Re­vival of growth

The Pak Banker - - MARKETS/SPORTS -

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.

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