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Approach paper of 10th five-year plan says country lost around $35bn due to destruction of infrastructure and output losses since 2002-03



ISLAMABAD: The Tenth Five Year Plan (2010-2015) has outlined the importance to come up with the exact cost of ongoing fight against militancy, terrorism and extremism, stating that the plan will lay solid foundation for just and equitable development, which will be best way of defeating the obstructionist forces.

The approach paper of the tenth five-year plan, which will be tabled before the National Economic Council (NEC) on Thursday for formal approval in its meeting with Prime Minister Syed Yousuf Raza Gilani in the chair, states that Pakistan lost around $35 billion due to the destruction of infrastructure and output losses since 2002-03 after becoming part of the ongoing war against terrorism.

The NWFP and FATA have been most adversely affected. The government, for the first time after assuming the reins of power, is going to make a promise with the masses through the approach paper for the tenth five-year plan that it will bring fundamental changes in growth and development path which was followed in the recent past during the Musharraf regime.

“Given this scenario, it is not surprising that the country is being described as a case of economic growth without real economic development,” the approach paper states, a copy of which is available with The News. The NEC will approve the exact size of development outlay and macroeconomic targets for the next budget 2009-10. The plan will also devise a strategy about sustainability of external debt in which efforts will be made to adhere to limits envisaged under the Fiscal Responsibility and Debt Limitation Act 2005.

The plan also spells out importance for placing an effective implementation, monitoring and evaluation mechanism. This has been the proverbial Achilles’ heel of past development plans. In a period of global and domestic uncertainty, this will pose even a greater challenge. An evaluation and monitoring system of selected ongoing development projects has been set up in the Planning Commission (PC). Similar capacity needs to be strengthened or built in sectoral ministries at the federal and provincial levels.

The paper is being issued at a time when national imperatives and global developments provide compelling reasons to make fundamental changes to growth and development path. “Our past strategies have delivered spurts of high economic growth. Unfortunately these have not been sustained and only led to boom-bust cycle” it states. In most cases, these spurts have been ignited by favorable international developments and increase in foreign assistance.

The paper says: “This is because growth has been consumption led and import dependent, and not driven by increasing investment and exports.” More importantly, it states that this growth has not met “our people’s expectations” and there is increasing disillusionment with the development process.

It says progress in human and social indicators has been disappointing, poverty level remains high, job opportunities that may meet citizens are lacking and “we have witnessed glaring income inequalities appearing in recent years.”

This situation must be rectified urgently as the plan is to play a pivotal role in bringing about a fundamental change in development paradigm. In this new paradigm, ordinary people, especially those in less developed provinces and regions, must be at the center of the development process and have ownership in the economic development of the country.

Courtesy: The News


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ISLAMABAD: The Asian Development Bank (ADB) has surprised the economists of the country, saying that the IMF programme loan of $7.6 billion under Stand By Arrangement with its conditions is not the right recipe for Pakistan’s economic ills. “Indeed, we believe that the IMF conditions will reduce the capacity to engineer a solution to the problems of inflation and falling foreign currency reserves without increasing the unemployed buffer

stock,” said Jesus Felipe, William Mitchell and L. Randall Wray, the authors of the ADB’s report titled A Reinterpretation of Pakistan’s Economic Crisis and Options for Policymakers released here on Wednesday.

“While the IMF statement suggested it is keenly aware of the need to deploy a ‘socially acceptable’ solution, we consider that a policy strategy based on fiscal austerity will create unacceptable levels of socio-economic hardship in Pakistan,” the report said.

The report was written at the time when agreement with IMF for the 23-month stand-by arrangement amounting to $7.6 billion was reached to support ‘economic stabilisation programme’ and the first tranche of $3.1 billion was released to Pakistan.

There existed two key objectives of the IMF loan that included I) restoration of macroeconomic stability and confidence through a tightening of macroeconomic policies; and ii) to ensure social stability and adequate support for the poor and vulnerable in Pakistan.

Under the loan terms the external balance is to be targeted via a fiscal tightening from a deficit of 7.4 per cent of GDP for the fiscal year 2007-2008, to 4.2 per cent in 2008-2009, and then 3.3 per cent in 2009-2010.

