The long-awaited ‘economic recovery’ seems to have gained some steam in the first year of the government of Prime Minister Nawaz Sharif. The key indicators are showing signs of improvement, and the chances are that the government wouldn’t miss most targets it had set in its first budget or later had committed with the International Monetary Fund for its $6.7bn loan by a wide margin.
The economy is expected to expand by 4.1pc – below the budget target of 4.4pc and far above the IMF estimate of 3.3pc, fiscal deficit is contained at 5.8pc of the domestic output, balance of payment position is much stronger than it was three months back, risks to inflation persist but it is down to the single digit, budgetary borrowings from the central and commercial banks are in control and private credit is picking up.
Economists and businessmen offer numerous explanations for improvement in the economic indicators, but all agree that the economy has stabilised even if the ‘quality of adjustments is questionable’. “The economy has done well compared with last fiscal year. The recent economic trends are encouraging for the businesspeople and the markets. Now is time to focus on improving the quality of fiscal adjustments next year to provide relief to the people (weary of long and nasty stabilisation policies),” noted Sayem Ali, economist for Standard Chartered Bank.
Some deem the recovery as fragile and don’t find it as one of the most enduring. “Such structural issues as energy shortages, very low tax collection as ratio of GDP, crumbling industrial and agricultural infrastructure, etc dragging down growth and private investment remain in place. You can’t expect the economy to bounce back to its feet without resolving these issues,” argued Farid Alam, chief executive officer of AKD Securities.
Others attribute even this fragile recovery to the largess of Saudi Arabia, expensive borrowings from the international financial market and huge cut in the federal and provincial development spending. Yet, the critics say, the economy has reached the point from where it can take off if a right set of policies is put in place to remove the obstacles holding back private (domestic and foreign) investment. They also point out that the unpaid bills of power companies have again spiked to over 1pc of GDP due to the government’s failure to restructure the power sector and improve governance.
The State Bank data shows investment as a per cent of GDP has declined to 14pc from 14.6pc a year ago. The fixed investment is down to 12.4pc from 13pc with private investment dropping to 8.9pc from 9.6pc. The gross fixed investment in the manufacturing has fallen to 1.1pc from 1.7pc. This means that the increase in private credit takeoff has more to do with the rising cost of doing business rather than investment in new projects or replacement of machinery. Foreign direct investment has also plunged 12pc. The slight rise in exports also has been a lacklustre affair because of energy shortages, particularly in Punjab, and surging cost of production on the back of high electricity prices and too much and too soon appreciation in exchange rate.
“The industry is ready to invest in new jobs to raise exports,” said Gohar Ejaz, Aptma leader. But before that happened, he contended, the government would have to remove acute gas shortages for the industry in Punjab to slash the manufacturers’ cost of doing business here to bring it at par with their counterparts in Sindh and Khyber Pakhtunkhwa.
Some like Pakistan Business Council (PBC) chairman Sikandar Mustafa attribute the decline in private investment to the rapid growth in the undocumented, informal sector of the economy and high tax rates.
“The next budget of the government would largely determine the direction of the economy and influence the future investment plans of the private sector. The corporate sector will not make new investments unless its existing investment is secured and the cost of doing business in the country cut through the documentation of the informal economy. The gap between the formal and informal sector has grown so big that the corporate sector is discouraged from making new investments,” he contended.
For some, the inordinate delay in the formulation of policies and setting targets for different sectors of the economy is quite upsetting. “How can you invest in a particular industry without knowing the government plans about that industry? We are hopeful that the government’s second budget will help remove many policy confusions regarding its plans to industrialise the country. Uncertainty about future policies can be as discouraging as energy crunch and security conditions,” Syed Nabeel Hashmi, former chairman of the All Pakistan Business Forum (APBF) concluded.
Leading economists like Hafiz Pasha believe that some ‘serious spots’ in the economy like low export growth, decline in public and private investment, risks to inflation, low tax collection, etc have been glossed over amidst a noise of economic recovery. Still, he felt that the built-up of foreign exchange reserves for whatever reason had afforded the government an opportunity to focus on higher growth to provide jobs and relief to the people weary of nasty stabilisation policies by increasing development spending and reducing tax burden on the existing taxpayers by broadening the net.
He was not in favour of the government plans to start such large infrastructure projects as Karachi-Lahore Motorway or Lahore Metro Train. “Get out of these projects; invest in power generation and in construction of industrial and agricultural infrastructure to push growth, create jobs and give relief to the people,” Pasha said.
With the IMF still watching over every step the government takes, many like Shahid Zia, financial analyst, don’t think that the government will move much away from the path of stabilisation. “The IMF statement issued after the recently concluded review of the loan programme indicates clearly that so far the multilateral lender is in no mood to let the government shift its focus from stabilisation to growth,” he concluded.
Published in Dawn, Economic & Business, May 26th, 2014