Revival of growth
Pakistan's economy is a mixture of opportunities and challenges. According to a review of the economy for the first quarter of 2017-18 by the Institute for Policy Reforms (IPR), despite a revival of growth, Pakistan's economy is still facing some serious risks and vulnerabilities. The report says that economic growth has improved with the revival in manufacturing and agriculture sectors. On the other hand, rapid increase in tax revenue has strengthened public finance. The latest figures show that LSM grew by a healthy 8.4% during the first quarter primarily due to improved power supply, better security, low interest rates, low inflation, and past years' investments. Agriculture has recovered from higher fertiliser off-take, higher credit and mechanisation, and support price for wheat.
However, major foreign financing challenges remain. These include a growing fiscal deficit and dwindling foreign exchange reserves. At 4.4% of GDP, the current account deficit grew by 120% over the same quarter of last fiscal year and far exceeds the target set by the government. Foreign reserves have fallen despite hefty external borrowing. So far, the government has attributed the runaway current account deficit to growth-inducing machinery imports. Machinery imports, however, did not grow during the quarter. Import of power generation equipment fell by 17%. Other indicators are also in the negative zone, including an uptick in inflation.
The IPR report points out that Pakistan is dependent on external savings, and the economy is exposed to continuous borrowing, loan rollover and re-pricing risks. Recent correction in rupee value may reduce imports and the deficit. But the central bank estimates foreign exchange financing gap of $12 billion in FY18. IPR warns that the gap will be much higher than this. Next year's foreign financing gap is a major economic risk. Fiscal deficit also is higher than the target. This has increased government's indebtedness, both domestic and external. These macroeconomic factors prevent sustained and longterm growth of the economy. They are the result of years of economic decision making that prioritises adhocism to solve immediate problems, but does not show resolve to deal with structural issues.
The underlying problems point to an economic structure that does not allow the economy to substantially increase investment. It is the result of a political economy that favors the privileged at the expense of everyone else. However, the report cautions against despondency, because that is the last thing the market needs today. It affirms that Pakistan has the potential to turn the economy around if all institutions show firm intent. Estimates say GDP growth will be higher than last year's 5.28%. An expansionary monetary policy coupled with largely steady exchange rate (despite 5% correction in December) and some agriculture and industrial revival would stimulate growth. Continuous growth in public sector investment and China-Pakistan Economic Corridor (CPEC) development projects will give further impetus to the economy.
State Bank of Pakistan (SBP) Deputy Governor recently said that economic activities in the country are gradually reviving due to the positive impact of improved security following the operation Zarb-eAzb and Radd-ul-Fasaad. A marked turnaround in retail sales has been observed in metropolises, with positive readings in investor and consumer confidence surveys. The dip in the value of the rupee has spurred exports while imports have been controlled through the newly imposed regulatory duty. Improved power and gas supplies have helped revive industrial activities across the country. The need now is to undertake some basic reforms aimed at bringing down the cost of doing business and attract foreign investment.