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Five factors to mar gdp growth

Published on 6th May, Edition 19, 2013

 

Pakistan is not likely to achieve more than 3 percent GDP growth during the current financial year. Economic growth of next financial year is also be marred because of formation of the new elected government and coming up with appropriate policies to turn around the economy. The issue of potential default has been overcome with the commitment of the IMF to provide US$5 billion under Extended Financial facility (EFF). However, unless some structural changes are undertaken to overcome energy crisis, budget and trade deficits and above all restoring confidence of investors and economic recovery may not be there.

With less than a week left in general elections, there are still apprehensions about peaceful, free, fair and transparent elections. Tehrik-e-Taliban Pakistan (TTP) seem adamant at keeping ANP, MQM and PPP out of the election process and paving victory of PML-N, PTI and religious parties. Not only meeting of ANP, MQM and PPP are being attacked but attempts are being made to assassinate the candidates. The most alarming point is that three of the candidates of parties under attack have been killed and if the number crosses a dozen, these parties will be justified in demanding ‘no polling’ in these constituencies on 11th of May. Though there is a whisper about postponing election, it is getting louder because of the attitude of TTP.

Even if one assumes that elections will be held on 11th of May the outcome may also become questionable. There are allegations of pre-poll rigging and any attempt to confine voters of targeted parties will provide them a reason not to accept the results. This may lead to strikes, shutdowns and even violent riots. One may recall that PPP won 1977 elections but these were termed ‘grossly rigged’, which led to violent rights and then imposition of martial law.

Hoping nothing goes wrong, the next government will also be a coalition, as no party will succeed in attaining even simple majority. This may led to formation of unnatural alliance under doctrine of ‘law of necessity’ that will not allow the incumbent government to focus on economic development, as most of its time will be spent on keeping the coalition intact.

On the economic front key five factors that are likely to impact Pakistan’s GDP growth are: 1) sluggish global growth, 2) domestic slowdown to persist, 3) investment cycle downturn, 4) current account deficit to linger on and 5) cost pushed inflation to continue. All these issues can be overcome if there is political commitment with the help of a home grown plan, rather than following the IMF recipe blindly. The history tells us, following the IMF recipe, does not allow the countries to overcome balance of payments crisis and these continue to suffer from a vicious cycle of borrowing for paying off the liabilities.

1) Sluggish global growth

Global growth turned weaker in 2012 and is expected to stay sluggish in 2013. Fiscal adjustments will drag growth down in advanced economies and delay cyclical recovery in emerging market and developing economies. The outlook for global commodity prices, including metals and oil, remains benign but some risks from large and continuous doses of quantitative easing remain. Global financial market conditions have improved as a result of unconventional monetary policy easing and supportive policy actions. However, tail risks remain significant, calling for committed action to reduce balance sheet exposures and prepare adequate buffers against possible contagion risks. Ironically, Pakistan’s exports are concentrated in United States and European Union, which continue to suffer from double dip recession.

 

2) Domestic slowdown to persist

Domestic growth will be constraint by structural bottlenecks. Shortages of electricity and gas, disruption in exploration and production activities in some of the areas and performance of some of the key industries will also be marred. During 2012-13 slowdown persisted because of energy crisis and agriculture output was affected due to higher urea prices. Though, the government did try to keep fertilizer prices low, it has to pay huge subsidy on imported urea. Gas supply to fertilizer plants is not likely to become ‘normal’ in the foreseeable near future. Running local urea plants below optimum capacity utilization added to cost but its import erodes foreign exchange reserves.

3) Investment cycle downturn

There is an urgent need to address energy crisis, road and telecommunication sectors to revive investment and growth. Lack of fiscal discipline remains a key issue that will mar fresh investment. If growth slows down continue it could result in revenue shortfalls and a resurgence of additional fiscal risks. Removing structural impediments and public investment stimulus to crowd-in private investment can turn around falling investment. However, this would need to be balanced by offsetting reductions in government borrowing to meet the budget deficit. Those talking about fresh investment ignore two ground realities: 1) looming energy crisis and 2) deteriorating law and order situation. If capacity utilizations are poor and local investors are shy, one should not expect foreign investors to look towards Pakistan.

4) Current account deficit to linger on

The fall in global commodity prices can provide a temporary relief to the current account deficit (CAD). However, focus has to remain on boosting exports and containing imports to overcome current account deficit. The present growth in exports is highly unlikely to finance increase in imports. CAD in 2013-14 is likely to benefit from moderation in global commodity prices. Yet, its sustainability continues to face risk from event shocks that may cause a sudden stop or reversal of capital inflows. The deceleration in remittances is likely to keep current account deficit high.

5) Cost pushed inflation to continue

Despite a moderation in headline inflation, the risks posed by high prices persist. Headline inflation and demand-side pressures have moderated, but inflation risks remain reflected in double-digit consumer price inflation, food supply constraints and suppressed inflation in energy segment. Persistent pressures from wages remain a major risk to inflation moderation. Although the pace of increase in rural wages moderated a bit, it remains high.

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