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The economic sweet and sour of the calendar year 2014

Published on 29th Dec, Edition 52, 2014


Upgraded Asian Development Bank (ADB) growth outlook, a bubbling equity market, the sliding LSM growth, an improved foreign reserves position, the still reluctant FDI, and a persisting energy deficit is what the calendar year 2014 had in store for us. While FY14 GDP growth of 4.1% coupled with the expectation of a similar growth rate for FY15 is something to sing about, a deeper analysis may bring to surface some serious imbalances and areas of concern.

The LSM growth of 1.95% recorded during July-October FY15 as against 6.35% during the same period, last year, doesn’t augur well for an already struggling economy. A meager LSM growth of 1.5% registered in 1999, rising subsequently to almost 20% in 2004-05, should have raised questions about the different economic management approaches employed under different governance systems. Such important questions were, nevertheless, not asked. Just to quote from the records: LSM grew at an average of 8.8% during 2000-08.

A thirty-two thousand plus equity market index may be an attractive option for the speculative forces, both domestic and foreign, but the corresponding slow growth recorded by the real sector would put a questions mark on the operational mechanism of our bourses. The KSE-100 Index rose this year to 30,000 level after Moody’s upgrading of economic outlook from negative to stable. Further fuel to the fire was added by the same rating agency’s upgrade of five major Pakistani banks’ outlook from negative to stable. The stock market then charted the unknown territory of 32,000 points. Banks, oil companies and cement sector were the beneficiaries of rising stock prices.

Foreign Private Investment 2,739 1,999 761 1,576 2,290 345 630
Direct Investment 2,151 1,634 821 1,456 1,668 355 423
Inflow 3,184 2,270 2,099 2,665 2,816 849 1371
Outflow 1,033 635 1,278 1,209 1,149 494 948
Portfolio Investment 588 365 (60) 120 623 (10) 207
Equity Securities 601 365 (60) 120 735 (102) 207
Debt Securities (13) (112) (112)
Foreign Public Investment (652) (20) (53) 5 2,115 69 (25)
Portfolio Investment (652) (20) (53) 5 2,115 69 (25)
Equity Securities
Debt Securities (652) (20) (53) 5 2115 69 (25)
Total 2,087 1,979 708 1,581 4,406 414 605
(Source: State Bank of Pakistan; figures rounded off to the nearest dollar)

Net inflow of foreign private investment recorded a growth of 46%, going up from $414 million to $605 million during the first five months of FY15. Out of the said $605 million, FDI accounted for $423 million, the rest going to portfolio investment. The FDI is yet far off the level it touched during the middle of the last decade. This means the investment that took flight after the termination of the semi-democratic rule of Mr. Musharraf, is still reluctant to make a comeback. With the great expansion in the quantity of money generated under the garb of “quantitative easing”, our markets’ failure to attract a portion of that money is a bit worrying. We have still to do a lot to woo the foreign investors who seem to be more interested in government-guaranteed investment like Euro and Islamic bonds.

On foreign reserves side, our position would appear a bit satisfactory particularly in view of the recent shaky past. Our reserves currently stand at around $15 billion in sharp contrast to the January, 2014 position when we held less than $8 billion in our reserves kitty. Out of $15 billion, around $5 billion are owned by bank depositors. Before tracking the source of $10 billion held by the State Bank of Pakistan, we might want to have a look at the reserve position of other countries in the region.

China 4,055 June, 2014 1st
Japan 1,266 October, 2014 2nd
Saudi Arabia 742 3rd
Taiwan 426 September, 2014 5th
Russia 419 November, 2014 6th
Republic of Korea 364 October, 2014 7th
India 316 October, 2014 9th
Turkey 132 19th
Malaysia 128 20th
Indonesia 112 Sept, 2014 22nd
Israel 86 24th
Philippines 80 25th
Pakistan 12 October, 2014 70th
Source: IMF data

The improved but still precarious reserves position owes much to the Saudi Arabian grant, IMF disbursements under the Extended Fund Facility (EFF), US payments under Coalition Support Fund (CSF), and $3 billion worth issues of Euro and Islamic bonds. The much trumpeted Euro and Islamic bond issues only reflects US and world investors, greed for higher returns. The Euro bonds, initially planned issue of $500 million was upgraded to $2 billion after its oversubscription by 14 times. The majority of purchasers comprised US investors. The 5-year Euro bonds carried an interest rate of 7.25%; the 10-year same category bonds offered an interest rate of 8.25%; while the Islamic bonds tagged a profit rate of 6.75%. Investment in Pakistani bonds came as a bonanza to the investors, especially the US investors as the rates offered were higher by 500 to 560 basis points than the ongoing US treasury rates. From Pakistan’s perspective, this was the same old trick of going for the costly short-term solutions at the expense of the country and its people. The burden of high debt servicing during the coming years will reflect the extent of damage done to the economy.

The positives, the calendar year is leaving in its wake, are however not to be dismissed summarily. The economic upgrade of Moody outlook, the ADO optimism about Pakistan’s FY15 economic growth, the upcoming Chinese investment to bolster Pakistan’s energy position, and the Army resolve to resolutely stand up to the threat of terrorism are no mean developments. We should expect the second half of FY15 to bring more hope of economic revival. It’s high time we learned to be a good business partner. Some serious friends of Pakistan are waiting in the wing for us to make up our mind to break away from our lethargy, greed and mediocrity and show our potential as a nation. China is one of them. If it can take its investment to such far-off places as Latin America, why it cannot help its friendly neighbor to come out of the vicious cycle of energy deficit?


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