Fishing in the Troubled Waters
The economy of Pakistan had been in turbulent waters since it remained grappling with one crisis after the other during the previous year. During this year Pakistan witnessed a lot more politics as well as the scourge of terrorism that left little room for reviving the crippling economy. In fact the year ended with a mix of more failures than achievements.
The available data suggests that the economy, in 2014, faced several reversals caused by various internal as well as external factors. The economy saw a high growth of the value of dollar against rupee and then appreciation of the latter. A declining trend of inflation was also observed and oil prices touching historical highs and now big slumps in its prices.
When the PML-N came to power in 2013, it inherited an economy that was in a poor shape. After his inauguration as the Prime Minister of Pakistan, Mian Nawaz Sharif prioritized the revival — rather resurrection — of economy and he, with the financial and technical support of the International Monetary Fund (IMF), launched an economic plan in September 2013, to reverse the deteriorating macroeconomic picture. The three main pillars of his economic reform programme were energy reforms, stabilising public finances, and improving the external balances.
So, during the previous year, what remained the scorecard of PML-N government in these three priority areas?
The PML-N government says that energy is a high priority, but there is little to show for its efforts. Pakistan is in the midst of a serious energy crisis that is seen in country-wide electricity shortages and daily cuts in power. This creates considerable hardships for households. Power shortages also have had a severe negative impact on industry, forcing many production units to operate at only 50–60 per cent capacity. Increasing the energy supply would lead to an immediate jump in the growth rate without any need for additional capital investment as industry could utilise the idle capacity.
Installed physical capacity in Pakistan can produce about 22,000 MW of electricity, while peak demand is over 25,000 MW. But power plants are supplying only an average of 17,000 MW and the government has to find ways to close the large gap. It has to increase physical capacity, which is a long-term proposition; it takes time to construct new power plants and develop alternative energy sources. For example, construction of the Diamer-Basha Dam, which will produce 4,500 MW of electricity for the national grid, will take 8 years to complete. Under endless negotiations, the proposed Iran–Pakistan gas pipeline has been ridiculed in the press as a ‘pipe dream’. It also has to increase the supply of power from existing plants. This requires increasing tariffs, eliminating arrears to power companies (‘circular debt’), reducing line losses, and collecting payments.
In order to reverse the bleeding of international reserves, the government made a major effort to secure adequate external financing from donors, international financial institutions, and international capital markets. The IMF arrangement of US$6.6 billion was an important breakthrough, and the World Bank and Asian Development Bank followed up with additional financing. The Gulf Arab countries continued their longstanding financial support for Pakistan, with Saudi Arabia providing a grant of US$1.5 billion in March 2014.
The government can claim some credit in bringing down the fiscal deficit, but this has been achieved largely by one-off revenue measures, such as unexpectedly large transfers from state-owned enterprises, including the State Bank of Pakistan, foreign grants and cuts in development spending. As part of the agreement with the IMF, the government aimed to reduce the fiscal deficit from 8 per cent to 5 per cent of GDP in the 2013/14 financial year, which was achieved. But without the one-off measures, the fiscal deficit would have still been close to 8 per cent of GDP. On the revenue side, the government committed to increasing the tax ratio by 1 per cent of GDP each year for the next five years from its 2013 level of 10.4 per cent — the lowest figure in the South Asia. This required the introduction of some new taxes but mainly involved enhancing the collection of income and sales taxes by expanding the tax base and eliminating exemptions and concessions. So far no progress has been made in increasing tax revenues.
On the expenditures side, the government planned to reduce subsidies, particularly energy subsidies, which were running close to 2 per cent of GDP. It announced a programme also to reform state-owned enterprises whose losses amounted to 1.5 per cent of GDP in 2013. This reform programme included the privatisation of 65 state-owned enterprises and the restructuring of the larger ones, such as Pakistan International Airlines, Pakistan Steel Mills, and Pakistan Railways.
In order to reverse the bleeding of international reserves, the government made a major effort to secure adequate external financing from donors, international financial institutions, and international capital markets. The IMF arrangement of US$6.6 billion was an important breakthrough, and the World Bank and Asian Development Bank followed up with additional financing. The Gulf Arab countries continued their longstanding financial support for Pakistan, with Saudi Arabia providing a grant of US$1.5 billion in March 2014. More surprisingly, despite its low credit rating the government was able to tap the international capital markets this year by selling US$2 billion worth of Eurobonds, and later another US$1 billion through the sale of Sukuk (Islamic bonds).
Pakistan’s 2014 scorecard shows that the government has not done well in energy reforms and public finances, but has managed to turn its external balances around and build up international reserves. It is still doubtful there will be any significant change in the energy picture in 2015, or that tax reforms and privatisation of state-owned companies will happen. Presumably, Pakistan will have to go to donors and international capital markets once again to manage its external position. Since the government was successful in doing this in 2014, it is likely that it will be able to generate sufficient external financing to keep any foreign exchange crisis at bay. Absent any major economic reforms, one should expect to see the growth rate remaining around 4 per cent in 2015, about the same as in 2014. While somewhat better than 3.5 per cent average growth experienced during the last 3 years of the previous government, it still means the Pakistani economy is merely limping along. No crisis on the immediate horizon, but no boom either.
The economic message of 2014 is that the government wakes up when a challenge presents itself. Otherwise, it lives in the 1990s. But, stay awake as the year 2015 comes with new challenges!
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The first economic survey post-IMF bailout package paints a mixed picture. Not much has changed in terms of economic targets, as most of them have been missed. The good news is that the economy has a growth rate of 5.28 percent — its highest in almost a decade — as compared to the expected 5.7 percent. Yet other economic indicators portray a dismal outlook. Inflation is up; forex reserves — although relatively stable — have declined to $21 billion, while remittances and foreign direct investment (FDI) stand at $15.6 billion and $1.17 billion, respectively.
