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Globalization of Media –MCM404 VU
© Copyright Virtual University of Pakistan 45
Lesson 14 “THE POPULATION, EDUCATION AND ECONOMIC DIMENSIONS OF PAKISTAN” Note: This particular handout deals with the third of the three dimensions covered by this lecture i.e. the economic dimension. Students are advised to study the verbal content of the lecture carefully as well as the PPTs before reviewing the text given below which is reproduced from the official publication of the Government of Pakistan titled: “Pakistan Economic Survey 2004-05”. This publication is normally released just before the presentation of the annual Budget of the Government of Pakistan which normally takes place in end-May or June of each year as the financial year of the Government’s Budget is 1st July of one year to 30th June of the next year. While there is some acknowledgement of economic problems and issues in this text, the overall approach reflected in this text is “positive” and “official”. To this extent, the text below may not be sufficiently balanced with criticism. However, a study of this text is relevant and necessary for students to gain a proper understanding of the official viewpoint and of various practical realities that have shaped Pakistan’s own economic situation in 2004-05 as well as the global economic environment. Students are advised to visit the following two websites: www.finance.gov.pk www.finance.org.pk Excerpt from the Pakistan’s Economic Survey 2004-05 page-(i) to (iii). Pakistan is in the midst of an economic upturn. Since 2002-03, the economy has mounted a strong recovery with a sustained improvement in prospects. During the fiscal year 2004-05, many of its macroeconomic indicators show marked improvement over (the previous) year. The most important achievements of the year include: the fastest pace in real GDP growth, powered by stellar growth in large-scale manufacturing, a sharp pick-up in agriculture, a continuing robust performance in services, and an extra-ordinary strengthening of consumer demand; a double-digit growth in per capita income in dollar terms, reaching $ 736; investment upturn gaining a strong footing, particularly private sector investment which remained buoyant owing to a rare confluence of various positive developments; an unprecedented increase in credit to the private sector for the second year in a row; sharp increases in the consumption of oil, gas, electricity and coal reflecting rising level of economic activity; fiscal deficit remaining on target despite a Rs.50 billion shortfall in revenue on account of lower collection of petroleum development levy (PDL); higher than targeted collection of taxes; a high double-digit growth in exports and imports; workers’ remittances maintaining their momentum; a continued accumulation of foreign exchange reserves and stability in the exchange rate; a sharp decline in the public and external debt burden; privatization programme continued to maintain its robust momentum; launching of the first-ever Islamic Bond (Sukuk) in international capital markets; and the performance of Eurobond remained in line with the markets, with the spread over US Treasury undergoing further compression. It is not uncommon to see pressures building up on prices, trade and current account balances when economic activity accelerates. Pakistan’s economy is undergoing structural shifts that are fueling rapid changes in consumer spending patterns. Three years of strong economic growth complimented by record low-interest rates and the on-going structural shift of many households in Pakistan toward higher consumption have injected new life into domestic spending. The extra-ordinary surge in domestic demand in conjunction with the unprecedented rise in oil prices fueled import demand which more than offset the improved outcome for exports. Accordingly, this year has witnessed a widening of the trade deficit more than what was envisaged at the beginning of the year. With the trade gap widening, the current account balance slipped into the red after posting surpluses for three consecutive years. This year has also seen inflation rising to a 8-year high, hurting the poor and fixed income groups the most. In particular, food inflation at high double-digits has put an extra-ordinary burden on the poor segment of society as they spend the bulk of their income on food items. A surge in domestic demand on the one d csity.com
Globalization of Media –MCM404 VU
© Copyright Virtual University of Pakistan 46
hand and supply side shocks emanating from rising commodity and oil prices on the other, have been responsible for the sharp pick-up in inflation this year. This year has seen improvements in many, macro-economic indicators along with improvements in social and living conditions indicators. Results from the recently concluded Pakistan Social and Living Standards Measurement (PSLM) Survey show a marked improvement in social and living conditions indicators. Key indicators such as literacy rate, gross and net enrolment in primary, middle and matric levels; access to sanitation and safe drinking water; use of electricity and gas as sources of lighting and cooking fuel, respectively; various health indicators such as child immunization and treatment of diarrohea, have all shown marked improvements over