Pakistan News And Discussion-10

Naresh · 02-26-2007, 05:18 PM

[center]PAKISTANâS ECONOMY â MYTH OR REALITY?[/center]

[center]The puzzling, high economic growth rate <img src='style_emoticons/<#EMO_DIR#>/Flush.gif' border='0' style='vertical-align:middle' alt='Flush.gif' /> [/center]

AS elections approach, the official projection of âeconomic miracleâ achieved by the government reminds one of a similar media campaign by former BJP government of âShining Indiaâ before the marginalised masses sent it packing. In Pakistan, the American economic model, now being pursued, has enriched the already wealthy at the cost of grinding poverty..

According to its spin doctors, indicators ofâ gallopingâ economic progress are things such as GDP growth averaging seven per cent per annum over the past three years. (Please ignore the misery of the three years before that!)

* Per capita income doubling to $800, perching us precariously on the bottom rung of middle-income countries instead of rubbing shoulders with the poorest nations of Africa.

* Foreign exchange reserves at $13 billion, up from less than half a billion in 1999 (never mind the fact that it still represents barely five months of imports).

* A flood of 9/11 motivated inward remittances (likely to hit $5.5 billion this year) and foreign direct investment (perhaps as much as $3 billion) eager for a share in phenomenal returns available to risk capital in this country;

* And, the KSE-100 index leaping tenfold from 1,200 to 12,000 propelling market capitalisation to over Rs3.5 trillion.

On the other hand, embarrassing statistics such as follows are ignored:

Official consumer price inflation of nine per cent per annum (100 per cent higher than it was in Oct. 1999.; largest trade ($12 billion) and the current account ($5.5 billion) deficitsâ both in absolute as well as relative terms in 60 years history of the country; serious crime statistics reflecting 100 per cent growth over the past six years( suicide bombings, and citizensâ disappearances); provincial disharmony, secessionist mayhem across Balochistan, and Taliban resurgence in the NWFP, ( grim reminders of a national fabric being torn asunder).

The assertion that the country has enjoyed annual GDP growth averaging seven per cent per .annum over the past three years needs to be examined closely.. There is a simple economic concept called the ""capital input-output ratio"". Put simply, it states that annual GDP growth cannot be greater than a third of the ratio of incremental capital formation to GDP. In other words, if our annual savings run around 10 per cent of GDP, (14 per cent if we include inward remittances), then our maximum GDP growth cannot exceed 4.7 per cent per annum.

So, when the government claimed that the GDP grew at 8.6 per cent during 2004-05, it implied that during 2004-05, national savings (domestic plus inward remittances) allowed us to invest at a breathtaking rate of 25.8 per cent of GDP. With perhaps the lowest saving rate in the world, Pakistan is simply not capable of achieving such high rates of investment.

But, if you were to talk to the government's spin doctors, they are likely tell you that because of great efficiency in re-investment, our capital input-output ratio is not 3:1 but closer to 2:1. In other words, we can achieve greater growth with less than 50 per cent of the resources as compared to the rest of the world. How cute?"

Now some hard proof about the number-juggling. The following data is gleaned from the Federal Bureau of Statistics and the SBP internet sites (all figures in rupees billion):

Our economy even in these best years as claimed by the governmentâ¦has never grown at rates over 2-4 per cent per annum. In fact, if we account for the 2.1 per cent per annum. growth of our population--, in per capita terms, the economy has remained almost stagnant.

Let's now examine the government's claim of having doubled per capita income to $800 over the past six years For a number to double in six years signifies an annual compound growth of 12.25 per cent. Alas, this kind of stellar growth has not even been achieved by China!

The real mechanism of the official flummery was, however, quite mundane. First, it began by restating GDP for the benchmark year 1999-00 from $460 per capita to $650 per capita on the pretext that every country in the world periodically readjusts its accounting base year. Now, with this clever device apart, it simply applied its inflated annual growth rates of recent years ...you have a per capita GDP of $800.

There is yet another trickery hidden here. The $800 per capita is by itself an inflated number in another sense. It is derived by dividing our 2005-06 GDP of $124 billion by a deflated population figure of 155 million.

