Pakistans economy in catch-22 situation

After reaching a record 8.6 percent of GDP in FY08, saving-investment gap narrowed by 3.2 percent during FY09 due to the combined impact of a rise in savings to GDP ratio and a decline in investment to GDP ratio. This excerpt from SBPs annual report gives a clue of hollow recovery in Pakistans economy, contrary to popular perception of stability.
Ordinarily, the narrowing of saving-investment bodes well for the economy since it implies reduced reliance on foreign savings leading to consequent improvement in external balance and lesser threats on imported inflation. But the devil is in the details.
The central bank said, unfortunately, instead of a healthy rise in savings rate, a sharp fall in investment rate was more pronounced in this reduction of the gap adding that although public saving increased marginally, the private savings deteriorated further to 13.2 percent of GDP - its lowest since 1999.
The 6.5 percent fall in aggregate investment last year - its biggest fall in four decades -- implies less impetus for future growth; whereas decrease in private savings indicates that households have much less amount of disposable income available with them -- pointing to even lesser contribution from domestic front for future investments.
The consolidation of fiscal balance during FY09 resulted largely from a steep deceleration in the growth in total expenditures. Despite considerable acceleration in growth in last decade, revenues fell as a share of GDP, worsening the countrys capacity to service its debt. These indicators emphasise the urgent need to revisit debt management policy to ensure an early return to a path of sustainable debt.
In contrast, with lesser FDI inflows, which were already on a decline for developing economies since FY07 ie before the financial crises, Pakistan seems to have little option but to increase the size of its debt book. And with low opportunities to raise money from global debt markets at decent rates, given the countrys risky ratings and damp global investment climate, the need of institutional lending is even more - surely not a good sign.
Adding to the concerns is the challenge to maintain last years improvement in current account deficit. If remittances fall and global commodity prices start soaring amid revival of domestic economic activity, external gap would start bloating again.
There is a catch-22 situation for our economic managers, both at fiscal and monetary end; the stabilisation model currently implemented under the umbrella of IMF neglects adequate economic growth for the near to medium term. And if exogenous variables improve, to fuel some recovery, other economic variables worsen.
Interestingly, however, the central bank remains muted in its annual review on how the current security situation will hamper future economic outlook, where other seasoned economists say the country is in a state of war economy, which could have long lasting repercussions.
Perhaps the central bank hopes that structural reforms, on which it has stressed many times in its annual report, will help mitigate the impact a bit. But then when the institutions could decay widely in the previous decade of high economic growth, what hope could one have, to address these structural issues at a time when economic mangers are walking a tightrope.