In the absence of a major recovery in the manufacturing and agriculture sectors, the bank claims that the impetus to growth will come from the services sector. In claiming so, the bank fails to see that growth in the services sector is largely dependent on growth in manufacturing and agriculture.
Pakistan’s economy has come a long way in the last one year. Many acknowledge that the PPP government took several politically tough decisions like the abolition of power and oil subsidies to successfully stabilise the sliding economy it inherited. By implementing its macroeconomic stabilisation programme it has brought back the economy from the brink. Fiscal and external account deficits have narrowed, foreign exchange reserves have improved and inflation has declined significantly. The country’s sovereign ratings have also improved.
Naturally, the State Bank of Pakistan’s report discusses all these positive trends in detail. But full economic recovery will take some more time in spite of the positive spin the SBP has sought to put on the state of the economy in its first quarterly report for the financial year 2010. This is mainly because the government has failed to address the structural bottlenecks stalling economic recovery and growth. A persisting energy crunch continues to distress the industry; water shortages are preventing the country from exploiting its full agricultural potential; and failure to tax the rich and powerful lobbies is once again threatening to destabilise the fiscal stability achieved in recent months. The result of these failures is evident: the economic outlook remains weak.
Yet the SBP is hopeful that the nation’s GDP will increase by around 3.3 per cent, the target set in the budget for the current fiscal year. However, few subscribe to the bank’s optimistic view. In the absence of a major recovery in the manufacturing and agriculture sectors, the bank claims that the impetus to growth will come from the services sector. In claiming so, the bank fails to see that growth in the services sector is largely dependent on growth in manufacturing and agriculture. Unless the commodity-producing sectors improve, there is little that the services sector can do to push growth.
At the same time, threats to macroeconomic stability are resurfacing. Inflation is projected to resurge on increased power and gas prices. Fiscal slippages could make it hard for the government to meet the fiscal deficit target, and the delay in the realisation of pledged aid/loans/grants from the Friends of Democratic Pakistan group is impacting liquidity and preventing the government from spending on social and economic development. The external side, nevertheless, is expected to improve over the last financial year due to generous funding from the IMF and the US under the Kerry-Lugar act. Therefore, it is difficult to expect a major pick-up in growth, at least in the foreseeable future. Unless obstacles to growth are removed, it will be futile to expect sustainable growth even over the long term.