950813

Karachi situation imperilling business

ADB outlook sees

1994 gains being

wiped off in 1995

IKRAMUL HAQ

ISLAMABAD: The Asian Development Bank has urged the government to urgently address the law and order problem in Karachi which is imperilling business activity, financial services, trade and overall economic growth.

This plea has been made in the Asian Development Outlook 1995-96 published annually by the Asian Development Bank.

Discussing the policy and development issues, the outlook points out that the biggest problem for policy makers is deterioration of the budgetary and monetary performance.

Though there were some notable gains in reducing fiscal deficit through improved revenue generation and curtailing expenditures, the outlook states that all indications are that in 1995, most of the gains of 1994 will have been lost. The fiscal deficit is expected to deteriorate and monetary expansion to increase. Consequently inflation is expected to worsen. Thus it would appear the attainment of consistent macroeconomic management has so far eluded Pakistan's policy makers.

The chapter on Pakistan notes much progress in deregulation and liberalisation of economy and denationalisation of state run industries. The economy is open to foreign investment, agricultural subsidies have been reduced and prices aligned with those in the world market. Besides privatisation of banks and state-owned monopolies in electricity, gas and telecommunications has begun.

However despite these advance, the outlook says the government continues to intervene in industry sector by international competition such as in sugar and textile. Deficient economic management combined with the failure of the government to consult all sectors of the economy and a tendency to make decisions on an ad hoc basis have begun to damage economic morale and have led to breakdowns in the administrative machinery. These matters must be addressed urgently.

Another difficulty needs to be addressed is the lower cotton production because of the virus. A concerted effort to contain and reverse the spread of virus must be made and at the same time efforts to diversify the industrial and agricultural base must be redoubled.

In regard to trade and payments the outlook states there are indications that export growth has picked up considerably in 1995 and could be as high as 16.9 percent by the end of the year.

In regard to growth and investment, the Outlook says GDP growth is expected to improve to 4.6 percent in 1995 and further to six percent in 1996. Growth prospects for the economy, however, depend heavily on the performance of the agriculture sector. Agriculture sector output is expected to increase by 2.8 percent during 1995 and further by 4.3 percent in 1996 on the assumption that continued efforts aimed at restoring the cotton crop will eventually be successful.

As the manufacturing sector in Pakistan is dominated by cotton-based textiles, a bad cotton crop has a depressing impact on manufacturing. There will be some positive effect of increased private sector investment in both manufacturing and in the energy subsector. As a result, industry is forecast to grow by 5.7 percent during 1995. With the additional impetus provided by the expected recovery of the cotton crop during 1996, industry will grow by seven percent during that year. The services sector is forecast to grow at 4.8 percent during 1995 and at 6.3 percent during 1996. Gross domestic investment as a proportion of GDP is expected to decline to 18.3 percent in 1995.

Gross domestic saving is projected to drop to 14.4 percent of GDP in 1995. Both gross domestic investment and gross domestic saving are expected to recover substantially during 1996 assuming that the commitment to the structural adjustment programme comes back on track.

With GDP growth continuing to improve and a better agricultural performance, exports are expected to continue growing at 11.5 percent during 1996. Imports are likely to grow by around 12 percent during 1995 as the economy begins to recover and investment continues to increase. With continued growth and higher investment, import growth is projected to increase to 16 percent in 1996.

Workers' remittances are expected to continue falling and with some slowing down of the increase in foreign currency accounts, the current account deficit over the next couple of years is likely to worsen, increasing to 3.1 percent of GDP in 1995 and 3.6 percent of GDP in 1996. With export earnings expected to improve significantly over the next two years, the debt-service ratio should decline over this period to 25.8 percent in 1995 and to 25.1 percent in 1996.