No Early Relief Seen For Pak Economy

Pakistans economy, hit by industrial recession and slow agricultural growth, is unlikely to respond immediately to recent tax and tariff cuts, a research report by SocGen-Crosby Securities said.

The supply side strategy introduced by the new prime ministers economic revival programme will not be effective in the short term, said the report, received on Wednesday.

After sweeping to power in February 3 polls, Prime Minister Nawaz Sharif unveiled several incentive packages cutting taxes and import tariffs in a bid to boost production and growth.

SocGen-Crosby said Pakistans weak external sector, a tightening of foreign exchange availability and a drastic increase in government borrowing from banks, crowding out the private sector, had helped depress industrial production.

 

What started as a balance of payments crisis has now mushroomed into an industrial recession in Pakistan, which has been compounded by delayed winter rainfall affecting agriculture growth, the report said.

It said industrial production, excluding the power sector, had contracted 3.1 percent in July-January compared to the same 1995/96 period. Including the power sector, overall industrial growth in the whole of fiscal 1996/97 (July-June) was expected to be 3.4 percent, compared to 6.1 percent in 1995/96.

Underperformance of major crops such as wheat, sugar, rice and cotton was likely to cut agricultural growth to two percent in 1996/97 from 6.74 percent the previous year.

The downgrading of our growth forecast for both industry and agriculture has resulted in our overall GDP (gross domestic product) growth forecast being lowered to 4.1 percent from our earlier estimates of 5.7 percent, it said.

Official figures say GDP grew 6.1 percent in 1995/96.

SocGen-Crosby said Sharifs economic revival programme aimed to reverse the downtrend by tax and tariff cuts, but these might produce only a mild recovery.

Concerns remain over whether the tax cuts will bring in the expected revenue, it said.

It said past experience showed only income tax collection responding favourably to tax reductions while income from tariffs and sales tax tended to fall in tandem with the rates.

Though the government expects the widening of the tax net to compensate for the drop in collection, this will only provide significant revenue gains in 1998/99, the report said.

SocGen-Crosby forecast a 1996/97 budget deficit close to last years 6.3 percent of GDP. It put exports at $8.8 billion, imports at $12 billion, inflation at 13 percent and the current account gap at $4.2 billion, or 6.7 percent of GDP.

For 1997/98, it predicted real GDP growth at 4.8 percent, inflation at 11 percent, a current account deficit equivalent to seven percent of GDP, a budget deficit of 5.8 percent of GDP and a trade gap of $3.924 billion.

The reports forecasts were more pessimistic than the latest offered by senior government officials.

Hafeez Pasha, deputy chairman of the Planning Commission, said last week the fiscal deficit in 1997/98 would be slashed to five percent of GDP from a forecast 6.1 percent in 1996/97, while inflation would be slashed to nine percent.

He said the current account deficit would be reduced to 5.5 percent of GDP from 6.7 percent. Exports would exceed $9.0 billion and imports would be kept stable at $12 billion.

Pasha said the targets would be achieved through deep public spending cuts, aggressive export promotion and an expected industrial revival that would boost GDP growth to six percent.