90 lac bales. The country is till deficit in wheat and intend to import 1.6 million. Textile sector is looming. It is also evident from the buoyant performance of the Stock Exchange. Some of the textile units has declared dividends which were never heard in the past. Sanction for investment has reached a figure of Rs. 42 billion.

They are, no doubt, hopeful signs but a note of certain needs to be recorded. As for the rate of inflation it has to be taken with certain reservation. If the price Index has gone up by 5 per cent as against 13 per cent it does not mean that prices have gone down. It only means that prices have continued to rise but it has risen by 5 per cent over the previous year. Further these indices are influenced by averages and weightages. As there is a heavy weightage for food a decline in prices of onion, potatoes and tomatoes which may well be seasonal will influence the index when prices of a large number of products have shown a rise. Still the rising trend in prices is evidence by an increase of 10.79% during the current year as compared with the last year.

Moreover, there is a contradiction in IMF's strategy. It wants to reduce the rate of inflation to less than 6 per cent while it wants to increase the rate of utility services, to impose 12.5 per cent sales tax on all local manufacturers and the devaluation of the currency to its realistic level. The currency has already been devalued during the course of one year by nearly 24 per cent. Gas rates have to be increase for domestic consumers to international level. Subsidies have to be withdrawn. Rates of drinking water and severage has to be increased in keeping with costs. There has also to be a rise in prices of agricultural products. One cannot reduce inflation by increasing price on essential items of consumption.

As for investment one cannot ignore the double squeeze in investment through exchange rate depreciation and sustained counteraction in credit. Further IMF insists that government expenditure has to be kept within the ceiling given by them. IMF also wants that the government should keep a strict control over expenditure of provincial government and reduce assistance to provinces. Further loans and credit used by autonomous bodies are to be defined as budgetary loans which means that it will be difficult for government to borrow for social development. Pakistan has been following IMF policy strictly. Federal Development Budget is highly only about 5 per cent. The development expenditure in public sector was also limited and at the current inflation rate there is decline of 10 per cent. There also a freeze of 5.6 per cent in provincial development expenditure. Private sector credit is squeezed as Rs. 18 billion.

All these have resulted in a slow growth. Gross Domestic Product during the last financial year rose by 5.1 per cent against 6.9 per cent of the previous year. The growth rate during the current year is expected to be lower than the previous year. With an estimated decline in agricultural and industrial production.

As for the balance of payment the current Account deficit is higher than last year. Exports have increased by 2 per cent while inputs have increased by 4 per cent. There has been a sharp deterioration in terms of trade while there has been massive liberalization of imports.

This pattern of policy which has been introduced by IMF has been a failure in other countries. Even in the case of Pakistan, these policies were first introduced in 1980 but at the end of three years in 1983 some of the objective laid down by IMF were not achieved. In fact, load shedding was at its height and infrastructural facilities of communication water and power were at a low ebb. Pakistan's rate of capital formation and domestic saving remained low the overall fiscal deficit rose 8.1 per cent on an average 1986-87. If the growth showed high rates, good weather had a large share as the improvement was because of the increase in agricultural production while in the industrial products there was increasing share of services sector. Foreign exchange reserves weakened since 1984-85 and at the end of September 1988 the reserves declined to less than two and a half weeks imports.

It can be said that the present situation is different as we have a democratic government. Of course, there is a lot of goodwill for the democratic government and the democratic government has received a foreign assistance of 3 billion dollar. It is, however, not enough as its major portion goes to meet the previous debt. This debt can be effective if there is a moratorium on debt servicing for four or five years. At present debt servicing is about Rs. 26 billion a year which could be well used for infrastructural facilities and social sector. No doubt, policy initiatives take by the government has activated private sector and with the establishment of Board of Investment process of investment has been stream-lined. It cannot, however, be ignored that in a rigid economy like Pakistan development of the economy cannot be left entirely to market operations. Moreover a number of incentives are being provided to the private sector in the form of abolition and reduction of taxes. It has already led to a growing gap between the rich and the poor which leads to social unrest, kidnappings, robberies, corruption, are signs of such social unrest.

In a developing country like Pakistan what is required is equity with growth. While there has to be greater inflow of capital and higher investment in infrastructural facility. It is equally important to have institutional changes in the rural sector and better strategy for income distribution. The postulate to "grow first and distribute later" has been difficult to achieve, once growth begins people who own physical assets or human capital are in the best position to benefit from the process of growth. These beneficiaries of growth make it difficult to redistribute income effectively. This is the challenge which the government has to meet towards stability the economy of the country in coming years.
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Author:Huda, S.M.
Publication:Economic Review
Date:Mar 1, 1990
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