Low savings, weak rating hinder recovery

Saturday, January 09, 2010
By Mansoor Ahmad

LAHORE: Numerous factors are impacting economic recovery which include very low savings rate, weak sovereign rating and absence of government’s writ to implement its decisions.

A study conducted by The News reveals savings rate in China and India is 40 per cent and 38 per cent of their gross domestic product respectively. Pakistan’s national savings rate stands at a dismal 11.8 per cent of the GDP. The Chinese and Indians have enough resources from national savings to finance their investments while Pakistan has to depend on foreign inflows to support investment.

Pakistan’s government has offered unmatchable incentives to foreign investors but sovereign rating of the country, determined by the Economists Intelligence Unit in December 2009, was ‘CCC’ which in simple words means questionable capacity and commitment of the government to honour obligations and a patchy payment record. This rating certainly would not attract foreign investors.

China, India and Bangladesh have sovereign rating of ‘BBB’, ‘BB’ and ‘B’ respectively which at least ensures capability of their governments to honour immediate obligations.

Other impediments facing investors in Pakistan include high interest rate, high inflation, power and energy shortages and poor infrastructure. Domestic investors are still prepared to commit their resources to the country but the way the government is being run forces them to stay away.

They have been interacting with the present government since its coming to power 19 months ago. Government functionaries agree to the proposals of the private sector to improve the economy, but these proposals are not implemented even after approval by the federal cabinet.

The decision of the federal cabinet to inject at least 100 million cubic feet per day of gas of the Sui Southern Gas Company into Sui Northern Gas Pipelines was not implemented, causing an acute energy crisis in Punjab and NWFP. There is no shortage of gas in Sindh and the province could spare at least 100 mmcfd of gas but some hidden hands within the government are blocking the implementation of the directive of the federal cabinet.

Textile policy announced after approval of the federal government in August last year was not implemented, plunging the value added textile sector into deeper crisis. The sector was assured of 3-4 per cent refund of export invoice value to provide them a level-playing field against competing economies. But the decision has yet to be implemented. Four per cent duty drawback amounts to $32 million or Rs2.7 billion per month which has not been provided for the exporters.

The promise made by the federal finance minister in October 2008 about refund of research and development support dues of the textile sector has not been honoured. Refund claims amounting to Rs6 billion dating back to June 2008 have to be paid.

The assurance given by the federal water and power minister to eliminate load-shedding by December 31, 2009 also proved hollow. In fact, the power supply condition has deteriorated.

The trade policy announced in July 2009 promised lucrative incentives to the engineering sector. However, none of the incentives were provided to the sector, leading to a fall in engineering exports instead of increase as envisaged in the policy. Earlier, the directive of the federal cabinet to import sugar in February 2008 was not obeyed which intensified the sugar crisis.