All this means there are not many surprises to be had. The government has a habit of setting unachievable targets prompting most economic experts to rely on independent evaluations by international agencies. Moreover, the mincing of numbers to manufacture healthy economic outlook has continued this year as well. Last year, the reported 4.8 percent GDP growth rate was revised down to 4.5 percent after necessary adjustments. Similarly, the current survey doesn’t mention a number of tax exemptions granted in the outgoing fiscal year.
Current growth has been backed by mainly a spurt in services, and a partial rebound in agriculture courtesy of the cotton crop. Minus the services sector, the rest of the economy grew an estimated 1.9pc only. Exports have remained under stress as the country’s current account deficit crossed the $8-billion-mark due to the government’s rigid financial policies. Furthermore, despite the positive reviews from credit rating agencies and financial journals, investment rates have remained subdued.
But the main problem in the current survey has been the rise in tax exemptions in various sectors given under Statutory Regulatory Orders (SROs). The exemptions have risen to Rs415.8 billion following two successive years of reductions. The free trade agreements, mainly with China, have also added to the total cost of these. The government had started a three-year programme to phase out exemptions under SROs in the fiscal year 2013-14 as part of IMF directives. The government, nevertheless, followed the practice for two years before relaxing exemptions once again this year. If the government had eliminated SROs, the reduction would have been reflected in the FY17 economic survey. Moreover, the absence of records of certain tax exemptions — including capital gains exemptions worth Rs1.7b billion and independent power projects (IPPs) worth approximately Rs50 billion — add further ambiguity to the economic report.
Now with FY18 being an election year, an expected government-spending spree threatens additional complications. The centre must realise that it needs to address underlying problems including current account deficits and stagnant FDI in order to address long-term challenges. The international economic agencies have warned Pakistan against financial splurging for short-terms gains instead of investing in long-term projects. While a relatively significant portion of the Public Sector Development Programme (PSDP) is allocated to the China-Pakistan Economic Corridor (CPEC)-related early harvest projects, which are growth-enhancing for the most part, the bulk of development spending is on projects that have either tenuous or too marginal and diffused a positive effect on economic growth.
Highlights of PES 2016-17
1. Country’s overall economic growth rate recorded highest 5.28 percent in nine years, while last year it was 4.51 percent.
2. The agriculture sector accounts for 19.53 percent of GDP and 42.3 percent of employment.
3. Agricultural sector recorded a positive growth of 3.46 percent against the growth of 0.27 percent last year.
4. Cotton Ginning witnessed growth of 5.59 percent against the negative growth of 22.12 percent in previous year.
5. Livestock growth was recorded at 3.43 percent against 3.36 percent last year.
6. Growth of forestry sub-sector increased by 14.49 percent as compared to growth of 14.31 percent last year.
7. Fisheries sector registered a growth of 1.23 percent compared to growth of 3.25 percent.
8. Industrial sector growth recorded 5.05 percent in outgoing fiscal year as compared to 5.8 percent last year.
9. Growth of overall Manufacturing is registered at 5.27 percent compared to 3.66 percent last year.
10. Large Scale Manufacturing growth improved to 4.93 percent from 2.94 percent last year.
11. The construction sector has registered a growth of 9.05 percent against the growth of 14.6 percent last year.
12. Mining and quarrying sub-sector witnessed a growth of 1.34 percent against the growth of 6.86 percent last year.
13. Electricity generation and distribution and gas distribution registered growth of 3.4 percent against 8.43 percent last year.
14. Economic growth rate registered 5.28 percent against 4.51 percent which is the highest in 9 years.
15. The total volume of GDP has crossed $300 billion.
16. Agriculture sector growth improved to 3.46 percent against 0.27 percent last year.
17. Gross Public Debt Ratio improved to 59.3 percent to GDP from 60.2 percent to GDP last year.
18. Policy rate remained at 5.75 percent which is lowest rate in 45 years.
19. Pakistan Stock Exchange has been ranked the fifth best performing stock market in the world in 2016.
20. CPI based inflation rate averaged 4.1 percent
21. Manufacturing sector growth registered 5.27 percent compared to 5.8 percent last year.
22. FBR tax collection increased from Rs 2,590 billion in FY15 to Rs 3,112 billion in FY16.
23. Fiscal deficit narrowed to 4.6 percent in FY16 from 8.8 percent in FY13.
24. Per capita income increased to $1629 from $1333 last year.
25. Education enrolment estimated to reach 47.834 million by end 2016-17.
26. Currently there are 1,201 hospitals, 5,802 dispensaries and 5,518 basic health units as compared to 1,171 hospitals, 5,695 dispensary and 5,478 basic health units last year.
27. During July-March (2016-17), installed capacity increased to 25.1 million MW from 22.9 million MW during same period of last year.
28. Current expenditures during July-March (2016-17) stood at Rs 4,383.6 billion against Rs 3,971.3 billion during same period of last year.
29. Expenditures on pro-poor sectors increased to Rs 2,694.7 billion during 2015-16, which was 9.3 percent of GDP.
30. Services sector witnessed growth of 5.98 percent against 5.55 percent last year.
31. Total investment recorded growth of 11 percent.
32. Total investment increased to Rs 5,027 billion in FY17 from Rs 4,527 billion in FY16.
33. National Savings remained at 13.1 percent of GDP in FY17 against 14.3 percent in FY16.
34. FDI posted growth of 12.75 percent during July-Apr, in FY2017.
35. Wheat production increased to 25,750 thousand tons in 2016-17 as compared to 25,633 thousand tons in last year.
36. Rice production increased by 0.7 percent, sugarcane 12.4 percent and maize production 16.3 percent during FY 2016-17.
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