By Muhammad Ashraf Wani
Back in 2013, nobody would have imagined the state of country’s economy would be so stable during the year 2017 that international financial institutions to report Pakistan ahead of China in growth besides improving its ratings and investment prospectus.
There is no denying the fact that in year 2013, when the incumbent government took over, the economy of the country was in shabby condition as clearly indicated by the low growth rate, the depleting foreign exchange reserves which had dipped as low as just $6 billion coupled with the chronic fiscal deficit widening and in addition high inflation and major structural impediments with real GDP growth declining to 3.6 percent.
After assuming the power, the PML (N) government had to take some prudent though bitter and harsh decisions to put the economy on the path of development. These decisions not only resulted in putting the economy on growth trajectory but also helped in increasing the GDP gradually on sustainable grounds.
Now, in 2017 when we look at the overall economy of the country, it has been placed on path of development despite all the odds and many international institutions acknowledge this fact as indicated by their reports on economy of Pakistan. Almost all of the economic and the macroeconomic indicators are showing a positive trend.
The Gross Domestic Product (GDP) has grown by 5.3% during the outgoing fiscal year 2016-17, which is a 10-year high growth, compared to growth of 3.68 percent in 2012-13. The impressive growth was on account of growth in services and agriculture sector owing to government’s supportive policies and high credit disbursements. The growth momentum in Large Sector Manufacturing (LSM) continued, mainly supported by better energy supplies; lower commodity prices; and accommodative economic policies. The sector recorded an impressive growth of 9.7 percent in April 2017 as compared to negative growth of 2.9 percent last year. During July-April 2017, it recorded a growth of 5.58 percent compared to 3.85 percent. The outlook of Large Scale Manufacturing is encouraging on account of supportive economic policies, low interest rate and higher PSDP spending.
Size of Economy:
Pakistan’s economy has been performing better than most countries around the world. There has been improvement in almost every aspect of life due to economic growth. For the first time, the size of the economy has surpassed $300 billion. On average, income of each Pakistani has increased by 22% since fiscal year 2012-13. The per capita income today stands at $1,629 as compared to $1,334 four years ago.
Foreign Exchange Reserves:
Currently, the foreign exchange reserves are at a comfortable level. It would not be an overestimation to say that in June 2013, Pakistan was on the brink of default. The Forex reserves were at an historic low covering only two weeks’ worth of imports. Large payments were falling due and what to say of the commercial banks even the multi-lateral development partners were shy of undertaking any new business with Pakistan. In June 2013 foreign exchange reserves held with the State Bank were around $6.3 billion which included short-term swap of $2 billion for which payments were to be made within weeks. This means that the real reserves were $4.3 billion. However, with the prudent policies of the government, the foreign exchange reserves currently stand at a comfortable level of $16 billion with SBP despite a larger than expected trade deficit mainly due to increased import of capital goods. If foreign exchange deposits with commercial banks are included, the total foreign exchange reserves of the country increased to around $21 billion;
The revenue collections have also increased 81% during the last four years with an average annual growth of 20%. In fiscal year 2012-13, the FBR collection was Rs.1,946 billion while for the fiscal year 2016-17, the target was Rs.3,521 billion. The tax to GDP ratio which was 10.1% in fiscal year 2012-13 is likely to increase to 13.2%.
Over the past four years, Pakistani workers and professionals working abroad have contributed substantial amount of remittances which increased from $13.9 billion to $19.9 billion. This 40% increase was made possible due to the government’s revival and payment of outstanding dues of Pakistan Remittance Initiative. The remittances for the first ten months of the current FY stand at $15.6 billion and are expected to grow in the last two months due to Ramazan and Eid despite challenging economic situation in the gulf region.
Inflation is considered as one of the important economic indicators. The Inflation was recorded on average 12% between 2008 – 2013. The incumbent government contained the inflation at 4.16% during the outgoing fiscal year, which was much below the target of 6%.
Fiscal Development Strategy:
The government followed a policy of fiscal consolidation because of which fiscal deficit reduced from 8.2% in 2012-13 to the current year’s 4.2%. This was achieved through higher revenue collection through improved administration and broadening of the tax base, undoing decades-old concessionary SRO and curtailing non-development expenditure of the government;
The merger of the three stock exchanges was completed in January 2016 after successful resolution of the issues pending for over a decade. Since then, Pakistan Stock Exchange has graduated from frontier to emerging markets in the Morgan Stanley Capital International (MSCI) Index. It has been declared as Asia’s best performer and 5th best performing market in the World by Bloomberg. It is note-worthy that the index has increased from 19,916 on 11 May 2013 to over 52,000 points currently. And during this period market capitalization has increased from $51 billion to $97.3 billion depicting a 90% increase.
