Traditionally Pakistan has been a high growth (averaging 5.6 percent) and low inflation country. With a population growth rate exceeding three percent, per capita growth has been satisfactory in the past, though social indicators have been poor. Moreover, this growth was not accompanied by higher savings and investment levels. With the domestic debt to GDP ratio growing and interest payments rising, Pakistan’s relatively efficient capital output ratio is steadily eroding. There will be need to mobilise huge amounts in the near future as capital becomes obsolete.
Pakistan’s aggregate growth rate has been cradled by the agricultural sector. Thus, a healthy cotton crop results in healthy GDP growth rates and vice versa. Foreign equity is a pre-requisite for more capital, technology and markets. Furthermore, there is need to focus on quality growth in terms of greater efficiency levels and diversification in the industrial sector.
However, a society where the fruits of development are not distributed amongst the majority, social tensions are likely to heighten.
Pakistan finds itself in a debt trap, owing to borrowing from the non-banking sector. Thus, domestic debt during the fiscal year 1994-95 stood at Rs. 797 billion or 42.7 percent of GDP, whereas domestic debt servicing amounted to Rs. 79 billion. The budget deficit currently stands at Rs. 110 billion at a rate of interest of 12 percent, which indicates that an extra Rs. 13 billion will be incurred under this head. This additional expenditure will further widen the fiscal deficit.
Recently, the Lahore Chamber of Commerce Forum Meeting made the following recommendations for improving the state of the economy:
Agricultural and industrial diversification coupled with tariff rationalisation is a pre-requisite for a growth target of six percent.
There is a need for an effective exchange rate through the managed float system to compensate for higher input costs.
As the current level of savings is insufficient to sustain an investment rate of 19 percent, fiscal reform is required. Domestic savings, both public and private, need to be encouraged. Public sector savings can be encouraged by reducing the fiscal deficit and improving the efficiency of public corporations. Household savings should be encouraged through a positive rate of return and low inflation.
The government needs to maintain consistent policies to promote stability within a secure macro-economic framework.
The government needs to provide civic amenities to its citizens effectively including health, education, cleanliness and satisfactory infrastructural services.
Justice and the rule of law must prevail in all social, economic and political fields, where equitable taxation and exemptions are available to every citizen and no special concessions are granted on the basis of nepotism.
(Adapted from the Summary of LCCI Economic Forum Meeting held on 09 December 1995.)