Road to Economic Revival
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.