“Highest GDP growth was recorded in a decade, Pakistan’s economy is flourishing; there is no problem of debt retirement” and “Economy is in bad shape, there is a need to declare financial emergency; Pakistan would require $35 billion in next 12-18 months”.
Above are the two contradictory claims on the state of economy in Pakistan in 2017 — the former from treasury benches and the later from its critics. In my opinion, both are slightly exaggerating. Neither everything is hunky-dory on the economic front as portrayed by the federal government, nor is it as bad as apprehended by its critics.
In 2017 too, the economy of Pakistan remained hostage to political economy considerations and different socio-political developments.
Credit should be given to Ishaq Dar that he stabilised macro-economic indicators after assuming the charge of minister of finance in 2013.
In 2013, the GDP growth rate was 3.6 per cent, the size of GDP was 22.9 trillion rupees; inflation was 7.5 per cent; FBR taxes to GDP ratio was 8.8 per cent and so was the fiscal deficit (8.8 per cent of GDP), whereas the size of PSDP was 540 billion rupees. State Bank’s foreign exchange reserves were less than $6 billion in June 2013.
In June 2017, GDP growth rate was the highest in the last decade, i.e., 5.3 per cent; size of GDP got expanded to 31.862 trillion rupees; inflation was 4.5 per cent; FBR tax to GDP ratio got improved to 11.1 per cent; fiscal deficit was recorded to be 5.3 per cent of GDP (one per cent of GDP is Rs360 billion), and the size of federal PSDP almost doubled to 1 trillion rupees over the past four years. After the sale of recent Sukuk bonds, the State Bank foreign currency reserves stood at $14.13 billion on December 22.
Compared to 2013, the economy of Pakistan is in a much better shape in 2017. However, the growth is not sustainable as its foundations are weak. One can argue that besides Dar’s fiscal prudence, the improvement in economy during his tenure was based on many “one times” and some other external factors.
A one time gift of $5 billion from Saudi Arabia, one time proceeds from the auctions of 3G-4G spectrum, a rare decrease in international oil prices for three and half years, a bailout package from IMF, and an inflow of CPEC early harvest programme investment certainly improved Pakistan’s macro-economic
But all of these proved to be “first aid” measures and were not meant to address the structural problems in Pakistan’s economy, especially the issue of low tax base (FBR tax revenue nearly doubled without any significant expansion in tax base), cost and ease of doing business, bleeding public sector enterprises, uninterrupted supply of energy at affordable prices, under/un employment, and low investment to GDP ratio. In June 2017, the current government presented its fourth federal budget, which was the first post-IMF budget of the PML-N.
July 2017 — start of the current fiscal year — was marred by political uncertainties. It started with the disqualification of prime minister Nawaz Sharif and very soon federal finance minister, too, found himself in hot waters.
Incidentally, Dar’s formal indictment by NAB court coincided with the period when final figures for the last budget 2016-17 were compiled. The final deficit figures were 5.3 per cent of GDP against a target of 3.8 per cent. This is the time when concerns were raised about the historic trade deficit and government’s heavy borrowing from the State Bank and other commercial banks.
While Ishaq Dar was dealing with his “personal emergencies” and facing accountability courts, there were demands for imposing “financial emergencies” under Article 235(1) of the Constitution of Pakistan. However, there were (and are) no solid grounds to impose financial emergency as “economic life, financial stability, and credit worthiness” of Pakistan are not under direct threat.
Having said that financial emergency is uncalled for, one must not ignore the current economic challenges, especially the “twin deficit” (fiscal and current account) which have the potential to take the economy back to a state in which it was in 2013.
The fiscal deficit for the current fiscal year is budgeted to be 4.1 per cent. However, this target is a bit unrealistic. On revenue side, the federal government would miss out on Coalition Support Fund payment (due to policy shift in the US), and “Gas Cess” (due to litigation with CNG owners).
On the expenditures sides, it would exceed the budgeted provisions for electricity and fertilizer subsidies (in the run up to next elections, the government would considerably control the problem of loadshedding through additional power generation, but due to increase in oil prices and low efficiency of many GENCOs the cost of generation would be quite high and the government would have to spend way beyond initial estimates on electricity subsidy. Likewise, it would have to put additional amount for fertilizer subsidy to please its rural voters).
Due to political unrest and other security concerns, there would be unforeseen additional expenditures on security. Rebate payment to exporters would also exceed the allocated amount. Another under budgeted expense would be the bailout package for loss-making public sector enterprises.
