TERRORISM can have deep and long-term economic effects. Productivity and growth decline in areas where the threat of terrorism escalates, suggests a research paper on the economic costs of terrorism written for the Australian government a few years ago. Another paper underscores that a heightened threat of terrorism creates uncertainty, increases costs of doing business and slows down growth.
This is precisely what is happening in today’s Pakistan as the unrelenting wave of terrorism buffets the national economy, making people feel far less bullish on the prospects of an early economic turnaround.
When terrorists strike consumer and business confidence weakens. “Sales slump, production tumbles and investment stops,” says Ashfaque Hasan Khan, a former special finance secretary. Exports also decline, he adds. Some of these things are already taking place. Exports have plunged 19 per cent to $4.635 billion in the first quarter to September of the current fiscal from $5.711 billion a year earlier.
Even more worryingly, foreign buyers are declining to open L/Cs with Pakistani banks for fear of disruption in the shipments as current spate of terrorist acts in major cities like Lahore, Rawalpindi and Peshawar deepens uncertainty.
Confirming this, Sayem Ali, an economist for the Standard Chartered Bank says foreign buyers may move to other destinations to meet their import requirements. “That could hurt our exports on a long-term basis,” he says.
Ijaz Khokhar, a leading garment exporter from Sialkot, says the existing economic scenario is making him feel less optimistic about the country’s ability to meet its export target for the current year.
“We were already trying to cope with several other issues, like energy crunch, constraining exports and now we have this problem of terrorism threatening to take us down,” he says.
Khokhar says the perpetual reign of terrorism scares foreign buyers and they refuse to come to Pakistan, one major reason for very low hotel occupancy in major cities.
“The threat of terrorism is imposing additional costs on our businesses because now we have to travel abroad to meet our buyers and enhance security related expenditure at our business concerns,” he says. “The rising business costs have adversely hit the small to medium producers and exporters as they work on small profit margins,” he adds.
Analysts refer to the plummeting foreign direct investment (FDI) as a sign of weakening investor confidence as a result of increase in terrorism. According to the State Bank of Pakistan, FDI has shrunk to $463 million during the first quarter of the current financial year from $1.117 billion the previous year, reflecting low risk appetite for longterm investment in Pakistan.
“Security concerns largely determine the flow of FDI into a country. If a country is unsafe for investment, the investors move to other safer destinations. The low investor confidence could be very damaging for the economy,” argues Sayem.
Foreign investors are not the only ones shying away from bringing their money into Pakistan. Local businessmen are also afraid of investing more money under the existing security and economic conditions.
“We are trying to protect whatever we have. Who would invest in the economy at a time when the government does not fulfill its commitments,” Gohar Ejaz, a textile exporter and real estate developer says as he refers to looming cuts in gas supply to the industry during winter.
The government had vowed in its recently announced five-year textile policy that gas supply to exportoriented textile industry would not be cut. It had also promised that the exporting textile units would be treated at par with fertiliser plants in regards to gas supply. But now it is dithering on its commitment.
The state-owned gas utility has in fact issued notices to industrial units in Punjab and the NWFP to make alternative (costlier) arrangements to keep their plants running in view of a likely gap in demand and supply of gas during NovemberMarch. Gohar claims the industry will face a production loss of $1 billion a month due to gas supply cuts.
The increased threat of terror ism, say analysts, can also pose budgetary problems for the government by forcing it to jack up security related expenditure. “The enhanced spending on security affects the budget and crowds out productive investments on development of social and economic infrastructure,” says Ashfaque.
An Institute of Public Policy (IPP) report entitled ‘State of the Economy: Emerging from the Crisis’ estimated in May that terrorism had cost the economy a hefty sum of Rs380 billion in 2008 alone. The cost of power shortages, the second heaviest drag on the economy, was Rs210 billion.
The report said the higher security related expenditure ran the risk of crowding out other expenditure related to the provision of basic social and economic services and thereby having an adverse impact on the lower income groups.
“Prior to 2001/02, the trend growth rate in real law and order expenditure was seven per cent, which doubled to 14 per cent during the following years. It, thus, appears that the law and order expenditure is higher by about 48 per cent in presence of the war on terror than it would have been without it. This implies a higher cost of Rs21 billion in 2007/08,” says the report.
Some of this increase may, however, have resulted from a general deterioration in the law and order and would have to be made in any case, even without the rising level of terrorism.
The government estimates that the war on terror has cost the country’s economy more than $35 billion in lost exports, revenues, opportunity, etc. But many argue that the greater inflow of remittances, which soared to record high of $7.8 billion last fiscal and is still rising, as well as aid, grants and loans from bilateral and multilateral donors have more than made up for these losses.
The counter argument runs like this: loans, grants and aid cannot and do not substitute the loss of life and the damage caused to production and infrastructure. “In exchange for lost production, exports and infrastructure what we are accumulating is debt. That’s not a good thing for the economy,” says a Karachi based market analyst.
