Fallout of war on terror

[Naveed Yaseen]

Economic growth outlook pessimistic: ministry
By Mehtab Haider
ISLAMABAD: An official document of the finance ministry reveals that the country has experienced major disruptions to a normal economic activity as the fallout of the war on terror spreads to the settled areas of the country.

“The outlook for economic growth is more pessimistic, import demand has shriveled, tax collection has declined and inflows of foreign investment and privatisation have been reduced,” states a finance ministry document on economic situation during July-Feb of fiscal year 2008-09 released on Wednesday.

The downside risk to the stabilisation programme agreed with the IMF may come from slippages on account of the FBR revenue collection and slowdown in exports neutralising to some extent the steep fall in import growth.

The negative large scale manufacturing (LSM) growth and falling credit to the private sector are indication of falling real economic activity, however, still better growth prospects in the agriculture and services sectors will give hope of real GDP growth at the targeted level in 2008-09, it added.

Pakistan economy, the document states, still faces pressures from higher inflation driven by spike in food prices, the acute power shortages, a bewildering stock market, a perceptible slowdown in the manufacturing and services sectors; lower than anticipated inflows and growing financing requirement.

Recent trends in most macroeconomic variables suggest that the disciplined implementation of the macroeconomic stabilization programme is paying dividends.

Improvement in fiscal discipline is complementing the tightening of monetary policy to aggregate demand compression to a meaningful level which has improved prospects of lower inflation in the final quarter of the current fiscal year. The demand compression is also manifested from fall in the cumulative Jul-February FY 09 trade deficit which is the first reduction in the last six years.

The narrowing trade deficit and robust remittances has caused reduction in the current account deficit and even for the month of February 2009, “we have witnessed first surplus in monthly current account surplus since June 2007.”

The improvement allowed for a build-up of the country’s foreign exchange reserves. The fiscal deficit target of 4.2 per cent of GDP and the current account deficit of 5.9 per cent of the GDP is now achievable.

“However, recent global financial crisis and extremely vulnerable security environment added risks to the economy,” the document says.

The trade data for the month of February 2009 though not representative for months to come, still provide food for thought about imminent risks to the external sector.

If the trade data in the month of March 2009, follow the same trend then it will be taken very seriously.

The two extremes in the remittances data like massive growth in remittance inflow from UAE and negative growth in US again need some assessment because if somebody has lost a job in UAE, he has to return with retained savings immediately while a person in similar situation in US can wait for the better tomorrow by consuming part of one’s retained savings.

The external data for the March 2009 will provide ample evidence of the impact of global financial crisis on the external sector. The economic growth target at around 2.5 to 3.0 per cent is still getable in the given circumstances. The massive negative growth in the LSM for the month of January 2009 may be purely a base effect because the growth in the sector for January 2008 was huge one.

The coming month may witness lower intensity of negative growth because the base effect will be favourable in the coming month.

Similarly, the surge in inflation for the month of February 2009 was again not representative because February 2008 had witnessed rare deceleration in the CPI index for the last one and half year.

The persistent negativity in the SPI during the month of March 2009 reinforces the optimism that the CPI inflation for March onward will be sharply decelerating.

The most optimistic estimate for the next year inflation will be around 6 per cent. The pressure on monetary, fiscal and exchange rate policy will be mitigated by lowering financing needs emanating from lower fiscal and current account deficits as envisaged in the stabilization programme.

Elimination of subsidies, partial transfer of oil payments to the foreign exchange market, and fall in the international oil prices will provide great help on this count.

http://www.thenews.com.pk/daily_detail.asp?id=170552