It is often said that Pakistan suffers from ‘confidence deficit’ as the public at large doesn’t have confidence in the policies or statement released about state of the economy of the country. A lot of content pertaining to economic performance released by the Government of Pakistan (GoP) is not taken very seriously. However, the experts prefer to read opinions of the World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB).
Readers used to give some credence to periodic reports of State Bank of Pakistan (SBP) as it was considered ‘autonomous’ but some of the recent acts of incumbent government have marred the opinion. In the prevailing environment it is becoming difficult to form an independent view about state of economy and future outlook. I am obliged to refer back to the recent review of the economy by the IMF.
Reportedly, the discussions between Pakistan and IMF staff pertaining to the 6th review of Extended Fund Facility (EFF) successfully concluded on February 05 in Dubai. The Fund appreciates efforts of the GoP to improve macro situation of the country. It also became evident that Pakistan would get US$518 million after the approval of IMF Executive Board. There is a need to dispassionately review remarks of the lender of last resort regarding progress of Pakistan’s economy and that form any opinion.
IMF staff expressed confidence on current economic situation and country likely to achieve a GDP growth rate of 4.3% for FY15. Furthermore, they appreciated the monetary and fiscal policies of the incumbent government, which is likely to further improve the economic activities in the country and external position. Inflation is expected to remain lower and current account deficit to stay at 1.2% of GDP. The fund also appraised the robust remittance growth and recent Sukuk placement which will further strengthen the foreign exchange reserves of the country. Although, revenue collection was below the 2nd quarter indicative target by 0.1% of GDP owing to legal challenges in revenue measures and plunging international oil prices but the Fund staff expressed its confidence that the tax measures can help in bridging the shortfall.
Fund staff highlighted the opportunity to reduce the economic vulnerability and to address the long standing imbalances of energy sector amid falling oil prices in the international market. It is pertinent to note that Pakistan is net importer of oil and its energy import bill is estimated around US$15 billion or one-third of total import bill. IMF showed its concern over independence of SBP, energy sector deficiencies, legal framework for deposit insurance and privatization/restructuring of public sector enterprises.
IMF showed its confidence in Pakistan’s economic growth in its 6th review and payment of 7th trance is likely to be granted in near term after Executive Board approval. The positive node from IMF will boost investors’ sentiments. However, it is necessary to highlight some of the structural weaknesses in Pakistan’s economy, worst being over reliance on remittances. In fact these amounts are being used to finance imports. On top of that bulk of country’s foreign exchange reserves consist of borrowed amounts rather than hard earned money. There is an immediate need to boost exports and cut imports.
Recent reduction in crude oil price provides an opportunity to cut trade deficit and build on reserves. This objective can be achieved by boosting exports. Granting of GSP Plus status by the European Union was likely to increase exports by one billion dollars, though a paltry amount, but the opportunity has been lost because of prolonged outages of electricity and gas. On top of that that the GoP has increased tariffs to compensate for the shortfall in revenue due to the reduction in crude oil prices. To date PML-N government has increased GST on POL products by more than 10%. This also negates the much talked about claims of the government that it pays huge subsidy on POL products, electricity and gas.
Worst of all the incumbent government has failed in resolving circular debt issue. It is necessary to reiterate that paying of billions of rupees will never solve the issue unless blatant theft of electricity and gas is contained and long outstanding dues are recovered. All the successive governments have failed in containing theft and improving recoveries but worst has been the track record of PML-N government.
Ensuring uninterrupted supply of electricity and gas at affordable cost can help in improving capacity utilization, achieving economy of scale and above all making local manufacturers competitive in the global market. Special attention has to be given to textiles and clothing, fertilizer and sugar industries which can help in boosting exports, earning additional US$5 billion annually by producing exportable surplus. Operating local refineries can also help in bringing down POL import bill. Some of the local refineries are working of expanding motor gasoline production; these projected must be completed on war footings. Availability of motor gasoline at lower rates will automatically encourage people to switchover to motor gasoline from CNG that will help in operating urea plants at optimum capacity utilization and earning extra foreign exchange by exporting surplus urea.
This season Pakistan is expected to produce 1.5 million tons surplus refined sugar. Therefore, the government must immediately grant permission to export 500,000 tons before March end and another half a million tons before end of current financial year. Let one point be kept in mind that if timely permission is not granted for export of sugar it will ultimately be exported to the neighboring countries that will deprive the country from earning additional foreign exchange.