Economic impact of war on terror and continuing

recession in Pakistan
Pak Economy Add comments
Dec 102008

The government can play an important role in enabling manufacturing firms to compete
in the world market by facilitating technological up-gradation in production, investment,
innovative capabilities and by providing energy at a competitive cost

By Parveen Zaiby

The terrorist attacks that were carried out on USA on 11th September, 2001, had significant
and far-reaching effects on the global economy. The shock was a bit too hard for an already
weak economy to absorb. Since then Pakistan’s participation in the international campaign
has caused uncertainty in the country, as it has been facing major challenges, like domestic
political and economic instability and increased law and order concerns amongst other
reasons. One element which was significant was adverse effects in the confidence of
consumers and business as the consumer confidence was declining and business sentiment
was depressed. Since the start of the anti-terror campaign, an overall sense of uncertainty
has prevailed in the country, which has contributed to capital flight and slowed down
economic activities making foreign investors jittery.” The economy was slowing down
substantially, with major engines of growth simultaneously showing signs of weakness; the
growth rate is expected to be only 3.5 per cent in 2009.

Apart from the psychological shock, a sudden increase in uncertainties made consumers
more cautious, thus leading to a reduction of spending, and that in turn had a negative
effect on investor confidence and sentiment. Thus, consumer and investor sentiment acted
on each other to create a downward spiral of economic activities like loss of exports, foreign
investment, privatisation, industrial output, tax collection, growing fiscal and current
account deficits, rising inflation, growth deterioration and depleting foreign exchange
reserves, and excessive increase in the country’s credit risk has made borrowing from the
market extremely expensive.

Another channel through which country is being affected is foreign direct investment (FDI).
Private capital inflows are already stagnating, and in the current scenario any improvement
seems highly unlikely, because frequent bombings, worsening law and order situation and
displacement of the local population have taken a toll on the socio-economic fabric of the
country.

The anti-terrorism campaign has also led to massive unemployment in the affected regions.
With recession come the associated adverse social effects in terms of rising unemployment,
underemployment and poverty. Several development projects started earlier in the affected
areas of the NWFP and tribal region are afflicted with delays, which may ultimately result in
large cost overruns. “It is apprehended that Foreign Direct Investment, which witnessed a
steep rise over the past several years, may be adversely affected by the ongoing anti-
terrorism campaign in Fata and other areas of the NWFP.

It overstrained Pakistan’s budget as allocation for law-enforcement agencies had to be

increased significantly, curtailing the funding for development projects. It is analysed that
Pakistan’s cost of war on terror has increased by 40 per cent to Rs678 billion from Rs484
billion last year, causing an adverse impact on the country’s socio-economic development.
The expected direct cost of war on terror will reach Rs114.03 billion in 2008-09 from
Rs108.527 billion last year. The indirect cost will increase to Rs563.760 billion from
Rs375.840 billion.

Manufacturing

Pakistan’s manufacturing sector recorded the weakest growth in a decade during the
outgoing fiscal year 2007-08. Overall manufacturing posted a growth of 5.4 per cent during
the first nine months of the current fiscal year against the target of 10.9 per cent and 8.1
per cent of last year. Large-scale manufacturing, accounting for 69.5 per cent of overall
manufacturing registered a growth of 4.8 per cent in the current fiscal year 2007-08 against
the target of 12.5 per cent and last year’s achievement of 8.6 per cent.

Heightened political tension, deteriorating law and order situation, growing power
shortages, cumulative impact of monetary tightening and rising cost of doing business are
responsible for poor showing of manufacturing in 2007-08. Taking a longer term view, the
manufacturing growth exhibits a moderating trend. From 2000-01, the large-scale
manufacturing sector as a result of a fast expanding economy, moved from one peak to
another and reached its zenith at 19.9 per cent in 2004-05. During the last three years the
large-scale manufacturing sector is showing signs of moderating along with a subsequent
slowing down of the economy and has registered a growth of 4.8 per cent during the
current fiscal year. The government can play an important role in enabling manufacturing
firms to compete in the world market by facilitating technological up-gradation in
production, investment, innovative capabilities and by providing most needed energy and
infrastructure. In addition, policy stability and rationalisation of tariff and taxes are
important elements for industrial growth to address the dynamic global and domestic
environment.

The slowdown will be particularly notable for Pakistan. Prospects will be hurt by the
reduction in capital flows and possible slowdown in the growth of exports. Pakistan’s
economy is already facing difficulties; the financial crisis will aggravate it. The main risk to
growth comes from the likely adverse effects on investment of the combined effects of a
slowdown of foreign funding and a possible increase in non-performing assets of domestic
banks owing to lower profitability of firms producing for export markets. At the same time,
higher inflation has required tightening of monetary policy. All of these factors will reduce
the availability of domestic financing of private investment. Public investment is already
constrained by rising fiscal deficits. Overall, there is likely to be a slowdown in the rate of
domestic investment. Improvements in saving rates have been an important cushion. But
inadequate adjustment to the losses from terms of trade, combined with a possible
slowdown of exports earnings and foreign capital flows will almost certainly reduce
investment and growth.

Employment implications of being partner in war on terror

Experience of economic crises in various parts of the world in recent years shows that
unless timely action is taken, sharp economic downturns can cause a lot of suffering to the
poor working population. It is, therefore, important to understand the employment effects
of the current global economic slowdown, look at the measures that are being put in place
from the point of view of job creation and preserving existing jobs, and come up with
measures required to overcome the adverse social effects of the slowdown.

The sharp decline in the growth of output, investment, manufacturing, (large scale
manufacturing) and stock markets has an important human dimension in terms of the loss
of employment that results from such severe downturns in economic activities. This,
however, is an aspect on which it is more difficult to produce hard figures as in the case of
output, reliable and up to date data on unemployment are hard to come by. The stock
market crisis has made possible loss of employment of about 20 to 25 thousand people and
thousands were laid off by the banks, and other organisations and private companies, which
in turn could help create alertness about the seriousness of the employment implications of
the war on terror and current recession.

http://jang.com.pk/thenews/dec2008-weekly/busrev-08-12-2008