Pakistan GDP’s growth lowest in the region
December 23, 2011
Pakistan real GDP growth remained the lowest at 2.4 percent among the regional countries on the weak external factors, bad governance and poor performance of its industrial sectors, State Bank of Pakistan said in its annual report.
On the contrary, India, Sri Lanka, and Bangladesh posted growth of 7.8 percent, 6.3 percent and 7 percent respectively. In this scenario, Pakistan will be surviving to maintain its strong economic position in the region until the political and financial stability bring in the economy for long-run.
Pakistan’s economy managed to grow by 2.4 percent in financial year 2010-11 despite devastating floods in the early part of the fiscal year. One-fifth of the country’s agricultural heartland was inundated, which interrupted production processes and disrupted the subsequent supply of both labor and capital.
It is estimated that 6.6 million of Pakistan’s labor force was out of work for 2 to 3 months, and capital stock worth US$ 2.6 billion (1.2 percent of GDP) was lost, SBP said in its annual report.
SBP projected that GDP growth is likely to settle between 3 to 4 percent as against the target of 4.2 percent set by the government. However, the agricultural outlook has once again been adversely impacted by the floods in Sindh, which has damaged half of its area under cultivation.
The central bank forecast that the government will again miss the 4 percent fiscal deficit target in FY12, with doubts on both expenditure and revenue targets. Moreover, both provincial and federal governments are less likely to be frugal this fiscal year, not just as
elections get closer, but also as provincial governments take greater responsibility for their fiscal affairs.
The absence of an IMF program may also allow expenditures to stray off course, while prospects for additional revenue measures are dim. The likelihood of achieving the non-tax revenue target as set in Federal Budget is also low for several reasons including expected US$ 1250 million Coalition Support Fund is more uncertain as Pakistan’s relations with the US are strained; with the recent cut in the discount rate, SBP’s profit could be less than the budgeted Rs 200 billion; and there is little progress on the auction of 3-G telecom licenses, which had been budgeted to raise Rs 75 billion revenue in FY12.
All concerned parties realize the need to push broad-based fiscal reforms if sustainable growth is to be achieved. The main ingredients remain the same, that is, the political will to widen the tax base to include untaxed or under-taxed segments such as agriculture and services; plugging leakages in the collection machinery; removing subsidies on electricity, fuel, and agricultural commodities, while targeting subsidies to underprivileged groups; and restructuring public sector enterprises, with a specific focus to reduce the monthly hemorrhaging that is adding to the government’s fiscal burden.
The political dimension of these issues cannot be denied, which reinforces our view that difficult political decisions are required to get Pakistan’s fiscal house in order.
The current level of overstaffing; corruption and wastage; and politicized unions in the PSEs, makes for a very challenging environment. However, these precise issues plagued the nationalized commercial banks in the 1990s, yet they were successfully restructured and eventually privatized.
PSEs need to be put back on the policy agenda; at the very least, credible management teams and a phased reform agenda must be formulated and made public.
SBP hoped that the policymakers may consider formulating a comprehensive medium-term fiscal reform master plan, which is staggered and sequenced on the basis of the hard lessons of the recent past.
Coordinated documentation; transparent collection with oversight; an equitable plan
to capture all commercial businesses and institutions into the tax net; a restructuring agenda for loss-making PSEs; and a credible enforcement mechanism, must anchor this masterplan.
These reforms will not be easy to implement, but prioritizing this initiative, and having the policy will to overcome the more vocal (and latent) resistance, will signal intent and give this effort a better chance of succeeding.
In the current state of Pakistan’s economy, there is no wiggle room left. Even if preliminary steps are taken soon, the magnitude of the task is such that results will not be forthcoming in the near future; hence, financing the fiscal deficit gap in FY12 will be very challenging.
The IMF has still not issued a Letter of Comfort to help Pakistan negotiate with the
ADB and the World Bank. With dim prospects for external funding, the burden will once again fall on domestic sources. Despite the recent cut in the policy rate, SBP will continue to rely on the government to respect its borrowing ceiling from the central bank.
SBP expects inflation to be within a band of 11.5 – 12.5 percent in FY12, which is broadly in line with the Annual Plan target of 12 percent.
The absence of a medium-to-long term strategy for the energy sector is very much concern for country’s economy. The government’s recent effort to resolve the circular debt problem, may help unlock financing and improve capacity utilization. However, given Pakistan’s growing dependency on imported furnace oil, and the higher cost of base-load energy generation, the government must go beyond fire-fighting measures.
The economic costs of the energy shortage are understated. The primary impact
is on small and medium size manufacturing units and service providers, which are not properly documented and therefore do not show up in our GDP numbers. Furthermore, the loss of employment is more severe, as these units tend to be labor intensive. The socio-political unrest triggered by the energy shortage in many parts of the country, is ominous.
On the monetary policy side, the sharp cut in the discount rate in FY12, has surprised the market. With inflation easing somewhat and banks increasingly inclined to place funds with the government, the degree of crowding out of the private sector required policy intervention. Although SBP is still watchful to ensure that lending rates do not become negative in real terms,
The outlook for Pakistan’s current account balance remains a source of concern, but it is hoped that some upside on strong worker remittances and a possible recession in the global economy. Although data for the first four months of FY12 shows a current account deficit of $1.6 billion, we attribute this to temporary events (bulky oil payments and a seasonal pause in remittances in September 2011, and an engineered shortage of hard currency in the parallel Forex reserves.
SBP identified a window of opportunity, whereby private investment and employment generation would be given due importance.