Zero growth, galloping inflation projected

The economic adviser’s wing of the finance ministry has estimated a 25% year-on-year inflation for the year 2010-11.

ISLAMABAD: Galloping inflation and zero per cent growth is feared for the country as the economic adviser’s wing of the finance ministry has estimated a 25 per cent year-on-year inflation for the year 2010-11.

In the aftermath of the flood catastrophe, inflation was expected to reach 13 per cent but now the estimates have doubled, combined with projections of increased poverty and unemployment.

An initial report on the impacts of the worst ever floods in Pakistan’s history, ‘Pakistan floods 2010’ highlight the adverse effects of the ongoing calamity on the macroeconomic environment.

The assessment is based on reports from national and provincial disaster management authorities, ministry of food and agriculture, ministry of livestock and the United Nations Office for Coordination of Humanitarian Affairs, as well as media reports.

The report prepared by the principal economic adviser, Saqib Sherani, states that the initial estimates suggest that gross domestic product could be zero per cent in real terms. The target for the current fiscal year was initially set at 4.5 per cent.

Therefore, according to the alarming report, there will be no increase in national wealth and the size of the economy will remain at Rs14.68 trillion. If the economy had grown as earlier anticipated, it would have increased to Rs17 trillion by June 2011.

The report states that “the substantial impact on the cotton crop, impact of the floods on farmers’ incomes and the wider rural economy” will be the major factors behind the zero per cent GDP growth.

As a result of galloping inflation, poverty reduction and employment generation efforts could be dented significantly.

Earlier, the government had projected an inflation rate of 9.5 per cent, which has now unofficially been revised to 13 per cent.

“More import of essential items, combined with lower international commodity prices and possible exemptions on moving to full cost recovery tariffs in electricity,” may lower the impact of inflation the report says.

“We discussed a range of possibilities and according to our preliminary estimates, the loss to economic growth will be from 2.5 per cent to 4.5 per cent,” said Sherani.

However, the estimates of the economic adviser wing are in contrast to what the finance ministry has taken to Washington to discuss with the International Monetary Fund. The estimates jointly prepared by the Planning Commission and top officials of the finance ministry suggest a conservative three per cent economic growth and 13 per cent inflation.

The opposing estimates in the finance ministry reflect the seriousness of the economic czars in dealing with issues of national importance.

The government is likely to request the IMF to relax its fiscal target by one per cent of

Rs167 billion in order to meet the flood-related expenditures for the year. The authorities earlier agreed with the IMF to restrict the budget deficit to four per cent of Rs684 billion.

However, the severe impact could be mitigated by increasing government spending, reconstruction and cotton import by the textile industry. At the same time “the nature, magnitude and timing of some of these measures remain uncertain”.

The report further states that while rebuilding and reconstruction could represent potential opportunities for boosting growth in the short run, at the same time there is a significant risk of Pakistan’s potential output having been impacted adversely by the scale of destruction and damage to its stock and social capital.

The actual implications for the economy will only be certain after the completion of the damage and needs assessment by joint teams of the World Bank and the Asian Development Bank. The assessment is expected to be completed by mid-October.

Published in The Express Tribune, August 23^rd, 2010