Even if the energy circular debt is not immediately paid off the expense side would exceed revenues far more than it is budgeted and this imbalance would easily take the fiscal deficit by June 2018 to 7.5 per cent of GDP if not more. This figure is much closer to where the PML-N started its journey in 2013.
Rising trade deficit is leading to current account deficit. One can argue that policy neglect is one of the major reasons for trade deficit. Enhancing exports was not a key objective of last four year’s economic policies. Our economic policies do not seem to address the major challenges faced by exporters.
Exporters complain of uncompetitive energy prices (this is ministry of power’s domain). They complain of negative impacts of “photo-shoot only” free trade agreements (part of diplomacy). Till recently, they complained of unfavourable currency exchange rate (was to be determined by State Bank of Pakistan).
Another constraint on export potential is delayed release of refund and export rebates from FBR (Ministry of Finance’s domain). One cannot say that everything is perfect with ministry of commerce, however, above mentioned challenges to exports reveal that our economic policies are not very export-oriented.
Low export base, limited export destinations, and surge of imports (not only petroleum products, edible oil, and CPEC related machinery but consumer items too) under a policy neglect situation have resulted in a current account deficit which is almost double than the budgeted.
The government tried to bridge the fiscal and current account deficit through the sale of bonds in the international market and domestic borrowing from the State Bank as well as from the commercial banks. Depending on the formula and definition being used, public debts and liabilities hover around 61 to 63 per cent of GDP.
Currency exchange rate remained a double-edged sword in 2017. In ideal conditions, market factors should determine the value of rupee against the dollar. A real exchange rate also turns exports more competitive and discourages unnecessary imports. However, a depreciated rupee impacts inflation, debt servicing, and import bill.
Studies show 0.3 per cent change in inflation due to 1 rupee change in the PKR value against dollar. Our foreign debts are around USD 85 billion, a depreciation of 1 rupee in PKR value against the dollar would add around PKR 90 billion (85 billion in debt quantum and 5 billion in interest cost) in Pakistan’s debt.
Due to obvious reasons, Dar tried to keep the exchange rate stable at 102 rupees per dollar. However, pumping borrowed dollar in the forex market was an expensive business so, finally, the State Bank had to let rupee value depreciate. It is expected that there would be further depreciation of around 5 per cent in PKR value by June 2018. This would mean more inflation, increased import bills, and increased debt quantum.
The above mentioned facts are worrisome, but there is resilience in Pakistan’s economy and that is why I am of the opinion that the economic situation is not as bad as the critics of the current government portray. The first five months of the current fiscal year 2017-18 have exhibited favourable performance.
The government’s tax revenues show a 19.5 per cent growth which may help in bringing down the budget deficit to some extent. Similarly, after a four-year decline, merchandise exports in the first five months of this fiscal year have grown by 11.8 per cent.
During the first five months of the current fiscal year, remittances from abroad have also shown 1.3 per cent growth. The recent adjustment of rupee against major world currencies would increase the import bill but may further encourage exports and remittances from abroad.
Similarly, growth is picking up momentum. Almost all the sectors of large sale manufacturing are posting a rising growth with the effect that private sector credit off take has significantly increased. Manufacturing units and business concerns are getting more credit now to meet their growing working capital and fixed investment requirements.
Agriculture sector is also performing well; cotton, rice, and sugarcane yield is projected to be good. Thus, one may say that projected GDP of 6 per cent for 2017-18 is not difficult to achieve provided economic issues are not politicised but a political consensus is built around them.
It is important that all political parties in Pakistan should agree on a “charter of economy” and stick to the strategic priorities outlined under this charter for the longer term.
One strongly hopes that political parties present in the Parliament would agree to make increasing tax to GDP ratio, handling loss-making public sector enterprises, and curbing fiscal deficit as the central pillars of this charter.
Another positive development in the last week of December is induction of Miftah Ismail and Rana Afzal Khan as new chaperons of economy. Both of them are asked to “bat” in the last overs of the current innings of the PML-N. It would be difficult for them to bring any revolutionary reform or address the structural issues of Pakistan’s economy in their less than six month’s tenure. However, they can certainly set policy directions right during preparation of next federal budget. Their priority should be creating jobs and focusing on rural development to transfer the benefits of economic growth among masses. However, this would have to be done without further increase in twin deficit (meaning controlling their temptation to present an unrealistic “election budget”).
If the PML-N is optimistic about forming the government after the next elections, it would not like to restart from an economic situation that it faced in 2013.