Road to Economic Re­vival

Enterprise - - Editor’s Desk -

The coun­try’s econ­omy ap­pears to have turned a cor­ner dur­ing the third quar­ter, as per the State Bank of Pak­istan’s ‘Third Quar­terly Re­port for FY14’.

Re­vival of economic ac­tiv­ity is a key devel­op­ment in fis­cal year 2014, with real GDP growth of 4.1 per cent, which is the high­est in the past five years. There are gov­ern­ment claims, though, that this GDP growth was ac­tu­ally 4.4 per­cent. Af­ter many years of low growth, sen­ti­ments about the econ­omy seem to have im­proved. Man­i­fes­ta­tions can be seen in the re­bound in real GDP growth; the rise in pri­vate sec­tor credit; a con­tained fis­cal deficit; the sub­dued in­fla­tion out­look; the sharp in­crease in FX re­serves; and the ap­pre­ci­a­tion and sub­se­quent sta­bil­ity in the ex­change rate.

Im­prove­ments in the econ­omy were the re­sult of the gov­ern­ment’s re­solve to ad­dress the en­ergy short­age, a grow­ing per­cep­tion of busi­ness friendly poli­cies and ex­ter­nal in­flows that have re­cently been re­al­ized. More specif­i­cally, auc­tion of 3G/4G li­censes; a larger than pro­jected in­flow via Eurobonds; pro­gram loans from the IFIs; and SBP’s ef­forts to sup­port the FX re­serves, have sharply im­proved the out­look of the coun­try’s ex­ter­nal sec­tor, and to some ex­tent, its fis­cal po­si­tion.

How­ever, the SBP re­port has em­pha­sized that “th­ese signs of im­prove­ments should not dis­count the chal­lenges faced by the econ­omy; and ef­forts for much needed struc­tural re­forms should con­tinue. Th­ese pos­i­tive de­vel­op­ments pro­vide a strong plat­form to move to­wards sus­tained economic growth in the medium term.” Ac­cord­ing to the re­port, the re­cent in­flux of ex­ter­nal re­sources not only sta­bi­lized the ex­change rate, but also sharply in­creased SBP’s FX re­serves. “As of 30th May 2014, SBP’s re­serves were US$ 8.7 bil­lion, com­pared to only US$ 3.5 bil­lion as of end-De­cem­ber 2013.

While the PKR’s ap­pre­ci­a­tion im­proved busi­ness sen­ti­ments and its sub­se­quent sta­bil­ity has eased in­fla­tion­ary ex­pec­ta­tion, the sharp in­crease in the coun­try’s FX re­serves pro­vides some com­fort for do­mes­tic and for­eign in­vest­ment.’’ The re­port says that av­er­age in­fla­tion dur­ing July-March fis­cal year 2014 was 8.6 per cent. Go­ing for­ward, the sta­bil­ity of Pak­istani ru­pee, sta­ble in­ter­na­tional oil prices, and softer global com­mod­ity prices should fur­ther con­tain in­fla­tion­ary ex­pec­ta­tions.

On the ba­sis of data re­leased by the Min­istry of Fi­nance, the SBP re­port says that fis­cal deficit dur­ing the first nine months of fis­cal year 2014 was only 3.2 per cent of GDP, which is sig­nif­i­cantly lower than the av­er­age deficit in the last five years.

The re­port, how­ever, points out that de­spite ef­forts for fis­cal con­sol­i­da­tion on the ex­pen­di­ture side, tax mo­bi­liza­tion still re­mains lack­lus­ter, as Fed­eral Board of Rev­enue (FBR) is still op­er­at­ing on a nar­row tax base. While the FBR should take con­crete steps to plug tax leak­ages and in­crease doc­u­men­ta­tion of all fi­nan­cial trans­ac­tions, pro­vin­cial gov­ern­ments (having con­sti­tu­tional right to tax ser­vices and agri­cul­tural in­come) also need to im­ple­ment pro­vin­cial taxes more ef­fec­tively.

On the fi­nanc­ing side, the gov­ern­ment mainly re­lied on do­mes­tic sources dur­ing Ju­lyMarch fis­cal year 2014. How­ever, ex­ter­nal fi­nanc­ing has in­creased sub­se­quently with the is­suance of Eurobonds, fresh loans from IFIs, and bi­lat­eral as­sis­tance. Al­though the re­sump­tion of ex­ter­nal in­flows is im­por­tant for a re­source con­strained econ­omy, this will add to Pak­istan’s ex­ter­nal in­debt­ed­ness.

The SBP Re­port high­lights that the to­tal public debt (ex­ter­nal plus do­mes­tic) has al­ready crossed the limit of 60 per cent of GDP, as set by the Fis­cal Re­spon­si­bil­ity and Debt Lim­i­ta­tion Act (2005) for fis­cal year 2013 on­ward. Hence, any ad­di­tion to the ex­ter­nal debt should at least be matched with an equiv­a­lent re­duc­tion in the do­mes­tic debt out­stand­ing.

Pres­sure in bal­ance of pay­ments also eased as bulky re-pay­ments to IMF sub­sided af­ter Novem­ber 2013, and the coun­try ex­pe­ri­enced in­flux of ex­ter­nal grants, loans and for­eign in­vest­ment (like Eurobonds). While ac­knowl­edg­ing this im­prove­ment, the re­port em­pha­sized the need to ad­dress struc­tural prob­lems that con­tinue to plague Pak­istan’s econ­omy. The pol­i­cy­mak­ers should for­mu­late an In­dus­trial Pol­icy that pri­or­i­tizes pro­duc­tion ef­fi­ciency and job cre­ation.

Such an ini­tia­tive should fo­cus on: ef­forts to pro­mote com­pet­i­tive­ness, in­stead of a cul­ture that cre­ates and re­wards in­ef­fi­cien­cies; re­struc­ture loss-mak­ing public sec­tor en­ter­prises (es­pe­cially Gen­cos and Dis­cos in the power sec­tor; and PIA and Rail­ways in trans­porta­tion sec­tor) to make them more dy­namic and prof­itable; and cre­ate a skilled la­bor force that meets the cur­rent (and po­ten­tial) needs of the manufacturing sec­tor.

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