The tightening is to be achieved by phasing out energy subsidies, better prioritising development spending and implementing strong tax policy and administration measures, interest rate hike to contain inflation, offload central bank borrowings, and build reserves.

As per loan terms the social assistance is to be strengthened but better targeted such that spending on the social safety net will be increased to 0.9 per cent of GDP in 2008-09, an increase of 0.6 percentage point of GDP.

The authors of the report criticised the said covenants of the Fund’s programme loan saying it would not help bail out Pakistan’s economy. “The Fund is less than clear on; (i) the nature of currency sovereignty; (ii) the nature and financing of budget deficits; and (iii) the nature and financing of trade deficits.”

Although Pakistan’s problems are result of misguided policies, it does not mean that the only solution available is to subject the economy to an austerity programme. In the words of Joseph Stiglitz renowned economist and former SVP of World Bank, “Stabilisation policy cannot be separated from growth policy. Failure to stabilise may hurt growth, but stabilisation, in the traditional sense of the term (price stability and fiscal adjustment), does not necessarily lead to economic growth.”

Architects of the ADB report believe that the IMF programme does not correctly portray the sources of inflation pressures, or the constraints on economic development. “Pakistan faces high inflation and insufficient progress toward development,” the report points out and says that the country is not fully utilising its domestic resources.

Pakistan in order to achieve sustainable development should mobilise domestic resources to improve incomes and reduce supply bottlenecks through expansion of domestic capabilities, the ADB report suggests.

Given substantial levels of redundant resources, they say, it should have been obvious that Pakistan’s inflationary bias could not be a simple matter of excessive demand. Thus, in appraising the inflationary impact it is incorrect to presume that fiscal policy has been excessively expansionary.

Using budget deficits as evidence of excessive expansionary policy is therefore erroneous, unless the deficits have pushed the economy beyond full capacity use of its resources. “For this reason, fiscal restraint may not be the medicine that is required in a situation in which a country is actually living below its means - as indicated by idle or under-utilised resources,” they concluded.

“We do recognise that Pakistan’s current situation is one in which robust growth over 5 per cent will tend to generate a current account deficit.” They explained further saying that: “From the orthodox perspective the consequences for Pakistan of having balance of payments (BOP) problems are straightforward.” When Pakistan encounters a BOP problem before short-term capacity utilization is reached, demand is curtailed, disguised and open unemployment increase, and capital accumulation has to be reduced. This leads, in the long run, to a relative deterioration of the country’s export potential compared with that of its main competitors. This situation tends to lead to a vicious circle with further BOP problems.

They said: “We do not endorse the orthodox solution.” Given that Pakistan operates with what we define below as a “modern money regime” that includes flexible exchange rates, we consider it has sufficient domestic policy space to pursue an alternative, sustainable growth path. “It can make use of this space to pursue economic growth and raising living standards, even if this means expansion of the current account deficit and depreciation of the currency.”

They also criticise the orthodox solution to a current account deficit saying it will actually make it more difficult for Pakistan to reduce dependence on imports.

The report is of the view that the IMF programme does not address the failures in the policies of the previous government, largely focused on a consumer-driven growth strategy despite the import dependent nature of the economy.

It is clear that while the country enjoyed very high levels of FDI the funds were largely concentrated in the consumer sector. This had two consequences: (i) it increased demand for foreign exchange; and (ii) it created a foreign exchange liability. The other significant point is that this investment did not generate corresponding amounts of foreign exchange revenue because it did not improve export capacity.

“The policy emphasis on fiscal restraint is also fraught with problems,” the report said saying the targets to reduce the budget deficit as required by the IMF agreement may help lower inflation, but only because the “fiscal drag” acts as a deflationary mechanism that forces the economy to operate under conditions of excess capacity and unemployment. This type of deflationary strategy does not build productive capacity and the related supporting infrastructure, thus offers no “growth solution”.

Likewise, fiscal restraint may not be successful in lowering budget deficits for the simple reason that tax revenue can fall as the taxable base shrinks because economic activity is curtailed.

Courtesy: The News



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