SBP Policy Rate:
The policy rate of SBP has also come down from 9.5% in June 2013 to the current 45-year low of 5.75%. Similarly, mark-up rates of Export Refinance Facility reduced from 9.5% in June 2013 to 3% in July 2016. In addition, the mark-up rate on Long Term Finance Facility gradually reduced from 11.4% in June 2013 to 6% for exporters and 5% for textile sector. This has led to a spurt in credit to the private sector.
Credit to Private and agriculture Sectors:
The Credit to private sector has grown to Rs.507 billion till May 2017 as compared to Rs.93 billion in fiscal year 2012-13, resulting in expansion of business activity in the country. Agriculture credit was Rs.336 billion four year ago which at the end of 2016 was Rs.600 billion and is targeted to increase to Rs.700 billion during the current financial year.
Reforms and ratings:
The government during the four years period implemented difficult key structural reforms programs in the country. Completion of the programs has strengthened confidence of the international community in government’s economic agenda. The government put the country on the path of sustainable growth which is being internationally recognized and reflected in the improved ratings by all major rating agencies including Moody’s, S&P and Fitch. Recently, researchers at the Center of International Development (CID) at the Harvard University have predicted that Pakistan’s annual growth rate over the next 10 years would be nearly 6 percent. This is a one point GDP growth rates increase compared to their earlier projections whereby Pakistan GDP growth rate was set to grow at 5 percent by 2025.
The external public debt to GDP has reduced from 21.4 percent in FY 2013 to 20.8 percent while net domestic debt increased from 38.8 percent in FY 2013 to 40.5 percent in FY 2016. As of July-March 2017, the net public debt stood at 59.3 percent below the threshold of 60 percent as prescribed in FRDL Act. The government is adhering to the Medium Term Debt Management Strategy to make public debt portfolio more sustainable. The government is focusing on extending the average time to maturity of domestic debt. The debt sustainability indicators of domestic and external debt have improved compared to FY 2013.
The government has already initiated a number of measures for the exports enhancement and for reducing current account deficit. It ensured uninterrupted supply of electricity and gas to the industrial sector while the tariffs were slashed. Due to some exogenous factors, the current account deficit widened to $10.64 billion as due to fall in exports and remittances during July-May 2017. The decline in exports is more due to external reasons as the decline in exports was also witnessed in other regional countries. However, the negative effects of exports are bottoming out as during the outgoing fiscal year six months have witnessed positive YOY growth with highest in June 2017 at 16 percent.
The Governor SBP informed that monetary expansion during FY 2017 remained aligned with the overall improvements in macroeconomic indicators with substantial contribution stemming from pick-up in private sector credit. In fact, the private sector credit flows posted their highest level since 1999. The credit to private sector recorded strong growth of 18.7 percent (Rs.633.2 billion) during July-23 June FY 2017, compared to 9.5% in the comparable period of FY 2016.
Prudent monetary policy and lower budgetary borrowing from commercial banks have helped the private sector credit boom. Overall, there has been a broad-based increase in credit demand, especially from fixed investment, during FY 2017
Challenges and odds:
The economic and financial experts are of the view that had there been normal environment, the economy of the country could have performed beyond imagination. The country’s economy had to bear loss of billions of rupees during the past four years owing to occasional uncertainty created by sit-ins, Panama leaks, Dawn leaks, lock-downs and other such unfortunate events since the PML-N government took over in 2013. Despite all these odds, the government policies did not let the economy derail and ensured positive growth, the ten years’ highest 5.3 percent during the fiscal year 2016-17 also ensuring improvement in foreign exchange reserves besides winning confidence of the investors. For the government, all these activities were conspiracies to halt the rapid economic development in the country as the PML (N) led political regime had the prime focus to lift the country towards new heights of progress. The business community of the country had also expressed serious reservations over the unending uncertainty, which it said had created a crisis-like situation in the country, hence doing business difficult.
Future Economic Vision:
The government has also put forward its five-year economic vision for 2018-23 to further strengthen economy in order to take it on the path of higher, sustainable and inclusive economic growth. The vision highlights the needs to focus on second generation reforms including deepening of financial market, improving ease of doing business, enforcing property rights, improving regulatory apparatus, enforcing rule of law, creating a credible and efficient judicial system and to build an institutional foundation that can sustain economic growth and give protection against external shocks. It envisages above 7% growth, sustainable economic environment, poverty alleviation, energy, food and water security, reforming of public sector enterprises, export competitiveness, and regional connectivity etc.