ISLAMABAD (December 31 2002) : Recounting its economic successes during military regime the Finance Division says that real GDP averaged at 3.3 percent and inflation averaged at 3.8 percent.
While, the agriculture sector averaged at 1.6 percent against 2.2 percent, large-scale manufacturing 4.7 percent against 3.0 percent during the last three years against the three preceding years.
A document “Economic performance during 1999-2002” was released by the government on Tuesday written by Dr Ashfaq Hassan Khan, Economic Advisor Ministry of Finance.
The document says that the KSE share index grew by 86.2 percent in October 2002 over October 1999 or from 1189 points to 2214 points (October 29, 2002), 1025.4 points increase in almost three-year.
Fiscal deficit is reduced to 5.0 percent of GDP in 2001-02 and would be reduced further to 4.6% in 2002-03, which remained near 7% during the last decade.
Despite crippling drought, real GDP grew at an average rate of 3.3 percent per annum during the last three years slightly better than the performance of three years prior to this government.
Non-agricultural GDP growth recorded at 4% has exhibited better performance as against an average growth of 3.5 percent during the last three years.
Agriculture has suffered severe setback during the last two years (2000-01 and 2001-02) of the present government as a result of the catastrophic drought, resulting in water shortage ranging between 41 to 50 percent as compared to the normal supplies.
The growth in large-scale manufacturing slowed considerably in the 1990s for a variety of reasons including worsening of macroeconomic environment, adverse law and order situation, inconsistent policies and poor governance.
As against an average growth of 8.2% in the 1980s, large-scale manufacturing slowed to 4.7 percent in the first half of the 1990s and further to 3.0 percent during three years prior to this government.
The flow of workers' remittances started picking up – reaching almost $ 2.4 billions in 2001-02, almost doubled from the preceding year.
Almost Rs 40 billions in the form of additional tax revenue was collected by the Central Board of Revenue during these three years despite the fact that Rs 70 billions worth of additional tax measures taken in three federal budgets.
Drought not only affected agriculture but it also affected the performance electricity sector because hydel electricity generation declined forcing Wapda to purchase expensive electricity from the IPPs.
Growth performance present different picture, once we adjust the impact of drought on the real GDP adjusted for drought, grew by an average rate of 4.6 percent per annum during the last three years as against 3.2 percent and 5.0 percent during 1996- 99 and 1990-95, respectively.
Pakistan has experienced sustained inflation averaging 11.5 percent during 1990- 95 and 8.4 percent during 1996-99.
As a result of prudent fiscal and monetary policy pursued by the present government, the inflation rate has been reduced to an average of 3.8 percent during the last 3 years his hard-earned progress on inflation front must be sustained in the medium-to-long run.
REVENUE COLLECTION: The performance of revenue collection during three years prior to this government (1996-97 to 1998-99) was dismal tax collection grew at an average rate of 4.8 percent per annum during the period 1996-99.
Almost Rs 40 billion additional tax revenue was collected by the Central Board of Revenue during these three years despite Rs 70 billion worth of additional tax measures taken in three federal budgets.
During the three years of his government, revenue collection has improved significantly tax collection grew at an. average rate of 9.5 percent during the last three years.
Excluding fiscal year 2001-02 real GDP adjusted for drought is defined as real GDP adjusted for agriculture and value added of electricity and gas distribution, which was affected adversely by the events of September 11, the growth in revenue collection is estimated at 13 percent.
During the last three years, almost Rs 96 billion additional revenue has been collected as against 40 billion in three years prior to this government.
Fiscal deficit as percentage of GDP has averaged almost 7 percent during the 1990s.
Strong fiscal discipline pursued by the present government resulted in lowering fiscal deficit to 5.0 percent of GDP in 2001-02 and is targeted to be reduced further to 4.6% in 2002-03.
As a result of improved fiscal discipline, expenditures on interest payments and defence have declined considerably during the last three years.
Interest payment was 34 percent of total expenditure in 1998-99 and was reduced gradually to 30.4 percent in 2001-02 and is likely to be reduced further to 28.4 percent in the current fiscal year (2002-03).
Similarly, defence spending was 22.2 percent of total expenditure in 1998-99 but was reduced gradually to 18.5 percent in 2001-02 and is targeted to be reduced further to 16.5 percent in 2002-03. The resources released from these two items have been used to finance poverty and social sector related spending.
Poverty and social sector related expenditures which stood at Rs 119 billion or 3.4% of GDP has been increased to Rs 161 billion or 4.0 percent of GDP in 2002-03.
