Briefing Notes for the Launch in Islamabad, 6 May 2010
Economic growth slows down considerablyGlobal economic crisis affected countries of South Asia adversely but generally to a lesser extent as compared to countries in other subregions of Asia and the Pacific. The crisis penetrated domestic economies of the subregion through substantial decline in exports and slowdown in capital inflows. Therefore, the impact of the crisis was less pronounced on these economies. Many of the countries of the subregion have been facing security problems ranging from internal conflicts to terrorist attacks linked to global geopolitical issues, thus adversely impacting on their macroeconomic performance.
In Pakistan, GDP growth fell from 4.1% in 2008 to 2.0% in 2009. The economy has been affected not just by the global economic crisis but also by the declining security situation and intensification of conflict linked to terrorism. Industry, especially large-scale manufacturing, suffered the worst of all sectors from the drop in international demand, while also having to cope with acute shortages of electricity. Improved performance of the service sector offset it to some extent, growing 3.6% in 2009, as well as a rebound in agriculture which benefited from a bumper wheat crop. While consumer spending remained strong, gross fixed capital formation, which had expanded by 3.8% in 2008, contracted by 6.9% in 2009. For 2010, a higher growth of 3.2 is projected. The anticipated recovery is expected to be supported by the restocking of inventories and a small recovery in exports as the incipient recovery in major economies gather pace. Large-scale manufacturing sector which contracted in 2009 is projected to register positive growth in 2010.
Inflation remains a key policy concernIn Pakistan, inflation rose sharply from 12% in 2008 to 20.8% in 2009 mainly because of food price increases. The Government increased the wheat support price by more than 50%, which pushed up retail prices of wheat and wheat flour across the country. It also phased out subsidies on petroleum products. To contain inflation, the Government has been cutting spending and attempting to improve the supply and distribution of essential commodities. Inflation is projected to decline in 2010 although it will remain in double digits. Upward pressures will remain high, particularly if higher oil prices, electricity tariff increases, higher wages, and fiscal expansion come to bear. A more active monetary policy might be needed to manage inflationary pressures. As inflation adversely affects the poor disproportionately, it is a serious problem for most countries with high incidence of poverty. Therefore, controlling inflation is and will remain a major challenge.
Trade declines sharply but workers’ remittances stay strongPakistan witnessed a contraction in both of its exports and imports in 2009. While global economic crisis led to a decline in exports by 6%, imports contracted at a much faster rate by 11% due to lower domestic demand coupled with massive fall in international oil prices. Depreciation of domestic currency also played a role in containing imports. A strong growth momentum in the workers’ remittances continued in 2009 and with over 20% increase the remittances stood at $7.8 billion. All these developments helped in bringing significant improvement in the current account balance, where deficit of 8.4% of GDP in 2008 was reduced to 5.3% of GDP in 2009. However, with the global economic slowdown and political and security uncertainties, there was a slackening of capital inflows due to lower FDI inflows, higher portfolio outflows, lower disbursements of loan and higher amortization payments.
Expansionary fiscal policyAs for all other subregions of Asia and the Pacific, Governments in South Asia used expansionary fiscal and monetary policies to counter the negative fallout of the global slowdown and moderate the decline in growth. Of some concern is the continuation of high budget deficit in some countries, while in others fiscal deficits improved somewhat in 2009 as compared to 2008. Moving forward, it is important that governments in the subregion prepare a clear roadmap of fiscal consolidation to be implemented at the earliest to contain growing public debt. Central banks also showed much more willingness to implement concurrently a range of monetary easing and liquidity enhancing measures including reduction in cash reserve ratio, statutory liquidity ratio and key policy rates in support of expansionary fiscal policies. Furthermore, inflationary pressures are growing. Consequently, some tightening of monetary policy is expected also.
In Pakistan, fiscal deficit has been rising in recent years, standing at 7.6% of GDP in 2008. In November 2008, the Government of Pakistan signed a $7.6 billion, 23-month Stand-By Arrangement with the IMF to support the country’s stabilization programme and help the country remedy balance of payments difficulties. Fiscal performance improved substantially in 2009 due to more stringent fiscal policy. The budget deficit came down to 5.2% of GDP. While performance on the revenue side was not very encouraging, the fiscal improvement in 2009 was largely based on reduction in oil subsidies and development spending which is likely to impinge on the medium-term growth rate. The Government needs to improve the tax base and raise the very low tax-to-GDP ratio in order to reduce the fiscal deficit to sustainable levels. The tax burden can be made more equitable by spreading it across different sectors of the economy, particularly services and agriculture.
Sustained high and inclusive economic growth needed for rapid poverty reductionWidespread poverty continues to be a serious poblem for all countries in South Asia. Therefore, accelerating economic growth is crucial to bring down poverty levels. The challenge will be how to make growth more inclusive by spreading its benefits to larger segments of the population. More resources should be devoted to provision of basic services such as education, health, sanitation and housing particularly for those belonging to lower income groups. Targeted programmes for the benefit of the poor in the broader framework of social protection should also be a priority. The Indian National Rural Employment Guarantee Scheme being successfully implemented in India can be replicated in many developing countries. The scheme provides guaranteed employment at minimum wage for 100 days each year to every rural household whose adult members volunteer to do unskilled manual work.
The inadequacies of physical infrastructure remain a key constraint holding back the potential of economic growth. Of particular concern is electricity shortage, where disruptions in the supply of electricity are compromising growth as a result of closures of factories and economic activities. Quality of life and human capital are adversely affected in case of frequent electricity outages of long durations. Huge investments are needed to enhance capacity of electricity generation. At the same time, renovation of transmission and distribution lines is necessary to minimize electricity losses. Potentials of trade in electricity among countries of the subregion should be explored and subregional cooperation in electricity generation and distribution should be promoted to overcome electricity shortages.