Oil prices forcing Pakistan to rely on loans

By Ihtasham ul Haque

ISLAMABAD, Dec 15: Pakistan will have to rely on foreign resources if domestic fiscal effort remains muted due to the likely impact of high oil prices on inflation, an official report says.

Prepared by the Planning Commission and made available to Dawn, the report warns that higher oil prices in the medium-term could eventually create problems for Pakistan like many other developing countries, especially those who were not categorized as highly indebted poor countries (HIPC).

They were being forced to seek increased foreign assistance, either commercial or concessionary, to finance increased social sector spending for achieving the Millennium Development Goals (MDGs).

The report — Millennium Development Goals 2005 — said that in an environment of higher interest rates, once again the goal of debt sustainability was partly compromised. Thus either the pace of foreign exchange earnings must continue to rise via unhindered exports and/or be financed by depletion of foreign reserves to maintain debt sustainability. The latter policy option again impacts the volatility of exchange rate and thereby expectations of inflation rate. “Central to all these trade-offs is the pursuance of prudent monetary, fiscal and exchange rate policies while targeting debt sustainability and increased social spending.”

The last two years’ respectable growth performance of the economy suggests that it has been accompanied by a steady increase in demand for imports and in 2004-05, the GDP growth of 8.4 per cent was accompanied by approximately 30 per cent increase in imports while exports grew by 15 per cent, with higher oil prices partly contributing to the surge in imports.

“Thus sustained higher growth to reduce poverty in the medium-term transmitted via higher current accounts deficits can dampen the momentum to reach debt sustainability,” the report warned.

About the medium-term challenge, the report points out that the success of the MDG-led poverty reduction strategy is mainly dependent on a growth rate of economy conducive to reduction in poverty and cost-effective investments in the social sectors to achieve the millennium goals by 2015.

It also says that if Pakistan is to realize the potential of international trade to enhance economic growth to achieve the MDGs, the main barriers to its exports would need to be removed. These include tariffs imposed by developed countries on imports and subsidies that developed countries provide to their domestic agricultural producers. The optimism generated in the Doha Round of multilateral trade talks, under the World Trade Organization on trade liberalization, dissipated with the collapse of negotiations in Cancun in September 2003.

Though over the last one-and-a-half decade, developed countries’ imports into Pakistan have been liberalized in terms of lower tariffs and other non-tariff barriers, Pakistan’s exports continue to face various forms of trade restrictions from developed partners.

Textile exports are broadly divided into quota exports to the US, EU, Turkey and Canada and into non-quota exports. In recent years, quota exports have increased, especially to the EU, because of enhanced quota allocations and quota utilizations.

According to European Commission studies, significant tariff and non-tariff trade barriers still existed and that the market opening by EU’s trade partners was very slow and insignificant. The average tariff for textile and clothing products under the WTO is nine per cent, while average applied tariffs for textile products by countries, such as Argentina, Brazil and Thailand, range between 20 per cent and 25pc, and are 38 and 39pc for India and Pakistan, respectively.

“This shows that textile exports from Pakistan are subject to one of the highest tariff rates,” the Planning Commission report said, adding that furthermore average applied tariffs on clothing products were even larger at 45 per cent for Pakistan and India. Indeed these over and above tariffs applications are greatly hampering Pakistan’s exports to developed countries, the report further regretted.

The preceding goal-wise review of the last five years progress and likelihood of their achievability by 2015 in case of Pakistan highlights the following essentials for fostering cooperation at the bilateral and multilateral level: a) expected growth momentum and its impact on poverty and employment is intimately linked with enhancing growth rates of productive sectors and capacity to produce and export. The provision of market access and fair trade regime is a necessary pre-requisite for the success of MDG-based poverty reduction strategy of the country; and b) sustaining and even scaling up the efforts to achieve the goals require increased diversion of resources towards the social sectors. Therefore, efforts at additional domestic resource mobilization and creation of fiscal space through debt reduction and maintaining sustainable levels will ensure the fulfilment of such an investment strategy.

Greater flow of official development assistance, the report says, can partly mitigate the fiscal burden of stringent domestic resource mobilization efforts otherwise needed for investing in social capital to attain the goals.

Maintaining the growth momentum



REPORTS suggesting that the current fiscal year would end with a lower than targeted GDP growth rate of seven per cent are disturbing. The reason for this reversal is said to be significant declines witnessed in the output of cotton and sugarcane. The government believes that the better-than-expected rice crop and good minor crops, plus increased hydel power production by Wapda and better performance by the financial sector during the year will help it maintain the high growth momentum begun in 2004. Then, GDP growth crossed the six per cent mark for the first time in almost a decade and was accelerated further in the following year to over eight per cent. This means the government hopes that the growth for the year would still be nearer to seven per cent if not on target. This appears to be an overly optimistic view because even growth in large scale manufacturing (LSM), which had contributed significantly to the high growth rates of the previous two years, appears to have slowed down.

The LSM sector, which accounted for 70 per cent of total manufacturing output and 52 per cent of total output of the industrial sector in 2004-05 and was responsible for 27 per cent of the contribution of commodity producing sectors to overall GDP in that year, has fallen way behind the levels achieved in the last two years. During July-August in the previous two years, large-scale manufacturing grew by 28 per cent and a little over 13 per cent respectively but stagnated at 7.6 per cent during the same period in the current fiscal year. On the other hand, with inflation still biting into incomes, it is hardly likely that the financial sector would be able to perform profitably. Meanwhile, the trade gap is widening by the day and is projected unofficially to show a deficit of around nine billion dollars by year-end. In addition, the budget deficit is also expected to increase. This will certainly bring the rupee under pressure and further fuel inflation. This in turn will nibble at economic growth, making it even more difficult for the growth rate to cross even the six per cent mark.

One would agree with the government’s assessment that the earthquake was not likely to have any significant impact on the overall economy because the regions affected by the disaster were the least developed areas of Pakistan and had very little by way of economic assets or economic activity. It is also likely that the inflow of a huge amount of resources and at a fast pace in these regions for relief, rehabilitation and reconstruction may create enough economic activity to accelerate the overall GDP growth in the country. But then the associated inflationary pressures are likely to prove a handicap causing the growth rate to be adversely affected. One had expected that the upswing in the growth rates witnessed in previous two years would be sustained in the current year as well because of the claims of the government that macroeconomic stability achieved some three years ago was sustainable, that economic management had improved tremendously meanwhile and that the country was now entering the second phase of reforms after successfully completing the first phase. This is not happening. Therefore, one would like the government to take a closer and more analytical look at its fiscal and monetary policies, especially those which are fuelling inflation and causing the trade gap and consumer credit to increase.