Pakistan in the grip of a major financial crisis

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: GDP is projected to be at an all-time high of 7.8% as against a target of 5%.

The budgetary deficit would be 6-7% of GDP as against a target of 4%. Besides the weak performance of major crops-wheat and cotton may turn out substantially below the target. In large-scale manufacturing, growth declined by some 50% to 4.8% as compared to 9% during the same period in FY 07. Acute energy crisis, coupled with high international commodity prices and political unrest through most of the year proved harmful.

In particular, textiles and chemicals in the industrial sub-sector were most adversely affected. The impact of government borrowings has been particularly evident in FY 08, with such borrowings rising to a record of Rs 551 billion by May 2008 (compared to only Rs 45.7 billion in the corresponding period of fy 07), almost doubling the total outstanding stock of borrowings to Rs 941 billion.

A natural consequence of such heavy borrowings by the government has been the pressure on prices. The consumer price index increased by 17.2% year-on-year in April 2008, the highest level in a month since April 1995. In particular, CPI food inflation reached 25.5%.

Since the State Bank of Pakistan presented its third quarterly report, Pakistan’s macro-economic indicators have worsened even further during the last four-five months since the democratically-elected government has been functioning.

The trends in Pakistan’s external sector are particularly alarming. By August 13, 2008, the Pakistani Rupee depreciated by Rs 12.4 against the US dollar and crossed Rs 75, while foreign exchange reserves touched 9.66 billion dollars, barely sufficient to meet the country’s imports for two months.

Pakistan’s foreign currency reserves are falling fast and it forward liabilities are included, real reserves may go down to $3 billion, not adequate to cover even one month’s imports.