According to CIA World Facts (www.cia.gov), our actual population as of June 2006 was 166 million. Therefore, dividing $124 billion by 166 million yields a per capita income of $747 and not $800. <img src='style_emoticons/<#EMO_DIR#>/liar.gif' border='0' style='vertical-align:middle' alt='liar.gif' />

Now the story of our foreign exchange reserves. From dollar one billion or even less per annum, our annual remittances have reached $5.5 billion per annum. In sum, over the past five years, this incremental inflow has exceeded $16 billion. Should it then be any surprise that our foreign exchange reserves are today $13 billion? The question is how can the government take credit for events engineered by Al-Quaida and President Bush?"

However, the story doesn't end here. All these massive dollar inflows needed an outlet. In a country possessed of zero manpower skills, a broken infrastructure, high cost of doing business, obstructive bureaucracy, and political instability, who would invest in productive assets with payback of 5-10 years?

Is it any wonder that real estate prices quadrupled and the stock market went up by a factor of 10? Why? Because there are no other options unless you wish to keep your money in banks at rates that yield negative returns of 4-5 per cent per annum.

The country's entire industrial sector is in shambles. Exports of textiles, leather goods, and hand-knotted carpets-- traditionally accounting for 80 per cent of annual exports--â¦are in steep decline. And what does the government do? It waxes eloquent about our burgeoning growth in auto sector that produces overpriced shoddy products that are likely to die a natural death given a whiff of international competition.

Countries do not develop by having international fast food chains mushrooming everywhere. Nor do they prosper by giving a cell phone to all and sundry. Economic growth is achieved by leveraging national assets that provide a country with an internationally competitive edge. In our case it can only mean one thing...our abundant natural mineral resource, fertile land and abundant river waters. This is where we need to invest heavily...not in IT., telecom, or even oil and gas. Do you know that we have four billion tons of test-proven coal reserves, and produce only four million tons per annum? Our coal power generation is barely four per cent of total power production whereas in next door India it is 70 per cent.

The economic reasons for a comprehensive coal policy makes eminent sense. In terms of energy content (calorific value), sub-bituminous coal averages 9,000 BTUs per pound vs twice that for crude oil. With current crude prices averaging $440 per ton ($60 per barrel), we could be saving $220 for every ton of indigenous coal production that replaces imported oil. If we could simply replace import of three million tons of furnace oil with six million tons of local coal production, that alone would trim our current $7 billion annual oil import bill by 20 per cent.

In terms of industrial economics and employment generation , the comparison is even starker. Our private sector mines sub-bituminous coal in Quetta and Khewra (in the Salt Range) and sells it to brick kilns for Rs3,000 per ton. Its current crude oil price equivalent is thus $100 per ton (or $14 per barrel of oil). Simple arithmetic tells us that even if the government paid a 100 per cent cash subsidy to producers for every ton of coal mined indigenously, it would save $240 dollars for each ton of furnace or crude oil thus replaced.

Huge coal reserves in Thar (Sindh) were discovered 25 years ago. However, no government has since been able to muster the $3-4 billion infrastructure investment needed to bring this easy 10-12 million tons per annum production valued at over $2 billion per annum on stream. It is unlikely that this government will do so either.

Two years ago, when international oil prices began rocketing upwards, the government announced great plans about tripling our national output of coal in 2-3 years by the simple device of forcing large power users like power stations and cement factories to use coal instead of expensive imported furnace oil.

Of course, this announcement greatly militated against the interests of our industrial lobby. It immediately swung into action claiming that our indigenous coal had low BTU and high sulphur content, which would entail large investments in scrubbing towers...an outlay the industry was reluctant to undertake. Predictably, the government knuckled under and instead of promoting local production of coal, it made import of coal duty free. So, instead of reducing the national import bill paid in hard currency, it did just the reverse. Thus, today we have over 80,000 tons of imported Australian coal sitting on the docks in Karachi at landed cost of $70 (PKR 4,200) per ton.

Cheers <img src='style_emoticons/<#EMO_DIR#>/cheers.gif' border='0' style='vertical-align:middle' alt='cheers.gif' />

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