The State Bank’s quarterly review of the economy was finalised before December 27. That is why its projections about the future trend of key economic indicators seemed overly optimistic but even at the time they were made they bordered on optimism because market started slowing down much before the December tragedy.

The approach of elections shifted government focus away from plugging critical infrastructure gaps, especially in the power sector, although this gap was implicitly (lost working hours) and explicitly (supply contract cancellations and ensuing losses) retarding productivity of every sector and escalating the cost of doing business. This critical gap will magnify over time, and part of the blame there will lie with the industry because it never seriously pushed the government into matching power supply with the rising industry demand.

If elections bless us with a regime that has a credible strategy to plug this gap and the others manifested by the present deficits in trade ($ 7.2 billion), current account ($ 4.8 billion) and revenue (1.6 per cent of GDP), one may see a rebound but it won’t make up for slow growth in agriculture and key large-scale manufacturing sectors during the earlier quarters. The focus should be on sustaining productivity by forestalling another violence-driven interruption.

Assuming that this is ensured, SBP expects a rise in retail and wholesale trade to push growth, but consumer good market sentiment (except food) doesn’t support this hope. Nor does the financial sector given slow credit off-take, accelerated and stiffer loan loss provisioning requirements, and network losses caused by the recent riots. Leasing sector continues to under perform, and following the recent riots, insurance firms may book large losses since they don’t re-insure their entire risk.

The existing political situation exacerbated the existing pressures that took their toll on growth; re-scheduling of elections will stretch their impact into third the quarter. GDP growth of 6.6 per cent is therefore unlikely. GDP can still grow by six per cent registering a modest slow down, as will the other regional economies but a critical factor in achieving this target would be containment of inflation to stabilise the industry’s cost structure.

SBP’s worst-case expectation is that consumer price index (CPI) will stay below 7.5 per cent. This is a tough task; since July 2007, it has risen by 8.7 per cent and the year-over-year (yoy) increase is 12.7 per cent. This is without a rise in oil price that has been held back reflecting political expediency in the election year. But the worrying part is that rise in the prices of wheat, rice, edible oil and sugar accounts for nearly three-fourths of the rise in CPI.

What is worth noting is that these commodities are traded in the economy’s large undocumented sector. In spite of claims about market checks through price inspectors having magisterial powers, the government has failed in coaxing this sector into behaving. Worse still, the government lacks a clear strategy for timely and sufficient import of buffer stocks, and the delivery network to upstage the profiteers.

Continued drop in agricultural productivity has forced import of wheat and cotton – crops in which an agricultural economy like Pakistan should have exportable surpluses. To complicate matters, price of oil – another commodity for which Pakistan depends largely on imports – has been rising without any prospect of coming down. In addition thereto, prices of key imported industrial inputs have soared due to a rapid rise in their consumption in India and China.

This trend may reduce imports in general, but import of wheat, cotton and power generating equipment will rise. Deficit in the services sector could rise due to our continued dependence on foreign service-suppliers, especially shipping services. In FY 07-08 so far, the rupee has depreciated by 1.4 per cent. Along with the dollar (to which it is pegged) the rupee will weaken further increasing the dollar and rupee value of all imports. During third quarter FY 07-08, oil price could stay around the present level.

These trends will also undermine Pakistan’s industrial competitiveness. Every chamber of commerce had pointed them out. Yet, exporters’ problems were compounded by the limitations imposed on availing subsidised credit. This milieu of domestic and international pressures will not permit achieving export target of $18.9 billion nor prevent imports exceeding last year’s figure of $30.5.billion. The first five month’s trade deficit of $7.2 billion may exceed $15 billion by year-end.

In recent years, the current account deficit has been plugged with capital and financial inflows including foreign investment. But weakening of investor sentiment on account of political and security concerns (indicated by SACRA outflows and turning back on some earlier investment commitments), and postponement of privatisation of state assets, foreign investment will be no where near the $8.4 billion received in 06-07.

On top thereof will be the outflow of part repayment of external liabilities that were re-structured in 2001, and profit on the FDI received in recent years. These trends defy hopes of containing the current account deficit within 5.2 per cent of GDP. Besides, Pakistani observers, foreign analysts, IMF, World Bank and ADB had also pointed to this burden that was building up; after December 27 this burden could only rise.

Given these increasing burdens of grave concern is the high fiscal deficit caused largely by current expenditure. In the first quarter alone the government borrowing (Rs191.3 billion) has exceeded the full-year target for 07-08. It may be noted that it doesn’t include the liability to the oil industry for the differential between import and retail sales prices of oil. The possibility this current liability of being converting into term debt to avoid recording an even higher current fiscal debt cannot be ruled out.

In spite thereof, in the Q1 the revenue balance recorded a deficit. At its current pace (1.6 per cent of GDP in Q1) it could exceed 6.4 per cent of the GDP by year-end. In spite of 22.3 per cent rise in Q1 tax revenue, and besides high current expenditure, the deficit reflects a failure to expand the tax net fast enough; a higher tax-GDP ratio could provide a larger cushion for absorbing slippages like the unpaid oil price differential.

A harsh reality is that after de-regulation, cuts in import tariffs, and removal of import controls, import-oriented domestic markets become vulnerable to external shocks, and agricultural sector’s demand for international prices can’t be classified as unreasonable. Since supply shortages worldwide are likely to persist, prices of domestically produced crops could remain volatile. How then you control CPI, the mother of all market distortions? In a vastly undocumented economy, containing CPI with just the monetary policy amounts to wishful thinking.

By implication, the priority of the new government should be to develop new water reservoirs, repair and expand the canal network, line the water courses, expand fertiliser and pesticides production capacity, and re-vitalise agricultural research to increase crop yield. With a third of its population still below the poverty line, Pakistan must grow enough to feed its hungry millions because it can’t waste its dwindling export earnings on food imports. Export earnings and other foreign inflows must go into filling the infrastructure gaps to support the industry.