“We cannot keep pumping money into the economy to keep it going”

Q. How do you view the current economic situation?

A. The economic growth that we have seen of late is not due to policies but due to an improvement in external flows. The economic situation, in fact, started to change with a large influx of money from the outside in the wake of 9/11. For instance, foreign exchange reserves in September 2001 stood roughly at the same level they were at in the 1990s. Since then, however, 60 billion dollars have come into Pakistan: 25 to 26 billion dollars in remittances by expatriate Pakistanis, 10 billion dollars in bilateral aid, 10 billion dollars in multilateral aid and six billion dollars in debt rescheduling. The remaining money came from privatisation proceeds and foreign direct investment. This money caused a real-estate boom, boosted the stock market, led to growth in the construction sector and helped expand consumer financing and spending. Coupled with some good crops, these factors allowed the economy to grow at 8.3 per cent in 2004-2005. Still, the average growth rate since 1999 is five to six per cent, which is less than what it was in the 1990s.

Moreover, the extended fiscal space allowed by the foreign inflows of money went into consumption instead of investment. Our growth is import intensive. As a result our trade deficit is widening. Because our exports are not increasing as fast as our imports, the need to raise money to plug the trade deficit is putting our foreign exchange reserves under pressure. Its second impact has been the rise in inflation. Money has been thrown into the economy without a corresponding increase in production.

Q. But there has been a visible increase in people’s disposable incomes…

A. When you are getting 10 billion dollars annually from abroad, it will certainly have an impact. Though it is desirable, it is not sustainable unless it is backed up by growth in the manufacturing and agriculture sectors. Our manufacturing sector is in crisis and because consumer-financing is city-oriented, the gap between the rural and urban areas is increasing.

Q. Some evidence suggests that there has been visible improvement in rural incomes. For instance, most motorcycles being produced in the country are being bought by villagers…

A. This question needs to be disaggregated. About six to seven per cent of farmers own 50 per cent of the total land in the country. Each one of them owns 25 acres or more. They have certainly done well. Motorcycles have gone to this six to seven percent of farmers. Rural non-farm workers and landless peasants have not benefited.

Q. There is a view that agriculture is suffering because input costs have increased phenomenally, with a corresponding increase in output prices, which is causing price hikes in wheat and flour…

A. In the last eight years, the average growth rate in agriculture has been 3.7 per cent. The current wheat crisis is partly due to economic strategy and partly due to mismanagement. In 1998-1999, total wheat production stood at 22 million tonnes. It is the same a decade later. No new incentives have been provided for increasing production. This year’s wheat crop was also mismanaged. Initial estimates put it at 23.5 million tonnes, which was more than the national requirement. But because nobody was watching wheat prices in the international market, the government allowed its export at a relatively lower price. High international prices also proved an incentive for smuggling.

Q. This is what the government says: the food inflation exists because international prices of food are high and still rising…

A. Food prices have to go to the international level, there is no doubt about that. But it should happen as a long-term trend, not as a fluctuation.

Q. Oil prices are also rising internationally. Should we also follow the trend?

A. This will increase the fiscal deficit at a time when we cannot curtail some of our development expenditure because we need to avert the energy crisis. The fiscal deficit will have to be overcome partly by passing on the oil price to consumers and partly by cutting development expenditure. But how can you cut development expenditure when health and education are already not getting the money they need? We need to cut non-development expenditure.

Q. What measures do you suggest to rectify the situation?

A. Pakistan is ill-prepared to face the consequences of a global recession. We cannot keep pumping money into the economy to keep it going because inflation is already high. So, I suggest that the new government prioritise the agricultural sector by focusing on high-value crops and boost employment through small and medium enterprises. To turn around the economy, the export sector needs to be dynamised, especially manufacturing.

— N.J. and M.B.A.