Rashid A Mughal
PAKISTAN’S economic growth is on track to achieve its highest level in the last eleven years. “Average heading inflation remains within the forecast range of SBP, but core inflation has continued to increase”, says a statement issued by State Bank of Pakistan. Though growth accelerated at the end of FY2017 , mainly on recovery in agriculture and stronger manufacturing but the other fundamentals remained subdued. With higher global prices for oil and other commodities, inflation exceeded the forecast. The projection for the current account deficit was surpassed by a wide margin because of a very large increase in imports. Foreign exchange reserves were drawn down to fill a financing gap. For FY2018, projections for growth and inflation are maintained, but the current account deficit is expected to exceed the earlier forecast again by a wide margin.
Pakistan’s macroeconomic conditions have significantly worsened in the past one year and heavy reliance on short-term foreign commercial loans can create repayment issues for Islamabad, warned the World Bank recently in a demeaning report. But, to some extent, government’s concerted efforts has led to macro-economic stability so national economy was moving steadily on the path of growth, though bumpy. The economic data for the recent months showed increased economic activity which is encouraging.
The government has taken important measures for enhancing exports and would extend all possible support to the Textile industry along with other sectors of the economy and provide an environment, conducive to fostering business activities. The IMF delegation, on their visit, discussed with the Adviser on Finance, matters related to growth of textile exports and requested for processing of tax refund, drawback cases on priority basis as it would resolve liquidity issues faced by exporters / manufacturers, and capital thus made available could be deployed by them towards expanding their businesses, in turn, helping country’s export earnings. The export growth in the recent months is heartening and the exporters should put in greater effort to make sure that this rising trend is maintained in the future as well. Thus there are mixed signals with regards to Pakistan economy in the immediate future, at least. Fiscal deficit for HH1-FY18 is expected to fall close to the last year’s 2.5 percent. There has been visible improvement in export growth and remittances are marginally higher. However, largely due to high level of imports the current account deficit remains under pressure. The exchange rate adjustment in December 2017 is expected to help ease the pressure on the external front.
Benefiting from both infrastructure and CPEC related investments, construction and its allied industries are expected to maintain their higher growth momentum. After incorporating the impact of commodity sector dynamics on the services sector, the real GDP growth is projected to be around 5.8 percent, significantly higher than FY17, but marginally lower than the annual target of 6 percent for FY18. This is largely due to expectations of a below-target wheat crop because of a reduction in area under cultivation. On the external front, export receipts posted the highest growth in the last seven years of 10.8 percent in HI-FY18 against a reduction of 1.4 percent in H1-FY17. Worker’s remittances also recorded growth (2.5 percent) during the first half of the year as compared to a decline in the same period last year. However, favourable impact of these positives was overshadowed by the continuation of strong growth in imports of good and services. Key challenges remain, however, regarding governance and security issues, reviving agriculture and improving its productivity, increasing exports and attracting investment, strengthening public enterprises, and improving the business and regulatory environment. The report observed that the planned reduction in the FY2017 budget deficit would enhance funding for private sector credit and better enable it to meet rising domestic demand.
Exports are expected to perform better during the year, increasing by nearly 5% as a recovery in cotton production underpins an upturn in textile sales, and as global prices for non-oil commodities reverse from a sharp decline to a modest increase. The report added that the mobilization of larger inflows into the capital and financial accounts had been central to the 3-year economic program with the IMF, and these flows are projected to increase to $6.5 billion in FY2017, mainly with more foreign direct investment and continuing sizeable official flows. Thus, even with the projected widening of the current account deficit, the overall balance should remain in surplus, augmenting official reserves. The corridor project with the China is expected to attract more foreign direct investment, and already in 2015 investors announced 40 greenfield projects worth a remarkable $19 billion, or 4 times the norm in recent years. Moreover, the decision by Morgan Stanley Capital International to put Pakistan in its MSCI emerging market index, effective from May 2017, will likely spur equity portfolio inflows. The real estate market gives another indication of the health of the economy and consumer confidence. It has been booming since last 3-4 years though in recent months it has slowed a bit due to political turmoil and un-certainty and Law and order issues, particularly in Balochistan. Consumer spending has increased thus bringing in more cash flow which is a healthier sign. If the government adopts prudent monetary and fiscal policies and above all controls rampant corruption, the economic fundamentals will further improve.
— The writer is former DG (Emigration) and consultant ILO, IOM.
Rashid A Mughal