Pakistan economy the glass is still half full
A worried housewife asked me at a lavish wedding the other day “I have saved three years’ fee in dollars for my son who is studying abroad. Should I withdraw the dollars and keep them at home or in a locker?” When I asked why she said she has read the finance minister’s statement in a newspaper which said that the economy is ‘teetering on the brink’ and the government will not have the money to pay the salaries.
A TV anchor who is doing a morning business programme asked whether the country is going to be bankrupt as being forecast by some leading economists? Many business leaders who meet socially at the parties are also worried about the state of economy. Everybody feels that as it is, the economy was not doing well and the floods have almost drowned it.
Leading economists like Dr. Hafeez Pasha and Dr. Ashfaque Hasan Khan are warning that the economy is on the verge of collapse. The IMF bailout is considered essential. But this comes with tough conditionalities that may further make life difficult for the government which is quite unpopular anyway. The scare such statements cause among the common people and the business community is quite telling.
All these economists are friends and I think they are screaming from the hilltop because they want to instill fear of the forthcoming economic crunch among the ruling coalition ministers. Though Finance Minister Dr. Hafeez Shaikh’s warning, which has shocked the people, was made in a closed- door meeting, it was also deliberately leaked to the press by some participants of the meeting without realising its adverse impact on the economic and business environment. It can panic people like my worried friend to withdraw her dollars from the banks thus causing a run on the banks. People have already suffered freezing of the foreign currency accounts, which from a hindsight, PML leaders also think was a mistake. It is making the people jittery in every sector.
Are these leading economists right in raising the alarm? They are right about the pressures on the macro economy which has increased manifold because of the devastating floods. Their fear is that if the government would not be able to contain the budget deficit consequently it would not be able to keep inflation down. Hence the government should tighten its belt and listen to the IMF instructions: control monetary expansion through higher interest rates; introduction of reformed GST; and raising the power tariff to the market price. These are tough measures for the government which is so unstable because of its own inefficient management and corrupt practices and the on-going intrigues to destablise them.
But there is another micro economic side of the story which has been missing in the analysis. Hence the perspective in which the whole economy should be seen is not reported. First we have to keep in mind that the worst scenario could be that the budget deficit which is already around 5% goes up further. The heavens would not fall. We have been through this phase before and come back. True this may further spur the inflation. But then so will the high interest rates on borrowings for the purchase of commodities and industrial transaction. The wasteful expenditure which the government wants to control in our economy by tightening the monetary supply is mostly done by the people who are a part of the undocumented economy.
According to two studies done by the economists, a few years back, Pakistan’s parallel economy was as high as 50% of the GDP. This means that the 2% growth rate predicted by the IMF after the floods hit Pakistan is understated. So the real buoyancy of the economy comes from this unregulated sector, which the government has to bring under the tax net brushing aside the criticism against reformed GST.
Pakistan is indeed faced with damages caused by the floods. One view is that 20% of the agricultural area has been destroyed. It would have an impact on the output of cotton, sugarcane, rice and tobacco. In spite of this loss Akbar Hashwani, who is usually right about the cotton output, being in the business of textiles and cotton trading, says that the crop would not be less than last year in spite of the floods. Reason: this year more people have ploughed better seeds and BT cotton seeds so the per acre yield may go up. Rice is mainly affected in Sindh which grows the Irri variety which is priced much lower than the Basmati. Hence its overall impact on the agriculture growth would be small. Sugarcane and tobacco crop damage however would have a suppressing affect on the agriculture growth rate but their weightage in the basket is only after wheat and cotton.
Now another factor which is being ignored is the impact of all the aid money which is coming in the country. Just a few examples: the UN has already pledges of over two billion dollars; there is a substantial inflow of foreign assistance which is coming directly to the NGOs – Red Crescent has some 67 foreigners working in the field assisted by 400 local volunteers; the hotel business in cities like Sukkur and Multan is booming; it is difficult to rent a car in the cities which have become hub for all the governmental and NGOs relief workers; over 10 million people are being provided food by the government; Pakistanis living abroad who belonged to the flood affected areas are sending more money to their relations; the Rabi crop in most of the area where the flood has receded is expected to be better than last year as land condition has improved; and NGOs purchase of food items for the affectees has resulted in the increased demand of food commodities. All such things contribute to the economy and keeps it going. There are many such factors which are being ignored by the macro-economists. I agree that the government finances are in trouble which can be taken care of by plugging corruption, improving efficiency, collecting taxes from all who have an income of more than Rs300000. But on ground the situation is not as hopeless for the economy on the whole. Countries do not go bankrupt and Pakistan in spite of its shortcoming is not a hopeless case as some would like to propagate because they don’t like the government. (firstname.lastname@example.org)