“The economic cost of terrorism and the war against militancy is considerably high and its impact is going to be felt long after it is over and done with,” he warns.
terrorism can have deep and long-term econom- ic effects. productivity and growth decline in areas where the threat of terror- ism escalates, suggests a re- search paper on the eco- nomic costs of terrorism written for the australian government a few years ago. another paper underscores that a heightened threat of terrorism creates uncertainty, increases costs of doing business and slows down growth. this is precisely what is happen- ing in today’s pakistan as the unre- lenting wave of terrorism buffets the national economy, making peo- ple feel far less bullish on the pros- pects of an early economic turn- around. when terrorists strike consumer and business confidence weakens. “sales slump, production tumbles and investment stops,” says ashfaque hasan khan, a former special finance secretary. exports also decline, he adds. some of these things are already taking place. exports have plunged 19 per cent to $4.635 billion in the first quarter to september of the current fiscal from $5.711 billion a year earlier. even more worryingly, foreign buyers are declining to open l/cs with pakistani banks for fear of dis- ruption in the shipments as current spate of terrorist acts in major cit- ies like lahore, rawalpindi and peshawar deepens uncertainty. confirming this, sayem ali, an economist for the standard chartered bank says foreign buyers may move to other destinations to meet their import requirements. “that could hurt our exports on a long-term basis,” he says. ijaz khokhar, a leading garment exporter from sialkot, says the ex- isting economic scenario is making him feel less optimistic about the country’s ability to meet its export target for the current year. “we were already trying to cope with several other issues, like ener- gy crunch, constraining exports and now we have this problem of terror- ism threatening to take us down,” he says. khokhar says the perpetual reign of terrorism scares foreign buyers and they refuse to come to pakistan, one major reason for very low hotel occupancy in major cit- ies. “the threat of terrorism is im- posing additional costs on our busi- nesses because now we have to travel abroad to meet our buyers and enhance security related ex- penditure at our business con- cerns,” he says. “the rising busi- ness costs have adversely hit the small to medium producers and ex- porters as they work on small prof- it margins,” he adds. analysts refer to the plummeting foreign direct investment (fdi) as a sign of weakening investor confi- dence as a result of increase in ter- rorism. according to the state bank of pakistan, fdi has shrunk to $463 million during the first quarter of the current financial year from $1.117 billion the previous year, re- flecting low risk appetite for long- term investment in pakistan. “security concerns largely deter- mine the flow of fdi into a country. if a country is unsafe for invest- ment, the investors move to other safer destinations. the low investor confidence could be very damaging for the economy,” argues sayem. foreign investors are not the on- ly ones shying away from bringing their money into pakistan. local businessmen are also afraid of in- vesting more money under the ex- isting security and economic condi- tions. “we are trying to protect whatev- er we have. who would invest in the economy at a time when the gov- ernment does not fulfill its commit- ments,” gohar ejaz, a textile ex- porter and real estate developer says as he refers to looming cuts in gas supply to the industry during winter. the government had vowed in its recently announced five-year tex- tile policy that gas supply to export- oriented textile industry would not be cut. it had also promised that the exporting textile units would be treated at par with fertiliser plants in regards to gas supply. but now it is dithering on its commit- ment. the state-owned gas utility has in fact issued notices to industrial units in punjab and the nwfp to make alternative (costlier) arrange- ments to keep their plants running in view of a likely gap in demand and supply of gas during november- march. gohar claims the industry will face a production loss of $1 bil- lion a month due to gas supply cuts. the increased threat of terror- ism, say analysts, can also pose budgetary problems for the govern- ment by forcing it to jack up securi- ty related expenditure. “the en- hanced spending on security affects the budget and crowds out produc- tive investments on development of social and economic infrastruc- ture,” says ashfaque. an institute of public policy (ipp) report entitled ‘state of the economy: emerging from the crisis’ estimated in may that terror- ism had cost the economy a hefty sum of rs380 billion in 2008 alone. the cost of power shortages, the second heaviest drag on the econo- my, was rs210 billion. the report said the higher securi- ty related expenditure ran the risk of crowding out other expenditure related to the provision of basic so- cial and economic services and thereby having an adverse impact on the lower income groups. “prior to 2001/02, the trend growth rate in real law and order ex- penditure was seven per cent, which doubled to 14 per cent during the following years. it, thus, appears that the law and order expenditure is higher by about 48 per cent in presence of the war on terror than it would have been without it. this im- plies a higher cost of rs21 billion in 2007/08,” says the report. some of this increase may, howev- er, have resulted from a general de- terioration in the law and order and would have to be made in any case, even without the rising level of ter- rorism. the government estimates that the war on terror has cost the coun- try’s economy more than $35 billion in lost exports, revenues, opportuni- ty, etc. but many argue that the greater inflow of remittances, which soared to record high of $7.8 billion last fiscal and is still rising, as well as aid, grants and loans from bilat- eral and multilateral donors have more than made up for these losses. the counter argument runs like this: loans, grants and aid cannot and do not substitute the loss of life and the damage caused to produc- tion and infrastructure. “in ex- change for lost production, exports and infrastructure what we are ac- cumulating is debt. that’s not a good thing for the economy,” says a karachi based market analyst. “the economic cost of terrorism and the war against militancy is considerably high and its impact is going to be felt long after it is over and done with,” he warns.
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