Editorial
Economic stagnancy continues
Investment is the key element missing
The Centre for Policy Dialogue's mid-term review of the economy has been quite revealing and insightful. It has drawn a balance-sheet of the painstakingly acquired strength in terms of fiscal deficit control over the last one and a half years being watered down by lack of investment in the economy. Between July and November of the 2002 fiscal, the macro-economic indicators improved quite markedly. Ironically, however, this did not have any commensurate effect by way of revving up the huge micro-economic sector which is the rock-bed, or the mirror-image, so to say, of the performing economy. Such a disconnect gives cause for a new concern for the national economy today. The review has revealed that while foreign exchange reserve, remittance, revenue collection and balance of payments have improved, there has been little progress in some of the other major areas such as, investment, credit expansion, inflation, foreign aid, government expenditure and industrial manufacturing.
Without being too clinically diagnostic, however, it must be said that the clouds of fiscal deficit and the external sector crisis that overhang economic stability and growth during the last one and a half years have been lifting for some time. Nevertheless, a quite explicable investment stagnation continues as a big road-block to economic recovery. The manufacturing sector is in a slump as is evidenced by a slow-down in imports of capital machinery, intermediate goods and raw materials. The investment crisis has also deepened due to the fall in term-loan disbursements. And what could be a more telling proof of the dwindling investor confidence than "the higher off-take of savings instruments despite interest rate cuts!"
Leave aside domestic investment, foreign investment too is down with only U$ 7 million recorded during July-August which is 30 per cent less than the comparable figure of the corresponding months during the year before. The prospect for foreign aid flow is bleak as well. There is little doubt that "low disbursement of foreign aid and fizzling out of FDIs have accentuated the vulnerability of external balance." There can't be any second opinion on that point.
So, what are the alternatives? The CPD is of the view that the government would do well to revise 'its public expenditure package and priorities in light of the mid-term review of the ADP and redesign its investment plan." This will help rejuvenate domestic demand, an option the government can take because it currently enjoys some room for moderate expansionary policy due to its conservative policy pursued till-date. On the back of a still low inflation, this could be attempted but with some risk for demand-pushed inflation. If such steps were not taken, CPD prognosticates that there could be stagflation. Government borrowing has declined but not without a supplier's credit component and the proportion of credit to the private sector vis-a-vis that to the public sector has increased, too.
On the flip-side there is a possibility that the government might go for internal trade related tax like local VAT and supplementary duty. These might exert a recessionary pressure on domestic investment.
Whilst the expert economic analysis of the CPD draws attention in its own right, it will be worthwhile to dwell on other factors that impact on investment, both domestic and foreign. So long as poor governance, bureaucratic sloth, huge delay in decision-making, corruption, extortion and rent-seeking remain the order of the day, any expectation of higher investment will be a pipe-dream. We have to treat these old ailments, without which, the best of policies in the world will go down drain. The potential investors, let's make no mistake about it, will look beyond the army to see if law and order has become a permanent fixture of a stable kind of governance. Flashes of temporary success cannot be a clincher of big money investment. That's where the primary emphasis of a new strategy should be.
Let's end on a short economic note, though: our high bank rate needs lowering to reduce the cost of borrowing.
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