Hold of non-economic factors on economy

Non-economic factors have assumed so much importance in the economy of Pakistan in the recent past that its prospects could now be explained by their behaviour and the capacity of the government to deal with them appropriately in future. According to a latest World Bank report titled "Global Economic Prospects: Uncertainties and Vulnerabilities", "economic activity in Pakistan, representing about 15 percent of regional GDP, continues to markedly lag outcomes elsewhere in the region, reflecting worsening security conditions, greater political uncertainty and a breakdown in policy implementation". In other words, recent weak growth in Pakistan, which was less than the potential, could be largely attributable to these negative factors. Talking about actual numbers, the report says that Pakistan's GDP touched the lowest level amongst all regional states of South Asia in 2010-11 while it was projected to stand at second in the bottom in the ongoing fiscal year 2011-12. The growth was expected to stand again at second number, only ahead of Nepal in the next financial year 2012-13. The report also notes that "infrastructure bottlenecks, including disruptions in power delivery" remain widespread. Coming to the brighter spots in Pakistan's economy, exports strengthened, particularly in the first half of 2011, led by textiles that surged 39 percent during this period. This coupled with the upswing in workers' remittances contributed to an improvement in the current account from a deficit of 0.9 percent of GDP in 2010, to a surplus of close to 0.5 percent of GDP in 2011 calendar year. Also, monetary tightening brought about positive real lending rates in early 2011 as well, the first time since late 2009. However, administered fuel price increases and, more recently, currency devaluation has contributed to inflationary pressures. Monetary authorities have also been monetising the deficit, complicating the efficacy of monetary policy instruments to reduce inflation. A key factor working against monetary policy efforts was the overall stance of fiscal policy, which despite some consolidation, remains very loose. Dwelling upon the situation prevailing in South Asia, the report states that following a vibrant 9.1 percent growth in 2010, real GDP decelerated to an estimated 6.6 percent in 2011, with a sharp fall-off evident in industrial production and trade late in the year. GDP growth was projected to ease further to 5.8 percent in 2012 before strengthening to 7.1 percent in 2013. Accounting for about 80 percent of South Asia's GDP, India led the regional slowdown as its GDP growth weakened to an estimated 6.8 percent in fiscal 2011-12, ending in March, 2012, from 8.6 percent a year earlier. Workers' remittances remain a critical source in South Asia - equivalent to 20 percent of GDP in Nepal, 9.6 percent in Bangladesh, 7.0 percent in Sri Lanka and 5.0 percent in Pakistan. Another crucial observation was that countries heavily reliant on foreign assistance, such as Afghanistan, Nepal and Pakistan, could be hit hard if fiscal consolidation in high-income countries were to result in cuts in overseas development assistance. Although most of the analysts in Pakistan would find the World Bank's observations rather ordinary or a reflection of the reality on the ground, yet the attribution of weak growth to factors like worsening security conditions, greater political uncertainty and a breakdown in policy implementation by a highly renowned organisation is unusual due to the fact that such institutions are very careful about their words and generally don't comment on non-economic variables affecting the growth of a country. The reason for such behaviour is that these kinds of remarks are often difficult to be backed up with statistics, could cause a great deal of harm to a country and the member country could take offence for unwanted intrusion in its internal affairs. The fact that the World Bank has decided to say these things so openly is due to almost a complete hold of these negative influences on Pakistan's economy at present, without any risk of deniability. Anyhow, the impact of such remarks could be highly damaging to our economy. For instance, foreign investment which is already declining at a fast rate, could slump further and expatriates could hold back their remittances in certain cases because of the raised apprehensions about the security situation in Pakistan etc. Also, experience suggests that while economic variables like budget deficit and monetary policy targets could be achieved within a timeframe, the duration of inhibiting factors like political instability and lack of security is almost impossible to predict. The uncertainty inherent in such a situation is usually a nightmare for entrepreneurs and other stakeholders of the system. Coming to the other observations of the World Bank, it is very sad to see that the growth performance of the country was at the bottom of all the regional states of South Asia and would continue to be almost at the same level during the next two years or so. On the other hand, there is not going to be any marked let-up in inflationary pressures in the economy due mainly to loose fiscal policy of the government. Hopes for foreign development assistance to ease pressure on the budget and balance of payments were also diminishing due to fiscal constraints in the developed countries and their unsympathetic attitude, particularly that of the US, due to difference in stance on the war on terror though the latter factor has not been specifically mentioned in the World Bank's report. All these challenges could have been met if there was a consensus on various economic issues and on a reform agenda to pull the country out of this dismal situation, but as pointed out by the World Bank, there is definitely a breakdown in policy implementation. After the termination of the SBA with the IMF and with increasing confrontation between various organs of the state and political parties, there are absolutely no efforts in place or even being contemplated to stabilise the economy through various reforms and revive its growth to the level witnessed in other South Asian countries. The results of such an unhealthy attitude towards the current problems of the economy are not difficult to comprehend. We could only urge upon the political leadership of the country to listen carefully to the messages and advice coming from various sources and accord a much higher priority to the economic issues of the country before the situation becomes unmanageable for everyone. Copyright Business Recorder, 2012