The growth story

Pakistan Today (Karachi) - - COMMENT -

one of its most se­ri­ous cri­sis post the 1930’s Great De­pres­sion. It is there­fore im­por­tant to eval­u­ate the ground eco­nomic re­al­i­ties in Pakistan.

The Pakistan Stock Ex­change con­tin­ues to touch new heights af­ter the Chi­nese ac­qui­si­tion of the 40% stake val­ued at US $85 Mil­lion, and is cur­rently hov­er­ing around the un­prece­dented level of 50,000. Truly, this is a re­mark­able achieve­ment and one that has put it amongst the top per­form­ing in­dices in 2016. While short term spec­u­la­tive eu­pho­ria and ma­nip­u­la­tion can fuel growth, long-term-sus­tain­able growth is based on ac­tual per­for­mance of the un­der­ly­ing stocks. That will de­pend on the per­for­mance of the listed com­pa­nies. There have been sce­nar­ios in the past when ‘bub­bles’ were built up fol­lowed by long pe­ri­ods of de­pressed prices.

The For­eign Ex­change Re­serves have been built up to a level of US $23 Bil­lion plus. This too is a re­mark­able achieve­ment, though it is strongly be­lieved that the bulk of the re­serves are funded through bor­row­ings, in the face of dwin­dling in­flows and high out­flows. The is­sue of the mort­gage of na­tional as­sets for this pur­pose is now be­ing brought into fo­cus as is the is­sue of ris­ing out­flows for im­ports, profit repa­tri­a­tion, and ma­tur­ing loan and in­ter­est re­pay­ments. All th­ese fac­tors are ex­pected to place ad­di­tional pres­sure on the re­serves in the ab­sence of vi­able rev­enue gen­er­at­ing op­por­tu­ni­ties.

The Re­tail sec­tor is an im­por­tant gauge and strong re­tail sales have a di­rect im­pact on a coun­try’s GDP. In Pakistan the Au­to­mo­bile sec­tor has shown ro­bust re­sults, par­tic­u­larly the mo­tor-cy­cle in­dus­try, which has ex­hib­ited growth of 10 per cent per an­num. Sec­tors al­lied to the wed­ding in­dus­try re­main strong with an in­ces­sant rise in ex­pen­di­tures. Tex­tile and made-up gar­ments, home ac­ces­sories, con­struc­tion ma­te­rial, and restau­rants ap­pear to be do­ing well with strong in­ter­nal de­mand. It is dif­fi­cult to es­ti­mate the re­tail sec­tor con­tri­bu­tion with ac­cu­racy due to the fact that this is mostly a cash based sec­tor with un­doc­u­mented trans­ac­tions.

The Real Es­tate mar­ket re­ceived a tem­po­rary set-back af­ter the pro­posed re­forms, but the Gov­ern­ment is mak­ing ef­forts to re­vive the sec­tor and re­store con­fi­dence. The sec­tor has gone through a ra­tio­nal­i­sa­tion phase and should come out stronger in the longer run.

New busi­ness start-ups are an im­por­tant con­trib­u­tor to the econ­omy and in Pakistan there ap­pears to be a fo­cus on small busi­nesses in the ab­sence of larger in­vest­ments. The emer­gence of the small scale en­ter­prises is crit­i­cal for growth and or­gan­i­sa­tions such as LUMS are play­ing an im­por­tant role in iden­ti­fy­ing new op­por­tu­ni­ties through their in­cu­ba­tor pro­gramme. This is a wel­come sign as this cre­ates em­ploy­ment op­por­tu­ni­ties and pro­vides a growth im­pe­tus for the econ­omy.

GDP growth in the econ­omy is mainly a re­sult of de­pressed com­mod­ity prices and non-rev­enue gen­er­at­ing in­fra­struc­ture projects in the ab­sence of gen­uine in­dus­trial growth. While the CPEC ini­tia­tive is ex­pected to have a pos­i­tive im­pact with the es­tab­lish­ment of In­dus­trial and Trade zones, there is an ap­pre­hen­sion that the Chi­nese firms would set up in­dus­tries and ware­houses and Pakistan would lose out. The fall­ing ex­ports point to a de­clin­ing man­u­fac­tur­ing sec­tor, how­ever, the re­cent Tex­tile Pack­age of Rs 180 Bil­lion should boost the sec­tor. The in­ter­nal dy­nam­ics ap­pear to be im­proved as a re­sult of the on­go­ing in­fra­struc­ture con­struc­tion projects with ce­ment and al­lied in­dus­tries mak­ing bumper prof­its and ex­pand­ing fa­cil­i­ties. GDP has been called a flawed in­di­ca­tor of growth, as pro­grammes such as ex­ces­sive gov­ern­ment spend­ing can be a con­trib­u­tory fac- tor for cre­at­ing a ‘false’ sense of growth.

