The good, the bad, the ugly

The Pak Banker - - EDITORIAL - Sakib Sherani

AT around the PML-N govern­ment's half­way mark, the party lead­er­ship has spared lit­tle ef­fort in re­count­ing the 'turn­around' in Pak­istan's eco­nomic per­for­mance un­der this ad­min­is­tra­tion. On the other end of the spec­trum, op­po­si­tion political par­ties (bar­ring PTI) have been us­ing a com­bi­na­tion of more rhetoric and less data to de­nounce the al­leged fail­ings on the eco­nomic front of PML-N's third term in of­fice since 1990. The Pak­istan Tehreek-i-In­saf is the only one to have an­a­lysed the data and the num­bers to ar­rive at their fairly com­pre­hen­sive, yet some­what selec­tive, cri­tique.

So what is the re­al­ity? Where does Pak­istan's econ­omy stand to­day com­pared to early 2013 - and how much of it is down to the poli­cies of this govern­ment?

There is lit­tle doubt from the data that the govern­ment has pur­sued a de­ter­mined path, un­der the aegis of an IMF pro­gramme, to­wards achiev­ing macroe­co­nomic sta­bil­ity. The coun­try's of­fi­cial for­eign ex­change re­serves have been built up from $6 bil­lion in June 2013, to $15.6bn as of endJan­uary 2016. A com­bi­na­tion of re­leases from the IMF and other IFIs, com­mer­cial bor­row­ing, Saudi money and the col­lapse in in­ter­na­tional com­mod­ity prices has sharply re­duced the short­term vul­ner­a­bil­ity of the coun­try's bal­ance-of-pay­ments po­si­tion.

In­fla­tion has de­clined from 8.3pc year-on-year in July 2013 to 3.3pc for Jan­uary 2016. De­spite dif­fi­cult cir­cum­stances, govern­ment tax rev­enues have recorded, prima fa­cie, fairly im­pres­sive in­creases in the past two years. Rev­enue per­for­mance has been com­ple­mented by the ap­point­ment of a se­ri­ous-minded and well-in­ten­tioned rev­enue tsar, the pub­lish­ing of the tax direc­tory in­clud­ing tax-fil­ing data of par­lia­men­tar­i­ans, some progress on re­mov­ing ex­emp­tions, and the set­ting up of a Tax Re­forms Com­mis­sion. In ad­di­tion, the num­ber of tax fil­ers has in­creased by around 280,000 ac­cord­ing to FBR, while the re­cent tax amnesty scheme for traders is likely to bring an im­por­tant seg­ment out­side the am­bit of tax­a­tion into the fold.

The econ­omy's growth per­for­mance has im­proved mod­estly, with real GDP grow­ing at a pro­vi­sional 4.2pc in 2014-15. Af­ter re­main­ing slug­gish for the past two years, the large-scale man­u­fac­tur­ing sec­tor is show­ing signs of mod­er­ate out­put growth across a wider spec­trum of sec­tors. Even pri­vate-sec­tor in­vest­ment ap­pears to be pick­ing up fi­nally, al­beit ten­ta­tively, while busi­ness con­fi­dence, as recorded by the lat­est OICCI Busi­ness Con­fi­dence In­dex, has re­bounded.

The bad news is that much of the good news on the econ­omy is car­ried on the shoul­ders of a sin­gle de­vel­op­ment - the col­lapse of in­ter­na­tional oil and other com­mod­ity prices. The price of bench­mark Brent crude has fallen from $115 in mid-June 2014 to $26 per bar­rel, be­fore re­cov­er­ing to the cur­rent vicin­ity of $35. This 70pc de­cline alone has im­plied a sav­ing of $7.6bn be­tween June 2014 and end-Jan­uary 2016.

The prices of other im­ported com­modi­ties have also fallen sharply in tan­dem, am­plify­ing the quan­tum of sav­ing to the coun­try's ex­ter­nal ac­count. On the other hand, ex­port prices have also been hurt. Ad­just­ing for th­ese fac­tors, in net terms, the govern­ment has re­ceived a wind­fall of at least $7bn dur­ing this pe­riod on the ex­ter­nal front. In other words, with­out this bo­nanza in com­mod­ity prices, Pak­istan's of­fi­cial for­eign ex­change re­serves would have been $7bn lower, at $8.4bn - de­flat­ing a much-touted achieve­ment of the govern­ment.

The other ef­fect of the favourable move­ment in in­ter­na­tional com­mod­ity prices has been on in­fla­tion. Had oil prices re­mained above $100 per bar­rel over the past 18 months, econo­met­ric modelling sug­gests that the year-onyear CPI in­fla­tion would be six per­cent­age points higher. That means CPI in­fla­tion for Jan­uary would have been in the nine to 10pc range rather than the 3.3pc that was recorded. The im­pli­ca­tion is that there is lit­tle govern­ment ef­fort or pol­icy in­put in the de­cline recorded in in­fla­tion - other than pass­ing on a por­tion of the fall in in­ter­na­tional oil prices.

In fact, three govern­ment in­ter­ven­tions have ac­tu­ally helped keep in­fla­tion - es­pe­cially food in­fla­tion - higher than what would have been the case. In the case of pe­tro­leum, the govern­ment has passed on to do­mes­tic con­sumers only 34pc of the 70pc fall in in­ter­na­tional oil prices. It has over­taxed high­speed diesel, the back­bone of the coun­try's trans­porta­tion and agri­cul­ture, to make up for lost rev­enue. If the full de­cline in in­ter­na­tional prices had been passed on, the diesel price would have been Rs43 per litre lower to­day.

In the case of wheat, it in­creased the sup­port price in Novem­ber 2014 at a time when wheat prices in Pak­istan were al­ready sub­stan­tially higher than world prices. And in the case of sugar, govern­ment poli­cies have in­creased lo­cal sugar prices over 10pc in the past year, com­pared to a 13pc de­cline in in­ter­na­tional prices. Sim­i­larly, FBR's rev­enue per­for­mance is al­most en­tirely pred­i­cated on the in­crease in sales tax on pe­tro­leum, the levy of ad­di­tional cus­toms and reg­u­la­tory du­ties on im­ports, rate en­hance­ment in ex­ist­ing taxes, in­tro­duc­tion of new taxes on ex­ist­ing tax­pay­ers - and the with­hold­ing of tax re­funds. An­other ma­jor area of un­der-per­for­mance is power-sec­tor re­form, as well as wider re­form and re­struc­tur­ing of the pub­lic-sec­tor en­ter­prises, bar­ring to an ex­tent Rail­ways. The govern­ment re­ceives fail­ing marks in the key area of in­sti­tu­tional re­form (mak­ing ap­point­ments on merit rather than crony­ism or con­nec­tions to the Sharif fam­ily, avoid­ing con­flicts of in­ter­est for its pub­lic of­fice hold­ers, mak­ing trans­par­ent and ac­count­able de­ci­sions in mega projects such as the China-Pak­istan Eco­nomic Cor­ri­dor or LNG im­port).

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