the last 4 to 7 years. While socio-economic and macro-economic policies pursued during the year have had a strong influence on across-the-board improvement, an increasingly broad and dynamic global recovery has aided Pakistan in this endeavor. Global economic environment (2204-2005) From the developing countries’ perspective, the global economic environment this year (2004- 2005) has been relatively less benign than last year (2003-2004). In terms of economic recovery, the world economy enjoyed one of its strongest years of growth (5.1%) in 2004 and this momentum is expected to continue this year, albeit at a more moderate pace (4.3%), owing to higher and volatile oil prices and rising interest rates. Although the global economy posted strong growth in 2004, the overall picture hides growing divergence across regions. Growth in the United States was stronger than expected on the back of strong domestic demand but it was disappointing in Europe and Japan – the two major growth poles of the world economy, reflecting weak domestic demand and equally weaker export performance. The story of emerging markets is altogether different. Real GDP growth in 2004 exceeded expectations in almost all regions. In emerging Asia, China’s growth momentum remained very strong while growth in India also remained robust. Pakistan’s growth performance in emerging Asia has also been extra-ordinarily strong on the back of strengthening domestic demand and robust global economic expansion. In the ASEAN region, Indonesia, Malaysia, Thailand and the Philippines posted growth in the range of 5 to 6 percent. While South Asia remained a strong performer on account of sharp pick-up in growth in Pakistan and India, Sri Lanka and Bangladesh also experienced growth of over 5 percent. Robust global growth of the last two years has strengthened the external demand environment, which contributed to the sharp pick-up in growth in developing countries via strong increases in exports. Pakistan also benefited from a healthy external demand environment as its exports continued to grow at high double-digits during the last two years. Notwithstanding strong global economic expansion supporting growth in developing countries, several other factors have impacted these countries adversely to varying degrees. These factors include: rising oil prices, sliding dollar, rising inflation and interest rates. This year (2004-2005) has seen an unprecedented rise in oil prices on the back of rising demand and a series of supply disruptions including capacity constraints in raising supply. Although the main consumers of oil continue to be the industrialized world (US, OECD Europe, and Japan together consume about half of annual oil output) they have at the same time prepared themselves to face oil price volatility. Over the last 30 years, they have succeeded in reducing oil intensity or use of oil per unit of output by one-half. It is the oil- importing countries who are severely affected by the unprecedented rise in oil prices in several ways. Firstly, these countries are less oil-efficient despite the fact that their oil intensity, on average, has declined by one-third; secondly, their foreign exchange reserves are relatively low and their balance of payments are fragile. Even a temporary period of higher oil prices can force substantial adjustment in domestic consumption at a considerable cost to growth and poverty reduction. The fiscal impact can be significant when domestic petroleum products prices are not adjusted accordingly. During the current fiscal year, Pakistan had to face serious difficulties in managing the cost of the unprecedented rise in oil prices. In order to shield its domestic consumers and industries from higher oil prices, it absorbed a fiscal cost of Rs.50 billion in the fiscal year 2004-05. Furthermore, it had to pay an additional $ 700 – 800 million in oil import bills.
Globalization of Media –MCM404 VU
© Copyright Virtual University of Pakistan 47
The sliding dollar, as a result of widening US current account deficit, raised the debt burden of developing countries on account of the valuation effect. During the first nine months of the current fiscal year, Pakistan’s external debt increased by $ 628 million due to the valuation effect alone. However, given the present outlook of exchange rate movements, particularly the weakening of the Euro after France’s rejection of the proposed European Union constitution, a further decline in the valuation effect is expected in the fourth quarter of the current fiscal year. In fact, after the French rejection, the Euro was trading at a 7-month low of $ 1.23; and the Japanese Yen at 108.4. These are good signs for Pakistan as its external debt would decline further during the fourth quarter of the year if the decline in non-US dollar currencies continues. The surge in international oil prices coupled with an unprecedented rise in world prices of commodities combined to spark inflationary pressures not just in Pakistan, but in the the global economy as well. Rising interest rates, reflecting a gradual tightening of monetary cycle to counter inflationary expectations, raised the cost of borrowing for developing countries. This cost is likely to adversely affect the balance of payments of developing countries, their fiscal position, as well as prospects for growth.