Stock market: As a result of market friendly policies perused by the present government, the stock market in Pakistan has recorded unprecedented growth during the last three years.
The KSE share index grew by 86.2 percent in October, 2002 over October 1999 or from 1189 points to 2214 points (October 29, 2002), 1025.4 points increase in almost three year.
Similarly aggregate market capitalisation has also increased by almost 43 percent during this period.
EXPORTS: Pakistan's exports have stagnated at around $ 8 billion during 1994-95 to 1998-99.
For the first time it crossed $ 9.0 billion mark in 2000-01 and remained there during 2001-02 as well.
Global economic down turn and the events of September 11 have impacted export performance during 2001-02.
More recent information suggests that exports have picked up significantly. During the last six months of 2002 (April-September) exports have grown at monthly average rate of 9.6 percent.
Even more recent information indicates that exports have grown by 14 percent during the first three months of the current fiscal year.
It may also be noted that monthly average exports during 1998-99 stood at $648 million.
These have jumped to $ 863 million during April – September, 2002 – an increase of 33.2 percent.
IMPORTS: While exports stagnated at around $ 8 billion during 1994-95 to 1998-99, imports hovered around $ 10 to 12 billion during the same period, resulting in massive trade deficit.
During three years of the present government exports crossed $ 9 billion and. imports remained around $ 10 billion resulting in sharp reduction in trade deficit.
FOREIGN INVESTMENT: The inflow of foreign investment in Pakistan has been declining since 1995-96 for a variety of reasons including; the saturation of investment in power sector; the East.
Asian financial crises of 1997; economic sanctions and freezing of foreign currency accounts of May 1998; the IPP and the HUBCO issues, particularly the way it was handled in the past, low levels of foreign exchange reserves and threat of default on external payments obligations; and disarrayed and unstable relations with the International Financial Institutions(IFIs).
Over the last two and a half years the government has succeeded in removing the above listed constraints.
For example, all the IPP issues including the HUBCO one have been resolved; foreign exchange reserves have reached at a comfortable position, economic fundamental have improved, all economic sanctions have been lifted, Pakistan has acquired high credibility for its reform programme from the IFIs; and stability in the exchange rate has been resorted.
Investment climate has further improved because of Pakistan's enhanced stature in the global order.
It is an accepted fact that taking foreign investment from a low and declining path to a higher and sustainable path is a daunting task. Flow of foreign investment does not increase overnight.
With the removal of many irritants and significant improvements in he country's macroeconomic environment, the flow of investment has picked up.
Foreign investment stood at $475 million in 2001-02 which was higher than $403 million in 1998-99.
During the current fiscal year (2002-03), almost $ 1.0 billion of foreign investment is expected.
It may also be noted that monthly flow of foreign investment, which average $ 33.6 million in 1998-99 has jumped to $ 52 million in 2001- 02 – an increase of 44 percent.
Recent information suggest that overall foreign investment stood at $ 167.4 million during the first quarter of the current fiscal year.
Notwithstanding the increase in foreign investment in recent years, much more efforts will be required to attract foreign investment on a sustainable basis.
Current Account Balance: Pakistan has maintained a large gap in its external balance of payments for a long time.
During the 1990s Pakistan's current account deficit averaged 4.5 percent of GDP or $2,557 million per annum.
During 1996-97 to 1998-99, current account deficit averaged 4.5 percent of GDP or $2,732 million per annum.
Such a large gap in current account resulted in sharp accumulation of external debt in the 1990s.
As part of the debt management strategy the present government has made strenuous efforts to minimise the gap in external account.
Over the last three years, the deficit in external account not only reduced to a bare minimum (1.4% of GDP) but it turned surplus in 2001-02 to the extent of 2.1 percent of GDP his has not only reduced stock of external debt and foreign exchange liabilities but also helped build foreign exchange reserves.
Foreign Exchange Reserves: Foreign exchange reserves of the country have widely fluctuated in the 1990s he reserves picked from low level of $ 529 million by end June 1990 to a maximum of $2,737 million by end June 1995 – mainly on account of one time sale of Pakistan Telecommunication vouchers amounting to $862 million hereafter it gradually declined and stood at $ 1597 million in October, 1999 sufficient to finance 7 weeks of imports.
Prudent macroeconomic policies pursued by the present government during the last three years resulted in improvements in the trade and current account balances, substantial increase in private inflows, availability of grant assistance, and inflow of assistance from donor agencies which led to the sharp and unprecedented build up in foreign exchange reserves.
Foreign exchange reserves stood at $8,504 million on October 29, 2002 – sufficient to finance almost 10 months of imports.
