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Mixed economic performance in 2014

Published on 29th Dec, Edition 52, 2014


Overall fiscal year 2014 was a better year for the economy. As for the actual behavior of various macroeconomic indicators, real GDP during financial year 2014 grew by 4.1 percent compared to 3.7 percent in the previous year and the target of 4.4 percent is better close to meet. The fiscal deficit was indeed contained at 5.5 percent. Growth saw a modest revival, especially in manufacturing. Manpower, for instance, was the country’s largest export sector. Export was larger than textiles, if we compare remittances with textile exports. The farm sector came out with a 2.1 percent growth, rather than the projected 3.8 percent, while the services sector expanded by 4.3 percent, against the 4.6 percent target set for the year.

The situation in Pakistan looked grim at the start of the last fiscal year but with the time many things showed improvement. Inflation was low, reserves rose, the fiscal deficit was contained and growth saw a modest revival. Inflation was down due to larger than expected declines in oil prices, and a steep appreciation of the rupee.

Reserves went up due to the inflow from the donor agencies and international investors. Exports remained sluggish, home remittances continued to grow strongly. The grant of $1.5 billion in February-March, 2014, Eurobond and 3G/4G auction proceeds in April and the divesture of UBL shares in June pushed up SBP’s foreign exchange reserves at a rapid pace. There is no need to say that if one-off foreign inflows like bilateral grant of $1.5 billion from a friendly country had not materialized, fiscal and external deficits of the country would have been much larger.

The International Monetary Fund (IMF) helped Pakistan manage its external sector, by approving more than $6.5 billion to bolster the Pakistan’s foreign exchange reserves. On the top of it, an inflow of $1.5 billion into the Pakistan Development Fund in February-March 2014 contributed with its share to release the held up inflows. It aided in the serious task of stabilizing the depreciating rupee.

Public Sector Enterprises (PSEs) continued to be a fiscal strain. There was the issue of structural reforms in the PSEs. There was unwillingness on the part of management and the staff to change their self-serving behavior and move ahead with the restructuring of loss-making PSEs. For the current year, State Bank of Pakistan has indicated the need for restructuring of PSEs.

Pakistan’s economy was polluted by floods in August 2014 but the damage appears to be less severe than the previous years dent. There was improvement in private sector credit but, given the appetite of banks for PIBs, lending to the corporate sector and overall investment was still constrained.

Government took several initiatives in the energy sector, results remained short of expectations. Energy sector continued to be the burden for economy. Inadequate planning and development of the energy infrastructure and lack of reforms in Gencos and Discos continue to hinder Pakistan’s economy. The State Bank of Pakistan said: “Pakistan energy sector is besieged by unpaid bills known as ‘circular debt,’ which runs through the entire power generation chain. The debt amounted to Rs500 billion by November 2014.” It just means that the government is not receiving payments from energy users.”

“Part of energy is stolen through dubious power supply distribution lines, while diesel and fuel oil destined for power-generating is outright stolen by officials managing tankers before they reach energy-generating units, one ministerial level official admits. “The total loss to the government at the hands of energy thieves, and the root cause of the miserable energy sector, is Rs1, 000 billion a year. The government does not have the will, the guts and administration to catch thousands of energy thieves,” and the Bank’s also confides, and admits “some of the top thieves are the government high-ups themselves”.

Poor planning and development of the energy infrastructure and lack of reforms in Gencos and Discos continue to obstruct Pakistan’s economy. More binding hindrances in the energy sector were not generation but distribution. In the natural gas sector, growing public campaign by industrial, commercial and CNG associations to supply them gas was a clear indication.

Pakistan’s ranking in the Corruption Perceptions Index (CPI) 2014 has improved and the Transparency International (TI), which released the report, has expressed the hope that Islamabad will work more vigorously to combat the menace. The TI described Pakistan’s CPI score of 29 out of 100 and ranking of 126 among 175 countries as the best. The country has never achieved this distinction since the first CPI was issued in 1995. Pakistan had secured the score of 28 and was ranked 127th among 177 countries in 2013, according to statistics released by Berlin-based non-profit organization committed to promoting accountability, integrity and transparency.

Pakistan must increase its hard currency earnings in the future, and not take on expensive debt to finance its external deficit”. Shortages of gas “have regressed to publicly lobbying policymakers”. Pakistan has no way out but needs to remain in the good books of the IMF for stabilization of the economy and sustain the gains of fiscal year 2014. However, continued assistance from the Fund would be contingent on certain actions to be taken by the Government of Pakistan.

The State Bank of Pakistan (SBP) said it has received $1.05 billion under the International Monetary Fund’s (IMF) three-year Extended Fund Facility (EFF). The fresh receipts have been transferred by the Fund after its Executive Board concluded its fourth and fifth review of Pakistan’s economic performance last week under the EFF. In a statement, the central bank said the conclusion of the review enabled the release of an amount equivalent to SDR 720 million or $1.05 billion. This payment brought the total disbursements under the arrangement to SDR 2.2 billion or $3.2 billion, said the State Bank.

Pakistan’s economy offers good prospects despite mixed performance in the outgoing year, as home remittances sent by overseas Pakistanis are moving on the fast track to set a historic high, exports are rising, prices of imported international oil and other commodities are declining, and imports are up and rising. The SBP report alert about the current political uncertainty created by public protests that started in the middle of August (2014) and has since receded. According to SBP the economic cost of this political impasse is difficult to quantify, but it is clear, this uncertainty has delayed investment plans.

SBP now projects growth to be in the range of 5-6 percent for financial year 2015. It does not include several hundred billion rupees of circular debt, the government owes to electricity and fuel supply companies. With that payment, the deficit will run up much higher. The outlook for financial year 2015 is far better. And, it is good news for the home-based Pakistanis, the overseas Pakistanis, the exporters to Pakistan, and the country’s foreign trading partners.

The government has virtually succeeded in building a record $15 billion foreign exchange reserve and exporters to Pakistan will face no difficulty in receiving payments for their goods and services, the imports are moving up and faster than last year, and exports may come close to $27-30 billion. The rupee will stay strong, and inflation will further drop, from an already low of the last decade.

As regards improvement in law and order situation in Pakistan government plans to execute around 500 militants in coming weeks, officials said after the government lifted a moratorium on the death penalty in terror cases following a Taliban school massacre. Six militants have been hanged amid rising public anger over slaughter in the northwestern city of Peshawar, which left 149 people dead including 133 children. After the deadliest terror attack in Pakistani history, Prime Minister Nawaz Sharif ended the six-year moratorium on the death penalty, reinstating it for terrorism-related cases.


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