Pakistan’s un­em­ploy­ment rate es­ti­mated at around 6 per cent is not par­tic­u­larly wor­ri­some. How­ever, there is a high el­e­ment of en­der-em­ploy­ment which is lead­ing to lower pro­duc­tiv­ity and lower earn­ings. It has been es­ti­mated by the Gov­ern­ment of Pakistan that al­most 60% of the pop­u­la­tion is be­low the poverty line. This is an ex­tremely wor­ri­some is­sue, when com­bined with the low lev­els of ed­u­ca­tion and high pop­u­la­tion growth rates in the coun­try. It can ac­tu­ally prove to be a se­vere drag on eco­nomic growth in the long term.

The Con­sumer Price Index in Pakistan (CPI Gen­eral) in­creased by 3.7% on year-on-year ba­sis in De­cem­ber 2016 as com­pared to an in­crease of 3.8% in the pre­vi­ous month and 3.2% in De­cem­ber 2015. On month-on-month ba­sis, it de­creased by 0.7% in De­cem­ber 2016 as com­pared to an in­crease of 0.2% in the pre­vi­ous month and a de­crease of 0.6% in De­cem­ber 2015. Core in­fla­tion mea­sured by non-food non-en­ergy CPI in­creased by 5.2% on YoY ba­sis in De­cem­ber 2016 as com­pared to an in­crease of 5.3% in the pre­vi­ous month and 4.1% in De­cem­ber 2015. On a MoM ba­sis, it in­creased by 0.1% in De­cem­ber 2016 as com­pared to in­crease of 0.2% in pre­vi­ous month ,and an in­crease of 0.2% in cor­re­spond­ing month of last year i.e. De­cem­ber 2015. With a low in­ter­est rate en­vi­ron­ment and de­pressed com­mod­ity prices in­fla­tion has been con­tained, but has the po­ten­tial of ris­ing in the fu­ture with a rise in in­ter­est rates and com­mod­ity prices. The re­cent GoP auc­tions for trea­suries have ex­hib­ited the ex­pec­ta­tions for an in­ter­est rate rise.

The Ru­pee has come un­der strain in re­cent months, trad­ing at around the Rs 109 level against USD, while the gov­ern­ment has held the rate at around the Rs 104 level in the in­ter­bank mar­ket. In the face of weak dy­nam­ics there are ex­pec­ta­tions that the Ru­pee would be de­val­ued in the near fu­ture to around the Rs 115 level, which would place con­sid­er­able in­fla­tion­ary pres­sure on the econ­omy. While it would place ad­di­tional pres­sure in terms of ex­ter­nal debt, it could pro­vide a com­pet­i­tive ad­van­tage for the floun­der­ing ex­port sec­tor.

The Bal­ance of Trade in Pakistan is ex­pected to be Rs -243,396.72 Mil­lion by the end of this quar­ter, ac­cord­ing to Trad­ing Eco­nom­ics global macro mod­els and an­a­lysts ex­pec­ta­tions. Look­ing for­ward, the es­ti­mate for Bal­ance of Trade in Pakistan stands at Rs -244,503.61 Mil­lion in 12 months time. In the long-term, the Pakistan Bal­ance of Trade is pro­jected to trend around Rs -244,557.35 Mil­lion in 2020. The con­tin­ued deficit has placed con­sid­er­able fis­cal pres­sure on the econ­omy in terms of ris­ing debt lev­els and fi­nan­cial bur­den.

The health of the econ­omy is con­nected to con­sumer sen­ti­ment and in­di­ca­tors can be ma­nip­u­lated to pro­vide a pos­i­tive out­look. Pakistan has the po­ten­tial to im­prove its growth rate, but for that to be­come a re­al­ity gover­nance and man­age­ment has to be im­proved and made trans­par­ent. The poli­cies should in­duce con­fi­dence for in­vest­ment and not be­come grounds for ridicule. Eco­nomic growth is vi­tal for the pros­per­ity of this coun­try and hav­ing sta­bilised and built a base the gov­ern­ment now needs to fill the gaps. In­flows need to be im­proved for gen­uine eco­nomic growth and out­flows con­tained. At the same time debt needs to be con­tained and Pakistan needs ex­port ori­ented growth, ris­ing FDI, and higher work­ers’ remit­tances.

Spear­head Analy­ses are col­lab­o­ra­tive ef­forts and not at­trib­ut­able to a sin­gle in­di­vid­ual. Web­site: www.spear­head­research.org

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