It may be noted that foreign 25 exchange reserves increased by 432 percent since October 1999 and until October 29, 2002.
The build up of the foreign exchange reserves not only strengthened Pakistani rupee viz.
US dollar but also stabilised the exchange rate and strengthened country's ability to withstand external shocks.
Remittances: Workers' remittances have been the major source of private transfers in Pakistan since the second half of the 1970s.
It reached $ 2.9 billion in 1982-83 – the highest ever in the country's history. It also exceeded the country's merchandise exports. Workers' remittances continued to decline thereafter, reaching $ 1848 million in 1990-91 he declining trend in remittances continued in the 1990s as well, reaching as low as $ 984 million in 1999-2000.
Declining pace of construction activity in oil rich countries, freezing of foreign currency accounts, uncertain economic environment in the country Years Remittances and large gap between the interbank and open market exchange rates have been mainly responsible for the decline in the flows of workers' remittances during 1996-97 to 1998- 99.
With macroeconomic conditions improving in the country and the confidence of expatriate Pakistanis restored.
The flow of workers' remittances started picking up – reaching almost $ 2.4 billion in 2001-02, almost doubled from the preceding year.
With continuing improvement in the country's economic conditions the flow of remittances has accelerated.
During the first three months (July- September) of the current fiscal year, remittances have shot up to $ 1052.9 million and if this trend continues, Pakistan is likely to receive almost $ 4 billion during 2002-03.
STRUCTURAL REFORMS: As stated earlier, stabilisation policy alone does not necessarily guarantee growth, therefore, the present government initiated a wide-ranging structural reform measures to supplement the stabilisation efforts.
These reforms were considered vital for enhancing economic incentives and improving the allocation of resources as well as removing impediments to private sector development.
Ideally, we should have analysed each and every reform measures undertaken during the last three years.
However, time and space do no permit to undertake such exercise o conserve space some of the major structural reforms are documented below.
TAX REFORMS: Tax survey and documentation exercise undertaken – Wealth tax abolished – A two-tier agricultural income tax introduced – Reduction in number of taxes (Federal and Provincial), tax rates, and penalties – Tax ombudsman's office established – Grass roots reforms in tax administration started – GST broadened and streamlined – A new Income Tax Ordinance on universal self assessment basis with selected audit, minimal exemptions, and more equitable rates have been introduced – Large taxpayer unit has been established – Fiscal Responsibility Law is expected to be put in place shortly – All tax whitener schemes eliminated.
Trade Reforms: Public announcement of tariff rationalisation, spread over 2001-03: – Maximum tariff brought down to 25 percent – Number of tariff slabs reduced from five to four – Minimising the use of excise duties in tariffs – Promulgation of anti-dumping Minimising the use of excise duties in tariffs – Promulgation of anti-dumping law consistent with WTO – Import liberalisation measures adopted for agricultural and petroleum products – Restrictions on agriculture exports removed.
Deregulation and Privatisation: Privatisation law enacted. EoIs invited for major privatisation deals (PTCL, banks, oil and gas interests).
Petroleum price adjustment mechanism introduced – Furnace oil excluded from freight pool. LPG price deregulated. Oil and Gas regulatory authority (OGRA) established. NEPRA is operational to regulate power sector.
FINANCIAL SECTOR REFORMS: Profit rates on NSS certificates rationalised – SBP strengthened, regulatory role improved – Non-core activities of SBP have been separated from its core monetary function – CIRC established for non-performing loans.
Change in management in NCBs with focus on professionalism and autonomy in operations – Banking companies ordinance amended to enforce capital adequacy ratios in line with international standards – SECP strengthened and insurance sector deregulated.
Governance – Restructuring and rightsizing of civil services – Proposals for rationalisation of pay and pensions being finalised – Increased autonomy granted to FPSC – Strong focus on training and improved procedures for performance assessment – Devolution of power to grass root level – Judicial reform. – Police reform – National Anti-Corruption Strategy in place – Freedom of Information Act Promulgated – Pakistan Public Procurement Authority established. Fiscal Transparency – Separation of audit and accounts: legislative measures adopted. – Formation of ad-hoc public accounts committees at federal and provincial level – Establishment of “new system of financial controls and budgeting.” – Publication of fiscal reports verified by the AGPR. Fiscal reform unit established. Human Development and Social Protection. Khushhal Pakistan Programme launched. Education sector reforms (ESR). Improvement in health sector delivery system – Zakat and ushr system revamped – Establishment of Khushhali Bank – Food support programme for 1.2 million poorest households.